Sunday, August 7, 2011

Downgrade: Storm in a tea cup?

The S&P downgrade of the USA to AA+ may well be like the Y2K scare in the year 1999. Remember Y2K? The world was going to end because there was tons of legacy code that couldn’t accommodate the rollover to the new century. As we now know, January 1, 2000 came in without major incident.

It isn’t yet clear what the impact of the S&P downgrade of the US to AA+ will have. There are good reasons to believe, despite the media hyperventilating, that it won’t add up to much.

Many economists and bloggers have reminded us that the S&P was the same agency which was giving top ratings to securities just before the sub prime crisis in the USA. It is a private company, managed for profit. They have about 100 analysts analyzing 136 countries - a lot of responsibility, for an organization that failed to recognize the collapse of the sub prime market.

My Point:
While initial market reaction could easily be volatile, I do not believe that this action will have any impact that lasts for more than a few days. What will happen is different: there will be a world wide debate on the power of private companies who virtually control the world through their manipulative actions. Since this time, the U.S. govt will be on the opposite side, I assume that the end result will be efforts to curb such power.

Impact on Markets:
Volatile markets are not good places to trade. Have patience. In the enxt few days, I expect a short term low to be in place. This could lead to a tradeable rally. My view remains that we should eventually see a correction to the 4300 - 3800 zone, but that will take its own time.


Anshul The Maniac Finance Kid said...

Sudarshan bhaiyya i quote you'volatile mkts are not good places to trade'.Per i feel dey can give good profits if u follow the startegy of hedging nifty future position by buying call(if u r long) or put(in case of short) at the money option at closing (around 3 25) and squaring off next day at 9 16

LIC Agent Noida said...

Sir, why do we talks a lot about news.. yes we should listen them but we should be more focused ion the price...