|This might be news for some of you? Cash sweep accounts are NOT protected in broker security accounts.
And for those who don’t know, cash sweep accounts are money market funds.
However, there are different kinds of money market funds…only those money market funds invested through BANKS are FDIC protected.
But Money Markets with brokerage accounts are NOT protected by FDIC.
Money Markets are protected by SPIC insurance, but that only matters should your broker go belly up….
If the money markets should lose value (called “breaking the buck” because most MMs are priced at $1.00 per share, exactly), it is highly unlikely your stock broker will take the blame since MMs are invested in short term debt paper such as 30 day treasuries, and 90 day commercial paper sold by banks and large companies for short term borrowing needs.
I think the average trader believes that their CASH account sits on a bunch of dollar bills in a vault somewhere? That illusion is not true…
Instead, your CASH accounts (called sweep accounts because every time a trader sells a stock, the proceeds are “swept” into a “cash” account) are invested in 30 day to 90 day paper sold by sovereign nations, banks, and large corporations.
If Greece were to default, or any other PIIG nation, then that event could cause investors to stop buying commercial paper sold by European banks because of fear of bank bankruptcies…this in turn could cause sweep accounts to become illiquid and/or worth less than $1 per share.
Also, should the US have a technical default on its treasuries on or around August 2, that would cause buyers to hesitate to buy or trade treasuries, except at greatly slashed prices causing a discernible drop in value of those assets (debts), and stinging many cash sweep accounts. Now, I know that most Americans believe that Congress will come to its senses and raise the debt ceiling limit, but I have my doubts. Time is short, and I believe the two parties are far apart in ideology, and as the TARP vote in 2008 demonstrated, there are many in Congress who do not understand how the complex world of finance really works.
The main point here is that many traders think of their cash sweep accounts as the “safest” places to park their money, even despite the low interest rates…
Well, “surprise, surprise!” Maybe that notion is about to be turned on its head?
So, where should one park their money if they are risk-averse in this market correction?
Well, the strategy I am using is to park my sizable cash sweep money (money otherwise not intended to be invested in stocks at this time) into currency ETFs. The ones I favor currently are FXF (Swiss Franc) and FXA (Australian Dollar)…
XRU (The Russian Ruble) looks a bit attractive too, but keep in mind that can be a more volatile, less stable currency because of political concerns…and yet, even the Ruble looks much more stable to me than does the US $ or Euro.
Also, consider some sweep money in gold/ silver…now, currently, gold and silver are in a de-leveraging selloff, so go lightly here for now. But the one that continues to stand out as a safe investment to me is the Central Fund of Canada (Amex symbol: CEF) which is invested directly into gold and silver bullion held under safe lock and key in a Toronto bank vault.
Now, keep in mind that when the smoke clears (which may not be for a long while?), you would have to wait 3 business days for funds to settle before you could use the proceeds from one of these ETFs for a stock investment…but the idea here is to preserve your cash for another day…what good is convenience with a cash sweep acccount if the money markets it invests in “break the buck” and lose value or become illiquid and difficult to cash out?
Now, what if my concerns are totally overblown and way off base, as I suspect some of you may believe? Well, at worse, you will probably make money any way on investing in these ETFs….or at least, you won’t lose much if I’m wrong, as the FXF and FXA move rather slowly compared to stock trades…and CEF is generally a very stable traded gold ETF.
Well, you have the plan from ACE…where else are you getting this type of strategy?
Good luck…now that you know my concerns about the very fragile economic situation…and what I think is the best flight safety plan! Don’t follow the crowd on this safety trade, people…you could get badly burned.
Please visit ACE’s message forum where active traders discuss their trades on stocks and options...it’s free! You might find your next great trade idea there!
When talking stocks, you will sometimes here a professional trader or broker refer to “the TICK.” The TICK refers to an intra-day index which measures the number of stocks rising on up-ticks versus those that are falling on downticks. A tick is the price-point where the next trade goes off.
Example: XYZ stock trades 100 shares at 9:30:35 am at $10.05….and a couple minutes later (say 9:32:37 am), the same stock trades 200 shares at $10.09…or 4 cents higher. That is called an up-tick. If the same stock then makes its next trade at, say 3 cents lower, then that is a down-tick.
