US Debt Downgraded - Where Do We Open Monday??

ratings change is old news.

Equities are slices of corporations. Who is doing better today than corporations - low taxes, high cash balances, cheap borrowing, significant power in Washington.

very true, but perception is all that matters and u never know how investors will perceive news like this. Ive seen markets rally on awful news, selloff on great news, and vice versa. Why such schizophrenic behavior then? How are levels of certainty today, compared to Friday at 3:59pm?

Urban, I'll take the opposite bet.
Equities open up, Gold sells and Ten year does nothing special. The market has had a whole weekend to digest, the possibility was already out there, so some of the bearish bets get closed out.
I'll change my mind if some bad news come out of Europe. In my mind the situation coming out of Spain & Italy may be far more damaging. Germany is balking at bailing out the Italians.

what say ye??

You're starting to sound like Ritholtz

nice, im wondering how the weekend of digestion will help or hurt things tomorrow morning..oops, didnt mean to sound like the big picture head honcho

We had bigger and more unfortunate news this weekend than a widely expected downgrade from a discredited agency. If only the media would be more thoughtful when they say that rates for consumers are going up - there's no reason for that, rather the spread against treasuries would narrow.

But the bigger news is the tragic deaths of 30 American soldiers in Afghanistan.

On Meet the Press this morning, Alan Greenspan basically said the market would go down and it would take a while to stabilize. He is actually the smartest person in the world of economics so to the extent we can predict what will happen, I will go with his assessment.

Sorry, also, my prediction:

Dow down >500 points tomorrow.
Gold up >$50 tomorrow

Noah, I call it a push. (Yeah, cop out, I know.) The point of ratings agencies is to do research and analysis of an instrument, usually one that is complex and regarding companies or municipalities that are not well known. So people pay "experts" to analyze the details of those organizations and the instruments to tell them things they don't have time to study themselves.

But the US political system, its tax system, its economy, and the underlying instruments are pretty much about the best known in the world by pretty much everyone. The market in them is the most liquid in the world. What are a bunch of 30-something analysts, who by definitino don't bring the same breadth of knowledge and experience as the rest of the market, going to add to this analysis?

Here's a random possibility: Tomorrow morning's Wall Street Journal front page reflects news about flaws in S&P's analysis, and other news that discredits S&P, making them the story rather than the rating.

... sponsored by the White House.

"The market in them is the most liquid in the world. "

yes, but what if this changes? our markets can get less liquid and perception of everything US as the safest out there, can change, or perhaps degrade. Granted I agree, if not here, where can u invest especially large amounts of capital? It will be quite interesting to see if perceptions of what you mention change at all, even ever so slightly, and if that has any effect on what we got used to..treasuries have had an insane run the past 20+ yrs, who knows what happens if that trade reverses for whatever reason

AUVS, I have to disagree with your assessment. The rating agencies are not doing credit research and to the extent they are participants should not rely on results. It was just three years ago that s&p said you can call a bag of crap AAA if you provide enough subordination(well that didn't work out so well...CDO?). What the rating agencies do is a provide a quasi-regulatory framework that in conjunction with regulators decides how much capital must be reserved against certain instruments or whether securities may or may not be purchased in a type of account(e.g. money market)

I'll go with stocks down, yields down, gold up. Why? Who the hell knows.

GET READY FOR MONDAY(IF YOU THOUGHT THE U.S DEBT DOWNGRADE WAS BIG FORGET ABOUT IT!
http://www.thelocal.de/money/20110807-36801.html

Advisors in the German government think the eurozone's bailout fund won't be enough to save Italy from its current crisis, according to a media report.

Economic advisors told the news magazine Der Spiegel on Sunday that the European Financial Stability Facility (EFSF) is only capable of helping smaller countries, not economies the size of Italy's.

Government experts say Italy's eurozone partners cannot cover the guarantee for Italy's state debt of over €1.8 trillion.

The report says Berlin is now insisting that Italy find its own way out of its crisis through budget cuts and reforms.

