Debt ceiling going down - what to do?

[rthomas]

I don't want to make this a political issue, but as an investor in bonds and stocks - mostly retirement and kids college, what should I do (if expecting a do nothing piece of ##$%%@ congress and I say that in a completely bipartisan way, the #$#%^^!!!!!)

[weezie]

Can't help you my good sir, but I am hugging myself that I started refinancing the mortgage a few weeks ago to get the payment down. Locked in till Sept, whew.
In the meantime, I'm hiding under the bed.

[Jarhead]

Not to worry, folks. My military retirement check was deposited in my bank account last night.
cat_maleOff_dress_500289.jpg

[77devil]

I don't want to make this a political issue, but as an investor in bonds and stocks - mostly retirement and kids college, what should I do (if expecting a do nothing piece of ##$%%@ congress and I say that in a completely bipartisan way, the #$#%^^!!!!!)

That's a question that obviously depends on factors particular to your situation. The time to get defensive, however, on a risk-reward basis, has passed in my opinion. Many investors are still moving cash out of money market funds, which are uninsured, into F.D.I.C. insured bank accounts.

I believe Congress will cut a deal even if a couple of days after the artificial August 2 deadline. If it fails to do so, I'm pretty confident that the President will prevent a U.S. government default by executive order. Further, not to distant history tells us in the cases of Australia, Canada, and Japan that a sovereign debt downgrade that remains in the high investment grade is not the end of the world, even no big deal. Now a downgrade of the debt of the country that is the world's reserve currency is potentially another matter all together and will likely cause some short term disruption.

I think the markets have largely priced in the scenario described above but, at this point, we'll just have to wait and see what happens.

[OldPhiKap]

Bonds will be paid, short-term there is no real problem.

If this goes more than a week, though, I'll change my tune. But don't see that happening.

[devil84]

This topic cannot be reasonably discussed without diving into PPB territory.

EDITED: After further moderator discussion, we'll reopen this thread. Please keep the discussion to investments and refrain from diving into PPB, thanks.

[sagegrouse]

The worse thing you can do IMHO (where the H is usually silent) is make major changes in your portfolio now. Better to ride it out. The instability in the market is not wild swings but declines on the 1% per day basis.

This is all a disgraceful kabuki dance. The debt ceiling will be raised, and if there is no deal by the deadline Tuesday, there will be a temporary increase or increases until there is one. Moreover, Europe collectively is in worst shape than the US and has even worse mechanisms for forcing agreement. I think the US dollar will still be the world currency ten years from now.

sagegrouse
'Anyway, that's what I am doing'

[devildeac]

Thanks for opening again. Hopefully rthomas and sage set the tone with discussing investments (But I did chuckle at their brief non-partisan smack-downs, too). We recently (last 1-2 years) revamped a couple different portfolios we have with 2 different investors by changing from about a 85/15 equity/cash set-up to about 70/30 mix. We "left" the selection of individual stocks and have all 4 and 5 star mutual funds, including national and international small/mid/large caps, including some emerging markets, commodity and real estate funds. This was advised (unfortunately) after the 2008 meltdown but designed to be somewhat less risk in tumultuous times, yet take advantage of highly profitable swings, too. One adviser looked at the other's wide range of funds and was impressed with the yields over the last 18 months or so and was happy with the changes he made also. Just wish we all could have been a bit more clairvoyant in early 2008. We also re-financed our mortgage last year at or near historic lows getting a 2 5/8% 5/25 product that we hope to have paid off in mid-2015 as I am getting too old for mortgages.

Who do we believe in this scenario? Our fine (cough) elected representatives saying we won't default/no big deal or the economists who predict near financial disaster and another deeper/longer recession than the one from which we have not yet completely escaped. If the second scenario happens, will it be even worse than 11-12% unemployment, 1980s-like inflation/interest rates and worse housing markets? Some have even predicted no safe haven for investments, not even US gov'mint securities or gold.

[JasonEvans]

My investment adviser recently sent us a note indicating that he had a good strategy for "sleeping well at night" if you are overly concerned that the financial markets are on the verge of a massive meltdown due to the debt crisis. He said you could buy puts about 10% out of the money to cover your portfolio. This would cost about 4% of the value of your portfolio, but it would cap your losses at 10%. So, if you had a million dollars, it would cost you 40-thousand dollars to ensure that you would not lose more than 100-thousand dollars. Considering the market lost more than 22% of its value in just 8 days during the financial crisis of 2008, I can see how some would find this attractive.

My adviser went on to say that he was not recommending this for any of his clients and I am not doing it. I think congress will figure something out, the downside of not doing so would be really bad, and I especially do not think we will see a US government default. But, if you are really worried, buying covered puts is a way to cap your losses at a time like this.

I hope folks understood the above explanation. If not, I can go into greater detail.

