Fitch shouldn’t kill your vibe, says Warren Buffett. Buffett told CNBC that Fitch’s controversial downgrade of the US credit rating is not affecting his investment strategy, and he’s still plowing into US Treasury per usual
Straight A student scoring an A-: Fitch's recent action echoes a significant event that occurred almost 12 years ago when S&P surprised the markets by downgrading the US from AAA to AA+ for the first time in history. This historical move was led by Beers and John Chambers, and their rationale back then bears a striking resemblance to Fitch's current reasoning: concerns over escalating US deficits and political dysfunction.
Case study of S&P's downgrade in 2011: The long-term repercussions were minimal, as investors eventually regained confidence in US assets, and government debt yields experienced a decline shortly afterward (which ironically lowered borrowing costs for the US government). Nevertheless, note that the market response in 2011 unfolded amid a sovereign debt crisis in Europe, which made US debt more attractive as a haven.
Immediate impact on the markets: The surge in US bond yields led to a significant decline in global stock markets, with the tech-heavy Nasdaq experiencing a 2.8% drop within the week
Refocus on US' woeful fiscal situation: The Fitch move is unlikely to alter the US policy outlook, as it remains characterized by fiscal challenges rather than stability. The possibility of a government shutdown looms, with Republicans and Democrats in contention over a $120b spending gap for fiscal 2024, which could occur as early as 1-Oct. Future debt ceiling standoffs (like the one we experienced few months back) also look inevitable as the recent debt deal set up another showdown sometime after 1-Jan-25. There is still no realistic action on the horizon to address the wider fiscal challenges Fitch mentions in its downgrade
For Tupperware to make a true comeback, it needs to tackle the core reasons for its initial decline - rising competition from the likes of Rubbermaid
A failing company: Following a surge in sales during the pandemic, the 77-year-old company, Tupperware Brands, faced difficulties as the demand declined. In June, due to its low value and stock price falling below $1, the NYSE issued a warning that it might delist the company.
To the moon: Since 21-Jul, online day-traders participating in discussions on platforms like Stocktwits and Reddit's r/WallStreetBets have joined forces to buy over $15m worth of Tupperware shares. As a result of this collective action, the company's market value has surged from $40m to almost $225m.
In hopes of a short squeeze: A short squeeze occurs when numerous investors place bets against a stock, but instead, its price sharply rises. This phenomenon accelerates the stock's ascent as short sellers rush to exit their positions to minimize their losses. Contrarian investors, on the other hand, attempt to predict a short squeeze and invest in stocks that exhibit a significant short interest.
Could Tupperware be more than a meme stock?: Shares reached a nine-month high on Friday following Tupperware’s announcement of a deal with lenders to restructure its debt and secure $21 million in new financing
Case Studies: Rental car company Hertz saw a 900% stock rally in 2 weeks following its 2020 bankruptcy filing and emerged from it with an unusual deal that paid off its debts and paid out to stockholders. Transportation company Yellow Corp shut down its operations last weekend and then saw stock prices rally by c.350% and is now working to secure a loan.
