In case you missed the big news, Standard & Poor’s downgraded the U.S. credit rating from AAA to AA+ last Friday. This is the first time since the credit-ratings agencies started back in 1917 that the America’s debt has been downgraded. Make no mistake, folks: this decision was a political statement, not a financial one. If you don’t think the debt-ceiling circus had everything to do with this decision, think again.
Everybody knows that the U.S. can pay all of its creditors tomorrow if it wanted to. As Warren Buffet pointed out, it would be with inflated dollars, but as long as we have the printing press there’s no question of whether we can meet our obligations. Is there, perhaps, a correlation with this downgrade and the fact that McGraw-Hill, publisher of S&P, wants to make a bigger impact in Europe? I don’t want to start getting into conspiracy theories here, but I do think that’s something that should be examined, and I do think they’ve overstepped their bounds on this one. I also think it’s another example of how out of touch the ratings agencies really are. Remember when these people told us that subprime mortgage tranches were AAA? How much credibility do they have left at this point?
Regardless, the downgrade happened, so now we have to live with it. And it’s created a mess in the stock markets. So the $64,000 question is, As investors, what should we do?
I’m using panic as a way to put my money to work, just like I use euphoria as a way to unload. I bought stocks on Friday and I’m going to buy stocks today. If the market continues to go down this week, I’ll probably buy even more. Volatility is high, so I’m also looking at the put market—selling puts into certain issues is a good way to create premium.
I aim to be a good steward of information, and right now I see a stock market that has become overextended to the downside. I also see a bond market that is absorbing this downgrade fairly easily. Look for value in this correction, but don’t try to be a hero in a market this volatile. And of course, do your own homework and be sure you have protection on your portfolio—just because I’m putting money to work doesn’t mean that’s right for you.
Michael Whalen, president and CEO of Heart of America Group and a member of the Jobs Creators Alliance, was my guest on today’s show, and folks, he was preaching to the choir. He told me how tax ambiguity and over-regulation were creating an environment of uncertainty for business that’s preventing them from hiring. This is a guy who’s built 27 restaurants and hotels in 10 metropolitan areas of six states. He knows a thing or two about creating jobs—so when he says there are problems out there, people need to listen.