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|Subject: Could the U.S. Lose Its Triple-A Rating?||Date: 6/3/2009 9:40 AM|
|Author: HaoJin98||Number: 17 of 20|
An investor buys an idea and waits for that idea to materialize. It might take minutes, hours, days, sometimes even years for that idea to materialize. The longer the time frame, the more likely the idea will materialize profitably, according to an recent article in May/June 2009 issue CFA Institute Magazine.
After it cut its outlook on the United Kingdom's triple-A credit rating to 'negative' from 'stable', last week Standard & Poor's raised worries that the United States could lose its "AAA" rating. On May 27, Moody's Investors Service, another ratings agency, said the U.S. government's AAA rating is stable despite the country's swelling debt. But it did not completely rule out a downgrade. A reassessment of the economy and the government's debt could put "negative pressure on the rating in the future."
The UK faces a 33% chance of a rating cut in the future. What’s the chance for the US? AAA means the agency sees very little risk of the government defaulting on its debt. Unlike other countries in the world, US debt is in its own currency: US Dollar. It can always keep on “printing money” to pay down debt. Therefore in theory the US should always be able to keep its pristine AAA rating.
According to Bloomberg, last week Bill Gross, co-chief investment officer at PIMCO, said that he believes the US will eventually lose its coveted triple-A credit rating. The US is running a $12-to-$13 trillion deficit with another $70 trillion of unfunded liabilities. Government spending under the Obama administration has accelerated, leading the nation's debt load to grow. US marketable debt now represents around 45% of GDP.
Regardless whether the US keeps its AAA rating or not, if you truly believe now is the beginning of long term US dollar slid, you might be able to profit from real assets such as SPDR Gold Shares (GLD), iShares Silver Trust (SLV), PowerShares DB Agriculture (DBA), PowerShares DB Commodity Idx Trking Fund (DBC), United States Oil (USO) or even Vanguard REIT Index ETF (VNQ). A more direct place is currency ETFs, such as PowerShares DB US Dollar Index Bearish (UDN), CurrencyShares Canadian Dollar Trust (FXC), WisdomTree Dreyfus Chinese Yuan (CYB) or CurrencyShares Euro Trust (FXE).
The euro is one of the most actively traded foreign currencies. According to NationalFutures.com, it also adheres to technical signals. For the past decade, the euro has formed a bottom against the US dollar in the 3rd week in October, and then it has gone up for the remainder of the year and then sold off at the beginning of January. It has made a secondary low around the last week of March and then trended higher into the summer. Following that, the market has declined into October.
The European Central Bank is not as aggressive as the U.S. Federal Reserve or the Bank of England, both in cutting interest rates and in promoting unconventional measure such as bond purchasing to boost the money supply.
I prefer to invest in foreign stock ETFs, instead of speculating in currency ETFs. As you can see, SPY and iShares MSCI EAFE Index (EFA) have virtually identical chart. The only difference seems to be from currency.
If you compare the chart of PowerShares DB US Dollar Index Bullish (UUP) below, when SPY began outperform EFA last August, it was because US dollar just started its upwards. Looks like now it is the time to reduce SPY and increase EFA position, in order to take advantage of weakness of US dollar. Instead of EFA, you can also look into other low-cost alternative ETFs such as Vanguard FTSE All-World ex-US ETF (VEU) .
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