US rating cut: Should we buy now? (9 Aug 2011)

To answer that million dollar question, please let us examine the whole situation. First, what actually caused the market to slump? Second, the correction is short or long-term? In the end, it depends on how gut are you as an investor in this sentiment driven market.

What actually caused the market to slump?

Panic selling is my answer. Simple and straight to the point. Investors are so scared that they can't figure out what is going to happen after S&P downgraded US long-time AAA rating. This was the first time US was being downgraded. No previous record for investors to forecasts, so dump first la. Herd mentality is playing a very crucial role now (again).

Short or Long-term correction?

As mentioned, panic selling also means short-term correction. People are throwing their assets at a discounted price for the sake of getting their sleepless night away. After awhile, then only they realized that the actual situation is not as bad as they think. Then, investors will come back to the "playground".

The panicky Good news?

While bear market set the stage last week, US did reported a few surprising announcements as below:

1. unemployment rate fell slightly in July to 9.1% as compare to 9.2% in previous month


2. payroll salary is increasing again in July (boosting consumer spending going forward)


3. 2nd quarter corporate earnings are better than many analysts forecast


4. After all, only S&P cut US rating while Moody's and Fitch still maintain the AAA rating


5. Commodities price came down so much which would put less pressure on inflation

Despite the good news, seems like the market was conquered by negative vibes successfully distributed by S&P. Finance Malaysia believes the market will sooner or later realized that the world economy is actually still recovering, albeit slowly. Investors will come back again in medium term owing to a few catalysts to rejuvenate investors' sentiment. Who knows QE3 is in the making?

Some Positives; Time to Buy

The S&P downgrade is a salutary event. It spotlights the problems with US government finances. This is all to the good. In the midst of the downdraft today, President Obama gave a brief statement that exhibited a total lack of understanding of US debt problems. The stock market followed the Obama comments with an almost immediate drop of another 200 points. Overall the markets lost nearly seven percent by the time the smoke had cleared.



But most folks get it, even if the President doesn't.



No longer can politicians pretend that the debt issue can be swept under the rug or buried in a sea of class warfare.



It must be time to buy stocks again.

Disaster after US rating downgrade? (8 Aug 2011)

The news that S&P downgrading US credit rating shows that rating agencies are doing their job fairly. Previously, rating agencies were blamed by Greece and Europe countries for downgrading their ratings when Greece facing rising debt issue. Though, US did not spare this round when S&P downgrade US AAA rating to AA+ (one notch lower).

What would be the implications?

Normally, the downgraded currency will slump, sovereign bonds will become less attractive by carrying higher degree of risk, hence pushing up the yields. Does US follow these theory? NO.

Why US is different?

USD will not fall much like Euro. First, USD is one of the safest asset, along with gold, during economic uncertainties. That's why USD was chosen as the world's most widely traded currency. During uncertainties (like now), investors are scare and they pull-out from equities around the world. But, where did they put the cash? USD is the answer mainly because it is widely used globally and of high liquidity.

Bond Yield will not jump like Greece's. Second, when the demand for USD is still there, US treasury bonds' yield will remain (or even fall). Continuing from previous question, where would you place your money, if it must be denominated in USD? Treasury bond or Cash Deposit? Definitely treasury bonds which still can give you around 2.5% yield (10 years US treasury).

The remaining AAA rated currency by there of the largest rating agencies.

How is the currency market would be?

Finance Malaysia believes that USD will weaken against major currencies which were rated AAA, but will strengthen against other non-AAA countries (including Malaysia). You may refer to the table above to gauge which currency should perform better in the near term.

Do The Numbers

The present value of our social security and medicare liabilities can be conservatively estimated at $ 66 trillion. How do we deal with that?



Lets tax the rich! If we raise taxes, ala the Obama plan to eliminate the Bush tax cuts for the rich, we will gain $ 770 billion in revenues over the next ten years. That assumes, of course, that business folks don't alter their plans after getting socked with this tax increase. So, let's assume we tax the rich. That gets us $ .7 trillion. That leaves $ 65.3 trillion to go.



