Cloudy days affecting solar companies

Stocks were under pressure yesterday with investors taking profits on high valuations. Bond yields climbed even before Fitch dropped a bomb on the US’s Credit rating.

Oh no you didn’t! Oh yes, they did. Fitch Ratings finally did what they have been threatening to do for months. Last night, the credit rating agency downgraded the US’s sovereign debt from AAA to AA+. The company cited a number of reasons for the downgrade, chief among them was political bickering (not their words) and a rising deficit, expected to get larger in the years to come. Did you know that these conditions existed in the US? Of course, you did, and so did the rest of the world, which has continued to use US Treasuries as THE go to safe haven.

To be clear, Fitch is not the first rating agency to sour on the US Treasury. Standard & Poor’s slapped the US with a downgrade in 2011, citing similar concerns. S&P never reversed the downgrade, and Moody’s still rates the US AAa, it’s top rating.

So, what does the downgrade mean to you? First, let’s get it on the table that Janet Yellen, the captain of the US Treasury, strongly disagrees with Fitch’s decision, stating that the downgrade was “arbitrary,” and based on outdated data. Well, it is Secretary Yellen’s job to disagree, but she is, kind-of, right. But then again, Fitch did cite some very real concerns, even though those challenges are nothing new. That aside, a credit downgrade means that a debt issuer is more likely to default on its debt obligations.

Do you really think that the US would default on its debt? Well, if you did… even if you had the slightest inkling that it would, you would naturally expect to get paid a higher yield to take the risk. That is known as risk premium. That is why bonds that are already issued decline when a credit downgrade occurs. That is also why new issues from that downgraded issuer come with higher coupons. Both result in higher yields to maturity. So, a downgrade could mean a selloff in the issuer’s bonds.

Now, let us look to Fitch itself for a definition of its rating system. According to Fitch (word for word):

‘AAA’ ratings denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.

‘AA’ ratings denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

I don’t know about you, but it doesn’t seem like there is much of a difference between the two. Neither of them mentions a default in the near future. So, it comes down to this. If things around the world start to go seriously sideways all at once, with economies and capital markets in a tumult, where would you put your money (cash and gold bars buried in your garden are not a choice)? Would you rush to the Fitch ratings website and seek out sovereign debt with AAA ratings? If you did, you would find a shrinking list which includes Germany, Denmark, Netherlands, Sweden, Norway, Switzerland, Luxembourg, Singapore, and Australia. All fine countries with capable, stable, and responsible governments. At least of few of the members on that elite list have significant industrial capacity to generate GDP. Would you pick any of those countries over the US? You might, but you would certainly still put most of your eggs in the US Treasuries basket. I have an idea, why don’t we consult the market for some answers. Given the high liquidity and the sheer size of the global US Treasury debt markets which trade around the clock, we can see how the world reacted to the news.

Well, 10-Year Note yields are virtually unchanged, reflecting that the bomb Fitch intended to explode, actually simply fizzled. Fitch came out with what it hoped was a King Tut’s Tomb discovery when it was, in fact, more akin to finding a shell in the sand on the beach. Still valuable, but not game changing. Still, it is important to note that there is value in recognizing that continued political bickering is truly unhealthy and it has already denigrated the global view of US governance. It is also important to note that the move can affect equity markets which may speculate that higher rates will lower stock valuations. You remember that thesis from… um, last year. With the recent runup in growth stocks, the news may leave them vulnerable to some downward pressure, if not increased volatility. At the end of the day, however, US growth stocks and Treasury securities still appear to be the cleanest dirty shirts.

STOCKS ON THE MOVE

Advanced Micro Devices Inc (AMD) shares are higher by +2.58% in the premarket after the company announced that it beat analysts’ estimates for EPS and Sales. The company revised current quarter guidance that was in line or higher than analysts anticipated. The company expected growth to return to its PC segment and analysts are encouraged by the news as well as hopeful for the company’s participation in AI-related growth. Potential average analyst target upside: +14.8%.

SolarEdge Technologies Inc (SEDG) shares are lower by -12.31% in the premarket after it announced that it missed revenue estimates for Q2. The company acknowledged a buildup in inventory and attributed it to declining orders in a high interest rate environment. The company further provided current quarter guidance that was below analyst targets. Potential average analyst target upside: +41.7%.

Also, this morning: Emerson Electric, Humana, Builders FirstSource, Carlyle Group, Phillips 66, DuPont, and CVS Health all beat on EPS and Revenues while Generac, Exelon, Johnson Controls, Kraft Heinz, Bunge, and Scotts Miracle-Gro came up short.

YESTERDAY’S MARKETS

Stocks had a mixed close yesterday as treasury yields climbed with larger supply expectations. The S&P500 decline by -0.27%, the Dow Jones Industrial Average gained +0.20%, the Nasdaq Composite Index fell by -0.43%, and the Russell 2000 Index declined by -0.45%. Bonds fell and 10-year Treasury Note yields rose by +6 basis points to 4.02%. Cryptos slipped by -0.4% and Bitcoin added +0.2%. The S&P ESG Index fell by -0.36%.

NEXT UP

• ADP Employment Change (July) may reflect 190k new jobs, lower than last month’s +490k surge.
• After the closing bell earnings: Altice, Clorox, Albemarle, Zillow, Equinix, NCR, QUALCOMM, Simon Property Group, HubSpot, Etsy, Spirit Airlines, Seagen, Public Storage, Energy Transfer LP, Williams, Goodyear, Robinhood, MetLife, MGM Resorts, Sunrun, DoorDash, and PayPal.