MarketWatch’s Dr. Irwin Kellner elaborated on the U.S. economy in a piece titled “Rough patch or briar patch?” His theme is that the economy is reeling from a one-two punch of plunging real estate values and a full blown credit crunch that might not be resolved with additional rate cuts.

To me, his assessment is right on and it would behoove many investors to focus on the big picture as well and get away from eagerly trying to find a place to deploy their money. Cash can be a very good invested position especially in times of turmoil. I was reminded of that when I received an e-mail from a reader who said “I’m looking for some ideas on the best way for a super senior to invest $250k in Vanguard funds.”

Given current circumstances, that is not the way to approach the market. First, our Trend Tracking Indexes (TTIs) have come off their highs. While the domestic one is still in Buy mode, the international one slipped into bear territory on 11/13/07. Second, all major indexes (Dow, S&P; 500, Nasdaq) have dropped below their long-term trend lines. Third, the Dow Theory letter, one of the most respected market timers of the past 70 years, just went into sell mode.

Fundamentally, the facts that Dr. Kellner addresses in his above article are all well known and are expounded upon in daily news. I believe that we are right at a dividing point where the market can break either way. I am playing it safe by protecting my capital from severe downside moves.

If it turns out that the market decides to climb a wall of worry and get back into sustainable rally mode, I will adjust my holdings at that time, even though I will be a little late for the upside party. I don’t mind that at all, since I believe right now far more dangers are lurking on the downside.

Among the daily news barrage about the Subprime/credit crisis, high oil prices and the ever worsening real estate down-turn, a little noticed item with potentially grave implications surfaced a week or so ago.

I had originally heard about it a few months ago when a friend of mine, who works for GE (General Electric), mentioned that some of his clients with money at GE where outraged when the cash holdings in their money market accounts were devalued below the $1 level per share. At that time, I suggested that surely GE would not let that happen permanently but infuse capital to maintain the steady $1 level.

Apparently, I was wrong. MSN featured an article titled “No shelter from the housing storm,” which addresses the fact that GE confirmed that it “broke the buck” on its Asset Management money fund, which is a nearly unprecedented event. I have to agree with the author when he posed the question:

“To do that instead of shoring up the fund, one wonders: How bad does GE think things are going to get?”

Writer Andrew Bary, on Barron’s Online on Wednesday, reported that the fund has “suffered losses in mortgage- and asset-backed securities and is offering investors the option to redeem their holdings at 96 cents on the dollar.”

Hmm, 96 cents on the dollar? That’s a sure 4% loss with no way to make it up. Why bring it up now?

As the economic picture worsens, you are likely to see this scenario repeated. Smart firms, if they can, will avoid this outcome by shoring up their money funds with an infusion of their own cash, such as Legg Mason did last week by adding $100 million to one of its money funds and providing $238 million in credit for two others.

Obviously, mutual funds will try as hard as they can to avoid this disaster; however, if pressed due to credit or liquidity problems, you will be left holding the ever shrinking bag.

What can you do about it?

For years, I have advocated the fact that when our Trend Tracking Indexes are in negative territory, and our holdings are in cash, safety is of the utmost importance. That means using a treasury-only money market.

Whenever I talk with new clients, undoubtedly one of the early questions is how much interest the money market account pays when we’re in cash. Usually, the rate has been somewhat lower than what you could get in the open market. My argument that safety is of primary concern when in money market funds has largely been ignored. Most every investor smugly tries to squeeze an extra ½% yield or so out of their cash holdings.

This has now become a dangerous game, and I suggest that you review your money market prospectus especially if your yield is too good to be true. Remember, there is no free lunch!

My view has always been that the yield of a money market account is unimportant; it will not make you rich unless you have a vast amount of cash to play with. Investing at the right time during an up trend, using sell stops and avoiding bear markets is what will grow your portfolio.

When that trend comes to an end, and you are headed for the sidelines, safety of capital should be your priority number one. Especially in today’s volatile, over-leveraged and non-transparent investment climate, don’t try to pick up nickels in front of a moving bulldozer.

Despite Wall Street’s peculiarities and never ending scandals, there always seemed to have been some information available which you presumably could rely on and which served as a resource with integrity.

Well, that seems to have changed now too due to the current credit crisis. Michael Shedlock’s article “Any Credibility Left At Fitch,” sheds some light on (credit rating service) Fitch’s approach to lowering credit ratings. I always thought that a rating company would/should be unbiased and issue ratings based only on facts and no other potential implications. That credibility went out the window when Fitch stated the following:

“Fitch recognizes that financial guarantors view maintenance of their ‘AAA’ ratings as a core part of their business strategies, and management teams will take any reasonable actions to avoid a downgrade.”

Huh? To avoid a downgrade? Why? If a company’s debt has become junk, it needs to be downgraded no matter whether there are grave implications or not. Any action to the contrary will make the function of a rating company obsolete.

If you invest in bonds or other interest rate sensitive instruments, you better think twice before silently acknowledging that AAA rating. It may not be worth the paper it’s printed on.

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

The bears were in control this week feeding the bulls some cold turkey for Thanksgiving.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved to +4.06% above its long-term trend line (red) as the chart below shows:



The international index slipped -2.03% below its own trend line, keeping us in a sell mode for that arena.

Happy Thanksgiving!

This week’s downside market action will make many investors feel like they are chomping on a cold turkey for Thanksgiving. The culprits have been the same and diversification, as so many times during recent corrections, hasn’t meant a thing. As I have repeatedly written, markets are so intertwined that the only true safe play will be on the sidelines in money market.

Oil prices approaching $100/bbl, continued housing troubles, along with new daily stories about the Subprime fallout and credit problems are not giving this market any support. Yesterday, after the markets had closed, another blow came when the editors of the Dow Theory newsletters moved to the bearish camp.

Why is that important? One reason is that many investors pay attention to it. MarketWatch had a feature story called “The Dow Theory Says Sell.” Their 70-year record shows that it beat Buy-and-Hold by an annual average of 4.4 percentage points per year.

While our domestic Trend Tracking Index (TTI) still remains +3.15% above its long-term trend line, and therefore in Buy mode, we have liquidated most of our positions as they triggered their 7% sell stop points. By the time the TTI actually crosses to the downside, the remaining holdings will have been sold.

With the benefit of hindsight, you may find some stories in the media analyzing how the current Subprime debacle and subsequent credit crisis started and the ever lingering question if it could have been avoided in the first place.

While the final results cant be tabulated yet, it turns out that Wall Street may have been its own worst enemy, at least according to Minyanville’s Eugene Linden, who wrote the excellent article “Could This Credit crunch Have Been Avoided?”

It’s a great read and sheds some light on the fact that the motivation of profit at all costs is greater than any fiscal responsibility. While that is not earthshaking news, the article further goes into detail how banks managed to camouflage problems to feed near-term profits and bonuses while future write-downs would be somebody else’s problem.

The final paragraph really sums it up by saying that in the meantime, we can guess what asset class will fuel the next bubble should we not break this cycle. As one former Goldman Sachs securities packager put it “Wall Street’s genius is taking simple, transparent and liquid tradable instruments and turning them into opaque and illiquid derivatives, while making money by overpricing the embedded options.”

That’s not going to change, so take your best shot at guessing where the next bubble will pop up. There’s only one condition in this contest. The underlying assets will have to be big enough to support several trillion dollars in derivatives.

Other than that, it will be business as usual.