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Wednesday
Aug102011

S&P Downgrade 101: Mini Series

We are well into our first week of S&P downgrade status. How are you and your small businesses holding up? I’m sure there is a ton of chatter around water coolers and shop fronts all over the country - most of it is made up of sound bytes collected from news outlets. I’m all for informed masses but if you’re reading this then you will hopefully have an advantage or at least the tools to guide those conversations positively and meaningfully.

What I want to do this week is break this issue out into a bit of a mini series. Instead of just lumping all this info into one post we are going to break it up and attack it in pieces. First what happened, then how’s this going to affect small business, and lastly how to navigate this type of economy.

First of all what happened? Well nothing that financial markets and politicians didn’t see coming for months. The knowledge of this process and its ramifications were announced months ago, we are talking March/April by S&P. In a really basic way what the S&P did was evaluate the government like any business that offers credit or debt. As a rating agency you need to look at not only the financials of the company but how it’s managed. S&P analysts then made their analysis on the best public and freely distributed information that was available to them - resulting in a downgrade - all of which should have also already been priced into markets. It was a combination of financial uncertainty and uncertainly in the leadership that caused this. Imagine a board of directors all pulling in different directions, how can any company efficiently operate like that before the financials start to suffer. Realistically though are your companies worth 20-30% less then they were last week...probably not. So you can see that markets might have slightly been a bit irrational in their uncertainty.

Next the S&P is only one of the three major credit rating authorities. The other two are Moody’s and Fitch Ratings and they have maintained a AAA rating for US debt (at the moment). AA+ for the US is too terrible of a downgrade either, while it is a blow to the ego we are still among top countries as far as lending goes. Belgium has a AA+ rating and they aren’t melting down are they?!

What this means for the economy is that growth will probably continue to creep forward slowly. Uncertainty is a wonderfully interesting creature and it’s what our markets are priced on. One of the things that happens when the perceived risk is too great is companies and people stop spending. Even though it is still very inexpensive to borrow, people have worked very hard on deleveraging, and banks are actually making funds more available - people will still freeze like deer in headlights. Since earlier this year the economy has been dealing with supply-chain issues like Japans hindered output and lagged effect of oil prices. Couple those issues with all the hype surrounding this downgrade makes it hard to see positivity, right? Well the US Treasurery is still one of the safest financial instruments internationally, the US dollar is still one of the most widely accepted currencies, and you are still going to do the things you did yesterday right?! We can do our part by continuing to spend, continuing to borrow, and continuing to keep growing our businesses.

While I am absolutely not selling or providing any type of financial advice here - this market could provide for some interesting moves for those that have investment portfolios. If you play financial markets actively then make sure you do your homework. Watching what companies carry for leverage and where their cash is right now might give you some insight on their next moves. Just like your pee-wee coaches screamed at you or your kids from the side lines: stick to fundamentals here! Don’t try to map technicals based on what happened in 2008, it might look similar but it’s an entirely new and uncharted animal and you will get burned.  If you are a set-it-and-forget-it type you have some great dollar cost averaging type opportunities here. When markets are down it’s always great to pick up more of the stuff you already have as it brings your costs down over time - it’s like the stock market just went on sale :) 

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