Horse farm buyers, crappy. Nyc re buyers in last 2 yrs even crappier.

Who cares? The damage is done. Even if mkt ends up year end, return with volatility is not the same as wo.

The berkeley is not as nice as the hyatt. Flmaoz.

there was an amusing twtter post, along the lines of:
us credit rating downgraded, treasuries rally in flight to safety :)

i guess its not inconcieveable that rock solid dividend paying blue chips rally tomorrow.
ko, pg etc

Hey,
This is to Noah or any of the other Street Easy economists.
If the U.S. truly funded it's debt, then shouldn't quantitative easing be almost akin to retiring the debt?
If the Fed could buy so much in the quantity of Treasury debt then perhaps we didn't need to borrow it in the
first place.

Of course if issuing bonds and quantitative easing is just a monetary tool...

>The berkeley is not as nice as the hyatt. Flmaoz.

The Dover Sole is great.

ionada, its very likely you are right with that call

SPX 5% down before bouncing back to close to unch. Gold follows the reverse pattern but in smaller percentage. 10y Yields lower as we will be a in a slow growth mode for a long time with no inflation. 30Y higher as the credit concerns that far out are real. Japan downgrade did not prevent the yields from going lower. Eventually 10 Y at 2%.

noah (+ all others): so what does this due to the interest rate market tomorrow (let's say for a classic 30 year fixed conforming NYC co-op loan)? Big spike? Little spike? Nothin' much? Should buyers, if they are close to locking anyway, lock tomorrow because things are really heading north, or should they just sit tight. ride it out, and see what happens?

Eddie Wilson will be ready to call this one Monday morning, 9.35 a.m., then claim he sold some puts and/or calls after hours Friday to make sure he locked in his claims.

HAHAHAHA!

People are claiming that consumer and housing interest rates will change because they are typically a spread to Treasuries. Yes, now theoretically, something has changed with Treasuries, not with consumers. So it would seem more likely that spreads to Treasuries would change - narrow - rather than spreads staying fixed. The more rational outcome would be that housing rates don't change, except maybe there is some short-term volatility as this new event settles in.

Interesting stuff to chew on huntersburg, tyvm.....

Sorry, but we get a rally:
"ECB to buy Italian, Spanish bonds to stop contagion" -- Reuters. S&P downgrade is priced. ECB & G-7 intervention isnt.

oh w67, you're around. you know, it's usually done to say thanks when a stranger does something nice for you. just a thought.

ahhh, more intervention, more QE, the ways the Keynesians like it. Equities fly, rates still rise, and gold flies. This buys some more time and we will be back here in 4-6 months to talk about another bond market bailout..is this the 5th or 6th ECB intervention now in the last 18 months? I cant remember

http://www.kitco.com/

I see a first print on Gold

1690 - +$27

What is it at Goldline? Apt23, what did they offer you when you spoke to Goldline?

S&P down 2.2% at the moment....

I hate politics and I think I hate this county

interesting, so the ecb announcement not changing much yet

This really is an ECB story. We Americans are so self-centered.

599GTB -- please feel free to go elsewhere. America will be better off without people who hate it.

cuba is waiting 599!!

10-year seems flattish.

599GTB
22 minutes ago
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I hate politics and I think I hate this county

599, you aren't by chance in Columbia County?

manhattanfox and 300_mercer, 599 doesn't like his county, not his country. Don't be so harsh.

Sorry, I see.

"10-year seems flattish."

Flattish but ever so slightly up.

Trifecta!

I agree with those saying the news out of Italy and the rest of Europe will have the greater effect on the market than the S&P downgrade. I can see the Dow drop 200 and Treasuries yields not moving too much due to a flight to safety.

By "slightly up", I mean price, so yield is slightly down.

