- Should U.S. debt still garner a AAA? One agency shows first signs of downgrade
- Alan Knuckman offers “the most important indicator” in today’s market
- Chris Mayer’s pair trade “the financial crisis will not undo”
- Obama’s latest intervention… how the government plans to fix the derivatives market
- A tech industry Patrick Cox says “you want to own” right now
After yesterday’s major Social Security and Medicare announcement, today we have to ask (again): Can the U.S. hold onto its AAA credit rating?
“The U.S. government has had a triple-A credit rating since 1917,” answers former U.S. comptroller general and I.O.U.S.A. protagonist David Walker, “but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.
“First, while comprehensive health care reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.
“Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.”
Of course, we must note that the whole credit rating biz is… well… corrupt. The agencies that are responsible for dishing out sovereign credit ratings (S&P, Fitch and Moody’s) are the same ones that left us all out to dry in 2007. (Of course, mortgage-backed securities get a AAA… housing prices never fall!) Rest assured, if Wall Street can buy its way into AAA, Uncle Sam surely can too.
But even Moody’s is starting to hedge their bets. They recently created three subdivisions within their AAA rating: resistant, resilient and vulnerable… a corporate way of saying the good, the bad and the ugly. While the U.S. isn’t in the worst of the bunch, it’s certainly not the best.
Not the best time to be Ireland or Spain, eh? S&P has already downgraded both nations, and just this morning Spain unveiled its worst recession in over 40 years. GDP shrank 1.8% there in the first quarter, after a 1% drop in the last three months of 2008. From a year earlier, GDP is down 2.9%, the worst annual contraction since at least 1970, when Spain’s National Statistics Institute started keeping track.
Since we started today’s issue with a tough question, how about another: How much further can Spain and Ireland fall (Greece too) before the euro enters crisis mode?
Stocks suffered Wednesday, as the Dow shed 2.2% and S&P 500 lost 2.7%. Traders looking for a reason to take profits found their excuse in the worse-than-expected retail sales number.
“I’m very encouraged by this pullback,” our resource trader Alan Knuckman told CNBC this morning. “We’re coming back to a breakout point in the S&P 500. 875 is a pretty important level. Once we got through that, we had a nice acceleration, so we’ll see if that can hold.
“Regardless, the pullback is healthy for the overall market. It’s something that markets often do. It’s important to see how we recover after a big sell-off, which we haven’t really had yet. I need to see a day where everyone has negative opinions again. I want to see how the market reacts to a BIG push to the downside….”
When that big sell-off comes (and believe us, it will), Alan says, “Watch the next day or two. Will that pessimism overwhelm people again, or will people look at that as a buying opportunity? That will be more of a (market) indicator than anything.”
Buyers are drifting back into the market today after yesterday’s decline. The Dow and S&P opened up about 0.5%.
Two worse-than-expected data releases have tamed today’s equity buyback.
First, producer inflation inched up 0.3% in April, says the Dept. of Labor. Contrary to everything you might have heard from the Federal Reserve, inflation can exist in this market.
Second, unemployment claims rose by 32,000 last week, to 637,000, about 20k more than Wall Street was anticipating. Continuing claims, people filing for unemployment for more than one week, climbed 6.56 million. That’s the 15th consecutive week of record highs.
Financials beware: The Obama administration formally announced its intention to regulate the derivatives market today.
“The financial crisis was caused by — and exposed – significant gaps in oversight," opined Treasury Secretary Geithner. "We are committed to working with Congress to create a more comprehensive system."
No firm plans yet, but at the core of the government’s scheme is the creation of a centralized clearinghouse for derivatives. Credit default swaps and other derivatives are very much an over-the-counter matter currently, and the Obama team wants to, essentially, create an NYSE for these complicated contracts. We’ll let you know if it comes to fruition.
“Sell Chinese banks, buy Chinese commodities,” declares Chris Mayer, armed with your pair trade of the day.
“China’s banks are hiding more bad loans than the Appalachian Mountains hide moonshiners. Yet the stock prices seem to say Chinese banks are perfect. China’s banks make up 18% of the market of global banking stocks, but hold only 5% of the assets. Further, as a percentage of deposits, the market caps of Chinese banks are four times higher than Japan’s and 60% above the global average.
