Tuesday, August 9, 2011

S&P downgrades US rating.............

I know my readers are eagerly awaiting my view on recent downgrade of US from AAA to AA+.
I was not writing not because I was shocked by the carnage in local as well as Int market.Actually I was not doing good with my ownself and when I have no mood to write I don't write for the sake of writing.
The downgarde rating by S&P has craeted a havoc in US market and in the world all over.
I was just listening to the President of S&P, Deven Sharma, who  had an interview on CNBC here and what reason he was giving for the downgrade.
The main concerns he was pointing out was, the Internal Debt of USA was not going to come down by 2014 or by 2020.According to the projection made by US herself, the Debt will rise to $14.3 tr from $10 tr in 2014 and in 2020 it will be $20 tr which will be double from hereon.
So even after the US decided to take steps to trim down the expenses the Debt will keep on rising.
What other thing I was able to gather while watching the CNBC is the spending of US FED.
Here are the statistic.

Function -yr 2011 +yr
Total Spending$6.2 trillion
Pensions$1.0 trillion
Health Care$1.1 trillion
Education$0.9 trillion
Defense$1.0 trillion
Welfare$0.7 trillion

Here is one more news on Health Care spending.

"All health care spending in the United States is projected to grow at an annual average rate of 5.8 percent for the period 2010 through 2020, 1.1 percentage points faster than expected growth in Gross Domestic Product (GDP). By 2020, health care spending is projected to be 19.8 percent of GDP, nearly one-fifth of economic output, increasing from 17.6 percent in 2010. All health care spending will reach $4.64 trillion in 2020, nearly half of which will come from government sources."

So here again my analysis come to work.Prez needs to look at the Medical spending.That was my first concern for the high spending.
$1 tr for Medical care for Senior Citizen is too high for any Country which is 18% of the total spending.I don't want to cut down the medical treatment for Senior Citizen , but I want the expenses , the cost to get trimmed down.
In my last post I gave examples how much is the cost for treatment for surgery of Knee operation or bypassurgery and for even taking care of a small Abscess.
The US has to look at this futures of Medical Treatment that is dearing the US $1 tr everyyear now and by 2020 it will be $4 tr which is 400% more then now in 10 yrs down the line.
So if we compare the amount of  Medical expenses even now at $1 tr , it is as big as Indian Economy.
No way a country can come to reduce the expenses without trimming down the Medical cost which is eating 20% of the budget.
US will have to break the vicious circle of the Medical System.That is the only way the debt will reduce in future.
Like I said in last post, even 50% of the cost is taken care of, though it is still on higher side it will make a huge difference in government spending.That is the only region US can do something.Break the Medical chain.
$92,000 for a Knee surgery! Wow! I can't believe that.
Well, Deven Sharma was saying that by downgrading the credit of US , it doesn't say , US will default.It is just saying about the risk.
If Insurance Cos are making huge profit then it is obvious that they are paying less and getting more.It is a simple maths and when Co is making huge profit it means the profit is coming from where the margin is BIG.
I feel that if the Health cost comes down in US then naturally the health Insurance will also cost less and hence if the premium is less more people can afford to go for it and that way health Insurance Co can make up with the loss of premium.
I am confident that US has the ability to take care of such debts and they will take measures to do it.The players or market has reacted more negatively on the rating and I feel that there need not to panic.Heaven is not going to fall on earth with the downgrade.This is not a 2008 type situation.
That is my view and I may go wrong but that is what I am seeing.I am not seeing the repeat of 2008 as of now.Retail participation is at low , there is no over leaverage, the return in equites in US is higher then the bonds.These all take me to conclude that this was just a reaction of downgarde of S&P which I feel is overtly done.
I know, many there in India do not like my taking side of US but when I have to write on global economy and market then I have to write on US as well.Jab US ko zukam hota hai sari duniya to sardi ho jati hai.If US gets cold the whole world gets cold.........One can never ignore US...we like it or not.......US comsumes 33% of world production.If US falls everything falls.

I don't think CHINA will ever be able to take place of US in World.

But in the end, after reading the datas, I will write that my calculation come out correct that Medical Bill is the biggest spender of US Budget and that needs to taken care of.

DON'T PANIC................This downgrade do not say that US has defaulted nor it says that US will become  bankrupt next year....

I agree that the situation on the horizen is not favourable.The Europe crisis is also looming large on global growth.The higher interest rate in India is denting growth of our economy.Tonnes of grains is lying idle in goddowns.The real reason is the supply is less and demand ios more and in that circumstances the govrenment needs to unleash the grains locked in the goddown but instead of doing that RBI keeps on increasing the Repo rate .This is going to hinder the growth and hence we are seeing the GDP projection going down from 8 to 7.5 .
There will be huge downside today in morning .Market should open with a big gap down as Dow has been down by over 600 points which is the higest points after Lehman Brs debacle.
The strategy one can follow is either one needs to be on sidelines and observe from the fence or sell now and buy at lower levels.
The retail participation is almost NIL and the stocks are going down on a low Vol as there are no buyers and when there are no buyers the prices tends to go down.
It may take 3 to 6 months for market to stabilize as domestically also we are cornered by all type of problem like Corruptions and scams.