You can view a version of the intra-day $TICK chart on my public chart list at www.stockcharts.com under the name of AceStockTrader.
Yes, TICK can be charted…I prefer the 5 min and 15 min TICK charts…and I also have a daily and weekly version I like which I will show another time. On my TICK charts, I have an orange and green horizontal line. The green line is usually set at +600 and the orange line at -800. When TICK crosses either line, that is considered an overbought or oversold condition. What TICK represents are the number of upticks vs the number of downticks on the NYSE at any given point in time. When the TICK count is positive, that means that more stocks are trading higher than lower at that given moment….and vice versa when you see a negative number. Generally, you might see the TICK spike up past +600 or down past -800 only a few times a day…
TICK can swing wildly at times, and so it may seem to be difficult to parse out a pattern from TICK….this is why my recent TICK charts show moving average lines in them to spot changes in trend and direction…on the 5 min chart, I favor the 21 period line, which is basically an average for the last 105 minutes…and recently, I added an 8 period line to try and discern an early change in direction…the 8 period line is there to spot changes before they become clearly apparent to other traders.
Richard Arms, the inventor of the TRIN index has recommended using TRIN in conjunction with TICK….TRIN shows the underlying behavior of large traders such as hedge funds and mutual funds. TRIN helps one to spot these hidden trends which may be diverging from what the general indexes show, at times. TICK is a confirmation tool to discern that what we might see with TRIN is truly happening. TRIN is basically reflective of a ratio formula, and at certain times, the ratio can fool the unknowing trader….TICK helps one to confirm that what they might see in TRIN action is true….if TRIN shows strong buying but TICK is negative, this might mean that the ratio on TRIN is mis-leading at that moment in time.
Now, back to the MA lines on TICK….generally, when TICK 21 MA reaches about -300, it has been my experience that most of the selling is done on the NYSE, and often what happens is that a bounce ensues and catches the unknowing BEARS off guard….
TICK can also help you spot divergences in the trading day…TICK might begin to rise before the major indexes such as the Dow or NYA begin to move…or vice versa. Like TRIN, it captures the movements behind the scenes among all NYSE stocks even as big cap stocks continue to get propped up to keep the major indexes like the Dow looking flush.
Vice versa, when TICK reaches about +350 or +300 on the 21 period MA, that usually means that the last buyers are coming in (those ill-fated retail traders!), and that’s usually a good time to take profits and exit the trades–the 21 MA line works much like an oscillator for the trend and direction of the major stock market…..
When I was not working in Corporate America, I had a lot more time to watch TICK and take those profits every time it crossed up near +300…and close those bearish positions when TICK reached -300….sadly, I don’t have time to trade like that now…relying much more on the daily for that, but in this market, I have been whip-sawed a lot by trying to trade more methodically off of dailies…this has been a fast moving market that favors day-traders, not swing traders, imho.
However, for the day-trader or the swing trader who is looking for more precise entry and exit points, the 5 minute TICK in conjunction with the 21 period line can provide valuable insight into when to load up and when to exit fast moving trades. ACE
Are you looking for more insights on TICK and TRIN? Then visit ACE’s message forum where active traders post their trades and thoughts on these subjects and more. The message board is hosted and moderated by ACE.
FXF- Swiss Franc ETF
CEF- Gold and Silver Bullion Fund
GLD- Gold certificates
IF Greece should default, are you prepared with “the insurance stocks” above if your CASH SWEEP ACCOUNTS are frozen next week?
Did you know that up to 45% of Cash Sweep Accounts are invested in European Bank and European Sovereign Commercial Paper?
Will the FED come to their rescue like they did in 2008? Or more likely, can a damaged FEDERAL RESERVE holding $Trillions in worthless Mortgage-backed Securities and other highly suspect debt paper be in a position to rescue the world’s money market funds again???
I find it ironic that “the safety trade” is to seek out US Treasuries and US dollar assets?
…and should the US suffer a technical default on its debt soon…or just come close with the political wrangling in Washington, then how is an investment in the US treasuries and dollar-based assets a safe place to be???
We may be on the precipice of one of the most tumultuous financial earthquakes ever….and people are seeking safety in the very assets that may be most at risk.