By Michael Lombardi, MBA for Profit Confidential
Standard & Poor’s, the credit rating agency, believes the likelihood of the U.S. credit rating being downgraded in the near term is less than 33% (one in three) and it has decided to keep its credit rating on the U.S. economy at AA+, slightly lower than the best investment grade. (Source: Standards & Poor’s, June 10, 2013.)
This may be good news to the politicians who continue to believe there is an economic recovery in the U.S. economy, but it’s not enough to convince me.
In March, 47.7 million Americans, or 23.1 million households, were on some form of food stamps in the U.S. economy. (Source: United States Department of Agriculture, June 7, 2013.) This is more than 15% of the U.S. population.
And instead of people moving away from the government’s help, as would be the case during economic growth and a recovery, dependence on the government is actually increasing. Food stamp use in the U.S. economy was lower at 44.5 million in March of 2011.
Economic growth in the U.S. economy means job creation and consumers increasing spending—we have the exact opposite today.
After 2009, we had a sense of economic growth in the U.S. economy as demand in the global economy meant many multinational American companies were able to sell their goods for a profit outside the U.S. But as the global economy struggles now, it’s a different story.
For the second quarter of 2013, 116 companies in the S&P 500 have provided corporate earningsguidance; 93 of them have provided negative guidance. The ratio of companies providing negative guidance compared to companies providing positive guidance has hit the highest level since the first quarter of 2001! (Source: Thomson Reuters Alpha Now, June 10, 2013.)
Going back to Standard & Poor’s keeping the U.S. economy’s credit rating unchanged…it doesn’t mean much. We are far away from economic growth, and the troubles in the global economy continue to be a major hurdle.
American companies have plenty of cash on hand; but because they hold a very gloomy view of the U.S. economy, they are shying away from spending their money. So instead of our economy recovering on its own, we have money printing and government spending trying to help our situation—both of which failed miserably for the Japanese economy.
Michaels’s Personal Notes:
I can’t stress this enough: troubles in the eurozone are far from over.
First and most important, the strongest nations in the eurozone are experiencing an economic slowdown now too. As I have written before, France and Germany are seeing diminishing demand.
Finland, one of the financially strongest nations in the eurozone, fell into a recession in the first quarter of this year. Why? Exports from Finland are declining due to economic slowdown in the eurozone area, unemployment is increasing, and the government has introduced spending cuts. (Source: Wall Street Journal, June 5, 2013.)
The European Central Bank (ECB) expects the eurozone economy to shrink by 0.6% this year, lower than its previous estimate of 0.5%. In the first quarter of 2013, the eurozone experienced its sixth consecutive economic slowdown. (Source: Associated Press, June 6, 2013.)
Regardless of what you hear or don’t hear in the popular media, don’t believe for a second that the economic slowdown in the eurozone is going away anytime soon. The region is struggling with extreme levels of unemployment—the highest ever just recorded in April.
Some countries in the eurozone such as Ireland, Greece, and Portugal have now reached debt-to-income ratios (what the government spends compared to what the government brings in) above 300%. (Source: The Guardian, June 9, 2013.)
We have heard the head of the ECB say that the central bank will do “whatever it takes” to save the eurozone. But Germany is challenging this notion. The President of Germany’s central bank is expected to testify in front of the court and say it is illegal to bailout bankrupt eurozone countries; it puts no limit on the country’s spending and it’s essentially a way to give loans to governments of other countries. (Source: BBC News, June 11, 2013.)
You need to keep in mind that Germany was at the forefront when it was trying to help the eurozone after the debt crisis hit, sending the eurozone into a downward spiral; if Germany backs away from this “whatever it takes” stance, the outcome will not be good.
The eurozone’s economic slowdown is very important to observe, because it affects us here at home—in the profits of American companies and their stock prices.
What He Said:
“A Stock Market’s Obituary: It is with great sadness that we announce the passing of the Dow Jones Industrial Average. After a strong and courageous battle, the Dow Jones fell victim to a credit crisis and finally succumbed on Friday, October 3, 2008, when it fell decisively below the mid-point between its 2002 low and its 2007 high.” Michael Lombardi in Profit Confidential, October 6, 2008. From October 6, 2008 to November 27, 2008, the Dow Jones Industrial Average experienced one of its biggest two-month losses in history.
- Warning: 79% of S&P 500 Companies Issue Negative 2Q Guidance (etfdailynews.com)