New Zealand is starting off its monday with NZ50 down -2.81% , asia to follow shortly

I think we're at:

S&P: index down 2.1%
10-year: yield down by 0.02%
gold: up 1.4%

this really is your knee jerk reaction, it will be also interesting to see how the actual open is compared to this initial knee jerk reaction..im sure things will change

"the ways the Keynesians like it"

Which chapter of Keynes did you read that from, UD? That's right out of the Milton Friedman handbook. I don't even think there were such markets as these in Keynes' times.

The ECB doesn't have enough money to stop a run on bonds, so to speak. Any more than the Japanese have enough money to stop the yen from appreciating. All of this points to the same underlying problem: the governments are attempting to fix the result rather than fix the problem, and that has never worked for long periods of time.

What happens tomorrow morning doesn't matter. A lot can happen between now and tomorrow morning that we might never know about. Central banks cannot prop up a stock market - they don't have enough money. They can - and did - cause a bubble, but they can't stop it from popping.

Over the next 6-9 months the QEII bubble gets unwound. Nothing can stop it; the more money they pump into the system, the worse the crash will be. Nothing can stop the deleveraging from the Bush Decade. It was unsustainable: bad fiscal and bad monetary policies. Property prices will continue to fall, and not recover in our lifetimes. Using the historic p/e ratios, the Dow should be around 6,000 right now. It may very well be on its way back down.

This process is part of a fundamental reordering of the economic system. Band-aids won't work. A WPA-style jobs program would certainly help, but the Republicans have nixed that one from the get-go.

"this really is your knee jerk reaction, it will be also interesting to see how the actual open is compared to this initial knee jerk reaction..im sure things will change"

Well, things will change in the next 10 minutes. ;)

Yields now down 0.04%. Sounds like the market telling S&P they're irrelevant.

If, however, it makes any difference:

U.S. Stock Futures Plunge, Dollar Falls After Rating Cut

http://www.bloomberg.com/news/2011-08-07/u-s-stock-futures-oil-plunges-on-rating-downgrade-n-z-index-declines.html

I have been saying for months that all of the charts were aligning just like 2008 - Mercury in retrograde. So we'll see.

But you can thank the Tea Party for bringing the country this close to default if things do, in fact, get bad.

"Mercury in retrograde" - you sound like a HY trader I used to know..a brilliant woman I must say though, saw every step of this crisis in summer of 2007 when we first met. played out almost perfectly..

why do u say this? its just an odd thing to say when talking markets, and the fact that this friend of mine used to say it too, given her position, makes me wonder

I hate to sound like a conspiracist, but my gut feeling is the Treasury and Fed make phone calls and jawbone some institutions into buying.

I haven't heard any noise about retail cashing in their 401K plans so I think this is very contained. Again, the fact that the announcement occurred after Friday's close is no accident. The U.S. knew in advance and got an agreement from S&P to announce after Friday's close(which is how every administration always releases bad news).

so..you know what the chinese think.

you know what the swiss think.

and you are privy to the fed and treasury?

Gov. Hugh Carey dead: http://www.nytimes.com/2011/08/08/nyregion/hugh-carey-who-led-fiscal-rescue-of-new-york-city-dead-at-92.html

Read this before you go sleep tonight: With Little Fat to Trim, a Second Recession Could Cut Into Bone
http://www.nytimes.com/2011/08/08/business/a-second-recession-could-be-much-worse-than-the-first.html?hp

I have no idea why anyone should give credibility to S&P. They were the same ones who gave triple A ratings to toxic mortgages and credit default swaps. They are one of the reasons for the financial disaster. Let's downgrade them.

If Obama had the guts to stand up to the tea party,this wouldn't have happened.

Nada. Friday rally due to short covering and 'buy on dips' morons. Shorts come back on Monday. Market down. Bond yield flat as it tries to figure out what is worse. Double dip and deflation or possibility of nutty QE3.

Long term, like I've said $500psf nyc re. Re-test of Dow lows of 2008. Acceptance of structural unemployment due to re driven credit bubble and slow painful credi shrinkage starting at financial cos. Bye bye bankers bonuses.

