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What To Do When Lots Can Go Wrong

Early Monday morning, the European Commission, the European Central Bank, and the International Monetary Fund agreed to a deal that would extend additional credit to Greece in exchange for belt-tightening, pension cuts and tax reforms. Markets around the world rose on the good news.

But rather than expressing a feeling of “Phew, we’re glad that problem’s finally solved,” the market’s reaction was more of a skittish “Let’s enjoy today’s developments while we can.”

Market Reactions

I say that because markets have been following every twist and turn in the Greek debt negotiations with their own reactive rises and falls. If some glitch were to develop in the latest agreement — which is altogether likely given what’s gone on before — look for markets to take a hit again.

Markets always react to news, of course, but current economic and political conditions make them ripe for more volatility. In addition to the ongoing Greek mess, there’s the potential for disaster in China where the government continues to prop up equity markets. And deep within the real economy, there are troubling signs of an impending slowdown coming from sharp declines in global shipping.

The Bank of America Merrill Lynch Fund Manager Survey

Mutual fund managers see all this and then some. As a result, they’re holding on to more cash than they have since December 2008, right after the collapse of Lehman Brothers.

The Bank of America Merrill Lynch Fund Manager survey for July found that fund managers now hold 5.5% of their portfolios in cash — and are bullish on gold for the first time in five years.

Here’s what else is on the minds of fund managers:

  • Confidence in the global economy has fallen sharply, with 42% expecting strengthening over next year, down from 55% a month ago.
  • China heads concerns, with 62% expecting a weaker economy in the next 12 months.
  • Global emerging-market equities remain the most unloved region with allocations at a 16-month low.
  • Bonds are still seen as much more over-valued than equities and more at risk of a volatility-driven crash; equity over-weights have risen to net 42%.
  • U.S. dollar bullishness strengthens despite the postponement of an expected U.S. rate rise to the fourth quarter or later.

The Bottom Line

So if fund managers are bracing for trouble, maybe it makes sense for the rest of us to be more cautious too.

For dividend investors, that means sticking to high-quality, less volatile dividend payers of the blue chip variety. Among the recently battered utilities, there are many solid companies with strong dividend histories; they could be a relative bargain, especially if whatever interest rate rise we eventually see is modest.

So be careful and do your homework. This is not a time to take chances.