Economic Update
August 9, 2011
By Jim Oelschlager
Chief Investment Officer
The audacious attitude of Washington in their superiority and invincibility has had a wake-up call – a downgrade of our credit rating by the S&P: our AAA is now AA+. The attitude remains that the rating processes are wrong and that they are right. Most Americans understand if you repeatedly spend more than you take in, it finally catches up to you. Washington doesn’t seem to understand this. For every $1.00 the government has taken in this year, they have spent $1.50. It is pretty easy to fool yourself when you are dealing with other people’s money.
The present crowd in Washington is unlikely to heed the wake-up call. I suspect that with the next election, the people will send a message loud and clear to Washington.
Nevertheless, things are pretty much as they were last week and are going to be next week, in our opinion. This is a symbolic gesture without any defining consequences.
There is much on the plus side. The price of oil has recently dropped from $112 per barrel to $83 dollars per barrel … a 26% decline. Because of taxes, etc., a decline of that magnitude will not be reflected at the pump, but there will be some significant price pullback at the pump which will benefit consumers and improve their spending power and confidence, though this may be mitigated somewhat by the correction in the stock market.
Corporate profits continue to surprise on the upside and forward revenue and earnings estimates continue to improve. Balance sheets, for the most part, are in very good shape and getting better. Cash flow continues very high. It may be that in the not-too-distant future, corporate debt is considered safer than government debt.
So, once again, things will proceed, in our opinion, pretty much as they have, and in hindsight, this downgrade will not be perceived as an earth-shattering event.
Best regards,
Jim Oelschlager
This manager commentary represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice.
Investments are subject to market fluctuations and a fund’s share price can fall because of weakness in the broad market, a particular industry, or a specific holding.
Credit Quality: A measure of the quality and safety of a bond, based on the issuer's financial condition. Typically, AAA is the highest (best) and D is the lowest (worst).