-Jason "if you as certain the market is going down, you could also try to make money on the deal by selling calls" Evans

[JasonEvans]

By the way, I vouched for all of ya'll in the mod discussion about keeping this thread open. That is my way of saying that the first person who goes into political territory in this thread will earn my wrath.

Trust me, ya don't want to go there.

-Jason

[OldPhiKap]

By the way, I vouched for all of ya'll in the mod discussion about keeping this thread open. That is my way of saying that the first person who goes into political territory in this thread will earn my wrath.

Trust me, ya don't want to go there.

-Jason

BTW, still cold in Atlanta? 'Cause it's hotter than blazes out here in East Georgia.

;>)

(And that is not meant as a reference to Sherman, the Civil War, or Gen. McClellan's failed presidential campaign of 1864).

As far as the economic question is concerned, I agree that the odds of the deadline passing without action are small. Even so, there are things that can be done (I believe Eisenhower issued "gold certificates" in the early '50's in a somewhat analogous context). Also, IIRC, when the government shut down in the 1990's all stalled payments were indeed made. So absent a long, protracted deadlock, the real impact here is a blip.

Now, bond rating downgrades -- that's a whole different kettle of fish, and may or may not happen regardless.

[77devil]

My investment adviser recently sent us a note indicating that he had a good strategy for "sleeping well at night" if you are overly concerned that the financial markets are on the verge of a massive meltdown due to the debt crisis. He said you could buy puts about 10% out of the money to cover your portfolio. This would cost about 4% of the value of your portfolio, but it would cap your losses at 10%. So, if you had a million dollars, it would cost you 40-thousand dollars to ensure that you would not lose more than 100-thousand dollars. Considering the market lost more than 22% of its value in just 8 days during the financial crisis of 2008, I can see how some would find this attractive.

My adviser went on to say that he was not recommending this for any of his clients and I am not doing it. I think congress will figure something out, the downside of not doing so would be really bad, and I especially do not think we will see a US government default. But, if you are really worried, buying covered puts is a way to cap your losses at a time like this.

I hope folks understood the above explanation. If not, I can go into greater detail.

-Jason "if you as certain the market is going down, you could also try to make money on the deal by selling calls" Evans

I agree with your adviser although the current price of 10% out of the money "insurance" is only between 1-3% for one to five months of coverage. I don't employ this strategy very often because the premiums can add up quickly, but for occasionally hedging taxable exposure, where the tax cost of liquidating into cash would be much higher, it is sound advice.

[Bluedog]

If you're worried about US debt, you can shift your bond investments from treasuries/munis to more corporates. I don't believe the US will default on its debt, but its conceivable that if this continues to drag on these types of funds will take a sizable NAV hit. Something like VFICX (Interm-Term Investment Grade), although obviously US corporations are still dependent on the US financial system, so they could still be adversely affected. But hey, Apple right now has more cash on hand than the Treasury. As for equities, I don't think there's any prudent change to make really - everything is already priced in and it would be just be a gamble. There already was a large correction over the past week. I'd say just make sure that you're diversified with foreign equities as well, but I've always done that (about 60% US, 40% Foreign for me, even though market cap suggests the opposite, but that leads to increased currency risk, etc.).

[OZZIE4DUKE]

He said you could buy puts about 10% out of the money to cover your portfolio. This would cost about 4% of the value of your portfolio, but it would cap your losses at 10%.

Jason, it would only cost you the full 4% (used in your example) if you let the puts expire worthless, which would be a foolish thing to do if there is a settlement in the crisis and the market either stays level or goes up (which it likely will). The value of the put will drop for three reasons - the value of what you bought puts on goes up, decreasing time premium and decreasing volatility, but it won't go to zero next week if there is a settlement.

Personally, I'm thinking of buying some straddles (or strangles ), maybe on the SPX or SPY, betting the market will go down, up or both, hopefully violently with no settlement, a short default and then a settlement. There is a fortune to be made if you have the funds, the knowledge, and a little luck. Probably won't do it, but I'm thinking about it!

[SoCalDukeFan]

but why do we have a debt ceiling? This is a self imposed crisis. I think that Denmark is the only country with one.

About the only thing more stupid would be a balanced budget amendment.

SoCal

[cspan37421]

Something like VFICX (Interm-Term Investment Grade), although obviously US corporations are still dependent on the US financial system, so they could still be adversely affected.

I have money markets with vanguard - both Treasury and Prime - and I was surprised to learn that Prime is not all corporates - not by a longshot! 40% of holdings are US Government direct or USG agency debt. I wonder if it was always that way - certainly it was my impression when I got into it. Interesting that even VFICX has 6.3% US Government or agency debt. And I think T-bills are often used as collateral for corporate repos, etc., are they not? Things are more interconnected than one might realize.

[hurleyfor3]

Off the table... for now. I guess they still have to vote on it.