Debt ceiling deal, S&P Downgrade

And the volatility goes off the charts again.
Just seeing what folks are doing and thinking.
I spent Friday convincing several clients to stick with their
asset allocation plans (most of them pretty moderate).
Then the downgrade and now more downside movement in the
equity markets as well as - get this - further drops in
the treasury yields (meaning that people are *buying* more
treasury bonds in the wake of the downgrade).
Reply to
David S Meyers CFP
David S Meyers CFP writes:
Trying to decide when... (a) ...I'm willing to log into my account and see what's happened since I last looked at it Thursday. 1/2 :) (b) ...to rebalance back to my 60/40 equities/ST bond allocation from wherever it is now (which of course requires (a) :)
Reply to
Rich Carreiro
it is not really right to say "in the wake of the downgrade". It is really in the wake of realizing there has been no cut to government spending and debt will continue to rise. That, plus bad economic numbers (no surprise), so people are dumping equities and putting the cash someplace.
Reply to
Pico Rico
On Mon, 8 Aug 2011 14:47:00 CST, "Pico Rico" wrote:
No cut in government spending? How about no increase in revenue from their historic low's? It's about time the people in this country pay for what they want. That includes the wealthy and corporations. Thumper
Reply to
Thumper
The wealthy are paying for all the things the majority want, since the majority don't pay income taxes.
Reply to
Pico Rico
On Tue, 9 Aug 2011 13:35:43 CST, "Pico Rico" wrote:
The people you think don't pay taxes, support the wealthy by spending every penny they make on goods and services the wealthy offer. Let's see how many companies hit the skids when those so called non tax payers can't afford to buy their goods any longer. By the way, When ALL taxes are taken into account, nearly everyone pays the same over all tax rate. Thumper
======================================= MODERATOR'S COMMENT: Please try to steer this back towards financial planning issues.
Reply to
Thumper
It will continue to from time to time in the coming decades.
That Jeremy Siegel is right that my dividends will be buying stocks at bargain prices in the coming days and possibly months.
Company earnings look strong. It is too early to call this anything but a momentary panic right now.
I think this may push Congress to be more responsible in budgeting, including raising taxes.
When acquaintances ask me about stocks, I ask whether they can psychologically weather a 20% or so downturn and whether they can stick with their stock purchase for at least seven or so years. Do they "get" that purchasing a well-diversified portfolio of stocks reflects a belief that the world's economy expands via technological improvement; improvement in the standard of living; populations growing; demand rising? If not, then they should not buy stocks.
Reply to
Elle
[snip]
My understanding of volatility is variance about the mean. The VIX or "Volatility Index" measures down moves only. Has anyone here gotten interested enough to do the math, such that they can explain the actual computations? It just irks me to see another mis-named thing that people come to believe represents the name. Intuitively, I guess the computations for the VIX are truncated or massaged such that the index moves high on down moves, but reverts to an artificial smoothing to zero when the markets shoot higher, more like an oscillator than a variance. I didn't learn how to compute a one-sided variance.
The way the VIX is set up, if a normal trading range over five years was 1% plus or minus, then the SP jumped 15% (up) in one day, the VIX would plummet, and you'd hear "... well, volatility is certainly down!" That's not the statistical definition. What am I missing here? Euphemism?
Reply to
dapperdobbs
VIX is based on the price of options for the S&P 500 index and it gives the "implied" volatility of the index, not the "actual" volatility.
-- Ron
Reply to
Ron Peterson
I kicked myself for not following my hunch posted here a month ago, which is to recognize vol was near a historic low and to invest in etf VIXY, which has since risen about 60%. But like I had said, those long volatility etfs don't track right except over short periods, so I guess you normally would bleed money waiting longer for reversion to mean.
What I did was opportunistic harvesting of tax losses. Some recent defensive purchases were slightly lagging SP500 on both up and down modes, so I traded them in for better performing etfs on very down days. Cancelled out about a third of my taxable gains, in a year where I will be hit hard for roth IRA conversion costs. Like I had posted earlier, this can be efficiently done with a one-triggers-the-other trade order (sell to buy).
