During this short year, the stock market has already completed a scary drop into correction territory (down 10%) and has now almost fully recovered.  This was not the first rodeo for any of us.  In fact, it is almost second-nature by now for me to calm my clients and to keep their eyes on the horizon.  But this year, it has been slightly different.

One client has been kidding me about my too-frequent mention that there is a big difference between garden-variety recessions and a financial crisis.  Undoubtedly, that is true, but it also reflects the importance to me.

By mid-January, commodity giant Glencore was in free-fall.  This company has quite a checkered past.  Originally founded by the infamous Marc Rich in Switzerland in 1974, it operated as a private company until its IPO in 2011.  (Mr. Rich spent years on the FBI’s Most-Wanted List for illegally trading oil with Iran but was later pardoned by President Clinton on his last day in office.  The company has been accused of allegedly dealing with nefarious clients around the world.)  More ominously, it became huge in the volatile world of commodities, especially metals like copper and zinc.  Its IPO on the London stock exchange was the biggest IPO in London’s history, turning many insiders into instant billionaires.  It was also one of the world’s biggest users of derivatives, especially the types known as forward contracts and futures.

I have often said that, if we have another financial crisis, it will start in the derivatives market.  As I was reading more and more about Glencore, I was thinking more and more about Lehman Brothers, whose crash ignited the global financial crisis in 2008.  Suddenly, there was a real possibility of a financial crisis.  This sudden 10% correction might have been just another in a long history of corrections, or it could have been another financial crisis.

Because 100% bets are almost always imprudent, I didn’t sell everything in anybody’s portfolio, but I did take the unusual step of increasing the level of cash – a prudent way to deal with increased uncertainty.

Since then, most commodity prices have rallied nicely.  In addition, Glencore has successfully refinanced most of its banking relationships and put several valuable assets up for sale, to reduce its massive debt load. Its stock has rallied strongly.  The cost of their credit-default-swaps has decreased as well.

It was a false alarm, thankfully.  Maybe, I was wrong to increase cash somewhat during a typical correction, but it is always the right thing to do when there is a realistic possibility of a financial crisis.  Maybe, I was overly-vigilant, but I would rather lose a little of the upside, than catch a lot of the downside.