S&P downgrades US credit rating from AAA

[Russ H]

S&P downgrades US credit rating from AAA - Yahoo! News

Note: Making political comments may get you banned (not post deleted-- your *ss may actually get banned off this site if enough people complain)

For those who are new here, when something really big happens, we discuss how we can make money off of the change. We don't harp or make political banter or rants-- that's for other sites.

There will be hours (and hours, and hours) of political and economic oriented media coverage on this for the foreseeable future.

But on the Fastlane forums, we do something different.

We figure out how to profit from it.

So: Think.

How could you or your business potentially profit or prosper from a downgrade to US credit from AAA to AA?

Do read the article (link above). I find it fascinating that when a number of countries had their ratings reduced from AAA to AA, the long term effects actually trended up for them. How to explain that?

-Russ H.

 

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[Darkside]

Do read the article (link above). I find it fascinating that when a number of countries had their ratings reduced from AAA to AA, the long term effects actually trended up for them. How to explain that?

-Russ H.

This is the same ratings agency that gave those toxic mortgages AAA ratings before the housing collapse happened. So, why are you surprised that they've been wrong about national ratings?

 

[MamaD]

I think the American people were really hoping that this debt ceiling deal was somehow going to be their saving grace. The real issue is that the government has a long term debt problem that will not be fixed anytime soon.

Perhaps now, profit and prosperity will come from the thought, "It's all up to me now."

Perhaps now is the time to teach, show, and sell opportunities (ideas) more than ever. To the business owner, does it now make sense to say, "Don't wait on the gov't to fix your issue?"

 

[kahem89]

To be honest, i was waiting for this, and it actually came late.

I think were looking at a global reccesion which is realy just a part of the economy. And i think theres much to gain in going into business that doesnt cover superficial needs. So going into food business, or cheap clothing may be a thing to try out. If you got the capital that is.( i realy dont know, but thats just what common sense tell me)

had to make an edit here. Im not saying WE ARE GOING INTO a recession. Us is not the only problem. EU has big problems too. So having knowledge of how to make money in a reccision is crucial for succses. I wonder what businesses prospered under the 1924 recession. Better to be prepared than not

 

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[Ska2free]

Thanks for starting this thread, Russ.

My business will be directly impacted by changing US Treasury rates...we recently finished construction on a new office, which is partially financed with an SBA 504 loan. The way that works, you don't know your final interest rate until the loan is packaged and sold as a treasury debenture...so obviously I'm watching treasury movement with great interest! We have only a small amount of control over when our loan gets sold...by working closely with the SBA we can expedite (to a small federal bureaucratic degree) or drag our heels to wait out short term swings.

It's a smaller part of our overall building financing, and will be a fixed rate for 20 years...so the impact is not likely to be huge, but I'm hoping for rates to stay or go lower for the short term.

 

[Kak]

The interest rates are going exactly where they need to be during this time of uncertanty UP!! The artifically low interest rates couldnt last forever.

I guess now its just an argumnt about if (political comments deleted)-- watch it, Kak. You have been warned- Russ H.

The increase in the "risk free" rate of return will drive up the interest rates on my investments "finance 101" everything is just an underwriting of the risk associated with the aditional percent returns over that of the US government bonds.

Does anyone know if it will change the banking rules as some corperations now have a higher rating than the gov.

 

[Graves]

Amazing that they took so long to downgrade US treasuries. I think everyone was already pessimistic about the debt issue.

 

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[hakrjak]

This isn't news, this should already be priced into stocks. This is probably what the most recent decline has been all about. Thinking there is even a possibility that you won't see a stock decline on Monday, but instead you'll see traders buying on this news after a couple weeks of selling the rumor.

With regards to interest rates, there's no reason to believe they're going anywhere. When the rest of the world's bonds look as ugly as they do, the money is still going to pour into the US's AA+ rated treasuries. They aren't going to have to raise rates to make it happen. This was clear last week when treasury bonds went to almost zero % return several times because investors went there for safety, still seeing the US as one of the safest places to put their money with a tanking market.

Cheers,

-Hakrjak

 

[mkzhang]

I think one of the most probably impact of doing business from the decline of the American economy and trust worthiness, is the ever increasing needs of credit lines... until now unless we are dealing with massive amount of money changing hands, no small business ever find the big need for LOC... imagine if you are making widgets that is mfg in China... and you have to pay first before they are even manufactured or at least put security deposit in place. This will hurt a lot if you dont see it coming.