Fwiw, when you are making $400k/yr housesitting no one gave a fk about the $50k/yr pensions of some loser state employee...... But when your Borker income is $20k...... Damn those tax hikes hurt. So when you need it most, we'll cut extended unemployment and shrink gov't, just walloping our economy. IT IS inevitable. We are headed towards a worldwide synchronized double dip, that fact is being priced into the mkts.

Off to harrods to buy some goodies thanks to the C7 becoming $1mm in the next 2 yrs. What am I gonna spend the $2mm that I will have left over? Cheerios.

>sjtmd
4 minutes ago
ignore this person
report abuse Read this before you go sleep tonight: With Little Fat to Trim, a Second Recession Could Cut Into Bone
http://www.nytimes.com/2011/08/08/business/a-second-recession-could-be-much-worse-than-the-first.html?hp

Nonsense. Corporations are leaner, have significant cash balances, can borrow for cheap, barely have to pay taxes, have a reprieve from the payroll tax, can hire for cheap including because now they operate in a rather anti-union environment, and most importantly have just recently been stress tested. Additionally, any increase in unemployment makes the chances for repeal of Obamacare more likely.

Oh, and the punitive taxes on cash repatriation will have a much higher probability to be eliminated.

how big is your penis?

Why would that be of interest to you?

The regime's leader wanted to raise the debt ceiling by 2.7 trillion. He wanted a clean bill. The regime's budget proposed in February increased the debt by 10 trillion in 10 years. Every member of the Senate voted against it. But the Tea Party is to blame. streetsmart you're a conformist fool.

uh oh...

short?

Give me your email address, I'll send you a photo of it.

such a shame. oh well.

just #tweet it like Wiener....

You asked - so are you or are you not interested in my penis?

no...not after your comments.

Which of my comments made you change your mind about your interest in my penis?

yeah. you're probably not getting in anywhere i mentioned. but hey, enjoy london and paris in august. should be good for the ole' self esteem.

i asked a simple question.

do you need to review that?

So you are saying that through my silence, I led you to believe that my penis was not big, and because you now believe that my penis is not big, you are no longer interested in my penis.

Interesting.

Since I didn't actually say anything about the size of my penis, wouldn't you just want to see the photo to confirm whether you are interested in my penis or not?

And just out of curiosity, w67thstreet says he has a crooked penis. Is that the type of penis you like?

Well if anyone were looking to buy an import. It may be too late. Dollar is tanking.

apparently you don't even have a penis. how sad.

Riversider, stay on topic. You too might have a penis that is of interest to columbiacounty.

rent stabilizer has cream cheese in the crotch. clearly not a penis. not a vagina either. just cream cheese.

columbiacounty
1 minute ago
ignore this person
report abuse apparently you don't even have a penis. how sad.

lucille, do you have a penis? if no, maybe that explains why columbiacounty doesn't like you either.

>columbiacounty
less than a minute ago
ignore this person
report abuse rent stabilizer has cream cheese in the crotch. clearly not a penis. not a vagina either. just cream cheese.

Ok, so Riversider has no penis, and that is why you don't like him. I get it.

that is a classic straw man.

without a penis.

so columbiacounty, you only like straw men with penises.

Interesting

only you would come to that conclusion.

After all this time, we finally found what can shut columbiacounty up. A big penis. That's what he likes.

Can someone please give columbiacounty a big penis. Please. Shut him up. (you know where to put it)

why have you decided that, riversider?

Columbia County, there may be a solution to your big penis need.
I did a google search:
http://www.google.com/search?q=penis+%22columbia+county

Here's one of the listings for you (2nd listing):

Buy Penis Enlarger In Hillsdale Town Columbia County New York
sofacheap.info/2815-6375_Buy-Penis-Enlarger-In-Hillsdale-Town-... - CachedBuy Penis Enlarger In Hillsdale Town Columbia County New York I live in New ...

oh, poor riversider.

keep trying.

keep going.

I'll buy back in when the Dow is at 9600, sometime around the end of Sept.