“As economic woes continue to linger, these outliers won’t likely hold up. Chinese bank stocks are for selling at today’s prices. ‘When these banks crack and come clean,’ says Chris Burn of Goshen Investments, ‘it will be one of the last phases of the [current] cycle.’
“On the other hand, there’s China’s massive urban migration. I can’t emphasize this enough. There is a migration of hundreds of millions of people from China’s rural areas to its budding cities. Just within the next 15 years, China will add some 60 new cities with between 1.5-5 million people. The U.S. doesn’t even have 10 cities today with a million people in them.
“The financial crisis will not undo this migration. It is bigger than that. It is a history-making event and the world will probably never see anything like it on this scale again. As China builds out these cities, it will consume great amounts of commodities — for roads, power systems, houses and more.
“Don’t let the nasty crater that was 2008 take you off the scent of commodities. China is still as big and voracious as ever in the commodity world. There is certainly a pause here, just as that old Chinese saying points out that every meal must end. But every ending also has a new beginning. China will be back for lunch, so to speak.”
Commodities are starting to feel the pinch of the recent stock decline. Oil had been holding steady, but over the last 24 hours, it has succumbed to renewed pessimism on Wall Street. The front-month contract fell from a 2009 high of $60 a barrel to $57 today.
Copper has it even worse. It fell through the $2 mark early this morning, and now at $1.96 a pound, it’s down almost 10% from last week’s high.
Gold is the exception (heh, isn’t it always?). The spot price hit $925 Tuesday and has flat-lined since. That’s a six-week high.
After a nearly full-point rise yesterday, the dollar index is holding steady at 82.8, waiting for the market’s next move. The euro dropped a penny Wednesday, and rests at $1.35 as we write. Ditto the pound, at $1.51.
The yen is the outlier of the bunch, growing stronger all week long as the world’s appetite for risk fades away. It’s at 95 today, nearly a two-month high.
“Do you remember when the Internet was viewed as interesting, but with little financial potential?” asks our technology adviser, Patrick Cox. “That’s where the robotics industry is now.
“Already, low-end robots like Roomba are exploding into new markets. Even as consumers cut back dramatically last quarter, Roomba sales were up 69% compared with the first quarter of 2008. This trend will continue. Within a few years, truly sophisticated consumer robots will be common in high-income households. Before you know it, incredibly capable general-purpose robots will be seen as essential appliances.
Don’t snicker… fortunes have been made with far less
“Moreover, military spending on robotics continues to expand and buoy the industry. The proposed Obama budget increases funding for the DoD programs that move robotics forward. The trend toward unmanned robotic weaponry is unstoppable. Military conflict will not go away, and robots offer many developed nations a way to reduce battlefield casualties.
“As Moore’s Law continues to improve computer technologies, the decision to risk robots, rather than humans, will be easier and easier to make. Regardless of consumer spending trends, we will see far more advanced robots in the battlefield and on crime scenes. Those advances will, in turn, accelerate the domestic and industrial robotic industries.
“Believe me. You want to own robots.”
Of course, Patrick’s readers have a robotics play, which you can get here. That’s just one of the transformational opportunities he’s expecting soon… for more, be sure to check out today’s P.S.
“Let’s see,” a reader begins, “we can put billions toward shoring up banks, stock brokers, auto companies and their suppliers, but there’s no money for Social Security or Medicare??
“What does that say about our government’s concern for the ‘common man’? I thought Obama was a man of the people.”
“Isn’t government, especially Social Security” a reader asks, “the biggest Ponzi scheme of all time?”
The 5: No. In a scheme, the victim has to choose to hand it over. SS is more like a Ponzi stickup.
“All the focus on Social Security and Medicare shortfalls,” writes the last, “has allowed another ‘balance of payments’ issue to slip under our radar. What will happen to the stock markets as the same baby boomer generation draws down their collective 401(k)s and the like without a countering infusion from new investors? I’m definitely out of that trust-the-market-to-make-you-a-million-for-retirement fraud!
“Thanks for the great insights!”
It’s our pleasure,
The 5 Min. Forecast
P.S. Today could be your last chance to be among the very first investors. Our breakthrough technology analyst Patrick Cox is expecting big news to emerge from a conference held after the market closes today. Should his forecast come true, this could be the big break for six very small companies… the kind that makes early investors rich. Patrick recently polished off a report highlighting these opportunities — read it now if you want to take advantage.