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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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  1. Somebody got caught telling a lie…bad Timahhhh!


    Peter Barnes “Is there a risk that the United States could lose its AAA credit rating? Yes or no?”
    Geithner’s response: “No risk of that.”
    “No risk?” Barnes asked.
    “No risk,” Geithner said.

  2. S&P Outlook  (on a Humpty Dumpty note - notice that the  "AAA" is GONE…as the upside scenario will only STABILIZE the "AA+" rating)
    The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently
    assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction--independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners--lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government’s debt dynamics, the long-term rating could stabilize at ‘AA+’.
    On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.

  3. "rustle123
    August 5th, 2011 at 8:11 pm | PermalinkIgnore this user 30 Years Ago Today: The Day the Middle Class Died …a letter from Michael Moore
    Friday, August 5th, 2011
    Friends, …"

    excellent post Rustle !

    I worked @ Union Pacific RR during that PATCO strike (I was only 23) and there was (short lived) discussion at union meetings about supporting the PATCO strike. The RR union "leadership" pretty much tabled such discussion dismissing it as "un-American" to go against our pres. Since I worked there, the wages I made then have actually lost buying power over those 30 years and that was a good union wage at the time. Of course non union / non negotiated wages have declined more in buying power.

    I believe someone here posted awhile back that MC Donalds offered about 5-6k entry level jobs across Florida several months ago and recieved 10s of thousands of applications from desparate folks who might have had a much better life position if US unions had backed those PATCO strikers long ago.

    I wonder where the breaking point of the average American will be. I read today that 29,000 0-5 year olds have died in the last 90 days in Dadaab Kenya refugee camp (housing 440,000) in a sea of tents. Will Americans have to get to that point? Looks like we are headed there, very sad …

  4. Full text of S&P downgrade from


    United States of America Long-Term Rating Lowered To ‘AA+’ On Political Risks And Rising Debt Burden; Outlook Negative

    We have lowered our long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’ and affirmed the ‘A-1+’ short-term rating.

    We have also removed both the short- and long-term ratings from CreditWatch negative.

    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.

    More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

    Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.

    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.

    Rating Action

    On Aug. 5, 2011, Standard & Poor’s Ratings Services lowered its long-term sovereign credit rating on the United States of America to ‘AA+’ from ‘AAA’. The outlook on the long-term rating is negative. At the same time, Standard & Poor’s affirmed its ‘A-1+’ short-term rating on the U.S. In addition, Standard & Poor’s removed both ratings from CreditWatch, where they were placed on July 14, 2011, with negative implications.

    The transfer and convertibility (T&C) assessment of the U.S.–our assessment of the likelihood of official interference in the ability of U.S.-based public- and private-sector issuers to secure foreign exchange for debt service–remains ‘AAA’.


    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.

    Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria (see “Sovereign Government Rating Methodology and Assumptions,” June 30, 2011, especially Paragraphs 36-41). Nevertheless, we view the U.S. federal government’s other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged.

    We have taken the ratings off CreditWatch because the Aug. 2 passage of the Budget Control Act Amendment of 2011 has removed any perceived immediate threat of payment default posed by delays to raising the government’s debt ceiling. In addition, we believe that the act provides sufficient clarity to allow us to evaluate the likely course of U.S. fiscal policy for the next few years.

    The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year’s wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.

    Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a ‘AAA’ rating and with ‘AAA’ rated sovereign peers (see Sovereign Government Rating Methodology and Assumptions,” June 30, 2011, especially Paragraphs 36-41).In our view, the difficulty in framing a consensus on fiscal policy weakens the government’s ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population’s demographics and other age-related spending drivers closer at hand (see “Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even More Green, Now,” June 21, 2011).

    Standard & Poor’s takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.’s finances on a sustainable footing.

    The act calls for as much as $2.4 trillion of reductions in expenditure growth over the 10 years through 2021. These cuts will be implemented in two steps: the $917 billion agreed to initially, followed by an additional $1.5 trillion that the newly formed Congressional Joint Select Committee on Deficit Reduction is supposed to recommend by November 2011. The act contains no measures to raise taxes or otherwise enhance revenues, though the committee could recommend them.

    The act further provides that if Congress does not enact the committee’s recommendations, cuts of $1.2 trillion will be implemented over the same time period. The reductions would mainly affect outlays for civilian discretionary spending, defense, and Medicare. We understand that this fall-back mechanism is designed to encourage Congress to embrace a more balanced mix of expenditure savings, as the committee might recommend.

    We note that in a letter to Congress on Aug. 1, 2011, the Congressional Budget Office (CBO) estimated total budgetary savings under the act to be at least $2.1 trillion over the next 10 years relative to its baseline assumptions. In updating our own fiscal projections, with certain modifications outlined below, we have relied on the CBO’s latest “Alternate Fiscal Scenario” of June 2011, updated to include the CBO assumptions contained in its Aug. 1 letter to Congress. In general, the CBO’s “Alternate Fiscal Scenario” assumes a continuation of recent Congressional action overriding existing law.

    We view the act’s measures as a step toward fiscal consolidation. However, this is within the framework of a legislative mechanism that leaves open the details of what is finally agreed to until the end of 2011, and Congress and the Administration could modify any agreement in the future. Even assuming that at least $2.1 trillion of the spending reductions the act envisages are implemented, we maintain our view that the U.S. net general government debt burden (all levels of government combined, excluding liquid financial assets) will likely continue to grow. Under our revised base case fiscal scenario–which we consider to be consistent with a ‘AA+’ long-term rating and a negative outlook–we now project that net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021Even the projected 2015 ratio of sovereign indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act’s revised policy settings.

    Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade.

    Our revised upside scenario–which, other things being equal, we view as consistent with the outlook on the ‘AA+’ long-term rating being revised to stable–retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating. In this scenario, we project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 77% in 2015 and to 78% by 2021.

    Our revised downside scenario–which, other things being equal, we view as being consistent with a possible further downgrade to a ‘AA’ long-term rating–features less-favorable macroeconomic assumptions, as outlined below and also assumes that the second round of spending cuts (at least $1.2 trillion) that the act calls for does not occur. This scenario also assumes somewhat higher nominal interest rates for U.S. Treasuries. We still believe that the role of the U.S. dollar as the key reserve currency confers a government funding advantage, one that could change only slowly over time, and that Fed policy might lean toward continued loose monetary policy at a time of fiscal tightening. Nonetheless, it is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021.

    Our revised scenarios also take into account the significant negative revisions to historical GDP data that the Bureau of Economic Analysis announced on July 29. From our perspective, the effect of these revisions underscores two related points when evaluating the likely debt trajectory of the U.S. government. First, the revisions show that the recent recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms. Consequently, the debt burden is slightly higher. Second, the revised data highlight the sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions. We believe the sluggish pace of the current economic recovery could be consistent with the experiences of countries that have had financial crises in which the slow process of debt deleveraging in the private sector leads to a persistent drag on demand. As a result, our downside case scenario assumes relatively modest real trend GDP growth of 2.5% and inflation of near 1.5% annually going forward.

    When comparing the U.S. to sovereigns with ‘AAA’ long-term ratings that we view as relevant peers–Canada, France, Germany, and the U.K.–we also observe, based on our base case scenarios for each, that the trajectory of the U.S.’s net public debt is diverging from the others. Including the U.S., we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.

    Standard & Poor’s transfer T&C assessment of the U.S. remains ‘AAA’. Our T&C assessment reflects our view of the likelihood of the sovereign restricting other public and private issuers’ access to foreign exchange needed to meet debt service. Although in our view the credit standing of the U.S. government has deteriorated modestly, we see little indication that official interference of this kind is entering onto the policy agenda of either Congress or the Administration. Consequently, we continue to view this risk as being highly remote.


    The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently
    assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction–independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners–lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government’s debt dynamics, the long-term rating could stabilize at ‘AA+’.

    On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.

  5. Note that we COULD stabilize at AA+ IF we let the Bush tax cuts expire.  Read the S&P’s lips – no new taxes = no more AA+!

    Roger Nusbaum:  

    I believe it is obvious that if the details of the U.S.’s current situation were applied to any other country, that country would be downgraded without a lot of controversy. One point I’ve made repeatedly since the crisis started is that the U.S. is in a unique situation by virtue of its role in the world economic order. The rest of the world has a vested interest in America’s welfare, which ultimately will prevent the type of perpetual panic in the streets that some people have been calling for since 2007 if not earlier.

    "No perpetual panic in the street" is not exactly a compelling investment thesis, however. As I’ve been saying for years, this crisis will take a long time to work through; in some ways things are getting worse and in some other ways things never got better, or perhaps more correctly were masked by QE and other desperate policy measures that have come and gone since.

    Nigam Arora:

    Following are our conclusions:

    o Regarding stocks, about 70% of the street is already positioned for a downgrade.

    o Regarding stocks, about 40% of the street is positioned for a downgrade to AA.

    o Actual downgrade is not to AA, but to AA+.

    o The net effect of the downgrade being less than what was expected by some and surprise to about 30% of market participants is likely to be a wash.

    • At the first glance, it would seem that the U.S. treasury bonds, now with a lower rating, should fall. But in reality, the opposite is a possibility. The reason is that a downgrade will provide more momentum to fiscal austerity in Washington. Fiscal austerity in the short-term means a slower economy. Slower economy means higher bonds.
    • There has been a big concern about a large amount of treasuries held by big U.S. banks. The Federal Reserve Bank has just come out with a statement that it will tell member banks there is no change in the risk weighting of the U.S. treasuries. In essence, this statement means that the Federal Reserve is spanking S&P.
    • It is hard to imagine France with a rating higher than the U.S.
    • It is hard to imagine the European Central Bank with a rating higher than the Federal Reserve.
    • This downgrade is likely to start of a race to the bottom, i.e., we may see a number of downgrades on an international basis.
    • Since Moody’s and Fitch have reaffirmed AAA rating of the U.S., in material terms, this downgrade will have no effect on institutions required to hold AAA paper. By law, institutions are allowed to use the highest available rating.

    What to do now?

    o If stocks get hit, we will be buyers of ETFs SPY and QQQ.

    o If gold and silver spike up, we will short sell ETFs GLD and SLV or buyZSL

    o We will take the opposite side of the first move in U.S. treasuries. We will use the ETFs TBTTBF, and TLT

    Housing Time Bomb:

    The recovery/green shoots/bull market hoopla was nothing but a complete sham manufactured by government spending. I have been saying it ever since the lows in 2009 and I took a lot of heat for it.

    It was easy to see if you covered your ears and didn’t listen to the BS that was being thrown to you by Wall Street on an hourly basis on CNBC.

  6. 2011 S&P targets as of yesterday:

    We missed this one – BEA Revised 2009 & 2010 Personal Income SHARPLY Lower:

    American’s spending turned negative in June (-0.2%) for the first time since September 2009. Without government largesse (personal transfer receipts) personal income would have declined. Personal income increased $18.7 billion, or 0.1 percent…Personal current transfer receipts increased 9.5 billion, in contrast to a decrease of $1.4 billion. Government largesse is 51% of income growth.

    The BEA revised 2009 and 2010 personal income sharply lower. Yes, once again US beancounters overstate economic strength for years and the Street is mum on the scheme.

    Personal income was revised up $69.1 billion, or 0.6 percent, for 2008; was revised down $244.7 billion, or 2.0 percent, for 2009; and was revised down $167.5 billion, or 1.3 percent, for 2010.

    Disposable personal income (DPI) (personal income less personal current taxes) was revised up $71.6 billion, or 0.7 percent, for 2008; was revised down $246.1 billion, or 2.2 percent, for 2009; and was revised down
    $195.0 billion, or 1.7 percent, for 2010

    We have screamed for years that jobs & income are the key economic indicators. Everything else is just background music. The average American continues to experience worse economic conditions that most of Wall Street, DC and Conservative nimrods realize or understand.

    Americans on food stamps jumped 1.1 million in May to 45,753,078 from 44,647,861 (+12/1% y/y).

  7. Barry’s Succinct Summation of the Week’s Events (pre downgrade):


    1) July Payroll gain surprises to upside led by 154k private sector job adds
    2) US debt ceiling is raised, modest debt reduction agreed to, finally the noise ends, for now
    3) Fitch and Moody’s reiterate AAA US rating with caveats, still waiting on S&P (we’ll see if they cave to political pressure and do nothing or stick to their threats)
    4) MBA said that apps for refi’s and purchases rise with mortgage rates down to 4.45%
    5) Italy waits all week to finally get off their beach chairs with the possibility of faster ‘fiscal consolidation’ and other changes
    6) ECB will likely start buying Italian and Spanish debt, however, will they sterilize it like they did with other purchases of PIG debt???
    7) SNB and BoJ give some relief from their screaming currencies
    8) US July vehicle and retail comps exceed estimates


    1) In gold terms, S&P’s retest March ’09 low of 666
    2) European banks get crushed again as they experience their version of our ’08
    3) US gov’t decides to take on even more debt by raising the ceiling, budget cuts spitting in the wind
    4) SNB, BoJ intervene, another week of disgust with fiat currencies
    5) ISM mfr’g and services in US both soften further 6)PMI mfr’g in China, India, Taiwan, Europe/UK all weaken

  8.  From the FT (via Hale Stewart):

    “We now also understand that the US is not going to make meaningful investments in its economic future. The conservative position that all spending is evil obliterates any distinction between investment and consumption, between the long term and the short term. The US suffers with an increasingly third-world level of infrastructure, third-tier education system and enormous gaps in the preparedness of its workforce. The debate has now ended; money to upgrade those faltering systems will not be forthcoming. And by the way, the US is not going to take on any other major problems either – immigration, tax reform or climate change, for example. It is not going to do so for the same reason it has failed at sensible economic management: because the Tea Party has a veto.”