Actually the downgrading from S&P should be taken positively by USA.Ofcourse S&P has made wrong assessment in 2007/2008 for Finance Co giving AAA rating and thereby creating the biggest meltdown of housing crisis in US but then looks like S&P has learned something from it as the reason given for the downgrade by Deven Sharma, the president of S&P on CNBC is very good to understand.
Prez should not get disturb by such things but actually work on it.If the Debt is going to rise from $10 tr now to $14 tr in 2014 and $20 tr by 2020 then that is not a good things for any country.So what S&P is saying is that the plan passed by the seneta is not good enough to bring down the deficit to normal level as it will keep on rising.
I heard Obama coming on TV to say that whatever downgrade any rating agency gives, US will remain AAA all the time.It was looking like Obama was hurt and so was Fin sec of state.
But when one look at the reason given by S&P, the deficit is not coming down but actually going up even after the measure to be taken decided , then that is a emergency call for Washington.The downgrade says that don't be satisfied by the outcome.You have not done enough for the deficit.
I keep on adding things here but as things come up to my mind I have to write it down for my readers.When my mind reads and after that thinks on it and what comes up is the analysis of the things I was reading or hearing.
Warren Buffet , the astute investor also didn't like the downgrade.He said, S&P should not forget that US has got the printing press and hence they can print as much dollars as they want.
That was a statement not given as a Economist but as an investor.
Whole world knows that WB has stake in Insurance Cos from Autos to Medical /healthcare Insurance and naturally he do not want the Medical treatment expenses to cut down otherwise the biggest pie of the profit will come down in his invesment Co.
Being a veteran investor, how he is not able to understand that printing dollars will make the dollar value down and the inflation will go up.
Warren Buffet is not concerned about the HIGH COST OF MEDICAL TREATMENT , he says we can print the money but the high profit margin that comes for the Insurance Co should remain as it is.
Friends, that is why in India also DII like LIC is always making huge profit.Insurance Co makes huge profit and the margin keeps on increasing with more people going for Insurance policy.The catch here is, how much LIC or for that matter any Insurance Co has to pay for Health Care of Life Insutrance policy.
Very negligible and  the rest premium goes as profit.Try to recall any person who went for LIC Life Insurance policy and how many person died before maturity and how much LIC has to pay before maturity of policy.
It is negligible.But these Insurance Agents will tell you all sorts of reason to buy the policy and we keep on paying premium for whole life and what comes in our hand is peanuts of return.
Though now some policies has shown good return and the main reason the salaried people buy these policy is, the Tax benifit.If they buy LIC Policy they have to pay less Tax .Otherwise there are other source of invesment that will give better returns then LIC.


  1. Excellent post once again , RajeevBhai...

    You have this unique ability of explaining complex issues in very simple terms...

    Thanks once again for putting in your valuable time and effort in explaining us about the current US debt crisis in simple terms...


  2. hi rajeev,
    if health care or insurance is such a promising sector,could you please suggest some stocks in this sector which you feel will give superb returns in days to come.

  3. Dear Rajeevji,

    Is this better time for investing in Indian stocks as the recent correction has brought the Sensex levels to an attractive one year forward P/E of 13 times. Also can you suggest me your selective picks for 2 to 3 year investment period.


  4. For Buffett right now at least, this is not a time for fear. This is a time for action. - http://finance.fortune.cnn.com/2011/08/11/warren-buffett-buy-stocks/

  5. surjeet,
    The only cheap stock coming to my mind is Max India...

  6. Hi Rajeev,
    RJ is so much bullish on Delta Corp. He has nearly doubled his holdings in it on 11-8-11
    Check the following moneycontrol link


    What you take Rajeev?
    Can one safely invest at these levels for multi-bagger returns.


  7. Hi Rajeev & Fellow-Bloggers,
    Posting below the video link of RJ's interview on ET Now just 1 day back.


    Note down. In part-1 he says - I DONT UNDERSTAND CHARTS.


  8. Hi Rajeev Sir,

    Whats your view on ABM Knowledgeware... LOne of my friend told me that it is a upcoming story and has posted good results....

    Kindly go through this company


  9. Hi Rajeev,

    I am regular reader of your awesome blog since long time. What is your view on IT sector for next 1-2 years on back of US & Europe crises are getting deeper. I am not asking this question for investing in IT stocks,but I am looking for the job in IT sector for next 1-2 years.So what's your view on IT sector in india by next 1-2 years.

    Thanks & Regards,


  10. Dear Rajeev ji, Today HBL Power come out with bad result . 10 cr loss, sales also comes down. Why interest gone up too much ? what is your thought on result. Please update

  11. Hi,
    I have seen the results.What I had make out from it is, it is not looking as bad as it looks.
    1)The sales has gone down by 20% ,40 cr, but the raw material cost has gone down by 30 cr and that means the margins are improving.
    2)The Reserve is at almost 500 cr on an eq of 25 cr and hence we can say that stocks is trading below BV.
    3)The Int cost has gone up by 10 cr and if we take that out then the 10 cr loss is almost wiped off.
    4) The pledge shares are not also not on higher side and that is also a positive for me.
    Hence I feel HBL is still a hold......

  12. Hi Sushma,
    There is nothing wrong in IT sector in India.The outlook for IT sector is positive for India as lots of works needs to be done in India relating that.
    Lots of Municipality, Courts, Railways has to go through IT revolution and hence for next couple of decades atleast there are ample scope for this sector.

  13. Vikas,
    RJ should be knowing better then anyone else as he has the first hand report of the Co.That must the reason he is increasing the stake.
    What we can do is , we can buy on his conviction...that's all I can say about Delta Corp.

  14. Rahul,
    ABM knowledge is in Eductaion space as well.I have already recomended long back along with ASM technology.....

  15. Rajeevji,
    Have you looked new website of HBL power ? It is looking interesting..Lot of information. I think Managment some plan..Pls comment