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Letter to Clients Regarding S&P Downgrade of Treasuries

Dear Clients,

The credit rating downgrade of US Treasuries discussed in a previous communication has come to pass.  Yesterday, S&P lowered the rating for US Treasuries to AA+ from AAA. 

As noted in that earlier communication, it is likely that the impact of this action on the Treasuries market will be muted.  Given that S&P has been warning about this action for some time it’s effect has been priced into the market so practically speaking we already have our answer regarding its impact.   We will see on Monday how the Treasuries market will react further since the official announcement came after the market close yesterday.  So far, yields on US Treasuries have been dropping as investors seeking security have increased demand for US debt.  The conventional wisdom is that this rating downgrade, and the threat of further downgrades in the future, will reverse this trend and cause yields to rise as investors demand higher interest payments in return for incurring the relative increased credit risk that a AA+ rating reflects. 

As you know, I do not waste time trying to predict what the market will do in response to events such as this.  I focus on controlling what we can by implementing and adhering to an investment strategy that allows you to stay on course for achieving your goals in spite of periodic, and inevitable, market declines.  With regard specifically to our strategy of using Treasury Strips to build bond ladders for those of you entering or in retirement, I see no reason for changing this.  The reality is that these investments remain the safest in the world, as evidenced by their continued high demand throughout the debt limit crisis and subsequent stock market drops.  My conviction remains that holding Treasuries to maturity to fund your retirement cash flow needs is a prudent strategy that will serve you well throughout your retirement years.

Market volatility, while stressful, presents disciplined investors with opportunities.  We will therefore be looking to opportunistically rebalance your portfolios by buying stocks at depressed prices.  We will also look at taking advantage of any increased bond yields when adding to your bond ladders since higher yields mean lower bond prices, decreasing the cost of building these ladders.  These actions will effectively allow us to “buy low and sell high” and add incremental long term performance while maintaining an equity/bond exposure ratio appropriate to your needs and risk tolerance.

I hope the above helps to put things in perspective during these turbulent times.  As always, I remain available to answer your questions and discuss your concerns, whatever they may be.

Thank you for your continued support and trust.

Best,

Joe

Letter To Clients Regarding Debt Ceiling Crisis

A version of this letter was originally sent on July 24, 2011

Dear Clients,

I am sure that you have been following with concern the political drama unfolding in Washington around the issue of raising our nation’s debt ceiling.  At this moment, it is not clear what the final resolution of this issue will be and it appears that negotiations have hit an impasse.   The markets will start to vote shortly in Asia when exchanges open on their Monday.  Our market will certainly react as well to these events and will continue to remain volatile as long as the impasse continues and we get closer to the August 2 deadline when fiscal debt is expected to exceed revenues.

I am also sure you are wondering how all this will impact your savings and investments.  I share these same concerns as a fellow investor (and tax payer) following the same investment strategy that I have recommended for you and investing in the same assets that comprise your respective portfolios.  Unfortunately, neither I nor the various pundits in the media possess a crystal ball to allow us to divine what will happen over the course of the next few days and weeks and, more importantly, how financial markets will react in response.

It is exactly this unknowability, however, that informs our investment strategy and policy of diversifying across a broad array of asset classes that tend to react differently to economic conditions.  I believe that all of your IPSs reflect a prudent approach to the uncertainly and risk that is an essential element of investing.  Your equity assets are invested in domestic and international markets, both developed and emerging, and are comprised of thousands of companies running the gamut of size and valuation.  Similarly, your fixed income assets are invested globally, in high quality issues (AAA/AA), with maturities averaging less than 2 years.  We have intentionally kept your fixed income asset maturities short as a hedge against inflation and to dampen the overall volatility of your portfolio.

In short, I believe that the work we have done together to prepare you for the risks inherent in the market will also prepare you for whatever may happen as  a result of the current debt ceiling crisis.  This is not to say that the ride will be an easy one.  I do believe, however, that you are well-positioned to see this crisis through and remain on track to achieving your long term goals.  As both your advisor and fellow market participant, I will be there with you and for you whatever may arise.  I am therefore not recommending any changes to your respective strategies at this time. 

I am attaching a link to an article from one of my colleagues, Bert Whitehead, that I think sums up my thoughts as well.

As always, I am available to you at any time to discuss this or any issue of concern to you.

Thank you for your continued support and trust.

Best,

Joe

"The Debt Ceiling Fiasco" at http://bertwhitehead.blogspot.com/

Quoted In Chicago Tribune Article On Spousal IRAs

http://www.chicagotribune.com/business/sc-cons-0602-started-20110603,0,7385908.story