 

[Russ H]

Some great points so far-- thanks to all.

-Russ H.

 

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[Russ H]

This is the same ratings agency that gave those toxic mortgages AAA ratings before the housing collapse happened. So, why are you surprised that they've been wrong about national ratings?

True that.

And it turns out S&P made a TWO TRILLION DOLLAR MISCALCULATION when determining the US's credit rating (it was called out after they issued their press release):

The U.S. Treasury said the rating agency's debt calculations were wrong by some 2 trillion dollars. S&P has confirmed it changed its economic assumptions after discussion with the Treasury Department but said that did not affect its decision to downgrade.

A major theme in S&P's analysis was the apparent breakdown in the ability of both sides of congress and the White House to govern effectively, as evidenced in the fractious negotiations leading to a last-minute debt limit deal that brought the United States to the edge of default.

And S&P acknowledged the mistake, and STILL maintained the downgrade, saying the downgrade was due less to $$$ and more to acrimonious politics.

Is S&P a credit rating agency, or a political watchdog group?

Sorry-- breaking my own rule here-- please don't answer if you think this is politics driven (ie, one side or the other), please don't make any comments. Just answer by saying "politics", and no more.

A better response: If you have knowledge/insight of how S&P is using this to lever politics and/or world markets, please share. But be very, very careful-- don't make comments or assessments of one political side or the other-- just say what S&P is doing to try and influence the world (or US) economy by doing this.

MJ/Other Mods-- if I'm getting too into the political muck here, close the thread. I didn't intend to, but the S&P comment about the downgrade being based on politics and not $$$ really has me confused. :smx4:

-Russ H.

 

[Russ H]

BTW, if you haven't ever really read up on the Great Depression, it might be worth spending 15 minutes reading the wiki:

Great Depression - Wikipedia, the free encyclopedia

-Russ H.

 

[garyfritz]

Is S&P a credit rating agency, or a political watchdog group?

Theoretically they're a credit rating agency. In reality they're a marketing tool for the banks. Anybody who really follows and understands this stuff knows that the rating agencies' results bear very little resemblance to reality. They continued to give AAA ratings to Greece, Italy, etc. looooong after it was very obvious their economies were in tatters and they couldn't possibly repay their debts. They did the same with the US -- but the biggest difference with the US is that our debt is denominated in our own currency, so we can just crank up the printing presses to "make the problem go away" temporarily. That's the easiest and least-pain short-term solution for the politicians so of course that's what they'll do. Expect serious inflation down the road as more and more fiat dollars chase less and less goods.

One of the biggest impacts this (long overdue) ratings change will have on the US is the cost of our debt. We've been running a deficit for a long time, and it's exploded in the last few years. We have to borrow to cover that debt, just like anybody buying a house and getting a mortgage. A country's credit rating has a large effect on the interest rates it has to pay on its debt. A lower credit rating means we'll be spending a lot more money on interest in the future -- we'll be rolling over the bulk of our debt within about 4 years, and the new debt will be at the higher rates. So an even higher percentage of our GDP will go to totally non-productive interest payments. Consider how that will affect the business climate and your ventures.

 

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[Jonleehacker]

I subscribe to Peter Schiff's videos. He's been right all along on these things, so I think he is one of the most trustworthy sources of understanding.

[video=youtube;SgNLTb58K_Y]http://www.youtube.com/watch?v=SgNLTb58K_Y[/video]

Personally on Friday, I bought puts on the S&P and have been holding Calls on the TBT (a bet that interest rates will rise).

Besides that I'll play short term trends as they develop. It is tough to say how the market will react. Short term, I would have said sharply lower on Monday, but after such weakness for the past 2 weeks, it wouldn't surprise me if the market went sideways for a few days to digest things.

Longer term though, I think this downgrade is like the first roll of the bolder over the cliff for the US dollar. It will only pick up momentum from here as buyers of US debt demand more interest, the increase in interest raises the national debt and it spirals in a bad direction.

Since my assets are held in Canadian dollars I'm no too threatened by this, but my eBiz operates 99% in the US, so a major downturn will impact my income in a big way.

