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

Debt Worries

This post will be brief

If the politicians can't come to a decision on the debt ceiling the United States will default and the stock market will fall at levels on par with 2008. I personally am going 100% cash in my United States portfolio but maintaining my Asia and European positions. This situation is very scary in that it is 100% preventable, all congress has to do is raise the ceiling. Until an agreement has reached I would stay out of US stocks.

WMT: Taking Over

Wal-Mart is an engine that shows no sign in slowing up. Now that it has swallowed up all the Mom and Pop stores it is looking for its next target to take down. It has zeroed in on dollar stores like Dollar General (DG) and Dollar Tree (DLTR). Wal-Mart has now opened up 3 Wal-Mart Express stores near its headquarter in Bentonville, Arkansas that look to compete directly with the dollar stores. These stores are basically a smaller version on the mega-mart that can fit into spaces where a traditional store would be too large. The Wal-Mart Express stores have been dominating the market and look to put other stores out of business. Wal-Mart already controls the affordable retail market and is now looking to take the cheap goods market currently controlled by dollar stores. From what I have heard the Wal-Mart Express stores are extremely popular and, being Wal-Mart, their margins are better than that of Dollar Tree and Dollar General. I would recommend stock in Wal-Mart on this news and believe for the foreseeable future Wal-Mart's stock will perform very well. I would also sell my positions in Dollar General and Dollar Tree but also I would look to Wal-Mart Express to take on Drug stores like CVS and Walgreen's.