• It finally happened. The US lost its AAA credit rating (from S&P at least) on Friday evening. It should have long since happened, but here we finally are.  What happened in the US Treasury bond market on Monday ?  Treasury prices rose.   Then on Monday, S&P extended the favor and lowered Fanny & Freddy’s rating. Rightfully so.
  • Last week was a brutal week for stocks and one of the best weeks on a relative and absolute basis for us. Thursday’s sell-off continued into Friday until the ECB announced it would begin buying Italy’s & Spain’s bonds. This caused stocks to rally from their depths. It also caused the US dollar to drop, and US Treasury bonds to be thrashed. But that was Friday.
    • if Europe ceases to be the ugliest game in town (and this remains to be seen), the US is going to assume that moniker.  Buy & hold has its perils.
  • Monday’s (this week) stock market sell-off was uniquely bad. All 500 stocks in the S&P500 index posted a loss.  I could not find a single occurrence in the past 12 years where that happened. I could be wrong, but I believe the last time that happened was “Black Monday” — October 19 1987.
  • $8T of paper wealth has evaporated from global stock markets in the past month.
  • The S&P500:
    • dropped 18% from its highs in April (the greedometer identified this as a likely secular high).
    • has dropped below its trailing 1 year average, and is back to December 2009 levels. A 20-month erosion in equity gains.
  • Other markets have seen these drops from the 2011 highs:
    • Brazil  -33%
    • Russia  -21%
    • India   -20%
    • China  -27% .
    • England: -21%
    • France: -28%
  • Bonds, on the other hand (mind you, not junk bonds) are having a great year. We’re up 4% so far in 2011 and the ride has been distinctly boring.
  • Tuesday.  What a day.
    • The Fed’s FOMC rate-setting board released a scheduled statement at 2:15. It indicated a considerably less rosy economic forecast than previously seen. The statement indicated the Fed would maintain the current 0 – 0.25% overnight interest rate until at least mid-2013. It also indicated it would continue to reinvest in Tbonds and maintain its bloated balance sheet.  No hint at QE3 or other new monetary steroids! With all the composure of an addict looking for their next hit, the stock market whip-sawed in reaction: the Dow dropped 310 points in 24 minutes followed by a 355 point rally in the next 36 minutes. A 665 point move on the Dow in an hour. On a marginally larger scale, from noon to 4pm the Dow dropped 421 points then gained 612. A 1033 point move in the Dow in 4 hours.  Does that seem normal to you ?    Proof positive of my position for the past 3 years: the only thing keeping the stock market afloat is an interventionist Fed. All the more sickening when Wall St asserts it “wants Washington to get out of the way”.  I do — but we have our best returns when Fed QE is not in the mix. How has Wall St performed over the past 4 years when QE was not sailing? (it crashes)
    • That late day rally ?   A classic short covering rally. It was followed by a total lack of conviction sell off at the open this morning.
  • The July employment report:
    • the U3 headline unemployment rate dropped from 9.2% to 9.1%. But had the number of people falling out of the labor force not risen, the U3 rate would have risen to 9.3%. Instead, we now have a labor participation rate of 63.9% — the lowest since 1983.
  • Gold hit more all-time highs. Why not ?   $1782 /oz.  Sure it’s a bubble. And sure it will likely drop to the $800-1000 range when it blows up. But it might go to $2400 first. Gold has long since separated itself from the other commodities in acting like an classical inflation hedge from overheated economic demand. Nope. It is now a full-fledged monetary metal // global currency.  Given that the only solution to our international economic malaise is the printing press, gold could well hit $2400 by year end.
  • It should soon be time for another installment of the Abby Joseph Cohen show. Any day now, Goldman Sachs will trot her out in an effort to get small investors to stay in stocks. Someone has to ride the stock market down and take those losses.  Any guess as to what she might say?  If you said sell your stocks, you’re probably going to be wrong.
    • Abby’s last appearance was in mid June — when the S&P500 was around 1300. She called for it to go to 1450 by year end.  My call was 1050. I like my odds better than hers. FYI: the S&P500 dropped to 1102 yesterday.
    • If it is acceptable to pound the table and claim the stock market is heading higher for reasons of hope and incomplete data regarding earnings (ignoring bad stuff), then why is it unacceptable to pound the table and say the stock market is over-priced, disconnected with our economic reality, and headed lower ?    I understand this point of view is inconvenient for most of Wall St and the fund companies that are only interested in having your money stay with them for the ride down.     But other than that, why not?
  • I feel another bailout coming. The USPS saw a $3B loss last quarter. Doubtless the pension and retiree healthcare costs are choking them.  Time for a rest button and re-negotiation.
  • Europe:
    • Hanging by a thread.  The ECB announced they have begun buying Italian & Spanish sovereign bonds.  Yippeee!   This hit the snooze button in terms of the bond market thrashing Italy & Spain.  But how long will the pause last?  OK, I wrote the above on Monday.  As of now (Wednesday) the bond market is back to bashing the PIIGS bonds. That’s how impatient the bond market is when it is fed a pile of…… let’s see…. what do pigs produce….
    • The ECB at this point still has no authority to buy Italy & Spain’s bonds until the previous bailout agreement is ratified by all 17 member parliaments.  And when that’s done, they’ll have official permission to do so. But the current EFSF bailout fund is far too small. So is the planned replacement fund (in 2013) — the ESM.  There remains no credible debt solution on the table in Europe (neither is there one here in the US).
    • Until Europe at least hints that they are going all-in with a $2T mega bailout plan, PIIGS debt is going to be pummeled, and stocks are going to get crushed everywhere.  Sorry Europe. You’re going to need a $2T bailout fund. Good luck getting that through the Bundestag.