S&P's Downgrade

A few weeks ago the rating agency, Standard & Poors downgraded the United States' credit rating from perfect triple-A to AA+. The effects of this downgrade were very serious as the markets reacted negatively towards the news and interest rates in the US are expected to go higher in the near future. Fitch rating agency reaffirmed on Tuesday that in their mind the United States has no possibility of a default in the near future and is still AAA rated. Both these rating agencies are well respected and make valid arguments but who is right?

It depends how you look at it. America is the standard reserve currency for most countries. Other countries hold United States Dollars (USD) in order to back up their currencies and keep inflation low. Those countries and all countries as of now will take $1 USD as face value, no country would refuse USD's. This is why Fitch is right to say the United States can't default because we can always print more USD's. As bad as that sounds and I don't believe it is a permanent solution, the US can print more money today and their lenders will take it. The United States' debt-to-GDP ration is around 80% which isn't good but in perspective, Japan's was well above 100% when it entered its lost decade. The United States is not Japan for many reasons and Fitch was correct to keep its rating AAA and declare it stable.

Standard & Poors downgraded the United States' credit rating and caused a mass panic throughout the financial markets. American politicians from the President to members of Congress publicly criticized S&P for their decision calling it a mistake. S&P said their reasons for the downgrade to AA+ was because of a $2 trillion short fall in budget cuts projections and wanted to see more. This was a concrete statistic S&P could point to but I believe the debate in the American government is what made up their mind. What we saw up to the debt ceiling deadline was a refusal by some members to raise the limit no matter what. We had politicians saying we didn't need to raise the limit, we could default, it wasn't that big of a deal. S&P realized that whether America defaults or not was because of its ability to pay its debts, but because its debts were controlled by humans who may not be the best to lend to. Just like we all have a credit score based on not only our income and expenses but on our responsibility to make payments on time and in full. S&P identified that America's debt could go in default because of the government's decision and not its ability to pay

Closer Look at Unemployment

The Unemployment numbers in the United States have remained high for 2 years and all the stimulus spending have not been able to bring it down. While the unemployment rate has always been known to economist as a trailing statistic to GDP it is still not tolerated to be this high by the American public for this long.

Looking more closely at the numbers we can see that the bottom three industries with the highest unemployment rate are construction at 20.6% of the industry is unemployed making up 12.1% of all unemployed persons, manufacturing with 10.6% of the industry and 10.9% of all unemployed, and the leisure and hospitality industry with 12.2% of the industry unemployed making up 10.7% of the total. The best performing industries are financial services, education and health care, and government jobs.

What the government of the United States needs to do is look at each of these areas and address how the numbers got there and what needs to be done. Manufacturing is the hardest sector to fixed. It is entirely based on supply and demand, the government stimulus will not directly impact this industry. A large reason for remaining stubbornly high is companies that laid off worker during the 2008 recession realized that by making a smaller workforce more productive it didn't need to have as many employees as it earlier thought. Manufacturing jobs will not be coming back in the near future. These employees need to be retooled to work in other areas or new manufacturing jobs need to be created by new technologies and products. One thing the government could do is encourage research and innovation. I would even go as far as new government investment on the scale of the "Manhattan Project" needs to happen but for a civil purpose.

Hospitality and leisure jobs will come back in time. Right now Americans are not taking vacations like they used to because of the unemployment and weak economy. In time these jobs will come back, the economy will recover and Americans will go back to taking vacations, I am not worried about this sector. The IEA recently released 60 million barrels of oil to drive prices down which is a temporary fix that might encourage a few families to take that vacation but will not make a significant improvement in my opinion.

Construction unemployment can be easily linked to the housing bubble burst. The housing market still hasn't recovered and the United States will not see new housing developments being built in the near future. The construction industry is where the government can step in and make the biggest difference. The government needs to reintroduce public works projects like those of the Great Depression. Obviously they can't go back to dam building but there are new projects to update America's infrastructure like repairing what was done last time such as roads, bridges, and water systems. Also new technologies like fiber optics and high speed rail could be funded by the government to create thousands of jobs. To pay for this the government needs to look at what it is spending today on unemployment benefits, what it could make from taxing those now employed workers, and any income the rails, toll roads, and any other income sources. As more jobs are created through infrastructure spending, manufacturing jobs should follow closely and leisure jobs just after that.

There, thanks to ideas from FDR and Eisenhower we just fixed the economy.

June 13th Preview

A look back at last week: Last week the market as a whole was sold off and lost about 1.7%. For my picks I was bullish on DE and POT while bearish on LCC. DE beat the street and stayed flat due to a rise in the price of corn. US supply of corn came out this week and my prediction for a tight supply was right, corn prices shot up on flooding concerns. POT faired similarly and was flat on the week. I strongly suggest getting in on these two stocks. LCC was down 8.9% on the week, considerably more than the market due to low traffic and high fuel costs. I'd say I went 3 for 3 last week on my picks.

June 13th-17th
Last week was the 6th consecutive week the major indexes lost on the week and I believe  market is oversold. However I believe because of the news coming this week the market will go depending on how the news is. There is a lot of big news this week. Retail sales and PPI (inflation) numbers come out on Tuesday that, if better than expected could cause the market to rally through the week. Wednesday more inflation (CPI) and industrial productions numbers come out. I expect industrial production to be worse than expected because of a strong dollar, causing US goods to be more expensive and imports to be cheaper. I expect inflation to higher than expectations, oil has remained steady but agricultural products will be more expensive than before as I explained last week. Thursday the last big news comes out for housing starts, I expect 0 houses to be started as the housing market is still in very bad shape. This news will not move the market unless it is better than expected. Look for Monday, Wednesday and Friday to be winning days for the US market.

Last week I talked about corn and how its getting to be too late to plant it, this week let's quickly talk beans. Farmers window to put their cash crop, corn in the ground is closing fast. Farmers are not going to leave the fields bare so less profitable soybeans will be planted across the United States. Bean supply will exceed demand this year look for falling prices of soybeans.

Pandora Internet Radio releases its IPO on Monday. Getting in on an IPO requires you to know somebody but you can get in on the hype of it. Most people who get in sell on the open and make a few dollars doings so. Look for Pandora (P) to sharply rise on the open, start to come back down, and go back up again but I wouldn't ride this stock for more than a day or two.

 Railroads are a great stock to get if you are not in one yet. Warren Buffet likes them so much he bought my favorite railroad, Burlington Northern and bundled it into Berkshire. My pick in the railroads is CSX (CSX 73.48). It has been relatively unaffected by natural disasters this year because it is located mostly on the Atlantic coast. I would stay away from Canadian National Railways (CNI 75.13) because it has been crippled by Mother nature and bad luck. They are diverting much of their traffic around their main lines, particularly in the Dakotas due to flooding and next the had a derailment in Northern Minnesota on an already congested line. I still think railroads are strong but CSX is the leader.

This week will be exciting on Wall Street and could go either way. Be sure to pay attention to those economic reports coming out and make your decisions off them. Also this week I will talk about OPEC and the talks or lack of them between members and what that means for the price of oil. Expect that post on Thursday.

One last pick: Buy blink-182 tickets because they are the greatest band ever and tour with My Chemical Romance. These tickets will be a hot commodity