    -Washington’s appetite for self-destruction (FT)

  9. Treasury vs. S&P (Financial Times):


    The US Treasury department found – and S&P accepted – thousands of billions of dollars of errors in some figures used by the rating agency.
    The Treasury went on the attack over the quality of S&P’s analysis, saying that “a judgment flawed by a $2,000bn error speaks for itself”.
    Early on Friday afternoon, S&P sent the Treasury a draft release that said net public debt would rise to 93 per cent of gross domestic product by 2021. By 4pm local time, analysts at the Treasury had replied that the numbers were wrong, according to a person familiar with the matter.
    S&P’s initial numbers were based on the ‘Alternative Fiscal Scenario’ prepared by the Congressional Budget Office. That assumed that discretionary federal spending would grow in line with the economy. S&P then subtracted the roughly $900bn in savings created by the debt ceiling deal to estimate net debt.
    However, the CBO had calculated the $900bn savings from a different baseline, which assumed that spending would grow in line with inflation. Calculated from the higher alternative scenario, the budget savings would be closer to $3,000bn. Adjusting for this would mean that net public debt would rise to only 85 per cent of GDP by 2021.
    From S&P’s point of view, however, the number did not make a difference to forecast deficits, only the debt-to-GDP ratio calculation. S&P believed that the difference changed the ratio by only 1.5 percentage points through 2015 and did not affect the trajectory of debt-to-GDP.
    It also did not affect the political factors regarding Washington’s ability to tackle the deficit, which influenced S&P heavily.
    “The political brinkmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy,” S&P said in its report.
    But the administration argued that political analysis is subjective territory for a rating agency and that S&P rushed to judgment without recognising the merits of the fiscal deal or future deficit reduction to come.
    Some market participants were sympathetic. “It’s a headline grabber that may shake Main Street confidence, but I’m confident it won’t result in higher Treasury rates,” said Jack Ablin, chief investment officer at Harris Private Bank. “I believe it will have little market impact near-term. There’s a global glut of savings with few safe havens. The US, Japan and Italy are the three most liquid sovereign bond markets. Which would you want?”


  10. This, if you can believe it, is from Forbes:

    The silver lining is that we might be able to use the S&P downgrade as a wake-up call.  President Obama’s first chief of staff, Rahm Emanuel, liked to say that you shouldn’t let a good crisis go to waste.  Oddly, the president has seemed to be out-maneuvered at every turn (most recently in the debt ceiling debacle).  But maybe he can use this crisis to get in the win column.

    How to do that?  Why not use a move from the Tea Party’s playbook?  Tell the opposition that he has something that they really want and he’s not going to let them have it unless they cooperate on a big, balanced debt reduction plan that meets his requirements.  Obama’s bargaining chip (asEconomistMom and others have pointed out) is extension of the Bush tax cuts, which are currently set to expire at the end of 2012.  Letting them expire would reduce the debt by  $4.6 trillion over the next decadeaccording to the CBO.

    The president should say this:  ”I disagree with S&P about the financial condition of the United States, but I can certainly understand why they expressed reservations about our policy making process.  The Congress, by threatening to default on our financial obligations, raised questions about our resolve to meet our financial commitments.  Worse, by rejecting a balanced plan of prudent spending cuts and new revenues, they passed up a chance to make a meaningful dent in our ballooning debt.  That is what provoked the rebuke from S&P.

    “In the face of this crisis, we absolutely must reassure financial markets immediately that we will get our financial house in order.  I’m using the one tool I have to guarantee that:  I’m promising not to sign an extension of the Bush Tax Cuts, or any tax cuts, unless they are part of a package that promotes job creation in the short run, reduces the debt over the next decade by at least as much as allowing the tax cuts to expire would do, and does this in a fair and balanced way that protects essential public programs and services.  I stand ready to work with Congress to advance this goal and, if we cannot agree, I’m prepared to veto any tax cut extension that threatens our prosperity.”

    Yes, the Republicans might decide that they’ll take the issue to the voters in 2012, but there would be enormous pressure on their candidate to produce spending cuts that could reduce the debt by at least as much as allowing the tax cuts to lapse would do.  Since polls repeatedly show that voters favor a mix of tax increases on the wealthy and selective spending cuts, I’d think that the president would be willing to engage in that debate.

    And, especially since polls seem to suggest that the Republicans in Congress are getting most of the blame for the failure to reassure financial markets, the GOP may be more inclined to participate in a grand bargain.

    The downgrade might turn out to be a blessing in disguise.

  11. Pathetic

    Poloticians will be the demise of this once great country.

    As far as wake up call…..You’re kidding yourselves…..these idiots will get the pollsters working overtime to determine how best to spin this terrible news. Christ…80% of the population wont even understand or care to understand what a downgrade is.

  12. Exec/Pathetic- Agree with you.  Our country is on the line. China is ridiculing us for our addiction to spending. They are the ones buying our debt and will hang it over our head when it suits their goals.  Unfortunately, the only thing on a politicians line of priority is the next election. The downfall of the USA is when we let them make their position a career instead of a service. Unfortunately, Phil will turn this into a discussion/blame game on the evils of the terrible Republican party when reality is there is enough blame to go around. Both parties have mismanaged this at a level that should be considered criminal. 

  13. Jake

    I agree.

  14. Robert Reich’s take on the downgrade:
    As much as I do understand the logic of S&P. Reich and Barry Ritholz do make sense when they say that S&P (and the other rating agencies) have lost all credibility on the subject of debt rating. As if collecting the scalp of the biggest economy is supposed to make up for the foolishness of the last 10 years. To some extent, the S&P guy on Anderson Cooper last night was right when saying that this downgrade reflects what has happened over the last 2 administrations, but where were the warnings? Where was this guy when we cut taxes, started wars and added new entitlement. Too busy stamping subprime loans with his big AAA stamp! Gimme a break!
    And here is Daniel Drezner’s take:
    His summary:

    In the end, I suspect Moody’s and Fitch won’t follow S&P’s move, so this could be a giant nothingburger.  Still, if these guys are going to be doing political risk analysis, it might help to actually have some political scientists on the payroll.  Based on their statement, S&P is simply extrapolating from the op-ed page, and that’s a lousy way to make a political forecast. 

  15. And 2 articles from The Economist on the current Europe situation:

    One might also have hoped for a robust intervention from the European Central Bank. Yet shortly after its president, Jean-Claude Trichet, told a press conference that the bank was buying bonds (without much enthusiasm), Italian spreads widened even further. Market participants complained that the ECB was buying Portuguese and Irish government bonds, a seemingly pointless intervention given that both countries have already lost access to markets. Instead of re-fighting the battles that have already been lost it should be focusing on those that count. Europe certainly could muster the resources to save the euro. If the war is lost it will be because of poor generals.
    A description of the proposed solution to the problem in Italy:

    Mr Berlusconi neither promised to stiffen the austerity package approved last month, nor to bring forward unpopular measures that will otherwise be left to the next government to apply. His most radical proposal was for an overhaul of labour law (if the unions and employers can be persuaded to agree).

    I don’t think that it’s going to cut it long term!

  16. To go back to trading for now, here is an article from CNBC’s own website:

    An indicator followed by veteran technical analyst John Roque that has perfect results for almost twenty years just flashed a buy signal. The beauty of Roque’s indicator, which has signaled positive returns three months out every time from its trigger point, is in its simplicity.

    Looking at past examples from his report, it seems when more than 80 percent of NYSE stocks fall below their 200-day average, the market is close to being oversold. Roque looks at the percentage of stocks on the NYSE that are trading above their 200-day moving average to get his timing signal. In a note to clients today, Roque pointed out that the number of NYSE stocks above their 200-day average on the NYSE was a measly 19 percent, When the number of stocks that manage to stay above this moving average — a common measure of momentum — make a nasty two standard deviation move to the downside from the norm, it usually means an oversold market and a good time to buy.
    "Extreme readings in this indicator (so far) have a perfect record with respect to market rallies both two weeks and three months later," wrote WJB Capital’s Roque, a respected staple of the technical analysis community, in a note. "We still think this market has issues, notably with the industrial sector, but we’re putting our trust in this indicator/data near term."
    The analyst cited seven other occurrences besides today since 1994 where the percentage of stocks below their respective 200-day moving averages reached such an extreme.
    Two weeks and three months later, the S&P 500 has been positive every time hitting the oversold trigger, with gains averaging 5.3 percent and 15 percent respectively. The last — and most extreme — oversold position was on March 2, 2009, about around the start of the bull market.

    Over time, strategist after strategist have tried to find the one magic indicator or mix of indicators that determine the right time to buy or sell the market. Some focus on extremes in investor sentiment, volume, crossings in moving averages… even cycles of the moon. 


    As is the tone in most of Roque notes, he’s not proclaiming to have found the secret to the market timing question that’s plagued every trader since Jesse Livermore. It’s just an indicator he’s kept track of over his career and so far, it has served him well for predicting short-term comebacks in the market.
    Given the turnaround in stocks on Friday, Roque’s streak may continue. 

    Technically, this does feel right as we are very, very oversold now, but this study might not take into account the political situation! But we’ve got to look at all the factors and this points up…

  17. Jakester- ytpical conservative bullsh!t, playing a victim before there is a reason… John Stewart had a nice collection of clips from your beloved fox news but since im typing from my phone ill wait until later to post it….

  18. Off topic, but I am interested in taking on stocktwits.  I assume you have my contact information in your user database, but let me know where I can email additional info if need be.

  19. jromeha- Explain what conservative bullshit was in my message? As I have reported before, I do not watch television so why make false claims that somehow I would appreciate anything Fox news has to broadcast? Typical of you to attack with no substance.  You are pathetic liberal hater.

  20. For anyone, including the lefty/liberal/commie wing on this board to exonerate—- from an equal share of the blame—democrats and socialists, from the State of our Disunion, is pure rabid partisanshit, and ignorance of history (who ran the House for 40 years until the republicans took over in 1994, and in doing so decade after decade ran up huge IOUs on the Social Security fund, and committed the country to social welfare programs, defense and highway contracts in the trillions that they did not pass tax increases to pay for?  Hint:  it wasn’t conservatives. The democrats ran this country into an economic Tsunami during those years. They are as guilty as Casey Anthony.
    As Phil likes to point out repeatedly, the puppet POTUS, the Bamster, is not responsible for what he inherited from George Bush (do not take this as any kind of support for one of the dumbest Princes ever to occupy the Oral Office).
    Likewise republicans aren’t totally responsible for hiding the debt and deficit behind Social Security Trust funds, making it appear as is the years from ’54 to’ 94 were self-sustaining.  Democrats have run up quadrillions of dollars in debt that they didn’t have the balls to raise taxes for. 
    John Stewart is a lefty to his core. Can’t be bothered watching his blatant bias any more than I could stand O’reilly’s over the  top  bias.
    Throw ‘em all out and stop defending the indefensible or at least read your history with an open mind to know what you’re talking about. From all indications the lefties here, only read from one book.  There are no better angels in either party, and therefore no better citizens, one from the other.

  21. I’m an Independent.  I think 90% of Congress is on the take.  I think Obama is doing a pretty bad job as President.  He has shown to be spineless.  i am not a fan of Obamacare and while the Democrats were in power, he should’ve dealt with job creation especially Phil’s infrastructure idea then and not devoted everything to Obamacare.  That being said, the problems we are having now in balancing the budget can fall squarely on the Republicans.  They created the wealth disparity over the last 30 years, It accelerated like crazy under Bush 2 and caused the majority of the problems we have now and will have in years to come.  Obama should not have wimped out extending the tax cuts a year ago and should not have put forth that pathetic plan recently unless they have something up their sleeve we don’t know about.  I don’t mind paying more taxes if I know it’s helping the country look better and the state of it.  I think most people don’t.  This is pure corporate bs that the Republicans and especially the brainwashed tea baggers puppeteered by psychotic Grover Norquist and are trying to push their lies across America saying they’re helping the common folk.  Common folk aren’t looking at tax increases and like Phil once pointed out, people without jobs aren’t paying taxes at all.
    Grover Norquist said he would go around to different Congress people in the last couple years who were Tea Party and Republicans and make them sign a document saying no matter what, you will not vote for anything that raises taxes.  And he made sure that document was signed in front of two witnesses.  And if they didn’t sign it, he would work hard to make sure they didn’t retain office.  After all him and Jack Abramoff might have been two of the most powerful Republicans in the last 30 years that never held office.  Does this not sound like blackmail to you?  At the cost of our country?  Love to see which corporate firms support Grover Norquist.
    The difference I notice between Republicans and Democrats is that when a Democrat is not doing a good job, other Democrats will criticize him and not vote for him.  Republicans party people on the other hand act like any Republican is their Mommy and Mommy can’t do wrong no matter what.  That’s why they never have facts or sensible arguments.  It’s just you’re stupid, Mommy’s doing a good job.  You don’t know anything, if it wasn’t for Mommy we’d be in worse shape it’s all your party’s fault.  And you can reply, back it up why?  And they would say, it’s not worth my time, you’re an idiot.  See how many situations this happens in and you’ll see it’s about all of them.

