Jul 13, 2011

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Stock Market Advice: The Riptides and their Cross-Currents

The Ups and Downs of todays’ stock market advice

stock-market-adviceIt comes with plenty of cross-currents affected by “Headline-Risk” which can be compared to the fastest, tallest roller coaster worldwide these days.

The federal budget deficit is on pace to break the $1 trillion mark for the third straight year, ratcheting up the pressure on the White House and Congress to reach a deal to rein in spending.

The deficit totaled $971 billion for the first nine months of the budget year, the Treasury Department said Wednesday. Three years ago, that would have been a record high for the full year.

With three months to go, this year’s deficit will likely top last year’s $1.29 trillion gap, according to the Congressional Budget Office. But it is expected to come in below the record $1.41 trillion reached in the 2009 budget year. The budget year ends Sept. 30.

These numbers are absolutely staggering hence why it really is not too much of a surprise why this data was just released.

“Moody’s Places US Aaa Government Bond Rating and Related Ratings on Review for Possible Downgrade”

New York, July 13, 2011Moody’s Investors Service has placed the Aaa bond rating of the government of the United States on review for possible downgrade given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligations. On June 2, Moody’s had announced that a rating review would be likely in mid July unless there was meaningful progress in negotiations to raise the debt limit.

In conjunction with this action, Moody’s has placed on review for possible downgrade the Aaa ratings of financial institutions directly linked to the US government: Fannie Mae, Freddie Mac, the Federal Home Loan Banks, and the Federal Farm Credit Banks. We have also placed on review for possible downgrade securities either guaranteed by, backed by collateral securities issued by, or otherwise directly linked to the US government or the affected financial institutions.

Stock Market Advice for discussion:

The review of the US government’s bond rating is prompted by the possibility that the debt limit will not be raised in time to prevent a missed payment of interest or principal on outstanding bonds and notes.

As such, there is a small but rising risk of a short-lived default.

An actual default, regardless of duration, would fundamentally alter Moody’s assessment of the timeliness of future payments, and a Aaa rating would likely no longer be appropriate. However, because this type of default is expected to be short-lived, and the expected loss to holders of Treasury bonds would be minimal or non-existent, the rating would most likely be downgraded to somewhere in the Aa range.

The specific rating that would be assigned at the conclusion of the review once such a default is cured would depend on (1) the speed with which the default is cured; (2) an assessment of the likely effect on future borrowing costs; and (3) whether there is a change in process for raising the debt limit that would preclude another default. A return to a Aaa rating would be unlikely in the near term, particularly if there were no progress on the third consideration.

While the debt limit has been raised numerous times in the past, and sometimes the issue has been contentious, bond interest and principal have always been paid on time. If the debt limit is raised again and a default avoided, the Aaa rating would likely be confirmed. However, the outlook regarding the current stock market advice assigned at that time to the government bond rating would very likely be changed to negative at the conclusion of the review unless substantial and credible agreement is achieved on a budget that includes long-term deficit reduction.

To retain a stable outlook, such an agreement should include a deficit trajectory that leads to stabilization and then decline in the ratios of federal government debt to GDP and debt to revenue beginning within the next few years.

Moody’s does not take a position on what measures should be included in any deficit reduction package. Instead, it is the resultant deficit and debt trajectories that are relevant to the rating and its outlook.

This current stock market advice does not affect the beloved penny stocks of the world hence giving the sub $5 equities the spotlight on center stage with small caps most likely outperforming large caps over the near term. Something concrete to chew on and take into consideration going forward with your investments!

The Captain signing off for now….Trade Smart, Trade Well and Stay Onboard the StockRunway!

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