S&P Downgrades US Credit to AA+

Trading Update:

We had a horrible month for the month of July. As a matter of fact, it was our worst month ever, at +9.4% gain for the month. The market has been highly unpredictable, primarily due to the US Debt issues (I really hate using the term crisis). Friday S&P downgraded the credit rating of the US to AA+, which means there is more danger for the markets to come. If only the current administration would get its head out of its butt, quit all the spending, balance the budget, and create a plan to reduce our actual debt, everything would be just fantastic. If only. But the bottom line is that even with the turmoil, we still managed to keep gains for the month above +9% for our premium members.

Commentary

Standard & Poor’s, one of the three major credit rating agencies that assign scores to debt issued by institutions, municipalities, and governments, said there is a heightened degree of risk in holding debt issued by the United States. So it lowered its rating from the AAA, the highest possible level, by one notch to AA+. It also said the outlook is negative.

Standard & Poor’s has assigned a “negative” outlook to the US long-term credit rating. That means another downgrade was possible in the next 12 to 18 months if it does not see an improvement in debt reduction. The other ratings agencies, Moody’s and Fitch, currently still have a AAA rating on U.S. debt, which they just affirmed. But both of those agencies have suggested the U.S. could also be downgraded if projected government deficits are not reined in. Moody’s currently has U.S. debt on review for possible downgrade.

That being said, it is obvious that this is going to cause a lot of turmoil in the markets come tomorrow. As a matter of fact, several large financial institutions are recommending that people pull out at least half of their investments from the stock market. While we expect that to happen anyway, it is also something of a self fulfilling prophesy. Risk aversion is coming to a head, and with the likely prediction of a huge exodus from the stock market, people will be looking for a safe haven to put their money into, which usually means foreign currencies.

Unfortunately, there is no telling where they will put their money until it begins. Since the US credit was downgraded, it is possible the strength of the us dollar will suffer and people will pour their money into other currencies, causing the other currencies to rise in comparison to the USD. On the otherhand, when risk aversion takes hold and people move their money from the stock market into Forex, they tend to put it into the USD, pushing it up vs other currencies.

The bottom line is that the coming market action will be highly risky, unpredictable, and extremely erratic.

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