Just two weeks after Standard and Poor’s (S&P) downgraded the U.S. government’s credit rating to AA+, the New York Times reported that the Justice Department is investigating S&P’s ratings of mortgage securities in the lead up to the recent mortgage crisis.

Despite the timing of the news, we know that the investigation isn’t retribution for the downgrade since the investigation precedes the downgrade by months. But the rating agency’s downgrade of US treasuries certainly didn’t help its case, and is construed by many as an effort at establishing S&P independence.

The investigation began with the Securities and Exchange Commission (SEC) looking into whether S&P and Moody’s Investors Service turned a blind eye to problems with sub-prime mortgage bonds that it rated prior to the recent financial crisis. The Justice Department joined the SEC’s investigation in recent months.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the debt crisis and U.S. downgrade in Advisor’s Journal, see What Does the U.S. Downgrade Mean for Clients? (CC 11-159), Debt Limit Deal Leaves Unfinished Business (CC 11-154), & Democrats Call Debt Limit Unconstitutional (CC 11-134).

Author: James Lavorgna, J.D., LL.M., CFP®

It was amazing to me when last Saturday, American investors woke up to realize that the economy was not doing well, unemployment and underemployment was around 17%, newscasters were reporting 15% of the American public was receiving food stamps, and people were horrified that, Standard and Poor’s, one of the premier rating agencies in the country and the folks who helped bring us the crash of 2008, downgraded the credit rating of the United States of America’s debt to AA+.

Then, a funny thing happened on the way to the country’s economic graveyard. People were fleeing the world’s stock markets for safety to where? The same U.S. Government Securities that were just downgraded. Go figure, Standard and Poor’s. So much for becoming a third world country this year.

Now don’t get me wrong; the credit downgrade was real, but hardly a surprise unless you have not listened to the news in the last six months. The credit agencies have been threatening to lower the country’s credit rating unless they reduced the federal deficit. And as everyone knows, Congress decided to reduce the amount of growth in the deficit instead of actually reducing the deficit.

But yet, there are still people out there who are crying for more stimulus money (translation: another credit card for the U.S. to give away meaningless, small amounts of money that really won’t make a difference to millions of Americans). Really?

Here is the real danger with these people. They may think that since many investors were fleeing to the U.S. securities markets after a downgrade, how far of a downgrade can we take before investors stop seeking out our government securities market for safety. That’s a lot of stimulus.

Here is my opinion. Last week, the Dow Jones Industrial Average on average reversed direction 150 times every 15 minutes and closed down 699 points or a drop of 5.75%.

Much of the volatility in a market like this is due to uncertainty about this government’s policies (however, some of the volatility in the market is consistently the professionals taking advantage of the fearful and uninformed amateurs).

Clearly, Washington does not get it, or if they do, then they are deliberately trying to ruin this country and it’s markets from within. It would not be the first time this has been done Mr. Soros . . . I mean Mr. Obama. Unfortunately, the country and the administration are being run by the largest group of inept people ever gathered in one place. I believe the administration will continue to blame everyone (George Bush, Sarah Palin, Sean Hannity) and everything (the Tea Party, talk radio, the media) else as the reason for the current economic conditions and do nothing to improve the situation.

Therefore, I am expecting this volatility to continue until it becomes clear who will win the next election. For these reasons, I urge everyone to take the time and review your portfolios and your objectives for them.

To say the least, the last ten days have been exciting. Profits galore have prevailed in our bond portfolios, while properly allocated equity accounts have shown slightly on the negative side. Relative return accounts have been down in line with the market.

For those of you who have come in for a portfolio meeting in the last six months, your portfolios should be where they need to be.

For those of you who have not realigned your portfolios and would like to, please call us.  For those clients on our Genworth platform, you should be looking at our Rowing strategies (tactical constrained, tactical unconstrained or absolute retains) to reduce volatility.

Those of clients on our Edelman platform, you can move to a more conservative model (i.e.: more cash) since the Edelman platform only does Strategic Management (i.e.: our equivalent to Sailing strategies).

About the Author:

Forsyth Wealth Management, Inc.

James Lavorgna, J.D., LL.M., CFP®
22 East Church Street
Martinsville, VA 24112
276-252-0633
jlavorgna@forsythwms.com
www.forsythwms.com

Last week, Standard and Poor’s (S&P’s) downgraded the U.S.’s credit rating for the first time in history, moving the US from AAA to AA+. Although Moody’s and Fitch have not followed the S&P’s lead, both agencies indicated that their prime rating is contingent on future U.S. debt reduction.

The debt ceiling agreement reached two weeks ago included a pledge to cut spending by $2.4 trillion over the next 10 years; but the rating agencies have said that the reduction was insufficient, hinting that cuts of $4 trillion or more are necessary.

Although the downgrade could have significant long-term detrimental effects on the U.S. and world economies, it certainly isn’t the economic Armageddon that a U.S. default would have been. In other words, it could have been worse.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the U.S. debt crisis in Advisor’s Journal, see Debt Limit Deal Leaves Unfinished Business (CC 11-154), Democrats Call Debt Limit Unconstitutional (CC 11-134), & Debt Deal Talks Down to the Wire (CC 11-139).

The downgrade of U.S. debt could soon be more than just a threat. Taking note of the US’s large budget deficits and continually increasing government indebtedness, Standard & Poor’s (S&P) gives mixed signals about the state of reform, having changed its outlook on the U.S. long-term credit rating from “stable” to “negative.”

While talks about debt limit increases are still speculative, S&P believes there is a one-in-three probability it will downgrade the U.S. long-term debt rating within the next two years. Such a downgrade could cause an economic catastrophe by signaling that there is a heightened chance the US will be unable to pay its debts as they come due. A downgrade would likely tank the markets, the federal government would be forced to agree to higher interest payments to sell its debt, and consumers would face an even tougher lending environment.

For previous coverage of the U.S. budget in Advisor’s Journal, see Republican Ryan’s Budget Faces Bipartisan “Gang of Six” (CC 11-80).

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