Raising the Debt Limit

The clock continues to tick towards the August 2, 2011 deadline when the United States debt ceiling limit will be reached. This limit is a key element of U.S. Government financial management. The U.S. Government is expected to receive about $175 billion in tax revenues for the month of August, but has $310 billion in monthly obligations that it needs to meet. As a result, the $135 billion in monthly shortfall is usually borrowed via the issuance of U.S. Treasury bonds. However, once the debt ceiling is met, the U.S. Government will not be able to issue new debt and will therefore, have to make significant decisions as it relates to what $135 billion or 44% of its "bills" it will delay payment on. That is, of course, if the debt ceiling limit is not raised by Congress and signed into law by the President.　

While the rhetoric coming out of Washington has certainly transitioned from compromise to contention, it should not be overlooked that the divided parties are aligned on a few very important criteria that should bring a resolution closer to happening—namely that spending cuts should be enacted and that a more responsible government spending policy should be put in place to get a handle on the nation’s soaring national debt. In addition, both sides seem to now understand that the polarizing political view of revenue increases (the Democrats’ wish) and significant entitlement reform (the Republicans’ wish) are too significant a gap to overcome over the short term and are now virtually off the table.

Now, the only (and it is a big "only") things that the two sides have to work out are: where the cuts in spending should come from, how long they will take to implement, and how much money they will save. The reality is that the two divided sides are not as far apart on the terms of a deal as they are from an ideological and political posturing perspective. Said another way: the two sides sound and act a lot further apart than their competing plans actually are.

We expect that the debate in Washington will continue over the next few days as the game of political ideological "chicken" plays out. However, our base case is that a compromise will be forged over the coming days and will result in either a short-term extension of the debt limit or, more likely, an agreement to raise the borrowing capacity of the United States Government until well into next year.

More importantly, even if a bill is not agreed upon and signed into law to raise the debt ceiling by August 2, we do not foresee the United States Government defaulting on its obligations. A default will occur if the government failed to pay the interest due on its debt. For the month of August, the interest due on Treasury bonds accounts for only $29 billion, which is easily met by the $175 billion in tax revenues that are expected. However, while a default would be avoided, the significant impact of dialing back $135 billion that could not be borrowed for other Federal services and obligations would have serious economic impacts.

While the debt ceiling debate has grabbed the headlines and is currently the most significant risk to the market, the underlying strength of the global economy remains solid. Moreover, several of the open-ended issues that have lingered for months are finally getting substantively addressed, including a plan for a second bailout of Greece, a stabilizing European debt crisis, and the re-emergence of Japan’s economic infrastructure from its terrible natural disaster in early spring. In addition, company earnings continue to be very strong as corporate America continues to benefit from a resurgent business reinvestment climate and a resilient consumer.

　

In the meantime, the current conditions support a cautious stance as the market is singularly focused on Washington. We expect that a resolution on extending the debt ceiling will ultimately be agreed upon, but not until the deeply divided government drags the nation and the market even further through the mud. But, on the other end of this self-imposed crisis stands an economic climate where businesses are earning near record profits, employment is improving, housing has stabilized, and consumers are once again revisiting the malls to spend. While the turmoil in Washington will invariably offer up several more nervous days as the debate lingers on, we believe that a relief rally for the market is around the corner once compromise replaces contention and unity trumps division. As always, if you have questions, I encourage you to contact me.

Best Regards, Mark C. Gosselin


Mark C. Gosselin
Branch Manager
Investment Consultant
11200 Broadway
Suite 2743
Pearland, TX 77584
832 895 6627 office
http://www.markgosselin.com/



The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult me prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

This research material has been prepared by LPL Financial.

Tracking #749471 | (Exp.07/12)

　

2011 Mid-Year Outlook, A Mix of Clouds and Sun: On Track

In the first half of 2011, the investing climate has been favorable — producing modest single-digit gains for the major asset classes. Two years after the green shoots of economic growth were first evident in mid-2009, they have blossomed and taken root. However, neither bulls nor bears, we continue to expect the economy and the markets will be range-bound in 2011. Bound by economic and fiscal forces that will restrain growth, but not reverse it, we adhere to our prior forecast for modest single-digit rates of return: high single digits for stocks and low single digits for bonds.

At the mid-point of the year, 2011 is on track for the key elements of our forecast that we articulated at the end of 2010:

• The job market is staging a comeback. Our expectation for the creation of roughly 200,000 net new jobs on average per month in 2011 has been met, so far.
• Policymakers have delivered economic stimulus. The Federal Reserve (Fed) has provided substantial economic stimulus, concluding the QE2 Treasury purchase program on June 30, 2011.

• Investors are playing it safe. Inflows to riskier markets remain anemic, contributing to modest performance for both stocks and more aggressively postured bonds.
• Currencies are influencing returns. As we expected, the currency impact on investing has been pronounced in 2011. The U.S. trade-weighted value of the dollar has fallen about 5% so far in 2011.

Key themes for investors can be found in a set of transitions unfolding in the second half of 2011. These transitions may offer investors positive options, in a period where the performance of the major indexes is likely to be lackluster. These transitions include:

• The evolution in the stage of the business cycle from economic recovery to modest, uneven growth. 
• The change in economic policy to the withdrawal of the fiscal and monetary stimulus provided over the past several years.
• The return of inflation that we call reflation.
• The shifting geopolitical landscape.

Market volatility, which we expect to remain elevated, may present risks to be sidestepped and opportunities to be taken advantage of. Investors with a more opportunistic profile may benefit from a tactical approach to investing in order to find attractive opportunities when offered and successfully take profits when appropriate. Longer-term strategic investors should consider remaining broadly diversified. As always, if you have questions, I encourage you to contact me.

Sincerely, Mark C. Gosselin


2011 Mid-Year Outlook


Mark C. Gosselin
Branch Manager
Investment Consultant
11200 Broadway
Suite 2743
Pearland, TX 77584
832 895 6627 office
www.markgosselin.com



The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult me prior to investing.

All performance referenced is historical and is no guarantee of future results. 

All indices are unmanaged and cannot be invested into directly.

Past performance is no guarantee of future results.

Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

Stock investing may involve risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.

This research material has been prepared by LPL Financial.

Tracking #741855 | (Exp.06/12)