Part 1 was 1.5 weeks ago. This is part 2, updated as of Monday morning.

It’s a particularly long video, but filled with my current thoughts

* What does the S&P downgrade mean?

* What should you have and not have in your portfolio?

* Should you move everything to cash?

* Is this emotional selling or fundamental?

I’m going to have 2 or 3 videos this week since so much is going on. One of the aspects of my job, in my opinion, is to over communicate with you as the adviser/client relationship is a partnership.


 Hi there, Mike Brady with Generosity Wealth Management, and today the topic is “Should You Freak Out, Part 2.” Because I did part one about a week and a half ago and just because so much is happening in the markets I’m going to try to do a video maybe twice this week, maybe even three times, believe it or not. Just because so much is happening in such a short time, I want to make sure that I have good communication with you; both to my prospective clients, to my existing clients and to whoever else might be interested in this.

 So, a week and a half ago, if you go back and look at that video, what I said is, I said that I thought that the debt ceiling was going to be raised, but I it’s going to be kicked down the, the can’s going to be kicked down the alley. And, absolutely that’s what happened. It’s pretty much a joke in my opinion. I said that it was going to be rough, “it’s going to be very volatile,” I think is what I said. We certainly have seen some volatility in the last nine days or so. And then I asked the question, I go, “is this the abyss?” “Is this 2008, all over again?” And I said, “no, I didn’t believe that it was, but we were going to have a rough patch before it got back out.” And I was more optimistic than I was pessimistic. And, when data changes you should feel free to change your opinion. Some of the data is worse, I mean I didn’t see as rough of a patch last week as I said a week and half ago. But, the reason you have a diversified portfolio, the reason why you make modifications throughout the year, is for something like last week.

 If you are here at the beginning of the week wondering “Oh, my gosh! What should I do?” The answer is that it might be too late. You should have the portfolio already and a good relationship with your advisor who can explain what your portfolio is.

 Hopefully you’re very low, if down to zero, on municipals. Hopefully your exposure to Europe is next to zero. Hopefully you have some gold exposure. And hopefully you’re well weighted with a lot of bonds in there, as well, which are of a short term nature. So, anyway, that’s what you do in preparation for it. But here we are.

 So the question is, is this the beginning…, is this the end of the beginning or the beginning of the end? Or where does this really go. And one thing we have to watch out for, I think this is a very common thing to do, but we want to be the smart money. We want to be the professionals- and not fall into what so many others, maybe our neighbors are doing. And that is assuming that when the market goes down, that it will continue to go down, it very well could, but we can’t jump to that conclusion. When the market is down ten per cent that doesn’t mean it’s going to go down twenty per cent or forty. It is not linear. As an example, if you make one per cent one month, it doesn’t mean you’re going to make twelve per cent for the year. Or if you lose one per cent in a month, it doesn’t mean you’re going to lose twelve percent. It’s not linear.

 And so, right now the question we might ask ourselves is, is it down now and is it going to rebound back up either slowly or quickly, or is it going to continue and getting out and cutting our losses is actually the wiser thing to do.

 Right now it’s a very unknown situation. It’s always unknown- ‘kay I don’t want to sit here and say that we absolutely know- but we’re dealing with a couple of major macro events that have not happened before. One of which is the down grade of the, of the S & P, excuse me, from the Standard and Poor’s of the U.S. government. And the whole ripple effect that that might have; I mean, as it relates to municipals, as it relates to money markets, as it relates to a number of different things. It’s a little bit unknown. I will, I will just kind of talk about that right this second, I think.

 Let’s talk about the Standard and Poor’s downgrade. It was poor timing. Friday, after market close- I mean just pretty rude as far as I’m concerned. Particularly after the last couple of weeks of the debt ceiling, very hyper-political discussion, one way or the other, on the two sides there. And so, first off, let me just tell you, I have a pretty low opinion of Standard and Poor’s. These are the same people who had highly rated Enron and Worldcom bonds, companies and bonds right before they went belly-up. These are the same people who downgraded Lehman Brothers the day that it collapsed. These are the same people who gave AAA ratings to all of the sub-prime mortgages that were packaged in structured products, with CDOs, all the different, all the different alphabet; the CDO’s, CLO’s, et cetera. This is the same company that did that. And so, if they bring down AAA, the U.S. government from AAA to AA+, I think it is, or AA-, sorry I can’t quite remember, I’ll look here at my notes here in a second, but it’s the next one down. Then does that mean that the, what does it really mean? It doesn’t mean that they’re not wrong, it just means that I have a pretty low opinion of the Standard and Poor’s.

 Now, the U.S. government, I think they said, Standard and Poor’s pretty much said what we all believed anyway- that we have a huge debt problem. Now, frankly, let me just cut to the chase here- what does this really mean; the possibility of the U.S. government not paying its debt is zero. Because all of this debt is in U.S. currency, ‘kay, so that does not mean that there wouldn’t be a negative consequence if we just turned on the printing presses. But, I’m telling you, the probability of the U.S. defaulting on its debt is zero. Forget everything you’ve seen or read leading up to this the debt ceiling, which is a whole other discussion about how important this debt ceiling really is, but the probability is zero. Now if they turned on the printing presses now that would have other effects. Of course, there would be inflation, and other negative consequences but we would pay it off, even if it was in deflated dollars, okay?

