Like the gutless, cowards they are, S&P downgraded the credit rating of U.S. Treasury bonds last Friday afternoon, after the market close, to AA+ from their historical gold standard of AAA. Keep in mind, these are the same geniuses who gave AAA ratings to mortgage backed securities that were brimming with toxic assets and who kept an A rating on Lehman Brothers up till the Friday of their weekend failure back in early fall 2008. Meanwhile the other two agencies, Fitch and Moody’s , reaffirmed AAA’s all around. Now with the scarlet letter of a AA+ rating, America gets to sit in the penalty box with the likes of General Electric (NYSE:GE) and Berkshire Hathaway (BRK.A, BRK.B). There’s worse company to keep.
Was the downgrade the real reason for this seemingly brutal sell off? I don’t think so. The downgrade was just the cherry on top of the double crap sundae of an obvious, slowing U.S. economy and the mounting debt crisis in Europe which is basically the fourth or fifth inning of the experimental baseball game known as the euro. Please. Couldn’t you come up with a better name? Anyway, there’s lots of hand wringing, and tooth gnashing and round the clock CNBC coverage. Is the market getting hammered? You bet. It’s being beaten like a rented mule. Naturally, comparisons to the trauma of 2008 are being thrown about. Don’t believe it. Not for a second.
Sure, the economy does suck on ice. However, the financial system is much healthier than in the dark days of 2008. Thanks to the banks not lending the money they got from the Fed, they have plenty of liquidity. That was the danger in 2008. The credit markets locked up. GE couldn’t roll over its commercial paper. G-FRIGGIN’-E!!! The company Thomas Edison started. You know, the guy who invented the light bulb? Things were downright frightening in 2008. You had cooler heads like PIMCO’s Mohammed El Arian telling their wives to run to the ATM to take out as much cash as they could. That’s scary. No food in the grocery stores, Mad Max scary. We’re not there yet and I don’t think we will be (of course, anything is possible). Europe’s a different story. Their Lehman moment is approaching. It will be eurostyle fugly. It will affect our markets but we should have enough cushion to hang in there OK.
In 2008-2009, you could buy big, industrial names like General Electric (GE), Dow Chemical (DOW), International Paper (NYSE:IP), and Alcoa (NYSE:AA) at single digit prices. That may have been a once in a lifetime type of opportunity. But that doesn’t mean that there aren’t some bargains currently floating around out there.
Here’s a handful of big, liquid names that now have single digit, forward P/E ratios and have dividend yields of 4% or better:
- Conoco Phillips (NYSE:COP)
- International Paper (IP)
- Intel (NASDAQ:INTC)
- Exelon Corp (NYSE:EXC)
- Eli Lilly and Co. (NYSE:LLY)
These are all top shelf, well run, big companies. The yield on the 10 year Treasury is a miserly 2.13% and, according to Fed chairman Ben Bernanke, it’s not going up anytime soon. Depending on whose number you look at, the forward P/E of the S&P 500 is in the low teens. I’m not the smartest guy in the room, but something tells me that half the P/E and twice the yield is a bargain for a known quantity.
If it’s time to buy or not, nobody really knows. But it never hurts to make a shopping list. Get your pencil out.