Sell in May and go away, or make that April?

It has to be said that with global merger and acquisition activity at one of its cyclical peaks this is usually a solid indicator that not such wonderful times are around the corner.

Normally the trigger for a set-back is something that hits entirely unseen, and without warning. And yet this month the 30-day deadline for compliance with the United Nations ruling on Iran's nuclear program surely is an exception. We can all see the writing on the wall in big red letters this time.

That Iran will have a showdown of some kind with the United Nations looks certain, and there is at least a possibility that some kind of a US-led military strike on Iran may follow later, and maybe sooner rather than later. In any event, it looks quite probable that Iran will end up using its oil weapon and shutdown its four million barrels per day supply.

$100-a-barrel oil

T. Boone Pickens, the legendary oil investor, has forecast that oil prices of $100 plus will immediately follow. That would surely panic global stock markets, and lead to a massive sell-off of equities and a move to cash, bonds and precious metals. In such an environment the switch to cash and bonds would sharply increase the value of the US dollar as a safe haven for funds.

Now let us be more optimistic. Iran might offer the UN a compromise solution or even decide that its own best economic interests were served by embracing the global economic community rather than trying to undermine it. There could be an internal power struggle and a change of government policy in the face of global isolation.

However, does it make much sense to stay invested in the industrialized and emerging stock markets with such a threat on the horizon? The risk-reward calculation is clearly against staying in markets at this time, with a smallish upside balanced against a potentially huge downside.

May comes early

Better perhaps to note that May might have come a bit early this year in financial markets and to act accordingly and sell now. The dilemma then is whether to hold the US dollar, which has been under pressure recently, or to diversify into other currencies and precious metals?

Diversification as a hedge against the unknown is never a bad strategy, and the wise answer would be to spread cash holdings into a basket of currencies and quasi-currencies like gold and silver.

But over the past two decades investors have written-off the US dollar so many times, only to be surprised by its resilience, and perhaps history will once again repeat itself.