  22. Iflantheman- AAPL
    Here is a note posted from about a year ago on your AAPL trading "system":




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    ·  lflantheman
    September 27th, 2010 at 6:08 pm |
    ongba….Sorry for the late reply.  I’ve been at my "other job".   Question was how would I handle AAPL  trade of owning 290s and selling 1/2 monthly 290s when it drops to 270.   Answer is it wouldn’t happen.  I would have stopped out long  before that kind of a drop.  My covers would have been bought back when about 50% lost and that would happen long before the stock dropped 20 points.   Whenever I make a trade I set a stop.  For me that’s a  part of the trade.  I can’t sit at the computer all day so I MUST have stops to  protect against unexpected moves.  For example, here’s a trade I might make:  AAPL is $291  .    Buy 10 Jan 11 AAPL calls @ 21.50.  Sell 5 Oct 1 290 calls @ 4.40.  If Oct 1 290 calls <2.00 buy 5 to close @ market.  If AAPL stock <285, sell to close 10 Jan 11 calls @ market.   (I calculated 285 by going to CBOE and looking at market value AAPL when the Oct 1 call drops below 2.00)    Couple of things to notice.  One is, this is a SINGLE TRADE.  I put in the stipulations at the onset.  This takes away all emotion I might have should the stock drop.  The close-out becomes automatic.  Also, I HAVE to do these trades at market;  if they are set at limit I may miss the trade and continue to lose while I’m not watching.   But with AAPL the spreads are narrow, so it’s O.K.
    I have been reviewing some old notes trying to improve my strategies and results. A couple of questions:
    1. Are you still following this basic scenario?
    2. What changes, if any , have you made since then?
    3. I am drawing a complete blank on the how you calculate and set the stops. In the above note you indicate using hard stops. Somewhere else, if I recall, you use trailing stops. Can you reiterate your thinking on this?
    4 I am particularly interested in some detail, if you can provide it on how you calculate the stop on the options based on the stock price?
    I have been doing a lot more trading in AAPL lately and have had some nice runs/profits but have had my hat handed to me a few times so I am trying to review and refine my plan. Thanks in advance.

  23.  Phil: TBT vs TLT puts
    My main focus has been positioning for higher rates by using TBT Jan 13 calls selling near months and puts, and long Jan 13 TLT Jan 13 puts again covering with near months.  My thinking is to hopefully figure out which approach works better given the decay factor possibly hurting TBT returns.  Although TBT is an ultra and could give more bang for the buck I think TLT also suffers from decay which if that is the case then that should benefit the puts when rates rise, correct or no?  Thus far my experiment in using both doesn’t lead me to any firm conclusions, perhaps due to pummeling TBT has taken thus far this year.
    Which approach would you favor TBT calls vs TLT puts?  TIA

  24.  Phil: follow up
    Also, I read this on SA and would like you thoughts as to whether it would make more sense.
    "Trade the way that the professionals do: Buy puts and short futures on long term treasury. Using a 30-year bond versus the 20-year on TBT creates larger price swings on interest rate changes. These strategies are not recommended for a beginning investor, but those who understand the futures and options markets can make more money from a more accurate decline in bonds."

  25. vegas—I have been informed that a member from basic chat wants to attend the vegas meeting—I  am ok with this but I thought I would put it to the board —let me know how you all feel about it

  26.  Savi: Vegas
    Additional person sounds okay to me.  That way if my TBT doesn’t recover perhaps we can get 6 people to share a room :)
    Has Vegas been declared a "politics/idealogy free zone"?

  27. I was just responding to your comments and attack on rustle(he chose the more respectful response). Anyways, you bring nothing to the table with your trading talk (or political talk) so consider yourself ignored. Thank you and goodnight:).

  28. Lincoln – you serious about sharing a room? If so, what is your budget?

  29.  pstas….Thanks for the inquiry as to my trading strategy for AAPL.   My trading strategy changes for trading AAPL, and other options, based on many factors.  I’m thinking about this as I go, so this probably won’t be a full list.   I’ll use AAPL as the example as I go along.   First, I have to decide whether I even want to be in the trade.  1.   I want to trade with the market trend, as a rule.  Optrader, on this site, is very clear about this.   Occasionally you will go against the trend, but you have to have a very good reason to do so.  This week I did have good reasons to trade both CSII and PCLN against the trend, trading both to go upward as the market trended downward, and did very well on both.  You will see my posts this week confirming that I went long on both as the market was tanking.  That having been said, usually you want to go with the trend. 2.  Next, you want to stay aware of what is going on economically around you and your stock.  Now we all know that AAPL is a superb company, but it tanked this week along with everything else.  I’m not going to stay in AAPL or anything else with the world crashing down around me, unless I have very good reasons to do so (see # 1.).     I am not a buy and hold guy.  I am a buy and watch it like a hawk guy.  And if I can’t watch it like a hawk, I’ll use stops.  I’ll get to that.    3.    Third, if you are trading options on a particular stock, you’ve got to know the company like the back of your hand.  I don’t trade many different positions, because I can’t keep track of them.  Usually I’m in one to perhaps 5 trades at the most.  I’ve heard of people owning 100 or more positions.  You may as well buy the S & P.  Perhaps if you’re a genius and stay awake 20 hours a day (do we know anyone like that?  :)  )you can do it.  I can’t.  So I concentrate on just a few companies or ETFs that I know and understand very very well.    4.   Fourth, I believe you need to trade in options that have high volume and good liquidity, such as AAPL or QQQ.  This allows you to get in and out quickly, with prices very close to your bid or ask.  WIth poor volume or liquidity your attempts to get in or out when you need to will lead to slippage, and cost you lots of money.      5.  Next, you have to adapt your trading style to your lifestyle.   You must not make trades that require you to sit and watch the computer if you have to be doing something else.  I, like many of us, have a primary job.   I adjust my trades, and stops, so that I won’t get scalded by unforseen events while I’m at my ‘other job’.  This is where stops come in.   I HAVE to use stops.   I set them differently depending upon circumstances.   For example, say the markets are fairly stable (not presently) and I believe AAPL is priced low (it is) then I might buy some long calls, or sell some puts.  But at the time of purchase or sale I’ll add stops.   Say I buy some AAPL calls for 3.00.  Month and strike don’t matter for discussion purposes.  How much variability in this price am I willing to tolerate?   To me this is a personal decision.  If I’m very very sure this stock is going up, and I’ve only risked initially a very small amount, then I might even place a buy order for MORE calls should the price drop to 2.00, for instance.   But if the trade is one I’m not positive of in the first place, and I’m testing the waters with the first buy, then I may put a stop at 2.00,  then get out.  Phil talks about this under his strategy section.  When a trade is going against you you have to reassess everything.  Should I double down?   Should I get out?   For me the stop is usually get out with the drop to 2.00.  Then I’m in cash and can patiently decide whether I should double down at the lower price, or just stay out.      I’m going to break at this juncture.   I’ll come back later.  Wife has a task she says can’t wait.  And you know how dat go  .     :)   

  30. It Just Went From Bad To Far, Far Worse As Germany Says Italy Is Too Big For EFSF To Save, Refuses To Carry Euro Bailout Burden
    Submitted by Tyler Durden on 08/06/2011 – 12:20 European Central Bank Germany Italy Monetization
    Remember when we said (yesterday) that Germany will soon balk over the fact that it is pledging its entire economy to bail out an insolvent Europe? Well, that moment has come.

    German Govt: Italy Too Big For EFSF To Save – Spiegel
    German Govt: Doubts Whether Tripling EFSF Would Help It Save Italy
    German Govt: Italy Must Make Savings, Reforms To Exit Crisis – Spiegel
    Italy Debt Guarantee Could Raise Doubts Over Germany’s Finances – Spiegel
    German Govt: EFSF Should Only Help Small, Mid-Size Countries – Spiegel


  31.  nicha: vegas
    My wife may come, in which case we usually share a room ;)  She claims to have a very sophisticated system for playing the slots.

  32. Iflan – you put forth some very good points. I have a few follow up questions to the above.
    1) I followed you in on the AAPL Oct 390/400 spread for less than $5. I also sold the Aug 5 $395 put which I rolled to Aug 12 $390 put. I continued to stay in this because it is an Oct position and is usually the leader when mkts go up.
    2) short strangle on BIDU Sep 140/175. I bought back the 175 call and doubled down on the 140 put expecting a bounce.
    I saw your comment a few days ago that you sold out of both these positions and remained in cash. I did not have any stops nor do I have adequate hedges for these. Any suggestions will be appreciated. Thank you.

  33. Anyone willing to share a room in Vegas. I know craig was interested too…

  34. Savi – is Opt coming to Vegas?

  35. CNBC had stated, FRIDAY MORNING, that a few hundred traders were hearing the rumor that S&P was going to downgrade the AAA rating.  This information had obviously been leaked, and I can only assume that the extremely well connected knew about such about the start of the last 10 trading day market collapse.  Not jusa a Euro and USA DDip panic sell…this is why you can’t just ignore the rumors on the trading floors
    With Germany, ask yourself what they have to gain by saving the Euro and bleeding themselves to death for a decade?  Let the whole system collapse, and be back at full speed in 3-5 years.  Germany is smart to understand that the IMF has lost its USA funding…so who will bail them out if they put their countries finances at risk???

  36. It is interesting that when both parties fight for popularity by spending on favored causes of each side, eventually, they can spend themselves into a corner, like now, where it becomes obvious that the spending did not have the desired result, and there are no remaining bullets in anybody’s gun to "encourage" growth. Without stronger growth than appears likely in the near future, the Debt/Deficit problem will not be solved.
    So, as has happened before, we are faced with only one remaining choice. Confiscate the money being saved by those with substantial savings. Will poor people feel better if they know that richer folks are being spanked and robbed? Because some of the super-rich control the direction of the country, we have to punish everybody with extra money?
    There may be no remaining choice, but we got here because people like me had no say in things for the last 20 years, and it pains me to have to pay for the mistakes of fools. (Again).

  37.  nicha…I’ll review these trades for you from my portfolio records one at a time:    BIDU  7/25   STO 10 Sept 140 puts  @ 5.30 and STO 10 Sept 175 calls  @ 5.00      Then on 7/28   BTC    the puts for 3.25 for 38% gain and BTC the calls for 27% gain.    What I was doing here is selling premium on both ends of a stock I felt would not move much with earnings (earnings were 7/25) and it did not.  The put and call values contracted, as expected, and within 3 days I was able to close the trade with respectable gain.   I never meant to hold this trade long term, but only to take advantage of premium decay following the earnings event.  Be back later.

  38.  nicha….The AAPL trade needs no particular review of the record.  Both of those plays were based on a market moving upward.    When it became evident the market was moving against those trades I sacked them both.  Before the week was out I was shorting AAPL.  I hold neither AAPL nor any other equity in special favor.  They either move in the direction I’m trading them, or I get rid of them.   Usually I’ll have a stop-loss that just kicks me out of these trade if the market moves in the opposite direction.  That takes the emotion (if their is any) completely out of the decision.   I think if you are going to become a very successful trader you need to learn to be completely stoic about the process.  Learn to cut your losers quickly and without emotion, and you will get more and more successful.    I’m amused sometimes to see some on our site here getting ANGRY it appears if a momo with a p/e of 80 plus continues to move higher.   My attitude is….who cares which way it’s moving.     Just help me figure out which way to play it and I’m ready for the game.  Anyway, cut your losers…..quickly!  

