As the effects of the S&P downgrade of U.S. sovereign debt to AA+ are being felt across global markets, we wanted to give you our assessment of what the downgrade and recent market volatility means for your portfolios.  As we’ve discussed with you often since the financial crisis, deleveraging is a slow and difficult process whether for individuals, institutions, or nations.  Europe is several years behind us in dealing with all the bad debt in its banking sector, and the ongoing turmoil in the EU was one of the main factors leading to this summer’s market decline.

 We have had much higher than normal cash levels since the spring when we began to get stopped out of some of our equity positions.  In addition, we have not been  comfortable with either the market action or the macro-environment  surrounding Europe and the debt ceiling battle here at home.  The downgrade by Standard and Poor’s was signaled for months, and the fact that it actually happened is the explicit realization that our political decision making process is deeply flawed.  S&P even stated that they needed to see $4 trillion in cuts in order for the U.S. to keep its AAA rating.  From the press release issued by S&P on Friday:

The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

There are three main effects of the downgrade; two are negative and one is positive.  On the negative side, market volatility will increase over the near term as risk gets repriced.  Also, the chance of the domestic economy sliding back into recession has gone up since corporate managers may further delay spending decisions that have already been postponed due to regulatory, political, and taxation uncertainty.  On the positive side, this is the first time in our lifetime that both political parties have acknowledged that continually increasing government spending and funding it with debt is not prudent or sustainable.

Our primary goal as always is to protect your portfolio while positioning it for future growth.  High cash levels and low equity exposure combined with the bonds in balanced accounts helps the portfolio during periods of market volatility.  However, we do not think that this is a similar period to the financial crisis of 2007-2008.  Our domestic banking system has been recapitalized, corporate balance sheets are strong, rates are low, and falling energy prices will help the consumer and businesses.  If both Congress and the Administration can focus on creating jobs rather than name calling, our economy may be able to get through this period of low growth without slipping back into recession.  We would also like to see stability in European sovereign debt spreads in order to become more positive on the market.

We were recently notified that we received a Top Performing Managers ranking in Pensions&Investments magazine dated 2/22/10.  We received the ranking in the category of US Separate Accounts Conservative Allocation for the 1-year period ended 12/31/09. Our composite that was included is the Taxable Moderate Balanced Conservative Growth composite.  The link to the article in Pensions&Investments is http://www.pionline.com/article/20100222/CHART/100219902&crit=top%20performing%20bond%20managers .  Crossvault is listed in the first category at the top of the page.

The source for the rankings is Morningstar’s separately managed account database.  According to their website, the database tracks over 9000 active global products.  It is used by more than 3000 institutional investors and investment consultants and 240,000 financial advisors.

We wanted to share some exciting news with you.

We’ve just been named “Top Guns” by Informa Investment Solutions (IIS) PSN database in the Domestic Municipal Fixed Income Universe in the 1 Star category for the quarter ending December 31, 2009.  The 1 Star ranking is based on performance for the quarter.  Each category recognizes the ten top performing managers for a specific time period vs. their peer group.

You may view the release with the description of the database and disclosures on Business Wire.

This new ranking follows our two “Top Guns” rankings for the period ending 12/31/08, our “Top Guns” ranking for the period ending 3/31/09, and our “Top Guns” ranking for the period ending 6/30/09.

I recently became aware that in my personal life I tend to gravitate towards using professionals who have at least 25-30 years experience in their chosen profession.  For example, the architect my husband and I are using to remodel our home, is Bill McDonald. 

Bill is 75 years old and has worked for and with some of the best architects in San Antonio.  When an issue arises, Bill has more than 40 years of experience to inform his creative solutions.

In my more than 26 years in the investment business, I have learned a few things.  I have been through three major bear markets, several recessions and, a few Fed Chairmen.  This experience has benefited our clients.

During the recent financial crisis my partner Marilou and I were prepared by holding a higher allocation of cash, prior to 2008.  We did not sell out in March of 2009, and instead began to put money to work shortly thereafter. 

Many seasoned professionals have learned to take the emotion out of decision making, allowing for rational, fact informed actions, and generally much better outcomes.

In Part II of Crossvault Conversations with Ed Cross, CEO of Cross & Company, I visit with him about his interest in urban redevelopment in San Antonio.  Cross & Company is a San Antonio-based full service commercial real estate firm with extensive expertise in office and industrial brokerage services, dispositions and acquisitions, and development and investment services.

We recently spoke with Ed Cross, CEO of Cross & Company, about the prospects for commercial real estate in San Antonio.  Cross & Company is a San Antonio-based full service commercial real estate firm with extensive expertise in office and industrial brokerage services, dispositions and acquisitions, and development and investment services.

In our continued Crossvault Conversation series, we spoke with Ernesto Bromley, CEO and Co-founder of San Antonio-based Bromley Communications – the largest Hispanic marketing communications firm in the U.S.

In this conversation, Ernesto discusses his focus and insights on Hispanic, Texas-based educational initiatives.

I spoke with Laura today about what the technicals are telling us about the market.

We wanted to share some exciting news with you.

We’ve just been named “Top Guns” by Informa Investment Solutions (IIS) PSN database in the Domestic Municipal Fixed Income Universe in the 3 Star category for the quarter ending June 30, 2009. The 3 Star ranking is based on performance for the trailing 3 year period.   Each category recognizes the ten top performing managers for a specific time period vs. their peer group.

 You may view the news release with the description of the database and disclosures on Business Wire. 

This new ranking follows our two “Top Guns” rankings for the period ending 12/31/08 and our “Top Guns” ranking  for the period ending 3/31/09.