That is one of the reasons I've spend the past year learning to trade the markets. It's a skill that doesn't diminish with economic trends (or old age for that matter).

Overall I think the first thought should be to protect your assets. I think a lot of Americans are naive and complacent about the way the value of their currency is being (rapidly) eroded.

The entire world has been complicit in sustaining the illusion of the strength of the US dollar, but this downgrade has signaled the beginning of the end of cheap debt, which has been other only thing enabling the US gov. to continue to deny dealing with it's problems in a meaningful way.

 

[GlobalWealth]

I owned SPY 126 puts and sold them on Friday at a large gain (or course it didnt offset all of the portfolio loss...). The S&P downgrade was well known to happen and certainly priced into the market over the past week.

Actually, there were early leaks on Friday that was the primary cause of the sell off during the day.

S&P has been notoriously late on downgrades, so this was WAY overdue. The market knew about it.

In my view we could still see more pain in the markets this week from mutual fund redemption. Retail investors are always late to the party and they could sell off causing mutual funds to tank. Considering the huge amount of equities in IRA/401k's, this could cause problems this week.

Other things to consider are the flow of money. Money is like water, it follows the path of least resistance. Big money will need to find a home. With treasuries downgraded, we will likely see money flow from this market.

But where will it go? Stocks, corporate bonds, sovereign debt, real estate, commodities? Who knows. But with the S&P500 technically ready for a correction to the upside, I wouldn't want to be short at open tomorrow am.

 

[Jonleehacker]

Bobby, you've hit on the most interesting thing about the current situation. It is obviously a time for money to flow to safety, but there isn't any safe place for it to flow to.

Japan and Switzerland are the only real candidates and both governments are vowing to fight any appreciation in their currencies.

 

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[Russ H]

Many, many thanks for the insights and updates.

This is EXACTLY what I was hoping for-- info on how/why this is happening.

As someone who has never been good at forecasting the markets, I very much appreciate the opinions from you all.

Thanks,

-Russ H.

PS And another big thanks to anyone who read this thread, and wisely did NOT post, b/c they didn't have the expertise. Your discretion is very much appreciated.

 

[Russ H]

Really, really excellent video, Jon.

Holy crap.

Schiff specifically responds to and addresses the questions I posted earlier (e.g, is S&P a credit rating agency or a political watchdog)-- great answers by Schiff.

He also really explains the "why" of things--- and acknowledges that S&P and Moodys and others rated derivatives as AAA, and explains how the other credit ratings agencies "chickened out". Also, his views on flight to quality going to the Euro, since Italy has actually made some hard austerity choices/moves, is significant.

-Russ H.

 

[Rickson9]

We figure out how to profit from it.
So: Think.
How could you or your business potentially profit or prosper from a downgrade to US credit from AAA to AA?

Speaking for myself, with my limited investing experience, I don't care about the hows or whys of the US credit down grade from AAA to AA. I actually don't care about the hows and whys of anything that can drop the market.

I just want to make money. Knowing the hows and whys of a market drop has never helped me make any money. But that's just me. I focus on the business. I want to know the income statement and balance sheet. The market and causes of drops are irrelevant to me.

From my perspective, ANYTHING that can drop the entire market is good. I don't care if it's a down grade, mortgage backed securities implosion, riots in Greece, tech sector fallout, collapse of housing, whatever. All I am looking for is a system wide collapse.

Why?

It's the absolutely easiest way to make money.

In a 'normal' or bull market economy, it is extremely difficult to make money. Prices are too high. And when prices are NOT too high, it's usually because the business that I'm looking at is going through a problem. And problems are difficult to diagnose as terminal or turnaround. Very difficult.

A market wide crash is easy. I can have a spectacularly performing business that will simply collapse in sympathy with a meltdown! How easy is that? I already know that the business is healthy AND I get to pick it up on the cheap! This is exactly what I have done in years past when the market fallout was attributed to the 'credit crisis', or 'tech wreck', etc.

We should all hope that this down grade causes another market meltdown. Why work for money when the market can give it to you for free?

Disclosure. I haven't bought a stock in over 2 and a half years as prices have racheted higher. I'm praying that the market gives me some freebies.

