Both Moody's and Standard & Poor's Ratings Services are warning of a downgrade to the U.S. credit rating. S&P has put U.S. sovereign ratings on a formal credit watch and that, "owing to the dynamics of the political debate on the debt ceiling, there is at least a one-in-two likelihood that we could lower the long-term rating on the U.S. within the next 90 days."
This gives the Obama administration serious leverage on raising the debt ceiling sooner than later. Bernanke can posture and claim no quantitative easing 3 (QE3) in the short term but, in the end, the Federal Reserve's hand will be forced to print more money since a default would lower the U.S. credit rating which would in turn cause an already weakened dollar to accelerate its descent.
The model remains on a buy as buying pressure on commodities signals the coming of QE3. QE3 should help both stocks and commodities higher, just as QE1 and QE2 have provided a substantial lift.
Most likely, there will be bumps along the way, as 2011 has been a most challenging and bumpy year. Thus, as we have advocated in this tough environment, pyramiding into ETFs is a sound strategy. Let the price prove itself before adding to your position. If the signal proves false, you lose little.
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