What next?



Well, perhaps bondholders will step up and buy $ 65.3 trillion more in our debt to fund our retirement and health care. You think the Chinese will do that?



Here are some more numbers. A twenty two year old college graduate might work 40 years and then retire at 62 and collect social security (that's right, three-quarters of Americans take the early retirement option at 62 (now 63), so 62 (now 63) is relevant age, not 65). So, they don't work from zero to age 25 and then they don't work from age 63 to 83. That's 45 years of no work and 40 (41) years of work. And, they plan to live at, more or less, the same lifestyle in all of these periods. Really? Since the typical American doesn't remotely save enough to do this, who will step up to the plate? That's where the $ 65.3 trillion shortfall comes in. Who will put this money up?



What eventually will happen is that the US will dishonor it's pledge to its senior citizens. It won't have any choice. It will not have the money or the borrowing capacity to come up with $ 65.3 trillion.



So, S&P is right.



Only politicians and hack journalists think this is do-able if only the tea party would go away or if only we could "tax the rich."

CNBC Hysterics

This morning's CNBC features Jim Cramer, of all people, calling for "bold" action by the ECB (European Central Bank). This is so absurb, it makes you wonder if Cramer is paying attention.



The world is drowning in sovereign debt and Cramer wants the ECB to step up and buy debt, effectively print money, and permit the current absurdity to continue unabated.



It's time for these countries to take their medicine. Yes, it will be painful, but not nearly as painful as it will become if nothing is done. Ditto for the US.



Forget about the immediate impact upon the stock market. That is totally irrelevant.



It is time to face the facts. The government spending in the western economies cannot be sustained. Period. Blame Standard and Poor. Blame the ECB. Blame the Tea Party. Blame whoever you want.



But, facts are facts. The western economies will ultimately default one way or another. The sooner they begin to do workouts and reduce their government spending, the sooner their economies can begin the process of real economic recovery.



Don't listen to the silly folks who are focused on where stocks may or may not trade today, this week, this month, or this year. That doesn't matter.

More Nonsense from Politicians

Geithner is complaining about Standard and Poor. The G-7 says that they will take "concerted" action, whatever that means. The ECB says they will buy Spanish and Italian bonds. These folks still don't get it.



Politicians believe that all they need to do is "calm the waters." If that worked, it would have already worked. The world is drowning in sovereign debt. The US national debt is spiraling out of control. "Calming the waters" might get you through a day or two, but that is about it. Sooner or later the cold hard facts of the numbers intrudes.



The size of government needs to be reduced in the western economies and the entitlement programs need to be phased out. The western countries cannot afford these things anymore and bondholders won't fund them. All the discussion by Geithner, the G-7, and the ECB is irrelevant and distracting.

Quadruple A

Warren Buffett is at it again. He has now declared that Standard and Poor was "wrong" to lower America's debt rating from AAA to AA+ and that it should be AAAA. This bizzare statement was offered to Bloomberg in an interview yesterday.

Buffett has famously urged Congress to raise tax rates, knowing full well that he will never pay them. Buffett, like other rich folks, can shift his assets around to avoid the tax man, so he could care less what the tax rates are.

Buffett wants everyone to see him as a modest, unassuming man who did well. That, of course, is nonsense. The son of a well-to-do Nebraska Senator (Republican, at that), Buffett has always had it pretty easy. He is definitely a smart guy, but he lives like a potentate, flying around is his private jet, hobnobbing with the wealthy and the far left as he issues absurd statements like his "AAAA" statement today.

No amount of obfuscation by Buffett hides the cold hard facts. The rating agencies are right on. US debt is in deep trouble. The US has $ 66 Trillion in unfunded liabilities in its entitlement programs. Buffett thinks that is okay and merits a "AAAA" rating. S&P doesn't agree. S&P is right.