 

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[randallg99]

firstly, the recent downgrade was probably medicine well needed. I am not sure if the politicians fully understand what a downgrade even means but lucky for those idiots the interest rates will most likely stabilize at the current levels (flight to treasuries have been UNREAL - bond auctions are flying these days) so the rates will stay low. quite frankly, its easy for Bernanke to announce a low rate policy for a couple of more years. Japan was downgraded this past January and their rates have still remained extremely low

secondly, the flight to safe haven treasuries has never been so crowded. Anyone see 3 month or 6 month rates? they've been negative! Tonight's print: .01% . Point Zero One Percent. Seriously? People are scared shit of risk right now. Going short treasuries only makes sense if there's a chance the economy is gaining traction.... but much of the data I see shows a very bleak macro outlook

thirdly, we've all seen the impacts on the banking sector in the stock market. Banks are so out of favor right now and may have just a bit more to drop. The US gov't has made it very obvoius they will not let banking solve their own problems and will intervene. Not saying to buy anything specific, but read history and see what someone said about 'blood in the streets...'

fourthly, gov't sponsored entities - Freddie and Fannie - they have a better return than treasuries and come with a 'virtual' USA guarantee as well as real cash flow from the mortgage markets. Carry trades involving GSE bonds make a lot of sense. Indirect ways to do this is buying AmReits such as AGNC, NLY, ANH etc

lastly, hard assets. If the current government continues to print money like its going out of style then there will be people scrambling for alternative currencies and income sources. Anything paying income during inflationary periods will become "gold"

Unfortunately Russ, this is a subject that cannot be ultimately discussed without the political interference in the markets. All markets are heavily influenced by our political leaders: stocks, bonds, real estate, metals, etc ...

I have been long silver LEAPS and in past few days rebought many holdings I once held in the form of LEAPS including Ford, Apple and VNR. I bought AGNC and NLY yesterday and sold half of those positions already. ALso keeping SDRL in my sights but waiting on European fall out to drop it back to 20 something. Still 70% cash in liquid accounts. I have also been very aggressive buying low-medium end real estate single family homes making 20% returns cash on cash. My goal is to get another 6 units by years' end. Bank stocks are on my watch list as well .

Good Luck to all to not only following your convictions, but sticking with them.

 

[PaulRobert]

Great write up Randall. I always enjoy reading and learning from your insight. +Rep

 

[Russ H]

A huge thanks to Randallg for weighing in.

For those that haven't been here a while, Randall tried to warn us all about the derivatives mess about a year before the financial meltdown. I didn't listen, nor did most of the rest of the world.

Update on the original post:

If you call yourself a credit rating agency, and make some major miscalculations in determining your ratings, and say that your rating is due more to politics than numbers . . . guess what happens?

The guys who make the laws (the politicians) decide to start regulating you, or demanding you show how you calculate your credit ratings.

In other words, the reason any US-based credit rating agency has never downgraded the US was BECAUSE of politics-- they realized that if you piss off the guys that make the rules, those po'd guys might just go all medieval on their *ss. So it was wise to give the rule-makers a high credit rating.

(make sense?)

I also agree that the US should have been downgraded long ago--- but looking at what has happened in this country-- and considering that S&P has NEVER downgraded the US, even during world wars, or the Great Depression, it makes you wonder why they chose to do it now . . .

BTW, I think I know why they chose to do it now. And it has everything to do w/politics, and using investors to push the politicians to make laws/set policy that is better for the markets. They pretty much got off scott free w/rating derivatives AAA, so they're just pushing to see how far they can go.

Not pretty.

Anyways, here is the update on what's happening from the rule makers (ie, Congress). I had to copy and paste it, b/c Reuters keeps pulling it and editing it (can you say "hot potato"? :smxB: )

Wed Aug 10, 2011 4:16am EDT
(Reuters) - Standard & Poor's, whose unprecedented downgrade of U.S. debt triggered a worldwide stocks sell-off, is pushing back against a U.S. government proposal that would require credit raters to disclose "significant errors" in how they calculate their ratings.

S&P, which was accused by the Obama administration of making an error in its calculations leading to Friday's downgrade, raised concern about the proposed new corrections policy and other issues in an 84-page letter to the Securities and Exchange Commission, dated August 8.

The SEC is weighing sweeping new rules designed to improve the quality of ratings after their poor performance in the financial crisis.

