Debt Ceiling Crisis

The Debt Ceiling Crisis
July 29, 2011

“The Debt Ceiling Crisis” has taken center stage in the last few weeks as Congress and the President are unable to come together on a fix for the economy.  Politicians and the media have spread fear and panic regarding the impact on financial markets if a timely agreement is not reached and every day that goes by the pressure mounts.

Two basic threats have emerged from the current crisis.  Threat #1 is that the U.S. will default on its debt if Congress doesn’t increase the debt limit.  Threat #2 is that the U.S. may lose its AAA credit rating on U.S. Treasuries.  Default is not likely as all sides realize this must not happen.  However, a reduction in our credit rating is possible unless Congress and the President demonstrate a serious effort to curb spending and balance the budget.  At least one rating agency has said we must cut $4 trillion out of the budget in addition to preventing default, and there isn’t a plan on the table that will cut the budget by $4 trillion.  A downgrade from AAA to AA is a real possibility at this time.

There is so much noise and you don’t know what a politician has said, even after he says it.  The market is generally far more honest.  While it would be great to be able to accurately predict the outcome of this conundrum, perspective may be more helpful than prediction right now.  The market has been digesting the debt ceiling issue for weeks, if not months.  During this time it has traded in a 10% range which is not indicative of panic.   The important issue in addressing your investment portfolio is to have a plan to manage risk.

  • Know what you will do if the markets react positively to the outcome.
  • Know what you will do if stocks decline, interest rates rise and bond values drop.

Recognize what you cannot control and what you can control.

  • You cannot control Washington, the media, or the market’s reaction to either one.
  • You can control your exposure to the market.

In our firm, we make decisions about how much market exposure to hold in a portfolio by focusing on indicators based on price movement.  This is objective, unemotional input as compared to news and the talking heads.  We don’t make decisions based on the emotion of the day, but rather we adapt portfolios as the indicators change.  We always determine the risk we are willing to take when we purchase a position for our portfolios and we monitor that risk until we sell the position.

Because we have a well-thought-out plan to manage risk, we are prepared to execute that plan objectively no matter what happens in Washington next week.

This report is a publication of Guelich Capital Management LLC, a registered investment advisor.  Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed.  All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.
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