Self Directed Investor Inc
SDI: "Empowering investors with ideas and education"
Symbol Lookup »  
Topics:ChinaETFsEarningsEconomyEnergyForexGoldIncomeLessonsIdeasTrading

  • Other news: News from PR Newswire
| More

Dungeons & Downgrades

Mon, Aug 8, 1:15 PM ET, by ilene, Sabrient.com

Dungeons & Downgrades

(Week Ahead section of Stock World Weekly)

On Friday, August 5, Standard and Poor's downgraded U.S. debt from AAA to AA+, and assigned a negative outlook to U.S. debt. In its press release, S&P directly addressed the contentious squabbling on Capitol Hill, and the clumsy spectacle of Obama, Boehner and the upstart Tea Party faction of the Republican party wrangling over the raising of the debt ceiling, a process that had previously been routinely approved as a matter of course.

In a stinging rebuke of the current dysfunctional political climate, S&P wrote "We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade."

S&P followed up by discussing its long-term outlook for U.S. debt: "The outlook on the long-term rating is negative. We could lower the long-term rating to 'AA' within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case."

Russ Winter of Winter Watch at Wall Street Examiner was not too impressed with how the Obama administration and Congress have been handling events, and not too displeased with S&P's takedown. He wrote, "Par for the course, the White House engages in goonery when Standard Poor finally does the debt downgrade deed. They spent most of their effort with push back and trying to embarrass S&P. The $2 trillion twisting the number reference from the White House (Timmy "Eddie Haskell" Geithner) involves a 10-year projection of GDP growth and pressuring S&P to accept an inflated number, which they did. BFD (big effing deal). Over the next several months, all these government baselines are going to fall apart anyway. I am no fan of S&P and love to see these cat fights, but this sure points to the complete lack of adult presence in the White House. What was more incredible is that just days before this came, Presidente Hopium was on the stump calling for more FY 2012 stimulus and deficits off the already understated FY 2012 baseline of $1.1 trillion. That reason alone explains why S&P has a negative watch on top of this downgrade.

"Some wags are saying this downgrade is already built in, but with the level of cognitive dissonance in the market I say otherwise. I am sure all the government put mucky mucks are meeting over the weekend and are stirring and preparing their usual toxins to stem any blowback. In actuality the only step that should be taken here is for the Fed to back Treasury collateral 100%, end of story. Unfortunately, these guys are like pedophiles, and have to use these situations to pad the wallets of their cronies."

Bruce Krasting asked and answered, "What to make of the move by S&P? I will tell you that I was surprised that it happened this weekend. I expected that S&P would have given the US till November to sort things out. From the news reports, it appears that the White House and Treasury were equally unprepared for this to happen now. Some thoughts:

"It is quite likely that we will see some interesting market action come Sunday night as this news is digested. But I will stick my neck out and say that once the dust settles a bit, the ratings drop is not going to have a significant effect (for now).

"It looks as if the US is going to have a split rating. (AAA {equivalent} by Fitch/Moody's, and AA+ by S&P.) If this were a high-grade corporate credit, the split rating status would make no difference in how the underlying bonds trade. I doubt that the S&P action will have a different (lasting) consequence." (On the S&P ratings move)

China and US debt

China is the largest holder of U.S. debt, and the S&P's downgrade presented an opportunity for the Chinese government to sharply admonish the U.S. government through the state-run Xinhua News Agency: "The U.S. government has to come to term with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone… China, the largest creditor of the world's sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China's Dollar assets." Xinhua suggested that the U.S. slash its "gigantic military expenditure and bloated social welfare costs" and accept international supervision over U.S. Dollar issues. (China rips U.S. on debt-rating downgrade)

Theoretically, the downgrade might make U.S. debt less attractive to the rest of the world, and might cause China to stop buying so much of it. However, Michael Pettis, finance professor at Peking University's Guanghua School of Management, argues that this is very unlikely. "Is the PBoC going to stop buying USG bonds? Once again we are hearing worried noises from various sectors about the possibility of a reduction in Chinese purchases of USG bonds.