The 517-page proposal includes a requirement that ratings agencies post on their websites when a "significant error" is identified in their methodology for a credit rating action.

The letter was sent three days after the U.S. Treasury Department accused S&P of miscalculating -- by some $2 trillion -- the U.S. debt in the next 10 years. That calculation was in a draft press release announcing a downgrade in the government's credit rating from AAA to AA-plus.

S&P vehemently denied it had made an error, but acknowledged that it changed its long-term economic assumptions after discussions with the Treasury Department. It switched to another economic scenario that resulted in a debt load $2 trillion smaller by 2021. But it said that did not affect its decision to downgrade the U.S. debt.

S&P's criticism of the "significant error" proposal is part of a broader concern that the SEC's reforms prompted by the Dodd-Frank financial oversight law could give the U.S. government undue influence over its ratings decisions.

S&P in particular is facing a tense relationship with Washington. Its downgrade sparked a backlash from Administration officials and lawmakers from both sides of the aisle. A Senate Banking Committee aide on Monday said the panel has begun looking into S&P's decision to downgrade the U.S. credit rating.

WHAT'S AN ERROR?

The SEC's proposal, issued in May, contains a wide range of provisions, including requiring credit raters to disclose more about their internal controls, to protect against conflicts of interest, and to reveal more about their rating methods.

But one issue that really rubbed Standard & Poor's the wrong way was the proposed requirement that raters disclose when a "significant error" is identified in a procedure or methodology -- and especially, who should define what that is.

The SEC's proposal asks questions about whether the SEC should define the term "significant error."

"If the commission were to define the term significant error ... we believe it would effectively be substituting its judgment" for the credit-rating agencies, S&P President Deven Sharma said in the letter.

He said S&P's own error correction policy "has proven to be effective and, where errors have occurred, our practice of reacting swiftly and transparently has benefited the market."

Barbara Roper, director of investor protection for the Consumer Federation of America, said that policy has proven inadequate.

"What was their correction policy on their Enron rating? What was their correction policy on their Lehman rating? What was their correction policy on their Bear Stearns rating? They don't have an error correction policy -- they have an error denial policy, and the SEC is absolutely right to step in," Roper said.

McGraw Hill's Standard & Poor identifies numerous issues with the SEC's proposal, including concerns about competition and that rules are consistent globally.

Of the big three raters -- S&P, Moody's Corp and Fimalac SA's Fitch Ratings -- S&P was the only one to raise major concerns in its letter to the SEC about the "significant error" provision.

The measure was tucked into Dodd-Frank after the rating firms gave glowing ratings to toxic subprime mortgage-backed securities and then were slow to downgrade them.

A Senate investigations panel issued a report earlier this year faulting S&P and Moody's for triggering the financial crisis with their flawed ratings and subsequent decision to downgrade them en masse.

The big three ratings agencies have spent well over $1 million lobbying Congress and federal agencies since January as they press for changes to the regulations, according to data from OpenSecrets.org.

Roper said S&P's pushback to the "significant error" proposal underscores the need for tougher reforms.

"If anything, their letter suggests it is absolutely essential that the SEC define it because absent a definition, these guys will obfuscate," she said.

(Reporting by Sarah N. Lynch, with additional reporting by Andrea Shalal-Esa; Editing by Karey Wutkowski, Gary Hill)

 

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[Russ H]

Unfortunately Russ, this is a subject that cannot be ultimately discussed without the political interference in the markets. All markets are heavily influenced by our political leaders: stocks, bonds, real estate, metals, etc ...

I know . . . sorry. Your discretion is much appreciated. I realize I'm walking a tightrope on this thread.

Thanks to EVERYONE on this thread for their discretion. I realize you all have strong political feelings, and I know how hard it is to refrain from "enlightening" all of us w/your POV. But as MJ wisely set out at the beginning-- expounding on political viewpoints only gets people pissed off at each other, since people don't then to change their political beliefs by reading other people's posts.

Also, keeping the focus here on the money, and economic policy is what I wanted to do-- and so far, it's working! Good job, all.

I have also been very aggressive buying low-medium end real estate single family homes making 20% returns cash on cash. My goal is to get another 6 units by years' end. Bank stocks are on my watch list as well

I have a friend who I spoke w/yesterday. He owns some pretty major commercial real estate (over $10 million).

