S&P Downgrade of US Debt – What it Means and  What We Need to Be Watchful For on Monday

Late yesterday evening, one of the top 3 ratings agencies = Standard and Poor’s, downgraded the AAA rating of American debt One Level to AA+.  Here’s what we are thinking –

1. Standard and Poor’s (S&P)  is only 1 of three ratings agencies.  The others haven’t made this move yet.
   
2. This is an important move and more of a help than a hindrance.  ELECTED officials have not been able to make the hard decisions necessary to trim back entitlement spending (Medicare, Medicaid, and Social Security) – which is a huge part  of the current and future budget problem. This downgrade should HELP elected officials make hard decisions by offering them an excuse that limits their perceived choice in the matter by the electorate.
3. This S&P decision and the summary assessments of U.S. elected political leadership should help American people SEE the problems better and encourage them to elect future congressional and presidential leadership that can solve these problems. This and other events like it will have a Defining Impact on the 2012 elections and may bring out or embolden excellent candidates with the understanding that they can win the upcoming congressional and presidential election on a basis of fiscal conservatism.
4. This is exactly the kind of work that ratings agencies should be doing.  We give S&P a big Thumbs UP for taking this stand and providing an immediate consequence to the terrible political leadership demonstrated over the past months in Washington (both parties).  Of course, this is the type of political leadership that we have had in Washington for a long time.  We needed a fail-safe mechanism like the debt ceiling limit and the fiscal conservative successes last November in order to have debate on this key issue in the first place, which allowed many to finally SEE the low quality of our current leadership (of both parties) during this extended debate process.
   
5. Now a word or two about what we are thinking about stock investing on Monday – – The markets and individual stocks are already down quite far from their recent May 2^nd peak (-11% for the broader market, and
   -50% for some stocks like U.S. Steel since February), and the S&P 500 is trading at approx. a price/earnings ratio of 12 vs. the typical post WWII level of 16, so there is less of an “profit-gap” or “air-gap” in the market to take out.  There is always room for the market to make an emotional drop, BUT it will be WAY LESS (if at all) than if this S&P announcement had been made prior to the market’s recent decent. 

   – In contrast to the 2008 and 2009 destruction in the market, corporate balance sheets and EARNINGS are much stronger AND we don’t have an unknown or immeasurable / impossible to calculate liability on the books that we had with credit default swaps and securitized sub-prime mortgages.  In 2008 and 2009, excellent stocks were thrown out with bad stocks as financial companies had to raise cash to cover an essentially UNKNOWN liability.  This is what made the last crash so severe.

   – U.S. debt has never been downgraded.  This “never-before” statement is unsettling and may elevate fear.  If a big sell-off occurs, we will probably start buying as much as can.  We will focus on companies with excellent leadership like Ford and Apple and basic materials like Alcoa (Aluminum co. of America).

   – If the market does not fall, we may add to our Ford holdings and maybe buy some Apple, and look at some basic materials like Alcoa.  We may also buy some leveraged ETF’s that go UP when the market goes UP on the backs of everyone who has been short over the last 3 months who need to cover their positions to lock in profits.

   The ProShares Ultra S&P500 (Ticker “SSO”) moves at a rate of 2x the move of the market – UP if the market goes UP, and is very liquid (investors can get in and get out essentially with as much cash as they want without moving the price)

   – Personally, IF we had a lot of cash already invested in the market – we would not sell in the face of this news or do anything rash.  We would wait to see what the market does.  Without sounding at all prideful, we would like to thankfully say that we have little cash at the moment in the market and hope to use this situation to our advantage – if possible – as mentioned above.

For your protection and our own, we would like to remind everyone that this is not an investment recommendation for any particular individual.  We cannot possibly know the risk tolerance and investment suitability of such investments for any particular subscriber. Successful investors know their own objectives, purposes, and risks associated with any investment – whether in stocks, real estate or other investments.  Each investor is on their own.

We are simply reporting the SMC observations and actions in the market place.
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