Should Investors Get Jitters About the Shutdown?

The link above is to an Associated Press article appearing in the Arizona Daily Star today. It is surprising to see the rather large numbers of “shutdowns” the US Government has experienced in recent times. This article does not make an estimate about the cost of a government shutdown but others estimate that if it lasts as long as the late 1995 shutdown, it could cost taxpayers as much as $2B. I hope the shutdown can be averted and thereby affect the financial markets only marginally but, as conscientious advisors counsel their clients about all investing: past performance is no guarantee of future results.  I sincerely hope that the Affordable Care Act is not delayed as a “compromise”. I will write more about why I support the ACA in another post. As of this writing, it appears that investors are, indeed getting a bit jittery as the DOW is down 103. I will use this as a buying opportunity if the decline is significant enough.

Strategic changes to my model portfolios

I have been for some time considering changes to my model portfolios. This has been precipitated by questions I have about traditional models that I was exposed to while I held my book of business at Genworth Financial Wealth Management and, prior to that as a financial planner in the capacity of Investment Advisor Representative at AXA Advisors.

Elsewhere here, I describe my practice philosophy as adhering to principles of Modern Portfolio Theory. MPT places great emphasis on asset allocation. Model portfolios are guides to investing client funds by diversifying their investments in mutual funds that hold various distinct classes of assets. Also elsewhere here I  list those I use. The models reflect a range of investment objectives and risk tolerance from “Capital Preservation” to “Aggressive”. The exact models I use are proprietary so I don’t display them to the public.

While my book of business resided at Genworth Financial Wealth Management I employed various institutional wealth managers to compose model portfolios for my clients. I assessed their risk tolerance and investment objectives and based upon these I would advise them to use a model portfolio of one of the wealth managers. Because these wealth managers held different views, they composed different models. Some were “strategic” some were “tactical”. The tactical portfolios could change their asset allocations for asset classes with some limitations. For example, they could have a target of 20% for Domestic Large Cap Growth but they could “overweight” or “underweight” that 20% in a range from, say 10% to 30%. They would adjust the allocation based upon their best guesses for near term Market moves. I don’t tactically adjust my portfolios.

Recently I attended a workshop organized by the Tucson Chapter of the Society for Chartered Financial Analysts and the Financial Planners Assn. Tucson Chapter. The presenters were from Oppenheimer Funds. Brian Levitt, economist and head of capital markets research for Oppenheimer Funds spoke extensively about the outlook for financial markets globally. The upshot of the presentation is that it is time for investment advisors to examine their views on allocating stocks and bonds in light of the increasing market capitalization of non-US companies. He stated that at this time US based companies own just 43%  of the share value of all the corporations publicly offered in the world. It is for this reason I am increasing the proportion of foreign stocks in bonds in my portfolios.

A Postal Savings Bank?

A Postal Savings Bank: Infrastructure that Doesn’t Cost Taxpayers a Dime

Perhaps some would question why I am concerned with such broad issues as the minimum wage and public banking. I would answer that economic growth is important to investors because without it, our investments are speculative; not substantive.

When we invest in the stock of a company we do so because we anticipate the company to be yes, profitable at present but primarily that it will be profitable in the future. Our share of the company means that we have a stake in it; that we will share in its growth and prosperity. Presently, the US economy is experiencing a slow and rather anemic recovery from the most serious recession since the great depression. Trillions of dollars in investment capital and real estate capital were lost during the 2007-2008 recession. This was due to the fact that the largest banks in the country were speculating on securities that were veritably unquantifiable. We learned, post hoc that mortgages were bundled into lots of thousands and then sold in shares, primarily to large financial institutions such as Wall St. banks. To make matters worse, derivatives of these collateralized securities were created such as insurance policies against the insolvency of the mortgage holders underlying the securities, called credit default swaps.

The crisis came when it became apparent that the trading in these securities between the banks had become so enmeshed that the institutions became unsure of their value. A gridlock on Wall St. formed that threatened to bring down the entire economy. The crisis was precipitated by extreme speculation by the banks with depositors money at great risk of insolvency. We now know that the Treasury Dept., led by Hank Paulsen stepped in and, literally with scraps of paper handed to the bankers, solvency and certainty was restored. There is great debate and controversy about this still today.

That brings us to the simple but ingenious proposal contained in this article by Public Banking champion Ellen Brown. Using the existing Postal Service infrastructure, a very low cost and very safe banking service can be created. The article points out that 1 in 4 US households is unbanked. This marginalizes those households in many ways. It causes an unnecessary financial barrier to those households; a drag on economic growth.

At the same time, the US Postal Service which, surprisingly has had a net INCREASE in business due to the boom in online shopping could “…recapitalize itself by diversifying its range of services to meet unmet public needs”. To sweeten the proposal further, the capital formed by the depositors could be loaned to the US Government as “National Infrastructure” bonds, making the Post Office a National Infrastructure Bank, and idea that has wide bipartisan support.

We need every good idea to accelerate this lackluster recovery. This idea would not cost a single taxpayer dollar and save hundreds of thousands of Postal Service jobs. All that would be necessary is a Congressional nod to allow the USPS to expand the scope of its services.


Today, we witness the intense gridlock in the US House of Representatives. The majority party is intent upon linking the funding of the US Government to the repeal of “Obamacare”. It is interesting to note that Pres. Ronald Reagan excoriated Congress for this very action during his administration. He cited many reasons this should not be done. The reason investors should be concerned is the introduction of a great deal of uncertainty to the financial markets.

As I have stated elsewhere on this website, uncertainty is a primary element that causes instability in the financial markets. Investors, faced with not knowing the outcome of a situation; in this case, the vote to continue funding the government, tend to sell their stocks and bonds and seek the safe harbor of cash, US Treasury securities, or precious metals. I could confer with my clients at such a time and propose selling their securities in anticipation that this crisis will not be resolved and the Federal Govt. will be “shut down”. I’m pretty sure that if I took that action, most would endorse a proposal to sell. However, the quandary I face in such a situation is that, while I might be correct in my timing and avert a plunge in the prices of the securities in my portfolios, I have no idea where the “bottom” of the slide might be. Knowing the bottom allows the market timer to repurchase their securities to allow for the (price) ride “back up”. And no one has such a crystal ball.

Elsewhere in this website, I discuss market timing and this very issue. This is the reason I do not practice market timing and advise my clients to stay invested through the crisis and allow me to rebalance their portfolios systematically until the crisis is past.