Reading List - United States / Negative Outlook

On Monday morning, S&P put the AAA credit rating of the United States at risk by placing the United States on negative outlook.  They key point in S&P's action is that the negative outlook is more of an outcome of poor behavior by both political parties in Washington DC versus the United States not being able to service debt effectively.  The rating agency feels with the political gridlock that exists, a solution will not be reached by 2013 to help solve the fiscal problems facing the United States.  Hopefully, this action by S&P will force policymakers in Washington to become serious about the issue.

The markets may have reacted the opposite as you might expect.  Investors sold risk in the form of equities, and Treasuries and the dollar rallied as a result.  The question investors must ask themselves: is this event a fundamental game changer?  If an investor feels given all of the problems in the United States, but the United States is still the best place to invest, this event may be a buy trigger versus a sell trigger.  If an investor feels like this is a game changer and most assets are denominated in US dollars, it may be time to diversify into commodities and emerging market stocks.

Will the negative outlook have a negative impact on the recovery?  The answer to this question is difficult.  Even given the low yields and other fiscal problems, investors still want to hold US Treasuries.  But, as a result of the negative outlook, this demand may slightly decrease and bond yields will increase.  SInce virtually every form of borrowing is based off of the US Treasury, it would indicate that corporate bond rates, mortgages, etc all should increase.  As a result, borrowing costs for firms and households should increase; increased borrowing costs may eat into the rally.  One outcome is that the Federal Reserve may need to continue to use the printing machine to help the United States get out of this fiscal mess.

At this point, it is way too early to tell whether this is a positive or a massive sell signal.  It is important to note that in any market conditions, investors can make money.  It is being able to identify those opportunities that truly separate the winners from the losers.  Given the title of this blog, "Value and Yield," it is prudent that investors play some sort of defense in this crisis by investing in dividend paying stocks.  These companies should be safe companies that can grow total dividends.  These companies should be a good hedge against downside risk and possible inflation.

What Downgrade? Pros Shrug Off Warnings from S&P (click here)
S&P US Ratings Cut Good for Long-Term (click here)
Wilbur Ross Interview (click here)