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The USA Downgrade: Where We Go From Here

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The most dynamic juncture in history just got more interesting.

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The news arrived Friday night like a rumor making its way around the halls of a high school. The S&P (Part of McGraw Hill (MHP)) downgraded the United States of America. (Cue Otter!)

When I first explored the validity of this news, the White House vehemently opposed the downgrade, citing "trillions of dollars of inaccuracies," and S&P reportedly backed off their posture.

It wasn't the type of behavior that infused confidence in either institution, although I'm sad to say I wasn't surprised. The ratings agencies (during the sub-prime mortgage mess) and The White House (in recent weeks) haven't exactly been model American citizens.

Of course, we know now it is fait accompli. For the first time in history, the USA isn't the world leader in perceived safety and/or credibility. The question investors the world over are asking is: what now?

A few points of parliamentary procedure, in no particular order:

  • I've offered for a few weeks that the market was pricing in this downgrade. Now that the big bad event is out of the way, a reflex rally higher shouldn't come as a shocker.

  • As I said in my earlier column, the questions become: "from where?" and "for how long?"

  • As a card-carrying contrarian, my first thought when I heard of the downgrade was "buy the news." But I've gotta tell you, that's seemingly consensus as I take the pulse of the Street. Everyone I spoke with -- to a person -- is looking to cover shorts or buy longs into this, which brings into question which dip should be bought, if any.

  • S&P 1130 -- the target we mapped last Tuesday -- remains in play and no, I didn't expect that 12% slide to arrive in less than a week (always honest).

  • We asked some tough questions last week, including:
  • We didn't ask them to be salacious or garner page views, these are serious topics that need to be discussed whether you agree with them or not. The friction between opinions is always where education is found.

  • Some thoughts on the forward ramifications of the downgrade:
    • Higher rates are in the cards for consumers.
    • Policy makers are handcuffed like Houdini.
    • Another seed of discontent has been both stateside and with our global partners.

  • There also are also reasons why this, alone, won't be a death knell for the tape:
    • Fitch and Moody's (MCO) were convinced decided to leave the AAA rating, so funds that are mandated to hold AAA-grade paper can point to the majority and sit tight.
    • The Fed, acting as the Sergeant-at-Arms for the White House, already said there will be no change in what financial institutions need to hold as collateral for US securities.
    • The USA doesn't like to be embarrassed. If there are buttons to be pushed, they'll likely push them in an attempt to further discredit S&P.

Bottom Line? I do believe we'll see a rally attempt, although it could begin at lower levels. How you approach that lift, if and when, should be consistent with your personal time horizon and risk profile.

Is that a cop-out? Well, it's not meant to be. I sense those rallies should be sold. The ability not to trade will be as important as trading ability. And if we can collectively navigate the next two to three years -- which, of course, will be a function of whether we're allowed to take our medicine rather than being force-fed drugs -- I foresee a light at the end of the tunnel that isn't affixed to the front of a train.

I continue to believe that the first half of this decade will be about capital preservation and financial survival, and the back five will reward those who remain engaged after the second side of the financial storm arrives.

That might seem like an easy enough plan but take me at my word, it will be anything but. When the time finally comes to close your eyes and buy them, it will -- and should -- feel like the silliest idea in the world.

Good luck today.

R.P.

Twitter: @todd_harrison

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No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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