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When Two Wrongs Can Make a Right

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Editorial Staff, Fisher Investments MarketMinder

NEW YORK ( Fisher Investments) -- In recent weeks, it's easy to find a lot to be frustrated about regarding markets. First, the political bickering over the debt ceiling along with associated overstatements about what would and wouldn't happen if it weren't raised. Then, following a debt limit deal, markets still sold off into correction territory. But if all this frustration weren't enough, S&P decided to push forward with a downgrade of U.S. debt -- from AAA to AA+.

There are those who have claimed -- and seemingly continue to claim -- a debt downgrade represents a fundamental negative. While we can agree this has impacted sentiment in the near term, playing a role (although news from Europe no doubt contributed) in Monday's 6%-plus selloff in U.S. equity markets, claims this will fundamentally change the U.S. economy are an overstatement in our view. Here are a few ironies to highlight why credit ratings agencies' opinions shouldn't weigh too heavily on your mind.

S&P, Moody's and Fitch have far from sterling track records. Here are three of their greatest hits for a refresher:

  • They maintained top ratings on subprime mortgage debt through 2007.
  • Lehman Brothers held a high investment-grade rating in mid-September 2008. The company failed on Sept. 15, 2008.
  • Enron, whose 2002 demise showed it to be largely an illicit house of cards, was rated investment grade until Nov. 28, 2002. But in the months preceding the downgrade to junk, the SEC began a public investigation of their finances, earnings were restated (swinging a big profit to a $586 million loss), the CFO was fired and the stock had plunged from a 2000 high of around $84 to less than $5.
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    In this light, it's more than a bit ironic credit raters continually call for governments to form a "credible plan" to reduce deficits and debt. Moreover, whatever you think of the budget deal lifting the U.S. debt ceiling, fact is it is a plan -- which is at least more credible than what existed before. (Which was no plan.) So if you take S&P's ratings at face value, increased government spending is fine to maintain an AAA rating, so long as you don't debate it. If you do, then the debate must produce what they see as a credible plan to reduce it.

    Ratings agencies are primarily charged with determining an issuer's ability to service debt. But S&P has said the U.S. economy and ability to repay aren't really in question. And you'd think a key metric in that would be mathematics. But in S&P's case you'd be wrong. It appears someone at S&P forgot to carry nine zeros (or move a few beads on the old abacus) considering they've confirmed a $2 trillion error was made in their original report. Never mind that though, because S&P stated politics was the driving force anyway.

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