November 17th, 2008

The Parking Lots Called SHY, TLT, IEF and AGG

I feel the tension in the air. Everyone is looking for an answer to the question of when all this anxiety and pain are going to end. You listen to one talking head and he/she asks “where will all the money that’s standing on the sidelines be put to work?” Another one says, “there are potentially several million of unemployed workers if this slowdown can’t be stopped in industries as varied as auto manufacturing, retail, newspapers, real estate, basic materials, etc.” A third says “it’s going to be 2-3 years before we see any daylight.”

Is there anything we can learn from history? At the risk of appearing to beat a dead horse, here’s one view (the 2003 bottom):

Let’s compare that with what we’re suffering through today:

The only thing I can say with complete confidence is that a bull market won’t be returning in 2009; perhaps it will be 2010.

The remaining question (for those of us who are primarily in money market funds) is what to do with the money over the forseeable future. There’s nothing to indicate buying significantly marked-down large caps is yet safe. Selling short after an average 50% crash in the stock prices seems like a risky strategy. Putting money into tax-free state bonds or ETFs doesn’t look safe either given the revenue shortfalls that have begun to appear on state, municipal, school, highway authority and other budgets (take a look at the Nuveen tax-free ETFs like NXP).

Perhaps the only safe securities are government bonds (or ETFs like SHY, TLT, IEF and AGG). They’re currently yielding 4.2-4.9% in dividends (actually, interest less management fees) which is better than money market rates. Not great but a fairly safe lot to park in.

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