"The threat of a looming US default seems to be driving this renewed concern, although I am not sure that the PBoC really is worried about not getting its money back. After all if the US defaults, it will be mainly a technical default that will certainly be made good one way or the other. Since the PBoC doesn't have to worry about mark-to-market losses, unlike mutual funds, I think for China this is largely an economic nonevent (not that there isn't good mileage in pointing to the sheer silliness of the U.S. political process). Still, for domestic political reasons, it needs to be seen huffing and puffing over American irresponsibility…

"Remember that the PBoC does not purchase huge amounts of USG bonds because it has a lot of money lying around and doesn't know what to do with it. Its purchase of USG bonds is simply a function of its trade policy."

Mish Shedlock agreed. "Pettis makes an irrefutable mathematical analysis that shows the idea the U.S. should fear the day foreigners, especially China, would stop buying U.S. treasuries is silliness. Let's look at this from another point of view. Congress, the president, Bernanke, and many others all want the RMB (Yuan) to rise.

"If the Yuan rises in value versus the US dollar, the other side of the mathematical equation says the US trade deficit with China will shrink and China's unemployment rate will rise. China, fearing unrest, does not want rising unemployment. Thus, in spite of all the misguided huffing and puffing of numerous analysts, it is China who fears not buying US debt. Otherwise, they would not buy it!" (Reserve Currency Curse: Idea China to Stop Buying Treasuries After S&P Downgrade is Fallacious; US Would Welcome China Not Buying US Treasuries!)

In contrast to a general reaction of disapproval and anger over the S&P’s decision to downgrade U.S. debt, Bill Gross took his hat off and praised them, ”I have been criticizing them and Moody’s and Fitch for a long time. Moody’s and Fitch are on the “S” list. I think S&P finally demonstrated some spine. S&P finally got it right. They spoke to a dysfunctional political system and deficits as far as the eye can see. They are enforcing some discipline.” (Bill Gross Tells The Truth: “S&P Finally Got It Right. They Are Enforcing Some Discipline. My Hat Is Off To Them”, Zero Hedge) In examining the S&P’s move, it’s natural to wonder about its motives – politics, money, or just a desire to (finally) do the right thing? A separate question is whether the U.S. deserves an AAA rating or not. Those who find fault with the S&P’s downgrade, should consider that second question as well.

Lee Adler of the Wall Street Examiner discussed the overall health of the economy, as measured uniquely in food stamps. "Total food stamp recipients rose by 1.1 million in May. That represented a dramatic acceleration from the recent rate. Enough QE2 had trickled down from December to April to slow the growth rate of people entering the program to about 100,000 per month. The last time we saw an acceleration of this magnitude was in September 2008. That was at the beginning of the 2008 crash in the stock market and economy.

"This rise in food stamp use confirms the evidence I have been tracking in the Professional Edition Treasury updates showing a sharp drop in government withholding tax receipts in May, suggesting the return of the recession that had been hidden by the government's propping of the markets and economy. I had repeatedly warned that once the propping stopped, the markets would collapse, and that once government stimulus payments were withdrawn, the economy would return to contraction. In recent weeks, I have reported in the Treasury updates and have mentioned on our Radio Free Wall Street podcasts that it appeared that the economy had suddenly gone into free fall beginning in May. This data on the food stamp program tends to confirm that." (See chart below, note the number of people on food stamps is inverted.)

Graphic866

96506_600

Try out Stock World Weekly with a FREE trial here >


SDI Glossary: "the Fed" Definition
SDI Glossary: "FY" Definition
SDI Glossary: "GDP" Definition
SDI Glossary: "Stock" Definition
This Article's Word Cloud:   China   House   PBoC   Some   Street   That   They   Treasury   White   about   back   been   believe   bonds   buying   debt   does   downgrade   economy   finally   fiscal   food   from   going   government   have   less   long   market   move   negative   once   outlook   over   political   process   rating   some   sure   term   than   that   their   these   this   trade   were   will   with   would

| More

Sector Detector: Santa tries to "sleigh" the fiscal cliff
Thu, Dec 13, 8:16 AM ET, by Sabrient.com

. ...

Dark Horse Traders' Hedge: It's Been a Long Way Down For Apple
Wed, Dec 12, 6:35 PM ET, by Sabrient.com

. ...

