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Sunday, November 27, 2022


S&P Downgrades US to AA+ – Tied With Belgium!


Officials at ratings firm, Standard & Poor’s, said U.S. Treasury debt no longer deserved to be considered among the safest investments in the World.  S&P removed for the first time the triple-A rating the U.S. has held for 70 years, saying the budget deal recently brokered in Washington didn’t do enough to address the gloomy long-term picture for America’s finances. It downgraded U.S. debt to AA+, a score that ranks below Liechtenstein

S&P said "the downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics." It also blamed the weakened "effectiveness, stability, and predictability" of U.S. policy making and political institutions at a time when challenges are mounting.

In other words, the ship is sinking and the captain and crew are doing nothing but rearranging the deck chairs.  S&P was supposed to release this report this afternoon (Friday) but the Treasury Department caused a delay by arguing the math the S&P was using (a $2Tn discrepancy).  At 8pm, the S&P decided the Treasury was wrong and went ahead and released the report, not only downgrading our Debt to AA+ but giving us a NEGATIVE OUTLOOK as well.  Now we have to contemplate what the effect of this change may be…

Let’s first keep in mind that this was expected.  In fact, it’s ridiculous how long it took for someone to downgrade us.  JPM estimates that $4Tn worth of treasuries are pledged as collateral by borrowers such as banks and derivative traders.  The change in status from one ratings agency is unlikely to trigger any immediate covenants (a primer on Sovereign Debt Ratings)  but it may take only one more before borrowers are required to come up with many, many Billions of Dollar of cash or securities to keep their creditors at bay – essentially – it’s a margin call on America!  

Well, I say this was expected but I mean by us.  We cashed out today (see morning post) but Little Timmy Geithner, who blew his chance this week to resign with America’s credit rating intact under his watch, was on Fox News in April SPECIFICALLY stating that there was "NO RISK" that the US could lose it’s AAA rating.  Read the article or watch the video – it’s amazing because both Congress and the Administration KNEW this would happen if they didn’t put a $4Bn reduction package together and they didn’t do it anyway!  

A downgrade could also have a cascading series of effects on states and localities, who already have their own problems to deal with.  These governments could lose their AAA credit ratings as well, potentially raising the cost of borrowing for schools, roads, parks, etc.  So far, Moody’s and Fitch have decided not to downgrade the United States credit rating. But they’ve warned that, if the economy deteriorates significantly or the government does not take additional steps to tame the debt, they could move to downgrade too.  

Money-market funds held by millions of Americans hold some $1.3 trillion securities directly or indirectly exposed to Treasury and government agency securities, as well as short-term loans to financial institutions, known as repos, which are backed by Treasurys. Experts say that the downgrade won’t force money-market funds to sell. But there are still risks.  If Treasurys tumble in value, funds will be forced to mark down their holdings, raising the potential for some to "break the buck" as the Reserve Primary fund did during the worst of the financial crisis.

We’ll get an idea on Monday morning about how "expected" this downgrade really was by the rest of the World.  As you can see from the chart below, which we discussed in Member Chat last weekend, it’s not like there are a lot of AAA countries for investors to turn to and, other than Canada and Australia, the rest are in Europe and you KNOW they are about as AAA as AIG.  Speaking of which, this should be a major benefit to ADP, JNJ, MSFT and XOM – the only 4 AAA rated companies left (there used to be 60).  

Perhaps there is a lesson to be learned there.  When 60 of our top corporations like Berkshire Hathaway, General Electric and Pfizer all lost their AAA ratings, investors shrugged off the change; the markets had already rendered their verdict. Borrowing costs for General Electric and Berkshire actually fell in the weeks after they were downgraded in spring 2009, amid a broader market rally.  “The rating agencies were late to the party,” said Cris Orndorff, a bond investor at Western Asset Management.

According to the NYTimes: "The truth is, even as the government maintained its AAA grade, the markets suggested long ago that the United States was no longer deserving of such a high rating.  The credit-default swap market provided one clue. During the financial crisis in early 2009, the price of insurance that would pay off if the United States government defaulted on its debt was similar to that offered for companies ranked just above junk. Even today, the price of insurance on a government default has been higher than that for Colgate Palmolive, the global toothpaste giant, which has a rating two notches below AAA.