  39. I’m taking a contrarian view of the S&P downgrade in terms of it’s substance. While it’s disconcerting for investors to have the clown-politicians in Washington play chicken with their assets, the conclusion of the game demonstrated that the less insane elements of the Republican party still hold the upper hand and were unwilling to force a temporary default just to make a political point. One can easily imagine the intense pressure from large financial interests that was applied in the days leading to the settlement. It was very untidy and ugly but in the end – no default. Now the tough decision-making has be delegated to a committee, the old handoff which in this case would be comical if it wasn’t so asinine (Super Congress?!, puhleez).
    Some issues I have with S&P and their decision. 1. The subprime disaster exposed the ratings agencies as shills and patsies for the investment banks. Their employees are looked down on as the lower echelon of the securities industry. By accepting as fact the data and valuation models provided by the issuers of the securities they rated (the same people paying them to rate the securities, who were also the same people profiting enormously from the undeserverdly high ratings the securities received), they’ve shown very little of the independence, intelligence or integrity implied and assumed in their grand ratings pronouncements. Therefore, the US debt rating decision is suspect. Furthermore, because this gives S&P an opportunity to loudly burnish their tawdry reputation, I doubt their motives. Why should we trust them now when they’ve been so horribly wrong in the past? Not just on the subprime blowup, but where were they on Enron and Worldcom?
    2. Is the ratings downgrade deserved? I don’t think so. All of the ratings are relative. The future is unknown so there is no absolute rating. Then S&P’s decision suggests that every AAA rated bond or bond issuer is more likely to make all it’s interest and principal payments on time than the United States. I disagree. The US is a troubled nation but it still has 312 million citizens, a $14.7 trillion GDP in 2010, the power to raise taxes and to print unlimited amounts of money, and the world’s largest military. Until now US debt has been the standard for creditworthiness – that’s why the T-Bill is referred to as the "risk-free" rate. If S&P is honest about this, then there should be more downgrades coming to issuers of all kinds, AAA and otherwise. Logically, if the US is at greater risk of default then what bond issuer isn’t? I live in Seattle where the old saying was, when Boeing sneezes all of Washington state catches a cold. Substitute the US Treasury for Boeing and how does the rest of that saying go then? Who would not be affected by a Treasury default? This further calls S&P’s decision into question. (And I’m not saying a Treasury default’s impossible, just that for it to happen without in someway damaging creditworthiness across the globe is unlikely. Shouldn’t this fact then be reflected in S&P’s ratings or are they willing to just let it hang there as one damned large unanswered question?)
    3. They’re rather late to the game as Robert Reich points out. Someone taking their cues from any one of the ratings agencies at this stage isn’t worth listening to or leaving your money with to invest for you. What serious investor today doesn’t know that the ratings agencies just express the opinions of people who’ve shown themselves incompetent in the past and are just as likely to be influenced by corrupting factors both financial and political, as they are to be honestly assessing the facts? Will qualified investors’ opinions of US debt truly be effected by this downgrade? Of course, I’m speaking of the ones who do their own research and should know better.
    But what will the consequences of the S&P decision be? I know that substance is not all that matters if it matters at all these days. Public perceptions and the depths of human stupidity are the all-important factors. Because many people still put faith in the ratings agencies, I suspect their ignorance will be paramount in the days ahead. And I truly pray that something – anything – can save us all from ourselves.

  40. OK, we are back to pointing fingers and name calling on the board.  Let’s all take a deep breath, exhale, have a drink among traders and understand we have differing points of view.


    In some ways I can agree with flips, in others not.  But, instead of looking back in retrospect at which party is to blame, how about looking forward and trying to change the direction of the ship!  How does one do that?  How do we make things better for our children and their children?  The political bickering is old, the blame game is over.  Facts are facts, but let’s use them to our advantage as to how to move forward.  Every time we blame, point fingers, bicker, etc, we take steps back.  I want to leave this world in a better condition than it is currently in, both monetary wise and environmentally.  Now, we just need to agree to compromise on how to do that.  Things are complicated, but there are ways forward.


    As for the extension of the Bush tax cuts by Obama, I believe he pushed through a few social agendas, one being the repeal of Don’t ask, Don’t tell.  This country was built on tolerance and freedom of expression, religion, etc, and we have had our fair share of issues around those.  Now is the time to act as a nation.   Either shit, take the lumps, wipe off, and then get off the pot. 


    Many of us are here for trading and understand the political interdependence upon our markets, which are rigged as we well know.  One just has to play the game.  Time to move on.

  41. I am struck by one element in the fervent political debate that rages on PSW. Republicans are pilloried for their tax cuts and foreign wars. Democrats, for their passion for giving away entitlements to all comers that destroy any incentive to work that most of the other 6 billion citizens of the planet would jump at.

    But one largish group of perpetrators gets a total, blame-free pass: the American voters. Implicit in this debate is the underlying assumption that U.S. Citizens of voting age are infantile, irresponsible imbeciles who will elect anyone and everyone who suggests that they can have more, do less, and maintain an unconscionable – and permanent – income advantage over at the rest of humanity as a birthright conferred by the sheer accident of being born within our national borders, and f--k anyone who suggests otherwise.

    Since when are politicians required to be a supernatural race of alien beings charged with providing an outsized standard of living for all (American) comers — FOREVER! And g-d forbid any of them should suggest otherwise! Why, we’ll fix them! We’ll turf the bastards out and find ourselves a group of politicians with such low I.Q.s that they will actually believe, against all reason, that such a thing is possible and are willing to destroy the entire economy for generations of our children to come in the vain pursuit of such imbecility.

    Welcome to the Tea Party, ladies and gentlemen.

  42. here here pharm there is no guilty party..certainly no one is acting guilty!! heres good tranlate of the der speigel dirigible,1518,778764,00.html

  43. goog* and hopefully good!!

  44. @ Phil, the markets are way oversold, but looking at the charts of all the major indexes, we can clearly see a head and shoulders pattern….so probably we will get a bounce due to the oversold condition, but after that we keep going lower until probably/hopefully support from last summer… maybe we should play for a short term bounce, and then go short, and finally go long for the rest of the year when we go back to las summer levels (maybe it will be around the jackson hole speech), what do you think? Thanks! 

  45.  Phil
    I see a lot of commentary on Technical Analysis sites that suggest the same strategy asaenz  raises in the comment just above. My question is, if a lot of TA followers are also saying  that, won’t the market discount/disappoint such a strategy?
    Anyway, do you think we pop to 1250 in the next week, then drop to 1170 as the TA comments are suggesting? 

  46. Pharmboy/blame game - "This is your fault, you know" 

  47.  he he, whatta great site / community
    Thanking you for all the tutoring : BALANCE !,  scaling, rolling, taking profits, adjusting the trade, etc.
    Just enjoyed back to back, best ever trading weeks.
    also, More Poly Rants !, from the rooftops, till progressives rule !
    you da man . . .

  48. phil

    do you have any buy picks?

    i have to unwind my tza and looking to get long or balance out my shorts -

    any dividend plays?

  49. We live in a big country (#3 in population). That’s just a damn lot of people. Consider for example the next country on the list that can support a 47,000 per capita GDP? (China, 7k, india 3k, indonesia 4k).
    It’s not easy setting economic policy for so many with so much. It’s not easy being us. But we are a relatively free people, and with our access to information that means we make the right decisions, over time and in the long run, when compared to those who do not enjoy this freedom. Even this message board today is one small microcosm of that much larger mechanism.
    And we’ll get through it.
    ps – I ran 14 miles this morning and am in no mood to fight. I’m the Shaman on the mountain top right now…  :)

  50. shaman you!..sorry

  51. Savi/Vegas,
    I’m a basic member. I had no idea that membership level had anything to do with the trip. There is no sense getting permission from the group and risking the tainting of the gene pool. I would prefer it if you would please  just send me back my $150. I will be in Vegas that weekend, because I do enjoy a good time, but at this point I would prefer to just blow the money on the Blackjack tables.

  52. rj—-my mistake the person interested is a voyeur member i.e. —-can view basic chat on delay and cannot chat themselves( I guess pays a much lower membership fee)—-I have no problem with him coming to Vegas—do not quite follow your statement "risking the tainting of the gene pool"—-thought as a courtesy I should ask the other chat members if they had any objection—

  53. rj—in my opinion membership level does not have any bearing on the meeting—trip

  54. rj—it was also a non-refundable deposit

  55. nicha—OPT has not said anything about attending Vegas

  56. rj – go to Vegas; ignore the un-savi

  57. OK, so the US was downgraded, yadda yadda yadda…..I don’t think it will affect the yields one bit.  Who wants to bet that the 10 yr goes to 2.0%?  I think they will!  China will continue to buy, Mish thinks so too.

  58. And for those mega bears – matt and myself included… this.

  59. Pharmboy,
    I bought puts and calls on ARIA and FLX, nov, jan, feb. Should I wait and see or do you have some suggestions?

  60. Pharm – I’m inclined to agree that it won’t effect yields. The political arena is probably where this can have the biggest impact. If Moody’s and to a lesser extent Fitch also downgrade then I it’s a different story.

  61. I don’t think it matters pak….the ratings agency gave the MBS’s AAA rating, they did real well with that huh?  We can print to pay off our debt.


    FLX/cha – not from me, sorry. 


    ARIA, hold tight.  ARIA is going back up.  I will be selling the Mar12 9 Ps next week.

  62. Thanks Pharmboy, I really appreciate your input on this Board and I believe I am going to make some good bucks following your strategies and advice.

    The Roman authorities provided free wheat to the peasants as a superficial means of appeasing the masses and distracting them from the fact that public policy and public service had failed, as corruption and decadence engulfed those in control of government. Free bread, chariot races, and feeding Christians to lions kept the small-minded peasants satiated and ignorant of their civic duty. Today, the authorities don’t hand out bread they hand out EBT cards to 45.5 million Americans, or 14.6% of the entire population
    Larry Elliot, writer for the UK Guardian, recently described the rot that has destroyed every empire in history
    “The experience of both Rome and Britain suggests that it is hard to stop the rot once it has set in, so here are the a few of the warning signs of trouble ahead: military overstretch, a widening gulf between rich and poor, a hollowed-out economy, citizens using debt to live beyond their means, and once-effective policies no longer working. The high levels of violent crime, epidemic of obesity, addiction to pornography and excessive use of energy may be telling us something: the US is in an advanced state of cultural decadence.
    Empires decline for many different reasons but certain factors recur. There is an initial reluctance to admit that there is much to fret about, and there is the arrival of a challenger (or several challengers) to the settled international order. In Spain’s case, the rival was Britain. In Britain’s case, it was America. In America’s case, the threat comes from China.”
    For the last forty years America has shifted from a society that created goods into a society that created debt. Displays of affluence like McMansions, Mercedes, BMWs, Rolexes, summer mansions in the Hamptons, designer clothes, granite and stainless steel kitchens, and 85 inch HDTVs, all purchased with debt provided like candy by the Wall Street banks and their sugar daddy – the Federal Reserve, have trumped true wealth building. The result is a nation with $52.6 trillion of debt outstanding, or 350% of GDP. The basic rule for maintaining a healthy economic system requires the population to spend less than they earn and save the difference. The savings can then be invested in domestic companies, plants and equipment which keep the country growing. Americans bought into the lie that purchasing cheap foreign goods with cheap credit was as valid as actually building wealth. The national savings rate, which exceeded 10% in the 1970s and early 1980s, dropped to less than 1% by 2005. Why save when you could whip out one of your 13 credit cards.

  64. chasw - ignore the un-savi???

  65. this comparative analysis is interesting form an historical perspective but talk about curve fitting..worry about one thing..what the big players are going to do to feint you out of your positions…if we really want to do any histolgical comp our leader comped to say ancient rome are we past augustus maybe where nero?…lets realize one overbearing issue subtlety worth understanding is the new power of the EFSF to intervene to buy bonds in the marketplace (at market prices) without putting a target country into a bailout program. The old EFSF has to negotiate a whole rescue package, as it did the Portugal and Ireland. The new ESFS will be able to swoop in at moments of tension and buy bonds in the market with such a program…
    Think about the economics of this. The EFSF funds itself at German/French rates, and buys distressed bonds from Italy and Spain at much higher rates. It’s a fantastic carry trade vehicle.

  66.  Agree Angel, Rome is an interesting comparison, certainly there is the paradigm of the hard-working society, sacrificing the now for the later, which becomes self-indulgent, falters and is overtaken by the hungrier, harder culture waiting in the wings.
    The parallel ends there.  Geographically and demographically, the U.S. has a compelling advantage.  China and the U.S. are about the same size, and have similar resource bases, but China has five times the U.S. population, and the Chinese may be proficient swimmers but are much more likely to invade a nearly depopulated Siberia, a resource-rich region that lies on its northern border, than paddle across the Pacific to take over California.
    I won’t bother with the rest of the comparison, but the U.S./Canada — a single geopolitical entity, viewed in historical terms — is simply the richest and best defended piece of real estate on earth.  Yes, the native U.S. population has become lazy and self-indulgent, and has lost its way in terms of competitiveness and productivity, for the moment.  But the Roman empire lasted 400 years, closer to 600-700 if you throw in the kingdoms and republic, and there is no reason to believe the U.S.won’t last at least as long, given the aforementioned advantages — the native Roman soil, and population, was much smaller in comparison with the territory it dominated.  The U.S., on the other hand, is almost unique in history for having won wars — and given back the territory.  This is a tremendous advantage.
    A more abstract advantage — but  one I would argue is by far the most powerful, being virtually unique in historical terms — is that, having virtually exterminated the Native American ethnic group that originally populated it, has been able to create a society that is inclusive
    and planning for it’s future, but mortality is a stern taskmaster — it requires sublimating the self for an abstraction, 

  67. An article in the UK Guardian that states that big bad China is coming for the US?  Not really a big surprise.  Failing empire maybe, and the folks in London love to talk of America’s decline but I don’t buy it.
    I guess I feel qualified to chime in as I have lived in China (Hong Kong) for the last four years.  All I can say is that you will be waiting a very long time if you are of the opinion that China is going to emerge as the dominate world superpower and foreclose on the US.
    I used to trade quite a few stocks on the Heng Seng, and used mostly formulas from Graham for fundamental analysis.  The numbers always looked great, but I soon learned that a 30% Communist corruption or Beijing profit meddling margin was needed.  This was especially true for companies like Sinopec as the second they showed a nice profit the government would sweep in with price controls and knock it down.
    I am a huge fan of Muddy Waters, and I think there will be many copycat firms that will try to duplicate their success as the targets are many and it is very, very easy to find wild corruption in many of the mainland companies.  Honestly I think they have done more to root out Chinese corruption than Beijing ever could.