I am kind of paralyzed from actually changing my asset allocation. I don't think it's bad to respond to cycles - a smart person can either play contrarian or pro-cyclical and take advantage of change, but things seem too novel for me to respond to yet. It seems the trade machines are in charge rather than actual people, so I can't rely on detecting and taking advantage of market psychologies as much as before.
Reply to
dumbstruck
I cooked up my own volatility index based on the adjusted returns of VFINX (including dividends). It's pretty noisy, but you can clearly make out Black Monday, the Dot-com Bubble, the Great Recession and the current mess.
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If you're interested in how this is computed: For every 30-day period, I fit a line to the log of the adjusted returns. Then I computed the RMS about that line. The RMS is plotted against the last day of the 30-day period.
I'll play around with some other periods. I know VIX is based on a 30- day period, but it's also based on futures, which is why it's a lot smoother.
--Bill
Reply to
Bill Woessner
[snip]
Hi Bill,
Thanks for your reply and chart. That's impressive. It does clearly show various noted market events, and it goes back far enough to provide a useful comparison. I notice that your picture shows average volatility looks a bit over 1%. That's more useful than VIX (e.g. 30? 25? OK, 30 and 25 what??). From your chart, I know that when the market moves by over 2% in either direction, it's above average, and that 6-8% moves are pretty much pushing the envelope. Is my interpretation correct? If the market moves by over 2% a day as it has been doing recently, how would that show up? That is, a 2% move once a month might be more normal than a 2% move for five consecutive days, so do consecutive days show up as cumulative volatility or does it get smoothed? What is RMS?
I missed something in statistics, so please be aware that if you throw regression analysis at me ... I don't know where the starting point is. The squares part, I get, I just can't dope out how you get a line fit to the scatter diagram. I use a ruler and a best guess. My excuse for being regression-line illiterate is that my interest in statistics waned seriously after discovering surveys are done with pre-fabricated questions which are often completely brainless and biased.
Reply to
dapperdobbs
i was watching jon stewart (imo a better source of info then actual "news") he had John Coffee Director of the Center on Corporate Governance at Columbia University Law School on. coffee's point was that the rating agencies were corrupt and being payed by the the people they rated. a person like me finds that very easy to believe given the bad track record of the rating agencies before the housing crisis.
so i ask myself if this recent downgrade means anything at all and should i pay any mind to these ratings in genreral? in wish i had the skills and training to do an analysis myself. to just look at the numbers while being detached from the propaganda out there.
personally i haven't touched a thing in my portfolio. if us bonds are risky they have been risky for some time.
Reply to
cporro
The main complaint I hear now is that agencies are overcompensating with extra negative ratings in order to combat that suspicion.
After the downgrade, didn't the value of US tbonds jump up (and sell well)? I heard an S&P rep blame the theater in DC, but wiser heads may think that was a good exercise that would have benefited countries like Greece to have had such a discussion of expenditures vs growth. I think the parties on both sides hid the fact a default was almost procedurally impossible and US bondholders can be paid forever, even with no raise of credit limit. The brinkmanship was falsely pretended, so that the US politicians wouldn't just kick the can as the Euros do.
One danger S&P is pointing to is inflation impacting US bondholders if budget isn't finessed. Cutting expenditures or especially raising tax rates can cut the tax base, and cause the gov't to print dollars to pay bills. We had some family bonds cashed in for almost nothing in the Carter years when interest rates were near 20% but these bonds were around 3% - you have to lower the cost to a buyer so they get the equivalent of 20% or whatever. It doesn't help to hold to maturity since inflation erodes anyway.
Below I post a 2 year chart I use to watch price action of various bond types. Until recently 20 year tbills had the worst results (zero) and were pretty volatile. In the last few days it has swapped places with high yield which went to zero and popped tbills up about 10% (the yield difference would be an equalizer though). Emerging, corporate, and TIPS cruised gently up pretty steadily, but I don't know the tips yield after recently going below zero. Excuse the crazy bounds of financial preferred - I like a bronco ride, especially when the yield is almost double digit (and with safety of preferred creditor).
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Reply to
dumbstruck

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