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Moody’s Investor Service, the credit rating agency, will fire a warning shot at the US on Monday, saying that unless the country gets public finances into better shape than the Obama administration projects there would be “downward pressure” on its triple A credit rating.
Examining the administration’s outlook for the federal budget deficit, the agency said: “If such a trajectory were to materialise, there would at some point be downward pressure on the triple A rating of the federal government.”
It projects that the federal borrowing is so high that the interest payments on government debt will grow to more than 15 per cent of government revenues, about the same by the end of the decade as the previous 1980s peak.
This time the servicing burden would be harder to reverse, however, because it would not be caused by high interest rates but by high debt levels.
Pierre Cailleteau, head of sovereign ratings at Moody’s, said: “The size of debt makes the US vulnerable to an interest rate shock . . . but the level of fiscal ambition is not one that secures for sure the [triple A] rating.”
Moody’s worries that the government will struggle to get political agreement either to raise tax revenues significantly from their current low of 14.8 per cent of national income, or to cut federal spending far from its high of 25.4 per cent of national income.
The report follows concerns recently expressed about the US public finances from the other large rating agencies. Standard & Poor’s warned last week the triple A status of the US was at risk unless the country adopted a credible medium-term plan to rein in fiscal spending. Fitch Ratings issued a critical report on the US in January.
Fitch said: “In the absence of measures to reduce the budget deficit over the next three to five years, government indebtedness will start to approach levels by the latter half of the decade that will bring pressure to bear on the triple A status.”
The high-end consumer is making a comeback, but mainstream consumers have yet to rebound and unemployment is to blame, Matthew Rubel, Collective Brands chairman and CEO, told CNBC Friday.
Rubel said he has seen proof of this in his own company, Collective Brands [PSS 22.00 -0.29 (-1.3%) ], which owns both discount shoe retailer Payless and premium shoe brands such as Saucony and Sperry.
The wide array of brands in Collective's portfolio allows Rubel to see what's happening with shoppers across a number of income levels.
"The premium consumer is clearly back," Rubel said. "So that upper one-third of consumers, their portfolios are recovered. They're not as worried about jobs right now and so they're back out shopping and when they are in the stores they are buying."
The market's flat performance year to date shows that it has lost the momentum from its spectacular run last year. This lack of conviction and direction (even in the face of a growing economy and strong earnings) may seem puzzling.
But is it? My short answer is: No, it's not puzzling.
My goal here is to help you make sense of it all and give you a few investment ideas along the way to profitably navigate this market environment.
Compared to the turbulence of the last two years, I envision 2010 to be a fairly tame affair, with the major indices up a decent but unspectacular 5% to 10%. I see the year as one of stability and consolidation, both in the equity markets as well as the underlying economy.
Keep in mind that this outlook is not inconsistent with periods of weakness, as we have seen recently, followed by stagnation and/or positive gains.
Not every sector and every stock will be stuck in such a tight range. There will be plenty of winners and losers along the way. And if you stay with me a bit longer, I will give you the framework to identify them for yourself and have a very profitable year.
Why a Range-Bound Market in 2010?
Last year's impressive performance reflected the realization that we were not headed towards the Great Depression 2.0. It was the exit from the recession and the above-mentioned recovery that was fully priced in by last year's market run up ahead of time.
While the very long-term trend remains favorable, there are many rational reasons for the market to take a pause now before making a clear trend move. Here are some of them:
- Double-Dip Fears: The market needs to be reassured that the recovery is sustainable and that we are not going back into another recession. The fear is that as the fiscal stimulus wears off in the second half of the year, the growth momentum would be difficult to sustain.
- Labor Market Concerns: As February's Employment Situation report showed, the labor market remains in a very precarious state. Everybody is talking about a jobless recovery, but how strong can the overall recovery be if we continue to have massive labor market slack?
- Fed Policy: Closely tied with these issues is the Fed's eventual removal of the extremely stimulative monetary policy measures that it put in place in the downturn. With respect to interest rates, the Fed has been saying for a while now that it intends to keep interest rates low for an 'extended period'. The market is actively engaged in handicapping a timeline for the Fed to raise rates; not exactly an easy exercise.
- PIGS & China: As if these domestic issues were not enough, the market also has to contend with sovereign risk issues and moves by China's central bank. While fears about the sovereign debt profile of Greece or any of these other countries (the so-called PIGS – Portugal, Ireland, Greece, and Spain) have receded to some extent, China remains a major issue. China is trying to control some of the speculative excesses in its real estate sector – in essence it is trying to let the air out of a bubble without actually popping it. China's ability to pull that off without damaging its economy is far from certain and remains a key risk factor for the global economy.
While all of these issues are real and substantive, I do not foresee any of them, individually or in combination, derailing the current ongoing recovery. I remain confident of the sustainability of the recovery and see enough evidence on the ground that the economy can sustain the growth trajectory even as the stimulative crutches are removed. That's the reason I am forecasting a positive gain for the market, albeit a small one compared to last year. It is the collective weight of these concerns that is expected to keep the market in check.
As Marshall McLuhan said, "the medium is the message". This is a television that says something about the owner and that message is "I can afford to spend the price of a medium sized family car on a TV set that will be obsolete within a couple of years". In this respect there can be no doubt that the 70 inch Sony XBR accomplishes its intended purpose brilliantly.
The truly discerning purchaser will use this set to watch CNBC or Fox News, or rather display the same disregarded in the corner of the room while paying attention to something else.
There are larger TV sets out there, but the 120" Philips LED display has a pathetic resolution and the 150" Panasonic weighs about as much as the Ferrari you could buy instead. Actually, the Panasonic does at least have a sensible use - as a cinema screen.
Buy with pride and think not that you could buy the 60" less than a fifth the price and use the remainder to build a health clinic or school in a deprived part of the world and put a picture of it on your wall instead. One advantage of that approach is that with no sound to turn off, its a lot easier to ignore.