The economic data also suggests that the United States has higher debt levels than most AAA corporate borrowers. Today, the United States debt as a percentage of the nation’s economic output is 75 percent and could top 84 percent by 2013, according to Standard & Poor’s research. The typical AAA-rated country has a ratio of about 11.4 percent.  By contrast, Exxon Mobil and Microsoft each had debt-to-income ratios exceeding 20 percent, while Automatic Data Processing had a ratio of 1.8 percent, according to Capital IQ, a business owned by Standard & Poor’s. Johnson & Johnson had a ratio of 92 percent."

As I said, no real surprises here to people who were paying attention (I predicted a possible 20% market drop on Business News Network on Tuesday).  Unfortunately, as we’re seeing this week, a lot of investors don’t pay attention to anything until it walks right up and slaps them in the face.  Next week will be interesting to say the least – with Monday’s nail-biting open leading into Tuesday’s FOMC announcement – I’ll add more commentary here as the weekend progresses but it’s going to be another wild week ahead.  While there may be panic selling (as if we haven’t had enough of that already) it’s also possible the Dollar drops sharply and rockets the equity markets – tune in for more as this story progresses.  


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@ Phil, i know that guessing the bottom is almost impossible, but how can you tell the difference between a real bottom and an oversold bounce? if for example, this new week its positive for the markets, how can we really know that its not just a bounce caused by an oversold condition? (breaking several levels of resistance? several days holding supports?) Thanks!

WHUCK i was totally making that shiite up..it osunded cool tho huh?

or maybe we should just wait for a news event like QE3? just like when we found a bottom before QE1 and QE2…

nkd down 1%

This downgrade is starting to remind me of Y2K. Back then, companies were spending millions to adjust and "experts" were talking about missiles accidentally going off, planes would fall from the skies, company records would be screwed up for years, traffic lights wouldn’t work etc, etc, and 2000 came and went with nary a problem.  Only a month ago, "experts" were saying how it would be financial armageddon if we got downgraded and markets would collapse as bad as they did in 2008 and now that it’s happened, futures aren’t looking good, but not that bad and have rebounded 100pts from the low already.  Think the downgrade in itself might be a non event at this point.

Good evening
Phil—thank you

 ECB announced 8 minutes ago it will buy Italian and Spanish bonds

futures traders – are you able to put in hardbstops that trigger after hours?

with IB – they dont seem to trigger afterbhours.

hard stops.

Sen Judd Gregg is a douche.  He’s talking about now is a wake up call to cut entitlements with not a word about the Bush tax cuts or closing tax loopholes.

cwetain entitlements will have to be cut and the tax code reformed and loopholes closed and taxed raised..there is 0 choice

 A very good point to Asaenz Phil…..What the S & P downgrade is really accomplishing is to rattle everyones cage, saying…."Hey, wake up here.  Your economy is starting to go to hell in a handbasket, and you’re doing very little about it."   And the world is watching, and world markets are dropping.  So from my viewpoint it doesn’t take a rocket scientist to figure out what’s going to happen with our market tomorrow.   I would be dumbfounded if we ended the day in the green.   But I’m actually hoping for an early rally, which could then be shorted.    I can hardly wait for morning to see how this plays out.  

Phil, what are the probabilities in your mind the Fed will announce QE3 or something along those lines on Tuesday or G7 announcing something concrete tomorrow? I mean the risks of another 2008 crisis or bigger (as the ones in trouble are the lenders of last resort) wouldn’t have them scrambling to put a plug on the equity markets where all could unravel? 

Gregg / Rustle – The Bush Tax cuts can’t be touched because they "create" jobs! For the nth time, we have a spending problem, not a revenue problem. Revenues at 14% of GDP are just fine! We could probably use another tax cut for "job creators" and take them down to 12% of GDP and then we’ll have to cut all discretionary spending and 1 out 4   – Medicaid, Medicare, Social Security or Defense. If possible, one program for people that don’t have lobbyist and don’t vote. So I guess Medicaid gets it…. 

@ iflan, i concur on shorting the markets if we get an early rally, but just for tomorrow, tuesday we might get something from the fed that might give us a rally, but needs to be something concrete or it will just be short lived….which aug QQQ puts are you planning to use for tomorrow? i might just buy TZA, instead of playing it with options….

Hello Phil, do you expect that lower oil prices could positively influence stock prices of LCC, UAL, RCL, CCL (so far there were no signs of this happening)? Also, do you think that BAC is a good short (on their new mortgage troubles)?

I hope you’re going to Vegas.  Forgot to mention that Ex Sen Gregg is a Goldman guy now.  Who’d have thunk it?

