(MCO) Much Ado About a Double-Dip?

Don’t panic. This is not the time to be scared by heated talks on the possibility of a so-called double-dip recession.

The global stock market has come crashing down close on the heels of the debt ceiling raise and the dramatic downgrade of the U.S. credit rating by Standard & Poor’s. But it would be too early and too pessimistic to proclaim that the economy is slipping back into recession while it is still struggling to recover from the last one.

We are not saying that the recent weak economic reports should be thrown in the trash, but there are several positives that will keep the economy afloat and your money safe. Yes, there is a palpable weakness in almost all data starting from manufacturing to consumer spending and yes, the GDP growth rate was revised downward.

But wait — a quick recap of the recent years show that corporate earnings have been at their strongest levels. Plus, the July employment report showed improvement. Last Friday, the employment report showed a better-than-expected job addition of 117,000.

The Experts Are Chiming In

Voices of assurance also echoed over the last few days. Former Federal Reserve Chairman Alan Greenspan, said on Sunday that the risk of a double-dip recession is minimum. He believes that the U.S. economy is in better shape than Europe.

Billionaire Warren Buffett believes that Standard & Poor’s has downgraded the U.S. credit rating by mistake. He believes that the economy will not see another recession in at least three years.

Though Fitch Ratings and Moody’s Investors Service warned the U.S. government about reviewing the credit rating for possible downgrades if the country does not control its spending, they still maintain the top credit ratings on the U.S. Moody’s Investors Service is a division of Moody’s Corp. (MCO), in which Buffett is the biggest shareholder.

Basis of Downgrade

According to the Congressional Budget Office, the U.S. budget deficit during the first 10 months of fiscal 2011 was $1.1 trillion, despite an 8% increase in revenues. For the first quarter, the country had a net deficit of $1.471 trillion.

According to the Treasury Department’s estimates, the actual deficit was $460 billion in the second quarter.

The deficit was covered by borrowing the money in the open market and by the Federal Reserve printing new funds under its QE2 program, but this way the country will never come out of the debt problem. So, it was necessary to restrict the country’s borrowing ability by downgrading its credit rating.

Catch-22 Ahead

The basic problem with the country is its lack of planning to manage expenditures without or lesser borrowing. To reduce borrowing, it has to arrange funds of its own. If it raises taxes to arrange the fund, economic growth would slow down due to lower spending. On the other hand, if it cuts costs to reduce the deficit, millions would lose their jobs.

Now, as part of the debt deal, the government has to tighten its belt. Obviously, all eyes are turned toward the economic stimulus, which the government should ideally withdraw with immediate effect. Now that’s a tricky call.

If the government withdraws the fiscal stimulus at this point, the risk of regressing into another recession rises. On the other hand, if the government continues with the stimulus, the escalating fiscal deficits may end up in a sovereign debt crisis, automatically threatening the economy.

So Where’s the Hope?

At this point in time, panic could be the biggest culprit. Investor terror is spreading like wildfire from New York to London to Hong Kong to Japan. Markets the world over are apprehensive of the U.S. government’s ability to repay debts to other countries. And this time around, it’s this fear that is aggravating the chances of a double-dip recession.

Following the market crash, investors of other countries could have sold U.S. bonds and increased interest-rates on their funds. This would have resulted in a further economic slowdown, making it harder for the country to meet its debt obligations.

We agree that the economic setback and the slow growth may persist for years, but there still isn’t a huge selling pressure on U.S.bonds. In fact, following the last meltdown, investors have shown more faith on U.S. Treasury bonds than other risky investments. Treasury bonds are in hot demand and are trading at all-time highs.

Furthermore, the first quarter GDP was revised downward to 0.4% from 1.9% and the second-quarter GDP saw an increase of 1.3% percent. If we think fundamentally, the downward revision in the first quarter was primarily due to lower inventory growth, which is in fact good because amid weak demand, higher inventory growth would have increased the chances of curtailing production, eventually leading to job cuts.

Unscathed Capital Requisite

On Friday, federal regulators said that capital requirements for banks and credit unions would be unaffected despite Standard & Poor’s downgrade of the U.S. credit rating. The decision of federal regulators is very important to banks and credit unions as there will be no additional burden on them due to the downgrade.

Moreover, the oversight body of the Basel Committee on Banking Supervision had proposed back in June, that the world’s biggest banks hold extra capital on their balance sheets as protection and prevention against another global financial crisis.

The targeted banks are those that could threaten global economy if they collapse. JPMorgan Chase and Co. (JPM), Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS), Morgan Stanley (MS) and Bank of America (BAC) are the likely names in this regard.

This extra capital buffer is an add-on to the set of minimum capital standards, known as Basel III, that was proposed by regulatory officials of more than two dozen countries in 2010.

As the capital requirements for these banks have not been affected by the market collapse, the recovery of these banks will continue, alleviating risks of any of these giants suffering a great fall.

Good Time to Buy?

At the cost of being repetitive, we do not see this as the time to panic and hold back investments. On the contrary, with declining unemployment claims, stabilizing home prices, lower oil prices, stronger auto sales, increasing consumer borrowing and continued low interest rates, confidence in U.S. recovery stays strong, even as the domestic dome as well as global negative cues pull the market down.

Rest assured, this is not going to be a repetition of Lehman story.

As a matter of fact, we think this fall in the stock market allows for more buying opportunities. This is actually the right time to enter the market by investing in blue-chip stocks with every fall.

We would suggest adding large-cap stocks with a Zacks #1 Rank (Strong Buy) to your portfolio at this point. Since their inception in 1988, Zacks #1 Rank stocks have generated an average annual return of +28%. During the 2000–2002 bear market, Zacks #1 Rank stocks gained +43.8%, while the S&P 500 tumbled -37.6%.

BANK OF AMER CP (BAC): Free Stock Analysis Report

CITIGROUP INC (C): Free Stock Analysis Report

GOLDMAN SACHS (GS): Free Stock Analysis Report

JPMORGAN CHASE (JPM): Free Stock Analysis Report

MOODYS CORP (MCO): Free Stock Analysis Report

MORGAN STANLEY (MS): Free Stock Analysis Report

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

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