  68. zero that is a brilliant analysis…china is a fraud and we have enabled it..but the culture bases its excahngeover gaining advantage through fair or unfair son’t worry about china there are about 20000 nukes aimed at their ass form every major western country and russia as well..they have gained enough advantage though our indulgence lets not give them more..they are turds

  69. [ Wrong button - strike the last two sentences]
    "is inclusive.  A Turkish family may live in Germany three generations, but is never considered "German."  Likewise for France, Spain, Italy, Japan, and Scandinavia.  I have lived and/or worked extensively in all of them, and their natural limitation is their ethnicity, and the fact that,as the population increases in wealth and moves away from manual labor it hase less children [a function of educational costs, mostly] and they lose demographic vitality.
    America is different.  Really different.  Within two generations, the most remote foreigner is as American as anyone else.  Leaving aside its isolated geography, low population density and comparative resource base — which can hardly be ignored — America has a singular ability to renew itself demographically, and this is an immense source of strengh
    Rome didn’t have it.  Nor did Britain, Germany certainly doesn’t, Japan wouldn’t even consider it, and I am quite sure China does not.  The "melting pot" is not a quaint abstraction — it is a font of culture-renewing vitality.  It is projected that, by 2050, the majority of Americans will not be "white."  Does anyone care?  Are their nativist screamers in the streets?  It hardly merits a mention — because it doesn’t make the slightest difference, provided that the political culture, the democratic ideals, and the language, are assimilated — a process already many generations old.
    As the bon mot goes, "Reports of [America's] demise have been greatly exaggerated."  But we are in a mess, make no mistake.

  70. Nukes.

  71. Really!?
    Some of you are talking about sharing a room in Vegas?  If you do, try to show some class… :)

  72. Here, here zero. It’s a huge check in the plus column. I agree the US is exceptionally different in this regard, though it has come at steep price to various groups who have fought prejudice over hundreds of years, and frankly still has a ways to go. But there’s no doubt we are way ahead of the world in this regard, and that it’s an incredible advantage. 

  73. maudkin

    you might have to subscribe and also claim to be a high net worth individual – but um this never gets verified – including if you want to actualy invest in a hedge fund.

  74. Good morning! 

    Things are not much clearer a day later.  Saudi markets fell 5% on Saturday, huge single-day drop.  

    TBT vs TLT/Lincoln – Well we hit my $105 shorting target on TLT this week (end of Thurs and early Friday) but they fell off really fast (which is why it’s my shorting target!).  As I said the other day, last summer’s panic spike was to $110 in late Aug and we dropped to $88.50 by Feb (6 months, 20%) and the only other panic that took us that high was $121 in Dec (not Sept, not Oct, not Nov) 2008 and we fell back to $90 in June (6 months, 25%).    At the same time, TBT went from a low of $36 in Dec 2008 to a high of $60 in June (6 months, 66%) and from a low of $30 last Aug to $41 in Feb (6 months, 36%).  As I said earlier in the week, with an ultra – its really a matter of how many consecutive days you string together as they compound on the way up.  If you have a choppy move on the way up, you can underperform the underlying (vs expectations) but, if you have a sequential sell-off in the underlying like we did with IWM this week or 20-year notes in 2008, then the ultra-ETF can do much better than expectations.  TZA, for example, is up 60% in 2 weeks vs a 15% decline in IWM vs 45% expected on the 3x ETF.  If IWM drops 5% tomorrow, then that 160% goes up 15% – THAT’s why the consecutive moves in the same direction compound like that).  

    By the way, the  most profitable moves we can make are getting the tops right in these ultras as they tend to pull back in spectacular fashions.  On the other hand, being wrong SUCKS so we want to look for light entries shorting the ultras on the way up (if we get a sharp drop).  See AGQ this week!  

    Treasury futures/Lincoln – It’s a valid strategy but WHY DOES EVERYONE HAVE TO TRADE ALL THE TIME???  What’s wrong with cashing out and waiting to see what happens, which I have been advocating for weeks.  Fund managers HAVE to stay invested – you don’t.  I would HATE to try to manage that kind of trade, it’s much easier playing with FAS Money-type trades and those are hard enough to deal with in a violent market move (so use DIA or SPY to be more conservative with the same strategy).  

    I’m going to say this now, while we’re on the topic.  The BIGGEST mistake, by far, that was made in 2008 was trying to guess the bottom at 12,000 and 11,000 and 10,000 and 9,000 and 8,000.  7,000 was a GREAT bottom call for those who survived (and rode out the drop to 6,666) but not many people who made big commitments at the OTHER 5 bottoms were able to do much better than win their money back.  

    What gave us a REAL bottom?  QE1.  Do you miss a quick win by waiting until AFTER the announcement.  Sure, you miss a move from 7,500 to 7,500 but then you can get in and catch the move from 7,500 to 10,000 and then we’re 50% of the bottom and, if you are not too much of a greedy bastard, you lighten up to see what happens next.  Well, last summer, nothing happened next until QE2, did it?  THEN we had a big day or two but EVEN if you waited to see if 11,000 would break – you still got to play all the way back to 13,000 and that was the top of the range we charted out in November where I said 100% gains on the indexes were a good time to go short for a 20% pullback according to the 5% rule.  

    That’s Dow 10,400 as a floor in a HEALTHY pullback – bad data can change that floor!  We’re at 11,400 right now, just halfway to a proper correction so let’s not all go trying to call a bottom and let’s not all go expecting to drop 20% – the WISE thing to do is watch and wait because, we are now dead center of a much wider Must Hold zone at 11,500 with 13,000 on top and 10,000 at the bottom.  We need a CLEAR indication of which way we go from here and whether you miss the first 2.5% move up or down will not matter much in the grand scheme of things.  

  75. Basic Member/RJ- Savi meant to say Voyeur Member, of course and it’s not a class (or genetic) distinction but a very obvious concern that, since the Voyeur Members do not participate in Chat, nobody "knows" them.  I don’t mind either way but it’s a fair question for you guys (the people who chat here all the time) to decide.   As it is, we planned on having about 20 Members there – as there are only 10 so far, why not open it up?  But what if it were 40 more that came who none of us know and then why not throw it open to the general public and advertise it and the 10-20 people from Basic and Premium chat that are coming could find seats in the auditorium with the other 200 attendees and watch the Power Point…  So Savi is protecting YOUR interest by asking YOUR (the people in Chat) opinion before making a unilateral decision.  

    Voyeur Memberships are new and we have far more Basic and Premium Members than Voyeur Members at the moment but that will almost certainly flip by next year so this will be an issue down the road.  I’m not a professional seminar guy and the idea was to get together and chat and have some fun while going over trading strategies in a fairly intimate setting.  I’ve never done it before so I’m not charging anything to give a seminar and Savi is not making money, just trying to cover the cost of a room, equipment and food and you should be thanking him for his efforts instead of giving him crap.  

    Tim is charging his Members $500 a day for his seminar, Barry is charging $895 per Member for a day – I thought it would be nice NOT to turn this into a high-priced circus with standardize presentations and just try to do something fun but I can see why, in the end, these guys get jaded and disgusted and just look at these things as a way to pick up another paycheck – because you sure don’t get any appreciation for making the effort!  I am apologizing to Savi, even if you do not.  

  76. Germany/Troy – So far, seems to be unconfirmed although here’s two items to add to the uncertainty.  

    • Japan: G7 Meeting Possible Before Market Open

      The Group of Seven rich nations are making preparations to hold a telephone meeting of their finance ministers while Japan stands ready to intervene again in the currency markets, Japanese officials said, as financial markets brace for further turmoil following the U.S. debt downgrade over the weekend.


    Japan stands ready to intervene?  Do they not realize they initiated the tail-spin this week?  WOW, that is just friggin’ scary that the conclusion reached by the BOJ is that they should prop up the Dollar again to "calm" the markets!  If the G7 gets into "every man for himself" mode – all bets are off because, don’t forget, when push comes to shove – the entire global financial system is based on nothing but trust.  

  77. Phil,
    Tell me that it’s not possible that Geithner could have been cold cocked by the debt downgrade.  If he really didn’t see this coming then we are in big trouble…..worst yet….if he did see it coming, then he blatantly lied in his interview.  Either way….bad.

  78. Does anyone have a clue as to what’s coming in the markets tomorrow??? 
    Do we get the typical rally on bad news……or are the days of bad news rallies over and we get black Monday?

  79. A moldy oldy, blast from the past:
    And before there was TBT there was SRS. Happened to come across some old notes on this over the weekend. This was another sure thing bet. Fortunately, I actually made a little money on this one but am still trying to work out of TBT.
    SRS just popped 38% in 10 trading days- the ultras can be like dancing on quicksand

  80. Markets- my 2 cents- my gut tells me we get a bit of a relief rally but the trend is still down and I am positioned accordingly. The S&P downgrade changes little fundamentally , if at all so it should be no big deal. But no one really knows. Phil is exactly right on this- a poor bet trying to peg a bottom. I have made some small nibbles on a few stock I am committed to long term so I think that may be prudent. Much too early to back up the truck on anything right now.

  81. Tomorrow/Exec – It’s very interesting looking over the futures and seeing – nothing.  So calm (since they are closed).  Of course, that’s the good thing of having a crisis over the weekend – we all wake up and brush our teeth and eat breakfast and play with our kids and say goodnight to them and now it’s Sunday and we do it again.  By tomorrow it’s not so much panic as positioning (hopefully) although it could well go either way…  As to Geithner – Everyone saw this coming, the S&P specifically Congress who were briefed by the S&P that, in no uncertain terms, anything less than a $4Bn reduction would end in a Downgrade – there was no way a reasonable person would think this package would satisfy the S&P – their goal was simply to stop Fitch and Moody’s from following suit.  

    Spanking and Robbing/Barf – Well there’s the joke of the thing, right. When the bottom 80% have less than 20% of the Nation’s wealth and the Nation is more than 20% of it’s wealth in debt – you get to a point where you CAN’T rob them anymore so now it’s time for the rich folks to pay up or get out.  Voting against it doesn’t stop it from happening – it only drove the problem to such an extreme that we lost control of our own destiny.  

    This is like if you have a business with 100 employees and you cut your salaries to the bone and you cut your cash flow to the bone and your minimal outflows are $1M a month and your inflows are $800K (20% deficit) a month and your salary is $200K and month and you have 2 top execs making $100K a month and 7 managers making $25K a month and 190 workers making $2,200 a month and $100K in overhead ($1M total).  And, by the way, this is "well distributed" for an average corporation (or country) where, the average CEO makes $11.4M, which is as much as 300 average workers!  

    Well, you can’t cut overhead because it’s leased and you need the space, etc. and your equipment and infrastructure is already falling apart from neglect.  And you can’t pay the workers less as you are bumping up against minimum wage and you’ve already cut all their benefits so what more can you do?  Well the solution to management is obvious – cut some workers!  While that might work for a company, as a country we are "stuck" with the people we fire so now America has to take a real look at the salaries of you, you’re two executives and the 7 managers, which account for almost 50% of the companies expenses and, so far, haven’t been touched by cutbacks.  

    In fact, in 10 years of salary cutbacks and layoffs (after you opened that disastrous ski store in Iraq, which you refuse to close), the company is producing less than it used to but, for some insane reason, the top 10 employees RAISED their salaries from $300,000 to $475,000 a month as a "reward" for the savings they made cutting back 10% of the workforce and cutting salaries and benefits of the remaining 190 employees to the bone (in real money terms, they now make less money than they did in 1970).  

    As you say, Barf, you are faced with one remaining choice – Duh!  No, poor people will not feel better because it doesn’t help them one bit when it’s finally our turn to pay.  I am very positive that our Government will make absolutely sure that they don’t derive one bit of benefit from the bare minimum it takes for us to keep the "business" running.  But trust me, within the top 10 employees, if there’s a way the top 3 can screw the next 7 over – we will!  And within the top 3 – well, needless to say the top 1 is the last guy that’s going to put his hand into his pockets, even though he’s pulling a a salary that is the entirety of the deficit.  

