Update - August 8, 2023

Warning Shots

Bad news for Washington…

Fitch downgraded our nation’s credit rating last week. The news rocked the market and sent major stock indexes on a four-day losing streak.

The rating agency cited “repeated debt limit standoffs and last-minute resolutions” – among many other issues – for its decision to knock the U.S. down a notch from its gold standard AAA rating to AA+.

But here’s what really stood out…

The debt ratio [112.9%] is over two-and-a-half times higher than the AAA median of 39.3% of GDP and AA median of 44.7% of GDP. Fitch’s longer-term projections forecast additional debt/GDP rises, increasing the vulnerability of the U.S. fiscal position to future economic shocks.

No kidding. Our national debt is unsustainable. It’s a threat to our economic future… but Washington will never have the guts to do anything about it.

And it gets worse…

Moody’s also announced that it has downgraded 10 U.S. banks and placed another 11 major banks on notice due to negative changes in the sector’s outlook. There are widespread debt concerns across both regional and major banking institutions.

The agency also forecasts a mild recession coming in early 2024, which would place even greater pressure on an already stressed financial system. If a recession does hit, Moody’s believes “there will likely be a tightening of credit conditions and rising loan losses for U.S. banks.”

These, dear reader, are warning shots. But our portfolio is and will be prepared.

Our shares of The Andersons (ANDE) are up 47% this year. The stock hit a new 52-week high last week after reporting a positive earnings surprise of nearly 40%.

What’s more, the company has the guts to commit to something both Washington and the rest of corporate America won’t: unloading debt from its balance sheet.

The Andersons has severely cut its short-term debt, from over $1 billion a year ago to just $103 million today. It’s also sitting on a cash stockpile of about $96 million.

And its operating cash flow soared by more than 50% year over year to $540 million.

The company will be well positioned for any economic troubles that may come.

And so will we.

P.S. We stopped out of Extra Space Storage (EXR) yesterday after the company missed on earnings. If you haven’t done so already, go ahead and sell your position.