What the Market Wants: Historical Tax Rates Provide Clarity
Mon, Dec 10, 8:15 PM ET, by Sabrient.com

. ...

Sabrient and Gradient Release Earnings Quality Rank (EQR), a New Quantitative Tool
Mon, Dec 10, 11:16 AM ET, by Sabrient.com

. ...

Sector Detector: Tech shows best valuations as budget negotiation continues
Thu, Dec 6, 8:16 AM ET, by Sabrient.com

. ...

Scott Brown to Reveal Sabrient's Top Stocks on BNN
Wed, Dec 5, 2:15 PM ET, by Sabrient.com

. ...

What the Market Wants: Shame on Washington!
Mon, Dec 3, 6:46 PM ET, by Sabrient.com

. ...

ETF Periscope: Big Unemployment Numbers Across the Pond Remains the Big EU News
Mon, Dec 3, 1:46 PM ET, by Sabrient.com

. ...

Sector Detector: Rankings stay neutral while charts take a bullish turn
Thu, Nov 29, 8:16 AM ET, by Sabrient.com

. ...

What the Market Wants: From Rush to Risk to Worry
Mon, Nov 26, 6:35 PM ET, by Sabrient.com

. ...

ETF Periscope: Britain Adds More Drama to the EU Circus
Mon, Nov 26, 10:56 AM ET, by Sabrient.com

. ...

What the Market Wants: A $64 Trillion Dilemma
Mon, Nov 19, 6:16 PM ET, by Sabrient.com

. ...

ETF Periscope: A Short Week On Wall Street Might Be a Good Week to Go Short
Mon, Nov 19, 5:35 PM ET, by Sabrient.com

. ...

Sector Detector: Jaded public needs a new hero
Wed, Nov 14, 8:16 AM ET, by Sabrient.com

. ...

Sabrient's Equity Valuation and Ranking Now Available on Bloomberg's App Portal
Tue, Nov 13, 11:45 AM ET, by Sabrient.com

. ...

What the Market Wants: The Devil You Know
Mon, Nov 12, 7:35 PM ET, by Sabrient.com

. ...

Dark Horse Traders' Hedge: Ride out the Storm with FCX, Option Review
Mon, Nov 12, 7:16 PM ET, by Sabrient.com

. ...

ETF Periscope: Bad Economic Numbers Mean a Good Time to Short the Eurozone
Mon, Nov 12, 3:35 PM ET, by Sabrient.com

. ...

Sector Detector: Focus returns to corporate earnings and Europe
Thu, Nov 8, 8:16 AM ET, by Sabrient.com

. ...

What the Market Wants: After Tomorrow, Another Uncertainty Bites The Dust
Mon, Nov 5, 8:35 PM ET, by Sabrient.com

. ...

ETF Periscope: Elections the Flame, Wall Street the Moth
Mon, Nov 5, 1:36 PM ET, by Sabrient.com

. ...

Sector Detector: Stocks attempt to launch a pre-election rally
Fri, Nov 2, 8:16 AM ET, by Sabrient.com

. ...

What the Market Wants: Frankenstorm Scares the Markets Closed
Wed, Oct 31, 6:36 PM ET, by Sabrient.com

. ...

What the Market Wants: Frankenstorm!
Mon, Oct 29, 7:15 PM ET, by Sabrient.com

. ...

ETF Periscope: With Companies Sitting On Massive Cash, Expect Blisters On Bottom Lines
Mon, Oct 29, 12:55 PM ET, by Sabrient.com

. ...

Sector Detector: Stocks can't overcome weak quarterly reports
Thu, Oct 25, 8:16 AM ET, by Sabrient.com

. ...

What the Market Wants: Looking for Certainty Amidst Uncertainty
Mon, Oct 22, 7:25 PM ET, by Sabrient.com

. ...

ETF Periscope: Watch Out Below If Earnings Disappoint This Week
Mon, Oct 22, 2:36 PM ET, by Sabrient.com

. ...

Sector Detector: Stocks back in rally mode even without Tech leadership
Thu, Oct 18, 8:15 AM ET, by Sabrient.com

. ...

What the Market Wants: Uncertainty Reigns in the Market
Mon, Oct 15, 6:53 PM ET, by Sabrient.com

. ...

