You can officially add 'Black August' to the lexicon of
financial terms. It fits neatly along 'Black Monday,' 'Black
Tuesday,' 'Black Wednesday,' etc. Put another way, stock market
behavior that typifies September or October, is happening in August
- a historically dull month. What's going on?
Last week I suggested that if the uninterrupted selling continues,
Wall Street's Big Wigs could be forced to return early from their
summer vacations in the Hamptons, which would create a huge
inconvenience. For any Big Wigs reading this that have not yet
boarded an aircraft headed straight for the office, what are you
waiting for? For the stock market (NYSEArca: IVW) to drop another
10 percent?
Credit Ratings 101
In this type of delicate environment, even immaterial events like
your neighbor selling his 56 shares of Dell (NasdaqGS: DELL) get
blamed for sinking the market. Today's immaterial event - or should
we say, 'symbolic' event - was the U.S. government losing its
coveted AAA-rating. According to media headlines, that's why the
market is down, but is it really so?
A credit rating is nothing more than a financial opinion about
the creditworthiness of a borrower. And history shows the financial
opinions of Wall Street's leading credit analysts, Moody's (
MCO
), Fitch Ratings, and Standard & Poor's (
MHP
) aren't just backwards looking, but are hopelessly late and
consistent wrong.
One thing we can say about today's cadre of credit raters is
that they've acquired some etiquette. In the past, they would've
dropped a credit rating completely unannounced. In today's
environment, they give their subjects months of advanced warnings
and then when a major downgrade actually happens, they do it over
the weekend. Some people call it cowardice, I'll call it
manners.
Now What?
The immediate effects of the U.S. government's declining credit
score are that major stock indexes like the Dow Industrials
(NYSEArca: DIA), Nasdaq (NasdaqGS: QQQ) and the S&P 500
(NYSEArca: SPY) don't like what they see. However, the bad news
from Europe (NYSEArca: VGK) and poor economic readings were already
weighing on the stock market and the credit rating thing is another
excuse to intensify the selling.
In contrast to stocks, U.S. Treasuries (NYSEArca: TLT) are sky
rocketing along with leveraged Treasury ETFs like the ProShares
Ultra 20+ Year 2x ETF (NYSEArca: UBT) and the DirexionShares 20+
Year Treasury Bull 3x Shares (NYSEArca: TMF). For many
investors, this is a confusing message, especially with the
government's downgrade. But weeks before the August 2 debt deal was
agreed upon, we kept our subscribers ahead of the credit ratings
curve. We also explained in our
ETF
newsletter weekly picks
, the crucial factors that would influence the future direction of
Treasuries.
Your Next Move
Stop lifting the already elevated egos of credit raters by
spreading the myth their financial opinions move the market.
Everybody knows the market doesn't like surprises and Standard
& Poor's downgrade came months after prior warnings and was
categorically not a surprise. Likewise, the other two musketeers
have left their U.S.A. ratings unchanged. Long live the status
quo!
There's no sense in believing today's credit opinions about
anyone or anything are any more accurate than recent history.
(Remember the AAA-rated mortgage securities from 2007-09 that
turned out to be rubbish?) In fact, there's a good chance that
today's AA+ rating of U.S. government long-term debt (NYSEArca:
TLT) will turn out to be wrong - badly wrong.
Beyond this, the longer term implications of a credit downgrade
will signal a new trend that won't be a friend to anyone who's
ill-informed.