    You had no say in things in the last 20 years?  Did you vote for Reagan or Bush or Bush?  Did you vote for local people who said you didn’t have to pay taxes or build a working base or make your country competitive in some field besides banking?  Did you cheer for a war without paying for the war?  Did you object to the fact that SS and Medicare were insolvent long-term and demand your representatives fix the problem by raising contributions or did you expect that cutting benefits below the poverty line would solve the problem?   Did you care that companies like GE Do 1% of the nation’s total GDP in business, pay out 10s of Billions in executive salaries but not a penny of taxes or did you tell your accountant to find you some of them loopholes?  Did you worry that all our manufacturing jobs were moving overseas or did you enjoy the "savings" while the middle class crumbled around you.  

    Sure the top 1% have amassed a great fortune by stripping the wealth away from the bottom 99% but they wrecked the country to do it.  Now the fools and their money will be easily parted but that’s what happens to "leaders" (business or government) who don’t actually lead but instead take whatever they can like a cancer until the day they finally kill the host.  Well the host IS dying and to top 1% are still killing it and they are about to attack the next 10% (as I have long warned) rather than make sacrifices to save the body.  Your remaining choice is to be smarter than a virus or to go down with the ship by continuing to take without building the body back up.

  82.  Phil: and others
    Thanks for all the thoughts this weekend. It’s been great to get various thoughts on what may be a very important (or not) event. Can’t imagine a better "go to" site in a time like this.

  83. Some interesting numbers on global debt from The Economist:
    They have compiled numbers from the government and private debt… Things are not looking good anywhere!
    The table at the bottom of the article summarizes well the problems faced by Spain, Italy, Portugal and Ireland. Their rate of GDP growth minus cost of finance is negative and in some cases, in double digit. They are in a hole and digging faster… Japan is also in negative territory which might explain the panic moves they are making in the currency market! 

  84. Phil 
    Now is probably a good time for that promised (threatened) insight on the rating agencies.
    I’ve utilized the services of the corporate finance group (fundamental not structured ratings ) at the rating agencies for about 10-15 years now.  Prior to about 2002, the agencies had a reputation as a source for unbiased opinions, deep industry knowledge and thorough research.  They had unfettered access to management which was also useful.  The agencies didn’t offer top pay, but paid well and had good benefits, stability and quality of life.  The package attracted good analysts who wanted to get out of the cutthroat environment, do unbiased research and have some time to spend with family.  However, things started to change around the time Moodys went public.  Einhorn hit the nail on the head when he noted that business continued to increase significantly for the agencies, but compensation costs did not.  Management coasted on their reputation and duopoly position and drove margins by not committing any resources to the business.  Analyst workloads were increased while compensation remained the same and resources did not grow proportionally with the increase in business (support personnel, research tools etc).  As a result, people left and went to the buy side (there was always defections to the buy side, but turnover increased dramatically).  As an aside, it’s interesting that people disparage the agencies when half of the fixed income analysts on the buy side came from the agencies.  Management didn’t want to pay the going rate for analysts so began to recruit accountants and people from industry who had no background in the market or credit analysis.  No one had time for training so these people were woefully unprepared for the task.  An attempt was made to systematize analysis and establish a process as the market demanded more transparency in the ratings process and management thought this would allow them to hire less qualified people (cheaper) and absolve them of any liability.
    In the structured finance department, the staff was primarily junior people (cheaper) with little if any background in the business and a few senior people who clearly didn’t have the time to look over everything.   The primary input for structured finance was a quantitative model to which the investment banks had full access-that was part of the transparency demanded by the market.  Given the much better paying opportunities in structured in the heyday, the department was a revolving door (most came there specifically for that reason and could not care less about anything else).  However, as I’ve pointed out, I don’t have any experience with the structured group so what I know is mostly second hand.
    Things have improved since the downturn, but only because the significant downsizing on Wall St has allowed the agencies to recruit some seasoned analysts.  The analyst ranks are bifurcated with a mix of more seasoned analysts who have training and experience prior to 2002 and less capable analysts who have no analytical experience outside of the agencies prior to that date (or at all).  In addition, resources remain tight as management expends dollars and time on ineffective projects to restore the firm’s reputation and compliance issues.  It is possible for the agencies to do a much better job (they clearly have in the past), but it will require different management and a better compensation structure or a different focus.  The fees the agencies receive are a fraction of the banking fees AND the banks ALSO receive enormous commissions from trades.  Expecting the agencies to maintain the same type and level of research as an investment bank with only a fraction of the revenue and compensation costs is unrealistic (agency fees are also a fraction of the trading commissions). 

  85. A BAC chart with links to articles pointing to more pain to come!
    Not a pretty situation at BAC! 

  86. Phil,
    I am looking for advice on portfolio mgmt. after mismangement.I admit advice and common sense were not followed before this. I thought on Monday with the debt bill passage, we would have a small rally and uncovered part of 15- 20 Aug VIX BCS and 44-49 SCO BCS.It was hard to get executions for the entire speads and i thought i would be able to but back the higher strikes on the same day. I now have some positions that make my stomach churn. I should have used your TV forecast possibility as a warning. I am at a loss on all these and would appreciate suggestions to reduce risk, margin and conserve cash. I am especially concerned about the VIX position and hope that that does not run to 60 or 90, the last day it trades is 8/16. Should I buy a 27.5 or 30 call to limit losses? Looking back on Friday, I could have bought it back on Friday for $5, which would have let me sleep better this weekend.
    I have learned important lessons through this debacle and will move to a more income portfolio set up which will require less intervention, as I do not have as much time to monitor during workdays. Monday morning is typical, I have an interview, but will be able to trade the first hour. Please let me know if you need any other details. Positions that i considered on track seem suspect,with volatility so high- like RIG Jan 12 35 puts, AAPL Aug 350 puts.
    Short 4 VIX Aug 20 calls- ugh
    Short SCO Aug 49 calls
    Long SCO Oct 60 calls
    Short 6 CSTR Aug 55 puts- Thought Netflix changes would benefit- President resigned & earnings disappointed. Did
    not stop loss- Never again. Roll & extend ?
    I like the doomsday puts- Jan 12 2.50 puts for .25 on  BA or a Jan 5- 2.50 put spread- regarding Stjean’s post above.
    I would be interested in coming to Vegas if I get out of August with out spilling too much blood…

  87. And finally for this morning – Oil
    Check out the OBV chart! Pretty telling!

  88. Morning folks
    Question for E-trade users.
    I downloaded my 2011 trades into excel by going to "Statements/Tax Documents and selecting e
    Export to Excel.
    The data downloaded onto the spread sheet but not in neat separate columns.
    Does anyone know how to get the downloaded data into a readable column format?
    Etrade told me how to do this last year and of course I’ve forgotten where I put the instruct.
    I do remember it was several fairly easy steps

    PS – what a mess – I also positioned for a bounce with TZA short calls against stock that was put to me —- but sold the stock Friday and left the short calls naked.   Am now expecting to get my ass kicked.
    How stupid to gamble on direction with such uncertainty in the market ( was following Dr. J’s expectation of a short squeeze into the Friday close but looking at TZA after hours trades, someone new this down grade was coming

  89. I’m sure many have already read this from SA site yesterday by hedge fund manager Nigam Arora.
    Sure hope he’s right!

    Our Analysis
    There will be no shortage of opinions in the media on the downgrade. The problem is that the vast majority of the opinions do not make money for the investors. I am refraining from writing my opinion; instead I am focusing on helping investors make money.
    This downgrade is a major change. The best way I know to profit from change is to apply the ZYX Change Method.
    Markets move based on the difference between expectations and what actually occurs. The first task is to determine how the street is positioned. ‘The street’ is simply a term that means positions of a majority of the big players. Obviously the big players do not disclose their positions; as a matter of fact, they guard them closely. However, the analysis is easy because of the data available from the computers at The Arora Report. The algorithms we use monitor and dissect every tick to generate valuable insights. 

    Following are our conclusions:
    o Regarding stocks, about 70% of the street is already positioned for a downgrade.
    o Regarding stocks, about 40% of the street is positioned for a downgrade to AA.
    o Actual downgrade is not to AA, but to AA+.
    o The net effect of the downgrade being less than what was expected by some and surprise to about 30% of market participants is likely to be a wash.

    At the first glance, it would seem that the U.S. treasury bonds, now with a lower rating, should fall. But in reality, the opposite is a possibility. The reason is that a downgrade will provide more momentum to fiscal austerity in Washington. Fiscal austerity in the short-term means a slower economy. Slower economy means higher bonds.
    There has been a big concern about a large amount of treasuries held by big U.S. banks. The Federal Reserve Bank has just come out with a statement that it will tell member banks there is no change in the risk weighting of the U.S. treasuries. In essence, this statement means that the Federal Reserve is spanking S&P.
    It is hard to imagine France with a rating higher than the U.S.
    It is hard to imagine the European Central Bank with a rating higher than the Federal Reserve.
    This downgrade is likely to start of a race to the bottom, i.e., we may see a number of downgrades on an international basis.
    Since Moody’s and Fitch have reaffirmed AAA rating of the U.S., in material terms, this downgrade will have no effect on institutions required to hold AAA paper. By law, institutions are allowed to use the highest available rating.

    What to do now?
    o If stocks get hit, we will be buyers of ETFs SPY and QQQ.
    o If gold and silver spike up, we will short sell ETFs GLD and SLV or buyZSL
    o We will take the opposite side of the first move in U.S. treasuries. We will use the ETFs TBTTBF, and TLT

  90.  ban2,
    try highlight column with data, and then click on ‘text to column’ under "DATA" tab.
    I’m not sure whether you can download all your 2010 trades into .txf format.
    File .txf can be processed by TaxCut, or another Tax software, and that automatically creates schedule "D" 
    Also you can find on the web free software that converts spreadsheet into .txf file, it will save you a lot of typing 

  91.  thanx much ed3524
    after highlighting data I 
    clicked text to column
    checked – delimited
    checked – comma
    checked – general
    hit – finish and it looks like that worked :)

  92. On the bright side, i did hold onto both sides of a Sept. 37-42 BCS, That is "on target".

  93. Phil,

    I’m going to say this now, while we’re on the topic.  The BIGGEST mistake, by far, that was made in 2008 was trying to guess the bottom at 12,000 and 11,000 and 10,000 and 9,000 and 8,000.  7,000 was a GREAT bottom call for those who survived (and rode out the drop to 6,666) but not many people who made big commitments at the OTHER 5 bottoms were able to do much better than win their money back.  

    What gave us a REAL bottom?  QE1.  Do you miss a quick win by waiting until AFTER the announcement.  Sure, you miss a move from 7,500 to 7,500 but then you can get in and catch the move from 7,500 to 10,000 and then we’re 50% of the bottom and, if you are not too much of a greedy bastard, you lighten up to see what happens next.  Well, last summer, nothing happened next until QE2, did it?  THEN we had a big day or two but EVEN if you waited to see if 11,000 would break – you still got to play all the way back to 13,000 and that was the top of the range we charted out in November where I said 100% gains on the indexes were a good time to go short for a 20% pullback according to the 5% rule.  

    That’s Dow 10,400 as a floor in a HEALTHY pullback – bad data can change that floor!  We’re at 11,400 right now, just halfway to a proper correction so let’s not all go trying to call a bottom and let’s not all go expecting to drop 20% – the WISE thing to do is watch and wait because, we are now dead center of a much wider Must Hold zone at 11,500 with 13,000 on top and 10,000 at the bottom.  We need a CLEAR indication of which way we go from here and whether you miss the first 2.5% move up or down will not matter much in the grand scheme of things.  
    Considering the above, WHAT NEEDS TO HAPPEN, OR WHAT POLICY CHANGE, STIMULATTION will cause us to believe things are going to move up?
    Or , does no one know? THAT would be scary!

  94. The world may not be ending after all; At least someone is buying:
    Buffett Unit Offers $3.25B for Transatlantic
    15% over Fridays close.

  95. Phil,
    Sorry, I needed to highlight copy of your post and it failed to happen.. That’s all you need, read your OWN post again!

  96. Phil--do you think the market tanks tomorrow morning?

  97. Savi/Vegas,
    Next time, instead of being presumptuous, I will try to obtain a few more facts. I know it is a pain to try to put something like this together and if I made it an even bigger pain I apologize.

  98. Savi – what’s your email? I want to send you the deposit.

  99. Seekin Canonization:
    In answer to your questions above about voting:  The answer to all of those questions is NO, I didn’t
    Anyone who volunteers for the Armed Services is either a complete dupe, suicidal,  or has no other choices.  So I don’t cheer for wars, view them as Eisenhower finally did:  a very few highly connected arms and military suppliers, as well as retired or other Defense department employees ushering in new ‘do-nothing’ careers with SAS, Loral, Northrop, and a hundred others to get even richer, the casualties be damned.
    In earlier days when I saw Social Security surpluses being gang-raped by cowardly politicians to pay for Social welfare programs that they wouldn’t pass higher taxes to fund, I screamed my head off in letters to the editor, the government, and anyone else who stood still for a minute.  So yes, I have been an advocate of tearing up those IOUs and, putting the money back, and burning effigies of Lyndon Johnson with some regularity on his birthday, the sonofabyatch.
    All in all I’m the perfect citizen you describe above. Can’t figure out why you don’t like my politics as they seem to conflate with your ideals.