Vegas / Rustle – So far, no… My schedule doesn’t allow me to plan that far in advance. I had mentioned before that it would have to be a last minute decision. I would of course like to go… We’ll see. 

It must be really frustrating for the BOJ as the yen has already gained back 1/2 of what it gave up during the last yentervention! It’s like pushing on a string there…. 

In any case, too early to make an exact prediction for tomorrow and too late to worry about it. But I’ll wager that the US markets open at 09:30 and we’ll either move up or down. And it’s my final answer. Good night and good luck!  

Just read the ‘of two minds’ piece.  great.  Conventional wisdom is so often wrong.  And even if they try QE3, why should we assume it’ll work? Are they going to QE til the end of time?  Do you think they’ll cart out David Tepper on Wednesday morning?  I worry too many people are teeing up long for the FOMC results… 

Man I hope you are not working out at the gym because oil has been fun since 10 pm, could be great late night, I think I’ll check back in a few hours 

 well the proverbial shit is hitting the fan and here is what I have to show for it:
1 AGQ 300 call
1 AAPL 340 put
5 CMG 280 puts
1 CMG 290 put
1 CMG 300 put
1 CRM 135 put
22 TBT 28 calls
10 TBT 31 calls (and 5 more at 34, but these are hosed)
3 GLD (Sept) 190 calls
I am pathetically uncovered unless 1) CMG tanks along with the market, (or hopefully, tanks more, like 100 points, pretty please?) and/or 2) every stupid friggin’ treasury investor has a collective wake-up call and demands more than 0.0000002% yield for their "investment" that is tanking 10% annum along with the USD.
What a bad end of the week for me, I closed out awesome plays such as GMCR 100 puts following stodgey rules that DO NOT APPLY IN THIS SITUATION WHATSOEVER (such as sell half, yada yada). This is it. This is the GOLD MINE, don’t stop for anybody, get every dollar all the way down. This is the "Microwave Oven Theory." We have more data now than we did yesterday or the day before. Use it!

Davew – No workout this week, have been out of town since last Thurs. morning. Funny, after I sold on Thurs for I think 92.25, my family packed our bags and went to the Baseball hall of fame for a couple days and then we decided to hit our place on Lake Champlain for a week, the kids wanted to ski/tube. So basically I missed the while drop. Oh well, I promised my wife I wouldn’t stay up all night trading all week long, just decided to check on things; creature of habit. Good luck, take the bastard /CL down to 80-81. I’ll be checking in from time to time.

Phil, on FAS money should we roll the long end?

So this (EU) morning we just had a strange brief panic break. I used that to pick up GC @ 1704…

Today should be interesting.  I’d imagine they will march out everyone they can to try and put a lid on this sell off.  Maybe even the Bernanke…..question is…..will the market react like it did in 2008 when every time the sent someone out…..it tanked worst?

Here’s another trading idea for the day.   Short the market with IWM or QQQ and simultaneously go long the best stock you can find, such as AAPL.   The latter down to 363 in premarket.  

If you have a solid net short position, have had for a quite a while, are you a pessimist or an optimist?
I feel like an optimist with the TZA being up over $5.00 in pre-market.
Being short for months overall, then the AAPL part of the trade you cite above is a good move???

  I have UUP Jan 22 long calls for $0.43 (currently at $0.39). Based on what I’m reading here, I think I should just try to get out even given the downgrade. Do you agree with that?

flip…I don’t understand your question.     What I’m saying about AAPL is that if you can get it in the low 360s I think that’s pretty cheap.   On the other hand, if the overall market goes even lower, we could see it below 350.  BUt I would be in favor of scaling back into AAPL at 365 or below.    I see now the futures have gone to -28 on S & P and – 60 on the NAS.   This could be a fine day for short term profits, but you’ll have to be on your toes.  I don’t know how I’ll play this till I see the market open. 

…I love when CNBC rolls out various" financial experts" and CEO’s, and they say this is a "good" thing, and "healthy" for us.. 
Wasn’t it also a "good" thing the last week of June when the market was up 100 points a day for a week and a half straight???..
This smells like a setup to me..  I feel the "big boys"  will jump in at some point today /tomorrow for a big V style rebound ,and send those who puked stocks up scrambling to get back in….and squeeze the shorts up… 
The U.S. always calms the world market’s and will lead the way again (with smoke and mirrors or some other means) but they will..   I learned from Phil not to trade on hunches, but after living through the last 9 months of manipulation..Expect the Unexpected.
….just a hunch.

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