Subject: debt ceiling deal--Gary's thoughts re our portfolios

Subject: debt ceiling deal--Gary's thoughts re our portfolios (10/16/2013)

Good morning.  I write this to let you know how I am approaching our portfolios regarding the political conflicts in Washington, DC.

Big Picture:

·         Stay the course, invest more on market declines.

·         I predict we will not have a market crash like in 2008.

·         We might have a market correction like in Summer/Fall of 2011.

·         There is always SOMETHING causing anxiety for investors.

·         The best strategies for the long-term have been most effective when we just stay invested and continue to save and invest more.

·         I know, that is easier said than done given the political picture.

Political Update:

·         Word this morning is that the House will vote on the compromise worked out by the Senate.

·         There was talk of the House working its own deal (which I believe would have failed in the Senate), but one of my best contacts said yesterday that was a no-go and the Reid-McConnell negotiation is what will really be voted on soon, and reports today are indicating the same.

·         I expect Speaker Boehner will get enough of the Republicans to vote for it, joining most Democrats to approve it in the House.

·         Barring a filibuster or some procedural maneouver by some protesting Senator, the deal will then pass the Senate also, and the president will sign it.

Results of "deal":

·         debt ceiling lifted for a while (we pay all of our bills--albeit with ever-more borrowed money)

·         government re-opened soon

This does not "fix" "everything", of course.  It just means our credit cards will have not been cancelled and we will have found our checkbook and a pen, and government services and workers get back to speed.  It also means we probably are going to see more negotiations/battles like this in the near future.

What this means:

·         no "default"; our bills will be paid pretty much on-time

·         no "real" default; our bond interest obligations will be paid, and our bond principle will be paid-back upon maturity

o   I think this "default on our debt" issue was overblown and misunderstood, as the government cashflow is more than enough to cover our actual debt obligations

o   Secy of Treasury Lew has discretion to prioritize payments

o   So, Secretary Lew would have to deliberately choose to default on our bond interest/principle if no deal has passed in time, and that is almost impossible to imagine for reasons both economic and political

·         money market funds are likely to NOT "break the buck" (our cash, while never FDIC-guaranteed, is likely to remain quite safe)

·         no progress on long-term fiscal strategy (entitlement reform, tax code, other budgetary items)

·         no guarantee this won't happen again (debt ceiling debacle of August 2011 was followed by Fiscal Cliff anxiety a year ago…)

For our portfolios:

·         Flex and Strategic portfolios should stay invested if Senate deal passes House

·         If no deal passes, we have the option of going to cash/money market funds IF we think we're facing another 2008-size market slide

o   I strongly caution against going to cash, though.  Market reactions tend to be swift and strong during such times, and I don't want people missing out on a rally that comes after a sell-off

·         Uninvested cash will be invested in large chunks or entirely if the market drops more than ~5% in a week or so AFTER there is a political deal

·         Uninvested cash will be averaged-in over the next three months if the market volatility is normal after there is a political deal or series of deals

·         You can override my recommendations, of course--it is your money even after I provide my advice

Please contact me with any questions.  Thank you!

--Gary