Given the adage "a picture is worth a thousand words," I've selected the five most important charts that put this week's economic and investment news into perspective for you. So say goodbye to long-winded commentary… and hello to easy-to-understand graphics, with our quick-hit observations.
S&P Drops a Debt Bomb (Kinda)
On Monday, Standard & Poor's downgraded its outlook for U.S. debt to negative. Politicians and the media freaked out. But the markets did not, based on the cost to insure U.S. debt. Take a look.
As you can see, five-year credit default swap (CDS) prices spiked on the news. Yet they failed to even reach their 2011 highs. And they still remain 50% below the highs hit during the financial crisis. Apparently, the market has more faith in our politicians to fix our debt woes than we do. In case you're wondering, the five countries most likely to default based on CDS prices are: Greece, Venezuela, Portugal, Argentina and Ireland. The United States isn't even in the top 25.
Deficit Reduction Plan: Tax the Rich (Plus the Middle Class, Lower Class and the Dead)
The President decided to honor Tax Day by hitting the road to drum up support for his deficit reduction plan. Simply put, his big idea is to tax big earners (i.e. - those "rich" folks that make more than $200,000 per year). And why not? Despite all the political banter that America is broke, the truth is we're still abundantly wealthy.
However, here's the problem with the tax the rich approach. It might bring in more revenue, but it won't even come close to fixing the deficit. Turns out if we want to tax our way out of this mess, we'd need to more than double tax rates for everybody!
How's that for a re-election slogan? "Read my lips: Lots more taxes for everyone!" I think it's time for a new plan. The "tax more and keep spending" approach simply won't cut it. As I revealed last week, the only hope is entitlement reform.
It's All About Earnings
The markets rallied on Wednesday after chip giant Intel (INTC) blew past its earnings expectations, proof positive that earnings are indeed the most important determinant of stock prices. Of course, it's still very early in this reporting season, with less than 10% of U.S. companies reporting their earnings so far. The activity really heats up in the next two weeks, though.
However, for the markets to keep rallying higher, we need the "beat rate" - i.e. the percentage of companies beating their earnings estimates - to pick up. So far, we're at 64%, which would be the weakest reading since the start of the bull market.
That's all for this week. Have a good weekend.