The Standard and Poor's rating agency is being closely watched for signs of another U.S. downgrade, from AA+ to AA, in the event the Super Committee fails to work out a deficit reduction plan.
Mixed debate over the likelihood of an S&P downgrade has increased as the Super Committee deadline grows nearer. Speculators are eager for any credible outlook.
Word on the street...
Bank of America has presented both sides: Last month analyst Ethan Harris said, "The 'not-so-super' Deficit Commission is very unlikely to come up with a credible deficit-reduction plan. The committee is more divided than the overall Congress." He adds, "the credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan. Hence, we expect at least one credit downgrade in late November or early December when the super Committee crashes."
Morgan Stanley's Christine Tan appears to have the same opinion. Her comments on Thursday suggest if the Super Committee fails to create a real $1.2 trillion deficit reduction plan, or if subsequent Congressional actions lessen the impact of a plan, S&P will have sufficient pretext to further downgrade the U.S. from AA+ to AA.
Last week, Bank of America analyst Michael Hanson sang a different tune:
In our view, the Super Committee is unlikely to agree to a plan, thereby triggering $1.2 trillion of automatic discretionary spending cuts. Under this scenario, we would see this as a further demonstration of the dysfunction in Washington DC, and it does little to push the US onto a sustainable debt trajectory. The rating agencies seem nonplussed. For example, a report from Moody's earlier this week suggests that the fall-back outcome would not, by itself, warrant a downgrade in the near term. As a result, we no longer see a December downgrade as likely.
However, Hanson adds, "we still see an elevated risk of a downgrade ahead of the election as the partisan divide would harden and the temptation to renege on past agreements increases."
An economic slowdown would be the most foreseeable consequences of an additional U.S. downgrade, and from the above predictions it can be surmised that analysts and institutions are erring on the side of caution.
Wondering which stocks are most vulnerable to a U.S. credit rating downgrade? For ideas, we collected data on short floats, and identified the top 10 S&P 500 stocks being targeted by short-sellers.
Short-sellers think these major companies are in major trouble, and vulnerable to headline risk. Do you agree? Are any of these stocks in your portfolio or watch list?
Use this list as a starting point for your own analysis. Sorted by short float. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. First Solar
4. AK Steel Holding
5. United States Steel
7. J. C. Penney
9. Vulcan Materials
10. Express Scripts
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Eben Esterhuizen does not own any of the shares mentioned above. Rebecca Lipman owns shares of FSLR.
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