ETF Periscope: Eurozone and Earnings Duke It Out for This Week's Market Mover Title
Mon, Oct 15, 11:16 AM ET, by Sabrient.com

. ...

Sector Detector: Earnings season launches under cloud of low expectations
Thu, Oct 11, 8:16 AM ET, by Sabrient.com

. ...

Jobs, Food Stamps, Conspiracies (Market Shadows' Fun With Numbers)
Tue, Oct 9, 4:56 PM ET, by Sabrient.com

. ...

Glimpse into the Future (Market Shadows' Fun With Numbers)
Tue, Oct 9, 4:45 PM ET, by Sabrient.com

. ...

What the Market Wants: Fasten Your Money Belts
Mon, Oct 8, 8:16 PM ET, by Sabrient.com

. ...

Ride Sally Ride (SLM) in Option Review, Add Cooper Tire (CTB)
Mon, Oct 8, 7:45 PM ET, by Sabrient.com

. ...

ETF Periscope: Ladies and Gentlemen, Start Your Earnings Season
Mon, Oct 8, 10:56 AM ET, by Sabrient.com

. ...

Sector Detector: Bulls keep their powder dry as presidential debates begin
Thu, Oct 4, 8:16 AM ET, by Sabrient.com

. ...

What the Market Wants: Fly to Safety (and not on American Airlines)
Mon, Oct 1, 7:16 PM ET, by Sabrient.com

. ...

Options Trade on GBX and MIPS
Mon, Oct 1, 12:36 PM ET, by Sabrient.com

. ...

ETF Periscope: Spain Remains a Pain For Wall Street
Mon, Oct 1, 11:15 AM ET, by Sabrient.com

. ...

5 Stocks Billionaires Are Crazy About
Fri, Sep 28, 12:35 PM ET, by Sabrient.com

. ...

Sector Detector: Investors Watch Romney's Hunt for Red October
Thu, Sep 27, 8:15 AM ET, by Sabrient.com

. ...

Broken Mirrors
Tue, Sep 25, 9:45 PM ET, by Sabrient.com

. ...

What the Market Wants: Caution is the Word of the Week
Mon, Sep 24, 7:25 PM ET, by Sabrient.com

. ...

David Brown Quoted in MarketWatch Article
Mon, Sep 24, 1:16 PM ET, by Sabrient.com

. ...

ETF Periscope: Is Wall Street Floating Along On An Equity Bubble?
Mon, Sep 24, 11:16 AM ET, by Sabrient.com

. ...

Sector Detector: Stocks finally break out from 3-month rising channel
Thu, Sep 20, 8:15 AM ET, by Sabrient.com

. ...

What the Market Wants: QE3 can Likely Produce 10% Short-term Gain
Mon, Sep 17, 5:55 PM ET, by Sabrient.com

. ...

ETF Periscope: Bernanke's Open End Bond Purchases May Snag at the Fiscal Cliff
Mon, Sep 17, 11:15 AM ET, by Sabrient.com

. ...

  More articles:  1 2 3 4 5 6 7 next »

ABOUT US »   ADVERTISE »   CONTACT US »   TERMS OF USE & PRIVACY POLICY »

Dungeons & Downgrades | Self Directed Investor | Copyright © 2008 - 2014, All Rights Reserved

Any ideas and opinions presented in Self Directed Investor content are for informational and educational purposes only, and do not reflect the opinions of BNK Invest, Inc. or any of its affiliates, subsidiaries or partners. In no way should any content contained herein be interpreted to represent trading or investment advice. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. All site visitors agree that under no circumstances will BNK Invest, Inc,. its subsidiaries, partners, officers, employees, affiliates, or agents be held liable for any loss or damage caused by your reliance on information obtained. Read Full Disclaimer.

SDI is associated with: ValueForum.com -- a subscription-based online social networking forum of over 1000 individual investors. | MarketNewsVideo.com -- videos appearing on SDI are produced by Market News Video. | TickerTech.com -- stock quote content appearing on SDI is at least 20 minutes delayed and is powered by Ticker Technologies. | GoldStockStrategist.com -- Edited by Scott V. Nystrom, PhD, Gold Stock Strategist provides analysis on gold mining companies.