 Now Warren Buffet, who I think very highly of, I mean the guy, give or take, thirty or forty billion dollars, he and I are, pretty much pals. And the guy is super smart, and he basically said the U.S. government, I’m still, the AA is now the previous AAA. Now what effect did this have in other governments? Japan was downgraded in January of 2011, it was pretty much a nonevent. The market dictates what they are going to require on the bonds that they buy from the government. So, Japan, it’s been downgraded most recently, and it pays half of what the U.S. does in order to borrow, ‘kay? That’s just it. We need to take into consideration that the Standard and Poor’s has probably said something that we all believe. They said the right thing, they said it kind of poorly, in my opinion, at a wrong time, they could have waited until a little of the uncertainty goes away but they said it, they said it.

 So now, this, the S & P downgrade does have an impact on municipals. Unfortunately municipals, I think a lot of them are going to be downgraded sometime this week or in the near future. That’s just kind of the way it goes. What impact that’s going have on the cost of borrow? It will probably increase the cost of borrow. They’re probably not going to survive quite as well as the treasuries. But once again, the market’s going to dictate what they require with your capital. The capital flows to what the best opportunity is. So, if a municipal bond or the U.S. government is still the best opportunity for them, that capital that’s in that free market, is going to say, “this is what premium I require for you to receive my capital.”

 I think, I’m just going to look here at my notes, because there is a lot going on, let me just jump to the conclusion. Which is; no I’m not freaked out and I don’t think you should be freaked out too.

 Now is the time where rational thought, calmness, an understanding that you’ve done what you can to put your portfolio in a position to weather this out, I am still, and I’ve not been convinced, although I could be convinced in the next couple of days, as data changes and opinion changes; but the fundamentals and the emotional are two different things. And I still like the fact that there’s two trillion dollars in balance sheet cash in the companies. And one and a half trillion in excess capital reserves in our banking system. I do like some of the efficiencies that companies have. And I still am feeling comfortable with some of the fundamentals in the market even if the technicals are not looking so good. And even if some of the emotionality has to be whetted out- now is not necessarily the time to freak out.

Now, that might change in a day or two. I’m actually recording this on a Monday morning, markets have closed sharply down. I think a lot of that is emotionality and a knee jerk reaction to an event that happened after the close on Friday.

 So, I’m going to, like I said, keep you updated and hopefully do these videos as often as I can this next week.

 Let me just kind of knock through a couple of things here…

 Municipals I talked about, let me put that to the side. You know there was nothing that was said last week that was new news- in my opinion. Europe: still a mess. If you’ve been watching my videos and reading my newsletters for the last year and a half, absolute disaster. You should have very very minimal international exposure.

 Let’s see, QE2, the end of quantitative easing two; we all knew it was going to happen. It happened at the end of June- that’s not a surprise.

 ‘Kay, I’m just going to reach through all my notes here, make sure I hit everything.

Buffet, God I love that guy, he’s smart, I wish I was as smart as him. Basically, he has a lot of cash and he is bullish on the U.S. and the U.S. market. It’s the most vibrant, robust and diversified economy. And you might say, “Oh, it doesn’t feel that way.” (Oops, I’m going to get a little bit closer and get focused again.) “Oh, it doesn’t feel that way.” But in comparison to all of the other options, that is the case.

 Let’s see, okay, I think I’m going to end now, I’ve been droning on for a while. One thing that I do want to kind of end on, there’s two things I want to end on; The first thing is, there seems to be a need to explain every type of a decline. Whereas we feel it’s our birthright if the market goes up. When the market went up 100 points or 200, it’s like “Okay, it went up 200.” We don’t sit here and say, “Why? Why did it go up? I don’t understand!”

 But on the other hand if it goes down 100 or 200; you got to explain it! There has to be an absolute answer for it. And I’m a chaos theory guy in general. And what that means, is sometimes things happen, a confluence of events that are very hard to explain. And I think that’s one of the things we’re in right now. A lot of newspapers and pundits are trying to explain exactly why this happened or that happened, etc. And it is typically a combination of all of them plus some emotionality thrown in to it.

 Right now, getting back to the- now is the time where we feel comfortable in the mix that we have with our portfolio. Maybe we’ll make some modifications as things go through. And as data goes through, you can’t be beholden to, “I’ve got to, this is exactly what is going to happen, and what I feel what must happen.” Because the market doesn’t care what we think. So we’ve got to also be willing to change our opinion. I’m just not changing my opinion just yet.

 The very last thing I want to talk about is- I’m going to throw up, after this video, some great web sites that I go and read throughout the day. I think they’re absolutely wonderful.

Forget CNN money, forget all these other kind of larger stream ones, they’re garbage. I like some of the blogs which analyze why something happens, or starts to explain it and goes underneath the surface; Pragmatic Capitalist, Zero Hedge, the Reform Broker, there’s a bunch of really good blogs out there that I really recommend.

 Anyway, Mike Brady. Generosity Wealth Management, 303.747.6455. And you have a wonderful day and give me a call if there are any concerns that you might have, thanks, bye bye.