I got all out at 12,600, a few weeks ago.

Gold will break 2,000 by the end of 2011.

Interest rates will start to go up.

This is all the US government plot to lower the dollar so that are exports go up. We are going global, and this is what it takes. Since our own economy can't support us, we need money from outside to make it. The other countries must see us as a bargain.

And they will.

9600.

>The other countries must see us as a bargain.

Which countries?

"clearly not a penis. not a vagina either. just cream cheese."

Dammit CC, did you let w67th post from your account again? Did he get you with a Nigerian prince who just bought Herrods but needs help cashing a check scam?

Harrods?

From QBAMCO in a note tonight:

We think Treasury obligations today and always will be money-good, but principal and interest will be repaid with bad money.
http://paul.kedrosky.com/archives/2011/08/qotd-money-good-vs-bad-money.html

equities - down 2.1%
gold - up $56, to 1706
treasuries - looks like they will rally on the open

you did good Noah

Noah,
if bonds & gold are both up then this is not about the downgrade but about Europe. Why would someone rationally buy more of a bad(downgraded) investment if the downgrade was legitimate and represented new information? I continue to believe this is both ECB related and the participants looking for an excuse to sell an overvalued market.

its not about the downgrade, its partially about Europe. Its about pricing in a new global economic weak patch, Europe included.

But I agree, Europe is a mess and the ECB hates these interventions to save peripheral countries. Germans are going to go nuts one of these days and not take it anymore.

The whole world is messed up, applying the wrong solutions and then concluding that the medecine wasn't strong enough. Governments, Banks and Consumers are over-leveraged and insolvent, so no amount of stimulus, Government spending, subsidies or lowering of interest rates will solve the problem. Until the parties that be recognize this fact we won't be out of the woods on this...

We need to restructure balance sheets at all levels.
http://www.hussman.net/wmc/wmc110808.htm

If there is one crucial point that should not be missed, it is this: the fundamental source of our economic challenges, from joblessness, to unresolved housing strains, to sovereign debt crises, is that our policy makers have repeatedly opted for fiscal band-aids and monetary distortions instead of addressing the core problem head-on. That core problem is simple: the careless encouragement of asset bubbles, and the refusal to restructure bad debt.

On the valuation front, we view stocks in terms of the normalized discounted stream of long-term cash flows that investors can expect to receive for the price they pay, and that calculation requires the use of normalized earnings and other fundamentals. As a result of last week's decline, the S&P 500 ended Friday priced, by our estimates, to achieve an average annual 10-year total return of about 4.9%, which is an improvement from the 3.4% level we observed a few months ago, but is nowhere near what would reasonably be viewed as undervalued. Jeremy Grantham at GMO puts a "fair value" figure for the S&P 500 at about 920. We prefer to think in terms of expected returns, and a 920 level would equate to 10-year prospective (nominal) returns in the range of 8-9% annually. That would not be a disappointingly low expected return, but would certainly not rival the valuations we've typically observed at bear market troughs historically.

The Germans! Not again

"you did good Noah"

Not quite: he was wrong on the 10-year yield. It is down by 0.1% rather than up by 0.2% as he predicted. I believe all 3 of my predictions hit correctly.

Noah, you are a silly man. Why the hell would a bond drop on a ratings downgrade?

300_mercer is also looking pretty good, thouhg the equities drop currently looksmore muted than he predicted. Let's see if his gutsy bonus call of reversing the drop by the close comes in and ditto will gold in the opposite direction.

I'll take the other side: we'll end the day down appreciably still in equities, up in gold.

"why do u say this?"

I'm a neo-Platonist.

Good thing Eddie Wilson plowed all of his profits back into the market a few hundred points ago - nothing like paying capital gains tax and then watching your gains disappear!

I think this mini-crash has less to do with S&P and more to do with unwinding the QEII-induced bubble. Even at 1,170 the S&P is 10% higher than it was a year ago, excluding dividends.

Perspective, people. Perspective.