8/7/2011: Credit Downgrade Update

8/7/2011: Credit Downgrade Update

On Friday evening, Standard and Poor’s announced that they are downgrading the United States credit rating from AAA to AA+.  This downgrade was the first time that the US has ever lost the perfect AAA rating and it remains to be seen how pension funds, institutional investors and other large debt holders will react to the downgrade.  As of writing this on Sunday evening at 7:00 PM, DOW futures are already down nearly 300 point for Monday morning’s open, which tells us that the stock market doesn’t like it.  The worst-case scenario is really bad so I’ll keep to myself the global financial meltdown that could happen if things start to unravel. 

On the ‘bright side’ (if there is one), even though the correction will probably continue, there is still a chance that a few factors might keep this from turning into the second leg of a double dip recession or a “W” shaped recovery (note that the terminology depends if you are a glass-half empty or half full kinda thinker).   First, credit problems and budget deficit aside, US debt still remains some of the safest debt in the world and is backed by the full faith and credit of the US Government.   Second, corporate earnings and oulooks have been really good lately and cash on corporate balance sheets is at all time highs.  This gives public companies a bit more of a cushion to weather the storm that may be coming.  Finally, the credibility of the rating agencies has taken some serious criticism since the Mortgage Backed Security debacle and they just don’t carry the weight that they used to before the market collapse of 2008.

There are going to be valid arguments on both sides of the investment community in the next few months, but from my perspective, both fundamentally and technically, it is time to sit things out and watch from the sidelines.  Last Wednesday I moved money out of commodities and into investment grade corporate bonds and on Friday, after the markets rallied up about 150 points in the green from its lows of the day, I sold ALL of my holding in the ALL stock markets.  The increased volatility, the triggering of technical sell points and fundamental nightmare that has been unfolding in the past two weeks have lead me to make massive changes in my portfolio holdings. 

I am now 50% Cash, 25% Investment Grade Corporate Bonds (LQD), 25% Precious Metals (15% SLV, 10% GLD).

I am not so bearish at this point as to be shorting the market but a few more down days and that may be the case.  On a longer-term basis, the S&P is still favored over Cash, but for now, enough of my indicators have shifted to tell me to make some moves.  If Cash takes over as the official top performing asset class, I will share with you the inverse ETF’s that I like, which take advantage of down markets and I will deploy some of the 50% cash holdings there.

For now, the new portfolio looks like this:

Holdings
Cash	Type	Ticker	Weight	Shares	Starting Price	Total Starting Value	Current Price	Total Current Value	% Gain (Loss)
Money Market			50.00%			$50,306		$50,306
Bonds
Investment Grade	ETF	LQD	25.00%	222	$113.47	$25,153	$112.57	$24,954	-0.79%
Commodities
			25.00%
Gold	ETF	GLD	10.00%	62	$161.25	$10,061	$162.35	$10,130	0.68%
Silver	ETF	SLV	15.00%	395	$38.23	$15,092	$37.41	$14,768	-2.14%
						$100,612		$100,158	-0.45%

The Portfolio Scorecard to date looks like this:

	Jan 24, 2011	today	% Change
My Portfolio	$99,994.75	$100,158	0.16%
S and P 500	1282	1199	-6.47%
FTSE 100	5943	5246	-11.73%
Commodities Index (GSG)	33.99	33.06	-2.74%
20 Year Treasury (TLT)	92.43	102.46	10.85%

8/3 Update

In the past few days we kinda heard the two things we needed to hear regarding portfolio security. (Debt Ceiling raised and Moody’s maintaining the US AAA rating).   So why did the market take a dive in the two days immediately following?  Well, because both of these announcements have a big fat “for now” attached to them, filled with uncertainty and tentative language that makes markets very uneasy.  The boys on the Hill have a lot of work to do and markets hate when financial futures are in the hands of the elected…. especially when those who are elected are on the hot seat in a year. 

In short, things feel very nervous in the markets both fundamentally and technically.  Bullish Percent levels are declining and are sitting right around 50% bullish.  Asset class price movements are acting defensively.  Silver and Gold are running up again.  Investment grade bonds are running up.  Treasuries are running up and commodities and stocks are taking a bit of a hit.  

This is a very tricky market to “play”.  If you are invested, stay invested… for now.  If you are in cash and looking for an entrance, wait a while.  Come back after Labor Day.  Only time will give us more direction.

Today, Corporate Bonds overtook Commodities as a the third place asset class so I am replacing my 10% portfolio holdings in Commodities (GSG) with Investment Grade Corporate Bonds (LQD) and then sitting on my hands until we get more definitive direction.