  100. BAC / Randers1 – I would be careful going too doomsday on BAC. They might be in trouble (and I am guessing, go lower), but if they could recognize the facts as a whole instead of trying to distill the bad news a bit at at time, it could go a long way to make things better! And don’t forget, they are too big to fail! 

  101. Markets in the middle East are not doing well today:
    Dubai – Down 3.69%
    Abu Dhabi – Down 2.53 %
    Israel – They had to delay the opened and closed down at almost 7%
    Every body is taking the S&P downgrade in stride… Only 3.5 hours until the futures open again and markets in Asia are about 4 or 5 hours away. Buckle up!

  102. I think what happens in Europe (e.g., a statement by the ECB about buying Italian bonds before markets open) and with the dollar will have a much greater effect on our markets tomorrow than the US downgrade.  A report about Middle Eastern markets – take it for what it’s worth.

  103. Flip- thx for that comment… Actually, i did ROTC bc i liked the people in it and i wanted to serve. I had other options as i commissioned In 2005 when the market was still doing great. I was making 55k a year upon commissioning while my ‘crew’ from high school were all making 100-300k. Most people i know joined bc they want to serve and like the sense of camraderie. Sure there are many who wanted help with college tuition or a few who ‘had no other choice’. However, in my 6 years experience they are the exception, not the rule. On the bright side, at least your comments are only attacking and directly insulting 3M of the population (probably a lot more if you counted our families), instead of your previous comments insulting 1/2 the population (women). Stay classy Flip.

  104.  israel had that massive economy protest…saudi closed up a bit..i think it all depends on germany

  105. i meant to say israel was closed on friday so selling there probably amplified by that

    The committee of bond dealers and investors that advises the U.S. Treasury said the dollar’s status as the world’s reserve currency “appears to be slipping” in quarterly feedback presented to the government on Aug. 3.
    The U.S. currency’s portion of global currency reserves dropped to 60.7 percent in the period ended March 31, from a peak of 72.7 percent in 2001, data from the International Monetary Fund in Washington show.
    “The idea of a reserve currency is that it is built on strength, not typically that it is ‘best among poor choices’,” page 35 of the presentation made by one member of the Treasury Borrowing Advisory Committee, which includes representatives from firms ranging from Goldman Sachs Group Inc. to Pacific Investment Management Co. “The fact that there are not currently viable alternatives to the U.S. dollar is a hollow victory and perhaps portends a deteriorating fate.”
    Members of the TBAC, as the committee is known, which met Aug. 2 in Washington, also discussed the implications of a downgrade of the U.S. sovereign credit rating. “None of the members thought that a downgrade was imminent,” according to minutes of the meeting released by the Treasury.

  107.  g-7 preparing statement of support for dollar…Nooooooo! the hedgies wont like that.

  108.  angel
    re g7
    so you think it  good or bad for equities?
    Strong $ = down market and if hedgies  already positioned for the fall they should like it – no?

  109. I don’t think that this type of language will help the political discourse:
    Not sure that it even possible to get along at this stage!

  110. How did we get there. A debt timeline:
    Well, at least from one side! 

  111. i am in phils camp every country in the g7 wants the dollar up against its currency …i think it will be bad for equities if we rally the buck..its a v tough call becuase a strong dollar could in this extreme situation instill a level of confidence in traders who are equivolcal about making bets..tomorrow is a crap shoot…plenty of time to get postioned i am short some nazz long a little euro..i got spooked out of my bond longs and heavier index shorts friday..i still don’y know if thats good or bad!

  112.  Fasten your seat belts for tomorrow’s ride.  Hopefully you are well hedged or in cash.   If not……..grab your ankles!    Here’s my trading strategy for tomorrow, for anyone interested.   I’m coming in with  August QQQ puts at the open if we are up any at all, but later in the morning if necessary.    What I’ll be looking for is some kind of confirmation that we are headed down.  I’ll be scaling in, starting with 10% of planned amount of $ to use for the day.  If QQQ moves down, another 10% goes in.  If further confirmation, another 20%, then if strong confirmation, the last 60%.   Trailing stops will be placed when the second 10% goes in.  I call this "Riding the Wave".  It’s similar to what I do a lot with AAPL.  But tomorrow, the general market will have more downward pressure than AAPL.   This strategy, I believe,  will lose me no more than 5% of the planned $ to risk, and could easily  gain 50% or more.  Good luck out there!  

  113. I wouldn’t be surprised if we spike down then start heading up.  But right now, anyone is guessing.  Will see futures in a few hours.

  114. Europe / Jcaesar – I agree, this downgrade of the US might have a temporary effect, but the situation in Europe is now critical. I did post a link to the debt situation in the world earlier noting that the PIIGS now find themselves in a debt death spiral from which there is no way out beside default or getting out of the euro zone! Troy posted a link earlier relating some discontent in Germany and even if it is now out there yet, we all have to understand that the Germans unlike others in Europe have not felt the wealth effect related to real estate and wages have been stagnant for close to 10 years as well. In addition, they raised the VAT tax recently to help lower the deficit (apparently a novel idea – raising taxes brings new revenues). Here is a link about real estate price comparison:
    Prices in Germany have gone down while in France for example, they have gone up 50%. (On an aside, check out the real estate bubbles in Hong Kong and S. Africa!) Almost sounds like self imposed austerity measures! To add to that, we have to recall the great efforts that Germany went through to integrate East Germany. And now they are asked to bail out Italy, Greece and Spain! That might be a bridge too far for many there as they seem themselves as having tighten their belts for close to 20 years now!
    On the other hand, default (even partial) by a country like Italy could go a long way to damage greatly the European banking system. And BTW, many US institutions have been writing CDSs against these European bonds so that could be painful as well. And that would also mean fewer exports for Germany who relies greatly on export for its own growth. We have to imagine all 3 countries out of the euro system in 5 years and see how many BMW, Mercedes and all are sold there when the pesetas, liras and drachmas are devaluated by a factor of 10! Either way, it cannot end well!

  115. Can somebody decode the German/French joint statement?  It seems like a nothingness to me.

  116. @Iflan..
    re:  the open tomorrow……No matter what the Dollar does?  It appears now at least the Dollar is a lot weaker vs the Euro and others.  Which should mean other assets go higher?

  117. stjean – Interesting about prices in Europe.  The whole situation in Europe is indeed an impending crisis.  The timeline is anyone’s guess.  Could be sooner than later.
    Another thing I was thinking about was why the RUT has diverged from the other indices in recent days, especially Friday (I saw Phil’s comment about this).  It’s been hit the hardest of all indices.  My guess now is that "THEY", being well aware of the impending debt downgrade, were moving into "higher quality" and "more stable" large cap stocks and out of the small caps.   If I’m right, the question now is whether that trend will continue, stabilize, or reverse?  We will know soon enough!

  118.  Phil, question about YRCW, what do you think of these articles? Is it worth taking a risk and selling puts on the stock since you’ve liked YRCW in the past and recommended selling puts a few weeks ago?

  119. lflan- on the QQQ’s- will you go with ATM puts i.e., delta around .50?

  120. RUT / Jcaesar – The RUT has always been more volatile than the other indices… Sometimes the Russell will lead you out a bear market, in this case, it’s leading us down!

  121. Iflan- also- what metric will you , if any, look at for confirmation other than price?

  122.  lflan – why QQQ (in particular) and not IWM?

  123.  flip….I’ll look at that, but only for further confirmation.
    pstas….behavior of foreign markets primarily.   But truthfully, I think the die is cast already.    ATM puts.  These have highest volume.  
    drcraig….IWM works too.

  124. The latest on Europe:
    Apparently, the dollar is trading down early in Asia which would be good for the markets! 5 minutes to the future’s open…. 

  125. Oops, dollar does open lower but S&P futures down 30 points from the close! 

  126. Oil down to $85 and gold opens $25 higher…. 

  127. Well that was an explosive start to the futures!

  128. On the S&P futures, we are at the lows of Friday which were followed by a 30 point rally. At the same time, when we made the lows on Friday, the dollar was at 75.20. It is now at 74.45! A bit counter-intuitive… Oil is also moving lower, not being supported at all by a weak dollar! The markets don’t seem to be reacting so much to the S&P downgrade as much as to the fact that the global economy is not well right now! As I write this, the dollar is going back up which will not be good news all around…

  129. stjean / dollar – Yenterventionists to blame, no doubt!  Or do only do their thing at 3:00AM?

  130. We’ll be down 350 on the futures soon.

  131. Jcaesar – Nope, no yentervention mentioned anywhere so far… Or else, they are doing it all wrong because that’s not helping much. I am guessing everybody is on hold now to see what’s going to happen! 

  132. The "commodities" currencies like the Australian $ and Canadian $ are trading down while the euro, pound and yen opened higher. This seems to be confirming that the main worry is a slow world economy not just the US downgrade. Needless to say, a US downgrade is no vote of confidence in the US economy!

  133. For those so inclined to play oil tonight:
    R3 – 94.26
    R2 – 91.10
    R1 – 89.18
    PP – 86.02
    S1 – 84.10 (we are here)
    S2 – 80.94
    S3 – 79.02 

  134. Good evening!

    Got home a bit later than planned from family event.  

    We have a gap down in the futures but nothing too bad – back to about Friday’s lows so off at about the 2.5% line.  

    Some early stock index futures prints: S&P 500 -2.5%, Nikkei -2.2%, German DAX -2.6%, FTSE 100 -2.7%, French CAC 40-3.2%. Currencies: Dollar -1% vs. the swissie, -0.4% vs. the yen, -0.3% vs. the euro , +0.5% vs. the aussie, +0.4% vs. the loonie.

    Dollar spiked down to 74.21 but it’s climbing back to 75.44.  Gold not much of a mover at 1,666 (sign of Lloyd!) and oil falling to $84.15.  Similarly, the Euro jumped to $1.44 and was rejected, the Pound at $1.647 and rejected and the Yen crashed to the 78 line (stronger) and held it.  

    The Nikkei is down at 9,110 – all the magic 2.5% line and that’s GOOD – because it means the bots have the ball and this is just a program trade adjustment, not random panic.  

    We just need to watch those bottoms from Friday and the 2.5% lines but, if they hold – we’re over the hump on the downgrade crisis already.  

    We can certainly play fro a sell-off by shorting oil (/CL) below the $84 lines (now $84.11) as it was $82.87 at Friday’s low with no reason to be higher if the markets are weak but ONLY if they fail that line with tight stops.  I’m more inclined to go long on the RUT (/TF) if they get back over 700 (now 697.10, up from 690.07 Friday) or the S&P (/ES) over 1,170.  I’m rooting for bullish!  

    No G7 or Yentervention yet – Yentervention would, of course, be a disaster as it would raise the Dollar and knock down our futures but the BOJ and the ECB may want to raise the Dollar to knock down their own currrencies in this crisis so watch that 75.50 line in the Dollar – we don’t want to be too strong over it!  

    Rumor!  Forget the S&P downgrade, markets tonight may be chewing over a Der Spiegel story saying doubts are growing in the German government that Italy can be rescued, even if the bailout fund was tripled. Additionally, there are worries a move to guarantee all of Italy’s €1.8T of sovereign debt might have markets beginning to question Germany’s solvency.

    Fact!  France’s Sarkozy and Germany’s Merkel issue a joint statement, confirming their commitment to implement the policies outlined at the July 21 summit. They appear to give the green light to the ECB, saying they are confident the bank’s analysis will allow for "secondary market interventions … when financial stability of the eurozone as a whole is at risk."

    Sources say the ECB is considering purchases of Italian and Spanish sovereign paper on a massive scale. Such a move would be a significant change in policy, turning the ECB into a Fed-like lender of last resort, and taking lead responsibility for fighting the crisis away from the EU governments. 

    Looks like we can all go home now. An ECB official tells a reporter for Italy’s Linkiesta, "Don’t worry, ECB will buy Italian bonds to calm this eurozone turmoil."

    Not enough that S&P introduced a $2T error into its original analysis, it then went ahead and downgraded the U.S. anyway by "changing their principal rationale… from an economic one to a political one," Treasury says in a blog post. Meanwhile investors’ collective judgment proves, "that the U.S. has the means and political will to make good on its obligations."

    Despite the S&P downgrade and China’s sharp criticism of the U.S.’s "debt addiction," Japan and South Korea say their trust in Treasuries remains unshaken. "There’s no alternative that provides such stability and liquidity," says South Korean Deputy Finance Minister Choi Jong-ku.

    G7 finance ministers and central bank governors are set to hold a conference call, possibly before Asian markets open for Monday’s trading, to discuss the financial crisis. The talks will follow discussions between deputy finance ministers earlier today. 

    Tune into Member Chat and we’ll discuss this as the markets develop.  

