Monday, April 18, 2011


Here's a wish list with price entry points:

PNC - $60
MSFT - $24
C - $4.25
GM - $28
JPM - $40
MET - $40

Here are my reactions to today's S&P news:

* U.S. debt will not be downgraded. It is not likely that U.S. debt will be downgraded in the next few years. The last two country downgrades (Canada and Japan) were nations that:
1. weren't reserve currency countries; and
2. had debt to GDP ratios of over 100%.
By contrast, the U.S. is a reserve currency, and our debt is only 62% to 64% of GDP.

* Progress will likely be made on the deficit front. There is now renewed pressure on the Democrats and Republicans to make progress on the deficit front.

* Taxes will rise, and austerity measures will be enforced. Along with the budget deficit progress that will come in the fullness of time (or maybe sooner!), expect higher marginal tax rates and more meaningful austerity measures.

* Corporate profit forecasts will be downgraded for 2011-2012.

* Economic growth expectations will be scaled back. Consensus projections for 2011 U.S. GDP growth will be lowered from +3.5% to around +2.5%.

Here are the comments of Miller Tabak's Dan Greenhaus on the concern du jour:

U.S. government officials are out in full force doing damage control with the main points being:

* S&P is making a "political judgment," a phrase that appears intended to dismiss the agencies concerns as partisan rather than economic or fundamental in nature
* Officials are reminding people that this has no bearing on the U.S.'s ability to issue or finance its debt nor does it mean a default is imminent. A default is most certainly not imminent. Indeed, S&P itself noted this morning that a default in the short to medium term is quite low while the "worst case scenario" is for a "mild" deterioration in the credit rating of the U.S. Longer term is a different story.

The 2011 budget compromise resulted in very, very little actual spending being cut. The only way to credibly and sustainably address the medium and long term deficit picture is by attacking Medicare, Medicaid, Social Security and Defense spending.

Worries -

1. Consumer nondurable issues have outperformed, a classical sign of a more defensive market.

2. Former market-leading stocks -- namely, GOOG and AAPL -- have begun to underperform.

3. First-quarter earnings reports have been disappointing and, when combined with No. 4 below, render the $95-a-share consensus S&P forecasts for the year more problematic.

4. The price of energy products and other input prices show little signs of moderating.

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