Stay alert and stay liquid.  Major changes may be necessary in the near term, but for now, hang in there.

7/22 Update... August 2nd approaches!

So, it has been over a month since my last post.  The reason for that has been part intentional and part unintentional.  Unintentionally, I have let the summer get away from me.  “We are expecting our first child in September”, is probably my only legitimate excuse and I hope you can forgive me.  But intentionally, I have not posted because, despite all of the noise in the markets this summer, NONE of my portfolio positions have changed.  US equities still rule the asset class battle with Emerging market stocks, commodities and precious metals as also holds.  Bonds, while we have seen some positive inflows into bond funds in the past month or so, are still out of favor and holding cash is just a bad idea.  All technical signs point to an offensive holding pattern.  We have the ball, but are playing it safe.

Here are the latest portfolio statistics.  As you can see we are up nearly 9% for the year, and we are quite handily, beating the S&P and most other benchmark indexes.

	Jan 24, 2011	7/22/2011	% Change
My Portfolio	$99,994.75	$108,776	8.78%
S and P 500	1282	1344	4.84%
FTSE 100	5943	5899	-0.74%
Commodities Index (GSG)	33.99	$36.01	5.94%
20 Year Treasury (TLT)	92.43	95.66	3.49%

Now, here’s the rub and the reason for my posting today.  Usually, any portfolio changes are not made overnight, and usually we have plenty of fundamental AND technical warning for making appropriate portfolio modifications.  However, because of the impending debt ceiling crisis is in the hands of the most closed-minded and one-sided people on the planet, all of my portfolio positions are in danger of taking a big hit… and so are yours.  So, you NEED to be prepared for the Armageddon scenario of a US default or a downgrade in credit rating.  Believe me, we DO NOT want this to happen and there is nothing we can do about it if it does …except move to Canada.  What I can help you do, at the very least, is protect your portfolio. 

·      First, listen for key phrases like “The US is NOT RAISING the debt ceiling”, “Moody’s has DOWNGRADED the United States credit rating”, or “the US is defaulting on its debt.”  Any of these phrases will create chaos in the financial markets and will be cause enough for you to get ultra defensive in your investment portfolio.  I am not a fear monger and I hate to think of what can really happen if we do not figure out this debt problem.  But if we default it could lead to the US dollar no longer being the world’s reserve currency.  If that happens we could be looking a catastrophic change for the worse in our long term quality of life. 

·      Second, plan for an immediate liquidation of all stock market AND bond mutual funds.  Just sell and sit out the turmoil. 

·      Third, look to increase your holdings in physical or ETF gold and silver, regardless of price.

·      Fourth, look to increase your holdings in physical or ETF commodities. 

Three and Four will be the ONLY asset classes that have a chance at retaining value in the months following a US credit downgrade. 

Stay liquid and stay alert.

Happy Investing!

5/24 Update

"Sell in May and go away".... looks like the wisdom of the ages is accurate again.  In fact, according to Indexuniverse.com, 'since 1950, the Dow has appreciated 7.4% on average (from April through September), versus only a 0.4% average return in the May 1 through October 31 interval.'  This year has been no different.  Since the beginning of May, Commodities are down 11.23%, S&P 500 is down 3.7%, Emerging Markets are down 7.9%, and Silver is down 25%... ugh.  On the positive side, Gold and Treasuries have held their value and even increased a couple of ticks.


The numbers don't lie.  At the beginning of May, we were up over 12% and were way up over the other benchmarks.  Today, after a solid decline across all asset classes, especially silver and the commodities, here are the benchmark comparisons for 2011.

	Jan 24, 2011	today	% Change
My Portfolio	$99,994.75	$102,993	3.00%
S and P 500	1282	1317	2.73%
FTSE 100	5943	5858	-1.43%
Commodities Index (GSG)	33.99	34.67	2.00%
20 Year Treasury (TLT)	92.43	95.78	3.62%

The good (aka... tough, frustrating, annoying) news is that despite the recent declines and the negative fundamental buzz out there, we are still quite far from any of my absolute sell signals.  I add those adjectives in parentheses because watching my portfolio decline like this makes sitting on my hands and not making any emotional trades that much more difficult.  1) The relative strength of the S&P 500 to Cash still points definitively to owning stocks.  2) The other relative strength relationships are all still pointing in the right direction.  3) The point and figure charts of the holdings in the portfolio are all still quite far from their respective trend lines, which would create definitive sell signals.  

Bottom line is that as of today, the recent market activity points to more of a "breather" or a pause for the markets than an overall shift in momentum.  Only time will tell if we need to get out the life jackets and jump ship.  For now, turn off the TV, get out the golf clubs and wait it out...

Happy Investing!