Uncertainty Over Default has not Helped the Market

Markets:

For the week of July 25, 2011 through Thursday, July 28, 2011

• Standard & Poor’s 500 Index: -3.28%
• Dow Jones Industrial Average: -3.48%
• NASDAQ Composite: -3.24%

The news was dominated by the United States’ debt ceiling. As of Thursday afternoon, no deal had been reached to raise the country’s debt limit. However, the yields on U.S. Treasuries have not indicated that the fear of a default is high. Wednesday the market reacted to economic news from the Federal Reserve’s Beige Book and Congress’ ongoing struggle to meet in the middle. The Beige Book data shows that the economy is growing, but at a pace that may be slowing. Initial jobless claims dropped for the week, keeping the trend at a very slow pace.

Politics

• U.S. Debt Ceiling
  • With the deadline drawing near, neither a bill nor a compromise has officially been reached to raise the U.S. debt ceiling.
  • Despite the risk of default, interest rates on U.S. Treasuries have not risen significantly, indicating the market thinks the risk is low.
  • However, if the ceiling is not raised, the government has enough monthly revenue to pay the maturing debt without defaulting.

Economic Data

• Beige Book and Manufacturing
  • The Fed’s Beige Book report for June through mid-July was released this week.
  • Economic activity grew, but only very modestly across the country.
• Jobless Claims
  • Initial claims fell below 400,000 to 398,000 for the previous week, down from 418,000 the previous week.
  • However, the trend must continue for the labor market to significantly improve.

Viewpoints

• U.S. Debt Ceiling
  •  Henssler Financial firmly believes that the U.S. government will not default on its debt obligations.
    • We find it disappointing that our congressmen have dealt with the debate in a “Mickey Mouse” fashion.
    • These are some of the same congressmen who voted down TARP the first time.
    • While TARP may not have been popular among Americans, most financial industry experts will agree, that without TARP, the system would have been done.
  • We can appreciate the debate between the right and the left.
  • This debt debate is a true philosophical difference of which direction our country wants to take.
    • We believe money is neither red nor blue, but green.
    • We consider what would be most beneficial for the taxpayer and investor.
    • We agree with former director of New York Stock Exchange, Ken Langone, who said he would not mind paying higher taxes as long as the money is used to pay down the deficit, and not transfer payments from one pocket to the other.
  • S&P and Moody’s have warned that they would downgrade the United States if Social Security payments were delayed, because they deem it as a U.S. obligation.
    • However, this makes no sense to us as “obligation” in terms of credit rating should be in factors of debt, meaning bonds.
  • Historically, every president in the last 30 years has raised the debt ceiling.
    • There have been 78 increases of the debt ceiling since 1960.
    • Raising the debt ceiling should not be considered routine, but it seems to have become that.
  • We would like to see around $3 trillion in spending cuts.
    • This would be closer to 3%-5% that is considered stable for the GDP.
    • If we get to that point, we would deem it progress.

Investing Through the Chaos

• We believe in investing over the long term and do not recommend selling any equities at this time in order to time the market.
• The market has firmly indicated that the default risk is extremely low because the interest rates on U.S. Treasuries have not risen like they did for Greece.
• If the risk were high, the interest rates would have risen significantly.
• Also, the volume of trading on credit default swaps for U.S. debt remains at a minimum.
• We believe these market indicators show how unlikely the U.S. is to default on its debt obligations.
• Market Timing
  • Some people have been suggesting that now is the time to sell equities.
  • The theory is that equities will drop, and you will be able to pick them up for less than they were sold.
  • We do not advise using this strategy!
    • In order for this strategy to work you must be right twice; when you sell and when you buy.
    • If you miss, you lose big!
  • However, the same people suggesting that you sell stocks are suggesting you hold your bonds.
    • We have to ask, if the government were to default, what would the bonds be worth?
    • Why sell stocks that are beating earnings estimates?
• We believe in holding high quality stocks and mutual funds that invest in high quality stocks.
  • We suggest:
    • Understand what you are investing in;
    • Know your time horizon, and
    • Buy quality.

Interest Rates

• The two-year Treasury was up 3.5 bps to 0.42%, still barely above all-time lows.
• The five-year Treasury inched up to 1.52%, still down in the past few weeks.
• The 10-year Treasury rate dipped 2 bps to 2.94%, down nearly 80 bps for the year.
• The 30-year Treasury barely dropped 0.5 bps to 4.25%, down around 0.5% since the first quarter.

Disclosures

This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.