A YEAR OF U.S. DOWNGRADE: AND LIFE GOES ON

A YEAR OF WORRY: OR WAS IT ?

Exactly a year ago in August 2011...rating agency Standard and Poor's shocked the world by announcing a rating cut of the US of 'A', stripping away the coveted AAA bond rating. The downgrade, unprecedented in nature threatened to turn the world upside down, drive up U.S. interest rates, pushing the dollar down, driving bond yields to exorbitant levels and scaring investors away from stocks and into that traditional refuge for the fearful: gold. Atleast most economists expected this sort of a reaction, had we been living in a perfect world. Exactly a year has passed, long-term interest rates are sharply lower, the Dow industrials reversed course and is now firmly above 13000. The dollar has rallied, and gold prices are down from where they were when S&P lowered the rating. It is difficult to imagine a more decisive repudiation of S&P's warning that the U.S. government might not be able to pay its bills.

ASSET CLASS                  % CHANGE
Dow:                                  +14.4%
Gold:                                  -3.21%
Crude:                                -1%
Dollar:                               +6%

EMERGING MARKETS: NOT IN GREAT SHAPE

Equity experts propogated that with the developed world in turmoil, global funds and investment giants would have no option but to seek refuge in Emerging Market equities which offered relative value with slightly more risk. But the reality seems to be far apart. Emerging markets such as India and brazil have barely moved in these last 12 months with ahigh interest regime prohibiting any recovery coupled with steep interest burden for the corporate sector. China still faces the prospect of a hard landing despite the monetary authority pinpointing to more easing.

MARKET                         % CHANGE
India:                                +2.5% 
Brazil:                              -0.88%
China:                               -17.95%

THE NAME IS 'BOND'

Despite S&P's warnings and the political stalemate, investors still want U.S. Treasurys. Given economic turmoil in Europe and uncertainty elsewhere, U.S. government debt and U.S. dollars look like the safest bet around. That is why the interest rate, or yield, on 10-year Treasury notes has fallen from 2.58 on Aug. 5, 2011 to lows of 1.5 percent. At a recent auction of German bunds the two-year note yields fell below zero for the first time as the euro-region’s deepening crisis saw investors willing to sacrifice any return in exchange for holding the region’s safest assets.

BOND YIELDS                              % CHANGE
US 10 Year:                                     -39.5%      
German Bund 10 Year:                   -53.36%  
Spain 10 Year:                                 +8.03% 
Italy 10 Year:                                  -1.32% 
Greece 10 Year:                              +68.89%