  135. Any time I’ve lost big was going short. I owned BAC at $5 and apple at $90 and everyone then thought the world was coming to an end. Heck, etrade sold my BAC shares at $5 without my consent because I had them on margin and they thought THEY were a huge risk. Ugh! Let’s hope this panic profits those of us who listen to Phil and JRW. Anyone who has read Thomas friedman knows the US is a great nation because we encourage the entrepreneurial spirit. I look at all this as an opportunity, even though I think politicians are knuckleheads. Anyone with enough smarts never runs for office anyway…

  136. They are pushing the Yen higher (weaker) to 78.32 already.  That sucks as the Dollar is 74.66 now and the last thing we need is a Dollar rally but the G7 seem terrified of a Dollar crash.  Interesting, what’s more important – stocks or bonds?  

    So far, my bullish plan is on track with the S&P over already  but just stopped out on a rejection.  The RUT failed at the 700 line.  Nas (/NQ) over 2,150 would confirm a trend up but, so far – no sale!  Keep in mind sudden G7 action could change things but a lack of panic (failing Friday’s lows) could lead them to make a very vague statement while they too wait to see ho things play out.  

    11,150 is the line to watch on the Dow (/YM) if they can’t hold that, we should be very cautious with bullish plays as the Dow should somewhat benefit from a flight to quality.  

    There is no panic into gold – that’s SUPER INTERESTING.  Silver is $38.76, so also not very exciting and copper touched $4.025 and bounced right back to $4.065 so no global demand destruction so far.  

    At least they are pushing the Yen slowly (still 78.32) or perhaps there is huge downward pressure on the Dollar (and into the Yen) so the BOJ can’t stop the Dollar’s decline – it’s a rotten way to get a bullish move in equities but we’ll take it for the evening as I think I’d rather (from a Global perspective) salvage the equity markets this week and let interest rates sort themselves out.  

  137. Fail on oil – Bearish it is at the moment:  $83.88 already!  You can’t have a preference here, we have to go with the flow! 


  138. I was at a family gathering this afternoon and, fortunately, most of them are at least half in cash because they listen to me!  I told those that still have bullish stock positions to make use of the futures if possible to cover the downside (S&P and RUT below the same lines works fine as well as oil) and to use TZA and EDZ tomorrow if things look worse.  Remember, you just want to mitigate 1/2 of the anticipated loss so my brother who has $700K left invested can put $100,000 on TZA and a 10% drop in the RUT will cost him about $70,000 and $100K invested in TZA will profit him $30,000 – maybe more if they are strung consecutively.  

    You don’t NEED to be 100% even on the way down because, eventually, we find a bottom and we do bounce.  So the stocks (let’s say $630,000 left) go back up 5% to $661,000 while TZA stops us out after the 2% weak bounce we expected with a 6% loss after hitting $130,000 so let’s say $122,000 and now we add $22K to the $661,000 worth of positions and we have $682,000 and that’s just fine because you don’t want to bet against yourself, do you?  Certainly not with an ultra.  

    If we snap up quickly, the $700,000 goes up 5% to $735,000 and the $100K short drops 15% to $85,000 – no big deal either.  Keep in mind, if you are not bullish – why would you have $700,000 on the line in the first place?  My brother’s logic is good because he’s mostly in cash and he doesn’t want to miss a big move up – just in case as we’ve seen 2 major Fed interventions before.  Also, he’s in stocks he REALLY wouldn’t mind doubling down on if they get cheaper (I wonder where he learned that?).

    Back in 2009, my nephew was just starting college and his 505 account was in the crapper, down about 50%.  My brother very wisely LEFT IT ALONE and instead took an adjustable loan at 2.5% to pay for college and waited PATIENTLY for the market to bounce.  2 year’s later, it’s more than back now and there’s plenty to pay for Grad school.  

    Keep that in mind – these things pass.  An asteroid did not hit the Earth, Billions of people did not get the plague so they will all wake up tomorrow, AND GO TO WORK and 95% of the 7Bn people on this planet could care less about what your squiggly lines on the charts say – they are going to go about their business and contribute to the global GDP no matter what the people on CNBC say!  

  139.  S&P back over the line – oil stopped out and back over $84 again ($84.15) so the bull side is paying better than the bear side so far, but we’re just scalping nickels and dimes so far…  

  140. Phil, thanks for your excellent coverage of so many things. Feel a lot better with access to your comments.

  141.  what happens to tbt tomorrow?

  142. Great updates Phil, and looking at the lines and the futures coming back, you have me feeling a little bullish.  Will wait till the market opens tomorrow before doing anything though.  Timmy Geithner is slamming S&P and trying to belittle the downgrade.  Don’t know if that has anything to do with the futures, but the move up was coninciding with him speaking.

  143.  US fed to sell gold and yse proceeds to jam 3x naz bull etf higher at approximately 10:30 am est…

  144. Phil/SLV - Bought SLV @ $37 on Friday for a QE3 Tuesday comment hedge…would you move 1/2 @ $39 in pre-markets?  I’m considering using the profits to buy some VXX puts if we fall hard Monday morning…playing for a FOMC bounce Tuesday.  ALso trying to figure out if I should move my TBT which is up 5%…I moved half of it already, think we might get a bounce Monday AM, and then reversal on treasury yields later in the day or early TUesday.  Your thoughts on SLV, VXX, and TBT?

  145. Timmeh Geithner couldn’t figure out how to run TurboTax to pay his self employment taxes, but he is blasting the S&P 500 on a "stunning lack of knowledge about basic U.S. fiscal budget math"…Too Funny Timmeh!

  146. Thanks Jack, Rustle!  

    Gold/Angel – Whuck?  I like that plan, gold tapping $1,691 on a spike up just before and I’d sell all my gold for $1,700 – especially since the US prices it’s holding at something silly like $100 per ounce.  Good time to take those profits off the table!

    SLV/Troy – I’d take the money and run on silver (now $39.15).  Silver was $49.82 when gold was "just" $1,550.  That bubble popped and gold may do the same after their own super-spike so be very careful with either.  

    TBT/Jabob – I hope up!  Silly if it doesn’t but G7 support could change it.  

    Speaking of G7 support  - Good for our bullish futures positions as it’s both supportive AND vague:  

    PARIS | Sun Aug 7, 2011 7:51pm EDT

    (Reuters) – The Group of Seven nations is committed to taking coordinated action to ensure liquidity and to support financial market functioning, financial stability and economic growth, G7 finance ministers and central bank governors said in a statement.

    "These actions, together with continuing fiscal discipline efforts will enable long-term fiscal sustainability," the statement released early on Monday said.

    "No change in fundamentals warrants the recent financial tensions faced by Spain and Italy. We welcome the additional policy measures announced by Italy and Spain to strengthen fiscal discipline and underpin the recovery in economic activity and job creation," it added.

  147. "………….Keep that in mind – these things pass.  An asteroid did not hit the Earth, Billions of people did not get the plague so they will all wake up tomorrow, AND GO TO WORK ……………."
    And just yesterday I saved 15% on my car insurance….

  148. Oil (/CL) back at $84.42 and, just to be clear, on a futures play off a line like this we set a .05 trailing stop on entry UNTIL we get to .15, then .10 and once we cross our first .25 line, we use that for a stop with a .15 trail so right now, the stop is $84.25 and when we cross $84.60, we re-set the stop at $84.50 but, otherwise, 85.49 carries a trailing stop at $84.45.  As always, when in doubt (ie. if you REALLY think it’s going higher), sell half anyway as taking 1/2 off the table at $84.50 and setting a stop on the rest at $84.25 (.25 trail) locks in an average .375 gain and, of course, since you are stopping out below $84.25 – that then becomes your bullish re-entry if we don’t pull back to $84 and now you have .125 cushion before you even give up being .25 ahead.  See how simple that is!  

  149.  LOL Flips!  

  150. @ 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!

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

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

  153. nkd down 1%

  154. 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.

  155. Good evening
    Phil—thank you

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

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

    with IB – they dont seem to trigger afterbhours.

  158. hard stops.

  159. 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.

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

  161. Bottom/Asaenz – Yes, a proper bottom is when the fundies change, like QE3 or major G7 intervention (not the vague stuff so far).  If we consider this a non-event, like Rustle notes – then this is already BS but I don’t see it that way because what we’re doing (finally) is recognizing the actual weakness in the economy that’s been there all along. 

    Keep in mind we’re not "downgraded" yet, we’re 2/3 downgraded and 3/3 warned – that’s ALMOST there but not quite.  Right now we have a lot of cross-currents pushing and pulling on the Dollar (74.425) and, with the Yen at 78 and the BOJ back on guard (I assume THIS time people will take them seriously) we may have a floor on the Dollar at 74.20 and that’s not going to give us much of a rally.  Euro $1.436 (need them over $1.44) and Pound $1.64 (need $1.65) must rally to push the Dollar lower and the Yen has got to fail 78.  

    Silver just shot back to $40 with gold at $1,694 but not much movement on copper ($4.08), oil ($84.33), gasoline ($2.75) or natural gas ($3.88) so now we’re getting a little panic movement that probably signals people are inching away from the Dollar as best they can.  That’s good for equities on for a pop but then we have to worry about which financials get downgraded on expectations of higher borrowing costs.  

    Stops/Samz – TOS lets you set stops but they do miss sometimes (big gap moves) so it is never a good idea to go to sleep with open futures positions unless you are very casual about losing thousands per contract.  

  162.  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.  

  163. 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? 

  164. 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…. 

  165. @ 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….

  166. 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)?

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

  168. 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. 

  169. 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…. 

  170. 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!  

  171.  phama,
    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… 

  172. dday97
    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 

  173.  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!

  174. 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.

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

  176. Good morning!

    Well that was a nice run but we seem to have topped out at 3:30 as the EU traders haven’t been able to keep things together.  

    I was off by .05 with my bottom call on the Dollar (74.15 was the spike low) and now it’s back to 74.46 and sending our indexes lower (down around 2% again) but it was a nice, bullish run while it lasted.  

    Hopefully it’s just early EU panic-selling by people who had no idea the US debt could be downgraded and, once we clear out the suckers, they can recover as the EU is down PLENTY this month and doesn’t need to prove anything by going lower.  Asia wasn’t terrible with the Hang Seng down 2.2%, the Shanghai off 3.8%, Nikkei down 2.2% and India down .8% so, comparatively, the EU is enthusiastic with the Dax down 1% and the CAC and FTSE both down half a point but Italy and Spain are UP 2% as they are getting FREE MONEY – and everyone loves FREE MONEY…

    SO – let’s call this a chance to re-load bullishly at Russell (/TF) 700 and Nasdaq (/NQ) 2,250 (the S&P has not come back enough at 1,181 to chase or the Dow at 11,246 but congrats to those who played earlier!).  

    We need that Dollar to be rejected at 74.50 to stay bullish so watch that line closely.  If the RUT AND the Nas fail their lines on the Dollar over 74.50 – we can flip bearish on the Dow and S&P on the assumption they’ll crash back to theirs.

    Gold touched $1,718, now $1,705 and silver topped out at $40.40.  Copper ($4.08), nat gas ($3.88), gasoline ($2.75) and oil $84.50 are all still weak.

  177. Hit our breakdown goals to go short (/ES) S&P at 1,175 and Dow is good right at the 11,200 line but with tight stops at the EU is trading crazy.  I’d still rather go long, looking for the Dollar to reject 75.50.  

    EU says they will take "all necessary measures" – silly to say if they can’t back it up….

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

  179. LOL!  Like I said, you can’t afford to be attached to a premise in this chop….  Down we go as the Dollar breaks over 75.50 (now 74.55) and the S&P (/ES) dropped like a rock (1,165) along with the EU markets, which are down almost 2% now.  That’s why we play both sides of the fence!

    Gotta watch that Dollar to see where the music stops.  Don’t blame the Yen on this one, they are down to 77.66 to the Dollar – it’s the Euro that had a big fail at $1.44 (Pound is holding $1.643) and just failed $1.43 and things will be VERY UGLY if we fall another point on the Euro but, with the ECB on a money-printing binge – it could happen.  

    What we need is announce that we are even crazier than the ECB and will print so much money that we can drop it out of helicopters to shower our people with cash – fortunately, we have a guy who’s just crazy enough to do it!

    So, let’s not take our sell-off too seriously, ONCE AGAIN, until and unless we break the lows, which were 690.04 on the RUT (/TF), 1,161 on the S&P (/ES), 2,123.25 on the Nas (/NQ) and 11,077 on the Dow (/YM).  Oil is back below $84 and still a good LONG here (/CL).   

    We’re still BULLISH and expecting a turn back up BEFORE we hit the bottoms so bullish again as we cross over.  EU is panic trading, I think we had our panic trading already (I hope).  

  180. 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… tanked worst?

  181. Damn, Euro dropping like a rock, Dollar up to 74.75 and we are getting dangerously close to the bottoms so best to go long AND STAY SHORT, just trying to pick a turn.  NAS (/NQ) is my top long pick if they hold 2,125 or the Dow (/YM) if they can cross back over 11,150 but VERY TRICKY to play here.  Just have to keep using tight stops in both directions and see who wins…

  182. 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.  

  183. @Felipe
    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???

  184. Phil,
      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?

  185. 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. 

  186. …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.