INVESTING: Time to protect assets; more turmoil lies ahead

Heroes are for sporting events and battlefields, not investing. With some of the damage repaired from the early August rout, it is a good time to raise a little cash and wait a few weeks. There certainly will be no shortage of things to watch while you wait.

It is easy to make either the bull or bear case right now. The technical damage suffered by the market leading up to the July high was more short-term in nature, not the type to lead to major market tops. Of course, the next bear market doesn’t have to be, and most likely won’t be, a nasty three-year ordeal. Twenty-five percent in just a few months could do the trick, and maybe that’s what we are in store for. In 1998, the S&P 500 fell 22 percent from July 28 until Oct. 9, then rallied 34 percent to the end of the year. And in 1994, the S&P fell only 1 percent, but the average stock dropped at least 20 percent during the year.

Given the recent activity, the bear case is fairly obvious. But there are longerterm, structural problems that often don’t get discussed. The biggest negative facing investors is the entitlement tsunami that is about to crush America. Paying all the benefits promised to the boomers could set back our standard of living by two generations. Whenever stocks begin to weaken, I start to think this problem gets a little more focus with the smarter money.

Using short-term fixes might only worsen the problem down the road. If the Fed cuts rates when it meets Sept. 18, and the U.S. dollar falls under more pressure, our living standards immediately decline. If the federal government somehow bails out the estimated 2 million troubled subprime homeowners, that lessens our ability to keep taxes down in the next 10 years. The ultimate bear market claim is that the subprime mess didn’t just leak to other areas; it completely saturated the entire financial system. To top it all off, the recent selling was so intense that it pushed several short- and intermediateterm indicators to deeply oversold levels. Selling in the near future could get even more intense.

At least for the intermediate term, there are several factors leaning in the bulls’ direction. There is a long history of government bailouts that proved highly successful. The Fed’s rate-cutting campaign in 1998 is one strong example. Stock market valuations are approaching 20-year lows. There has been more insider buying at large banks than at any point since 1995. Interest rates have dropped dramatically since early June. China and India still are devouring every natural resource the earth can produce. Republicans could keep the White House and keep taxes low. Americans could decrease the promised payouts to boomers. Indicators dropping to deeply oversold levels has marked stock market bottoms on several occasions in the last 50 years.

Raising 40 percent to 50 percent in cash wouldn’t be a bad idea right now. I think the market could go either way, but the burden of proof lies with the bulls. They have to make a case, with a few high-volume powerful up days. Until that happens, even if it takes several months, keep that cash in reserve.