In 1939, the British government printed posters worded "Keep Calm and Carry On" to increase moral of the public in the event of an invasion. Today, I am using it in a financial sense; keep calm and do not panic.
August 2nd is only four days away and we have seen little progress in Washington. Politicians are too busy debating and arguing over what to do meanwhile, investors and the business community are worried over the ramifications of a US default. There has been very little to ease the worry. President Obama and Speaker Boehner both have come on and told the American people that they are "confident" that the debt ceiling will be raised to avoid default. Yet, both have shown an unwillingness to compromise and have both walked out on debt talks. This isn't a political article and everyone has their own political opinion but it doesn't take a genius to recognize that our government is failing us in the debt debate.
With all this uncertainty of a default, people are panicking and questioning whether to sell everything and run to the hills. No. One thing that must be understood is that cooler heads will prevail. Do not sell everything because in the event that the debt ceiling is raised, you will miss out on a possible relief rally, which will hurt you more long term. On the other hand, I am not suggesting you just ignore your portfolio for the next week.
Instead, you can enact a defensive strategy that will help ease the pain and keep you protected. Its a basic three step plan that is designed to be in a neutral stance that will help you protect unrealized profits.
Step 1: Buy protective puts on your holdings
This is a basic defensive strategy that will protect you from moves to the down side. Buy 1 put option for every 100 shares you own for total protection. It is probably best to buy an at-the-money put option because it will protect your holdings more.
Step 2: Have a cash reserve on hand
Not all people will "Keep Calm and Carry On" so keep a stockpile of cash to pick up beaten down names from the possible sell off. If you aren't all in stocks then be patient and wait for some good deals. There are already some bargains emerging such as Caterpillar (CAT), which closed under $100 yesterday. Bank of America (BAC) is a great long-term play that you could get into after this debt crisis is over. I believe most of the bad news is priced into BAC and it could get into recovery mode as early as next year. It could be wise to pick up some healthcare stocks such as UnitedHealth (UNH), Express Scripts (ESRX) and energy such as Chevron (CVX), Schlumberger (SLB) if the opportunity presents itself.
Step 3: If you have to buy a stock right now, buy a stock that has business in Asia and/or Latin America
I don't recommend buying stock at this moment but if you have to buy a stock I would recommend a company that has exposure to Asia and Latin America as apposed to the US and Europe. These are companies like Coca-Cola (KO), Starbucks (SBUX), YUM! Brands (YUM), Qualcomm (QCOM), etc. These companies will not be hit as hard as companies with a higher exposure to US/Europe.
The next few days to weeks to months could be painful. Plan to protect your portfolio but be ready to profit during a rally. Put options on holdings, cash reserves and smart stock buys will help limit the pain. Congress has yet to show a positive sign that the debt ceiling will be raised. We are all hoping for the best but at the end of the day the cooler heads will prevail. Don't follow the crowd and sell everything to stop the short- term pain because you are giving up the long-term gain.
Disclosure: I am long CAT.