Pat Webb - Phase 2 Advisors
Weekly Market Update


The Markets:
Balance the budget; curtail spending; reduce debt - three aspects of simple fiscal management. At one time or another, nearly every American has done these things to keep their financial house in order. Now it's the government's turn. Trouble is, the powers that be haven't agreed on how to do it. Meanwhile, all the posturing in Washington is fueling investor frustrations as experts warn that failing to raise the debt ceiling will have disastrous consequences. Why is this such a complicated issue? And perhaps more importantly, why does immediate action need to be taken?

At a fundamental level, the problem is that the U.S. government spends more money than it takes in (See Chart). In order to cover the bills, it borrows money, thus the national debt. In theory, the debt ceiling is supposed to help Congress control spending, in reality, it isn't working. Since 1962, the ceiling has been raised 74 times, 10 of which have occurred since 2001.[1]


What is the debt ceiling anyway?

It is a limit set by Congress on the amount of debt the federal government can borrow. The limit applies to debt owed to the public (e.g. U.S. bond holders) and debt owed to federal government trust funds such as those for Social Security and Medicare.[2]


How high is the debt ceiling right now?

The ceiling is currently set at $14.294 trillion. The country's accrued debt reached that mark on May 16, 2011. Currently, Treasury Secretary Timothy Geithner is taking various measures to allow the government to continue borrowing until August 2nd.[3]


What now?
Nobody knows for sure how things are going to play out and the uncertainty is frustrating to say the least. Here are a few of the options that are currently being debated:

1)    Do nothing.
This is not an option we want to see elected. If no action is taken, the Treasury will not have authority to borrow any more money. And since the government borrows to make up the difference between what it spends and what it collects, funds would not be available to pay the country's bills.

Failure to act would create serious economic repercussions. At a minimum, a default would hurt U.S. bonds, the dollar, and investors' portfolios. And while a total government shutdown is unlikely, many who depend on government checks - from active-duty soldiers, veterans, and federal workers to name a few - could find their mailboxes empty. Which payments would be delayed is not known, but any choice would cripple parts of the economy and anger many groups of Americans.[4]


2)    Agree on a plan to reduce the budget deficit and national debt.

A package of $4 trillion in spending cuts and revenue increases is widely considered by fiscal experts to be the only way to start reining in the runaway U.S. debt.[5]  In this respect, the key issue is not just that a deal be made, but that it qualifies as a long-term solution.


Two key ratings agencies have said they expect policymakers to agree on a plan to meaningfully reduce the debt. Moody's Investors Services said Wednesday it would likely change its outlook on U.S. debt from "stable" to "negative" unless "substantial and credible agreement is achieved on a budget that includes long-term deficit reduction."[6]  Standard & Poor's went farther on Thursday by announcing there is a fifty percent chance it would downgrade the U.S. within 90 days if a credible agreement is not reached.[7]


And while most Americans understand that changes need to be made, the politicians can't agree on what those changes should be. To quote the president, "The American people are sold" on the idea of balancing spending cuts with tax increases. The problem is members of Congress are dug in ideologically."[8]


To be fair, deciding where to cut and where to spend is challenging. Take a look at this chart.





Even if the government agreed to cut all discretionary spending it wouldn't make up for half of the deficit. Even eliminating social security and all defense spending would barely cover the deficit. And of course, that can't be done. So as you see, policy makers have a serious challenge on their hands.

3)    Raise the debt ceiling again.
Most experts agree that policymakers will raise the debt ceiling. If for no other reason, because the consequences of not doing so are too great. If the debt ceiling is breached, interest that the government pays on its debt will rise, pushing the deficit even higher.

Federal Reserve Chairman Ben Bernanke was on Capitol Hill Thursday, warning that failure by Congress to raise the debt ceiling would create "a calamitous outcome." Global confidence in U.S. Treasuries and the nation's AAA credit rating are among our nation's greatest economic assets, and according to Bernanke, "Losing that credit rating would be a self-inflicted wound".  It would also be bad news for the labor market, the Fed chairman explained, which is an area of growing concern since the June jobs report showed hiring slowed to a crawl.  In short, failing to raise the debt ceiling would be bad news all around.  

It is our hope that a combination of efforts involving raising the debt ceiling and implementing a plan to begin reducing the deficit will be agreed upon promptly.

What are we doing in the meantime?

We have determined that it is too risky to try and predict what the outcome of this situation will be, and if we get a prediction wrong, it could cost our clients money. Overall, we have confidence that some sort of agreement will be reached and we do not think now is the time to take drastic action. We realize it may not be especially reassuring for you to hear this, but we believe it is the best choice.

Rather than reacting too conservatively or aggressively, we continue to maintain that a balanced approach to investing, including diversification and maintaining long-term vision, is the best way to weather storms like this. We will, however, keep a close eye on the situation and monitor how any developments have the potential to affect your portfolio.

If you have any questions or concerns, please don't hesitate to reach out to us. It is a pleasure serving you.



 07/18/11 graph

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized.
Sources: Yahoo! Finance, MSCI Barra. Past performance is no guarantee of future results.
Indices are unmanaged and cannot be invested into directly. NA means not available.

Quote of the Week
"To laugh often and much; to win the respect of intelligent people and the affection of leave the world a better know even one life has breathed easier because you have lived. This is to have succeeded." - Ralph Waldo Emerson
Recipe of the Week

Cranberry Sorbet

 07/18/11 recipe

From: Better Homes and Gardens
Simply cook and puree cranberries, strain, then freeze for a frosty and easy dessert.
It also serves as a palate pleaser between courses.

1-1/2 cups water
3/4 cup sugar
2 cups cranberries

1) Line the inside of an 8x4x2-inch loaf pan with plastic wrap; set aside. In a medium saucepan, combine water, sugar, and cranberries. Cook over medium heat until mixture just boils, stirring to dissolve sugar. Remove from heat. Cool slightly. Pour, half at a time, into a blender or food processor. Cover and blend or process until mixture is nearly smooth. Strain through a fine mesh sieve (should have 2 to 2-1/2 cups sieved cranberry mixture).

2) Pour sieved mixture into lined loaf pan. Cover and freeze for 2 hours or until mixture is nearly frozen. Stir well, scraping frozen mixture from sides of pan. Spread mixture evenly. Cover and freeze overnight.

3) To serve, let stand at room temperature for 5 to 10 minutes. Spoon into dessert cups or dishes.

4) Makes 8 to 10 servings.

Golf Tip of the Week

Add Some Power

If you would like more power behind your swing, avoid shifting your weight too much. To make sure you make a full turn with the proper weight shift, take your regular stance, then turn and point your right toe to the left. This will restrict your hip-turn and allow your arms to stay wider at the top of your back swing.

A way to practice this is with a ball under your right heel. This, too, will restrict you from turning too much. Just make sure you are in good shape if you try this and be careful to maintain your balance.

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Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.


The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.


The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq. The DJIA was invented by Charles Dow back in 1896.


The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.


The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.


Google Finance is the source for any reference to the performance of an index between two specific periods.


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Past performance does not guarantee future results.


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Pat Webb
Pat Webb - Phase 2 Advisors
8100 Turman Ct
Fort Collins, CO 80525