Posted: July 29, 2011
Playing chicken with the nation’s credit rating
Despite what's happening, stocks are still a good buyBy Fred Taylor
Regardless of what political side of the fence you are on, what is happening in Washington is nothing short of irresponsible. To play a game of chicken with the credit rating of the United States is no joke.
The simple fact that the European Union could at least come up with a band-aid solution to the sovereign debt crisis in Greece speaks volumes of how dysfunctional and partisan Washington has become. Aug. 2 is rapidly approaching, and time is running out for a credible long-term solution. I am watching this issue very closely with great concern.
This certainly begs the question, what to do if there isn't a solution by next week? Frankly, there isn't anything to do except avoid panicking and sit tight. As we saw with the TARP legislative fiasco in the fall of 2008, the failure to pass that bill the first time resulted in a 777-point drop in the market - a sell-off forced Congress to pass the legislation the second time.
It is difficult to predict whether a failure to resolve the debt crisis issue would spark a similar sell-off. What is different three years later, is how well corporate America is doing. They are reporting record earnings, have refinanced their debt with record low interest rates, and have very lean labor forces. Moreover, most of their earnings growth is being fueled by the burgeoning middle and upper classes in China, Brazil and India.
Many of these same companies continue to increase their dividends, which means more cash for investors to spend or reinvest. In some cases, companies that pay dividends are providing more income potential for investors than bonds. As was the case in the 1950's, investors can now get more in dividend income from large cap blue chip companies than they can from the 10-year U.S. Treasury bond yielding less than 3 percent.
Despite the political uncertainty, I remain convinced that stocks remain a good buy thanks to strong corporate fundamentals. In fact, many stocks that are producing strong earnings are underpriced, making it an especially prime time to invest.
Fred Taylor co-founded Northstar Investment Advisors, LLC in 1995. The firm specializes in managing personalized investment portfolios for individuals, families, and retirees with a focus on income generation. He is a member of the Colorado Forum and also served as an economic advisor to Colorado Governor Bill Ritter from 2008 to 2010.