He liquidated some of his low-yield paper asset investments about a year ago, and started buying specific kinds of houses that were in foreclosure.

After a few months, he really jumped in: He's bought about 40+ houses in less than 10 months, has sold 33 of them, and is averaging a 40% annual return (b/c his flip time is weeks).

He's intentionally NOT going for the big kill-- just lots of little $15-30K wins.

And he's having a blast-- what Billy (snowbank) refers to as "playing w/your monopoly money"

-Russ H.

 

[Rickson9]

When the ultra wealthy are buying, you should at least think about it.

"More executives at Standard & Poor’s 500 Index companies are buying their stock than any time since the depths of the credit crisis after valuations plunged 25 percent below their five-decade average. Sixty-six INSIDERS at 50 companies bought shares between Aug. 3 and Aug. 9, the most since the five days ended March 9, 2009, when the benchmark index for U.S. equities reached a 12- year low, according to data compiled by Bloomberg."
Insiders Buying Stock At The Highest Rate Since March 2009

I just love hitching a ride on the backs of talented entrepreneurs! There is nothing better than free money!

Speaking for myself, with my limited investing experience, I don't care about the hows or whys of the US credit down grade from AAA to AA. I actually don't care about the hows and whys of anything that can drop the market.

I just want to make money. Knowing the hows and whys of a market drop has never helped me make any money. But that's just me. I focus on the business. I want to know the income statement and balance sheet. The market and causes of drops are irrelevant to me.

From my perspective, ANYTHING that can drop the entire market is good. I don't care if it's a down grade, mortgage backed securities implosion, riots in Greece, tech sector fallout, collapse of housing, whatever. All I am looking for is a system wide collapse.

Why?

It's the absolutely easiest way to make money.

In a 'normal' or bull market economy, it is extremely difficult to make money. Prices are too high. And when prices are NOT too high, it's usually because the business that I'm looking at is going through a problem. And problems are difficult to diagnose as terminal or turnaround. Very difficult.

A market wide crash is easy. I can have a spectacularly performing business that will simply collapse in sympathy with a meltdown! How easy is that? I already know that the business is healthy AND I get to pick it up on the cheap! This is exactly what I have done in years past when the market fallout was attributed to the 'credit crisis', or 'tech wreck', etc.

We should all hope that this down grade causes another market meltdown. Why work for money when the market can give it to you for free?

Disclosure. I haven't bought a stock in over 2 and a half years as prices have racheted higher. I'm praying that the market gives me some freebies.

 

[Rickson9]

After a few months, he really jumped in: He's bought about 40+ houses in less than 10 months, has sold 33 of them, and is averaging a 40% annual return (b/c his flip time is weeks).

He's intentionally NOT going for the big kill-- just lots of little $15-30K wins.

And he's having a blast-- what Billy (snowbank) refers to as "playing w/your monopoly money"

-Russ H.

Beautiful! As I said in another thread, if I lost everything today I would start over investing in US RE. Almost no other investment beats it at the moment. Some of the millionaires of tomorrow are buying up US RE today. I assure you that we'll start to read some of their stories in a decade or so!

I'm closing on another $40k 2 bed 2 bath condo next Friday and I'll have it rented out @ $700 a month in no time. Afterwards I'll be closing on a $50k detatched 3 bed 2 bath home in October and rent that one out for $900 a month. I'm gonna keep buying as long as the prices are this good!

Apologies for the digression!

 

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[garyfritz]

Good Lord, I'd buy into that too! Here in Colorado we have a ~$200k 4br 3ba rental that rents for $1300. At current (extremely low) rates that cashflows, but just barely. If you got a 100% loan on a $50k house, at current rates you could have a PI payment of only $257 -- and you rent it for $900 !?!? Why do people rent if they can buy with a payment 1/3 as large as their rent!?

 

[Rickson9]

Good Lord, I'd buy into that too! Here in Colorado we have a ~$200k 4br 3ba rental that rents for $1300. At current (extremely low) rates that cashflows, but just barely. If you got a 100% loan on a $50k house, at current rates you could have a PI payment of only $257 -- and you rent it for $900 !?!? Why do people rent if they can buy with a payment 1/3 as large as their rent!?

For some reason many people don't want to/can't own/finance RE after what happened in Phoenix.