PRUDENT INVESTORS SHOULD CARE ABOUT MOODY’S DOWNGRADE OF U.S. CREDIT OUTLOOK

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By Nigam Arora & Dr. Natasha Arora

To gain an edge, this is what you need to know today.

Prudent Investors Should Care

Please click here for a chart of the federal deficit.

Note the following:

  • The chart goes back to 1900.
  • The chart shows that large federal deficits are a relatively recent phenomenon.
  • The chart shows about a $3T deficit during the pandemic when the government overdid giving away free money.   The government did not have the money to give away, so it borrowed more.
  • Even though the pandemic is behind us, the chart shows that large federal deficits are still there.  A big part of the deficits is the free money that is being given away right now through several programs such as the Inflation Reduction Act and Infrastructure Act.
  • Moody’s has downgraded the outlook on U.S. credit to negative from stable.  Moody’s cited the large federal deficit as a “key driver” behind the downgrade.  Here are pertinent excerpts from Moody’s:
    • “The downside risks to the US’ fiscal strength have increased and may no longer be fully offset by the sovereign’s unique credit strengths.”
    • “In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that the US’ fiscal deficits will remain very large, significantly weakening debt affordability.”
    • “Continued political polarization within US Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.”
  • The news came late Friday after the stock market close.  There was only a slight reaction on Friday in after hour trading.  When futures started trading on Sunday, the reaction was still slight.
  • This morning, the momo crowd is buying the slight dip driven by FOMO (fear of missing out), oblivious to Moody’s downgrade.
  • In The Arora Report analysis, prudent investors should pay attention to Moody’s downgrade, even though the momo crowd is buying the shallow dip.  The reason is that the U.S. is on an unsustainable fiscal path.  In the long term, money is made by looking ahead.  A practical way for investors to protect themselves is to diversify by investing some money overseas and in different asset classes as appropriate.  For those who can, it is also very helpful to be able to short to take advantage of prices coming down.  Here are the three key points:
    • Money is to be made in the U.S. and outside the U.S.  Yet, most investors have 100% of their investments in the U.S.
    • Money is to be made when prices go up and when prices go down.  Yet, most investors try to make money only when prices are going up and do nothing more than complain when prices go down.  Imagine if someone was to insist on driving only on a one way road that went north.
    • A practical, actionable way to protect yourself and enhance your returns over the long term is to subscribe to the Corporate Bundle that brings you more opportunities from across the globe and also helps you make money when prices go down.  Please read the Accelerating Wealth Generation section in the Trade Management Guidelines.
  • Be careful if you are just looking at the Dow Jones Industrial Average (DJIA).  DJIA is being boosted by one stock – Boeing (BA).  There are two reasons behind the boost in Boeing:
    • There are reports that China is about to lift the freeze on Chinese airlines buying Boeing jets.  This is a good will gesture from China ahead of Biden and Xi meeting.
    • Boeing is likely to win several orders from the Dubai Air Show.
    • As a full disclosure, BA is in the core Model Portfolio.
  • On the positive side, the risk of a U.S. government shutdown has lessened.  U.S. House Speaker Mike Johnson has proposed a two-step measure to postpone hard decisions to next year.  In essence, the proposal is the same as the proposal that resulted in the ouster of former Speaker Kevin McCarthy.  Hardline Republicans are opposed to this proposal.  However, indications are that the proposal is getting some Democratic support.
  • As an actionable item, the sum total of the foregoing is in the protection band, which strikes the optimum balance between various crosscurrents.   Please scroll down to see the protection band.
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Magnificent Seven Money Flows

In the early trade, money flows are positive in Tesla (TSLA), Nvidia (NVDA), and Microsoft (MSFT).

In the early trade, money flows are negative in Amazon (AMZN), Alphabet (GOOG), Meta (META), and Apple (AAPL).

In the early trade, money flows are mixed in S&P 500 ETF (SPY) and Nasdaq 100 ETF (QQQ).

Momo Crowd And Smart Money In Stocks

The momo crowd is *** (To see the locked content, please take a 30 day free trial) stocks in the early trade.  Smart money is *** in the early trade.

Gold

The momo crowd is *** gold in the early trade.  Smart money is *** in the early trade.

For longer-term, please see gold and silver ratings.

Oil

The momo crowd is *** in oil in the early trade.  Smart money is *** in the early trade.

For longer-term, please see oil ratings.

Bitcoin

Bitcoin (BTC.USD) is range bound.  There is some disappointment that whales did not run bitcoin to $40,000 over the weekend, taking advantage of low liquidity.  The disappointment is being countered by speculation that bitcoin ETF approval may come as early as this week.  There is also excitement about BlackRock (BLK) filing for an Ethereum ETF.

Markets

Our very, very short-term early stock market indicator is ***.  This indicator, with a great track record, is popular among long term investors to stay in tune with the market and among short term traders to independently undertake quick trades.

Interest rates are ticking up, and bonds are ticking down.

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The dollar is range bound.

Trading futures is not recommended for most investors. The purpose of providing this information is to give an indication of the premarket activity that usually guides the activity when the market opens.

Gold futures are at $1939, silver futures are at $22.16, and oil futures are at $77.36.

S&P 500 futures are trading at 4423  as of this writing.  S&P 500 futures resistance levels are 4460, 4600, and 4713: support levels are 4400, 4318, and 4200.

DJIA futures are up/down 74 points.

Protection Band And What To Do Now

It is important for investors to look ahead and not in the rearview mirror.

Consider continuing to hold good, very long term, existing positions. Based on individual risk preference, consider holding *** in cash or Treasury bills or allocated to short-term tactical trades; and short to medium-term hedges of ***, and short term hedges of ***. This is a good way to protect yourself and participate in the upside at the same time.

You can determine your protection bands by adding cash to hedges.  The high band of the protection is appropriate for those who are older or conservative. The low band of the protection is appropriate for those who are younger or aggressive.  If you do not hedge, the total cash level should be more than stated above but significantly less than cash plus hedges.

It is worth reminding that you cannot take advantage of new upcoming opportunities if you are not holding enough cash.  When adjusting hedge levels, consider adjusting partial stop quantities for stock positions (non ETF); consider using wider stops on remaining quantities and also allowing more room for high beta stocks.  High beta stocks are the ones that move more than the market.

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Traditional 60/40 Portfolio

Probability based risk reward adjusted for inflation does not favor long duration strategic bond allocation at this time.

Those who want to stick to traditional 60% allocation to stocks and 40% to bonds may consider focusing on only high quality bonds and bonds of seven year duration or less.  Those willing to bring sophistication to their investing may consider using bond ETFs as tactical positions and not strategic positions at this time.

To take a free 30-day trial to paid services to gain access to more opportunities, please click here.

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Nigam Arora

Nigam Arora

Nigam Arora is known for his accurate stock market calls. Nigam is a distinguished master of the macro. He is a popular columnist with over 100 million page views, an engineer, and nuclear physicist by background. Nigam has founded two Inc. 500 fastest growing companies and has been involved in over 50 entrepreneurial ventures. He is the developer of Theory ZYX of Successful Change Management and is the author of the book on Theory ZYX, as well as the developer of the ZYX Change Method for Investing.

Dr. Natasha Arora

Dr. Natasha Arora

Dr. Natasha Arora has significant expertise in investment analysis especially biotech, healthcare, and technology. Natasha is a graduate of Harvard Medical School followed by a postdoc at MIT. She has published several peer reviewed research papers in top science journals.

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