Saturday, August 6, 2011

S&P downgrades U.S. credit rating to AA+ for first time

Standard & Poor’s announced Friday night that it has downgraded the sterling U.S. credit rating for the first time.

The move came even though the Treasury Department said that it had found a math error in the firm’s calculations of deficit projections, according to a person familiar with the matter.

S&P decided to lower the AAA rating, held by the United States for 70 years, to AA+ after a bipartisan debt deal signed into law this week failed to assuage concerns about the nation’s growing spending.

Analysts have said a downgrade could increase the cost of borrowing for the U.S. government and lead to tens of billions of dollars in more interest costs per year. That could translate into higher borrowing for consumers and businesses, too.

A downgrade would also have a cascading series of effects on states and localities that rely on federal funding, including in the Washington metro area, potentially raising the cost of borrowing for schools and parks.

But the exact impact of the downgrade won’t be known at least until Sunday night, when Asian markets open, and perhaps not fully grasped for months. Analysts say the immediate term impact is likely to be modest because the markets have been expecting a downgrade by S&P for weeks.

Standard & Poor’s has warned Washington several times this year that, unless the federal government took steps to tame its debt, its credit rating could be lowered.

Some analysts are worried about the impact of a downgrade on markets where Treasurys are held as collateral and the AAA rating is required. But most analysts don’t expect this issue to pose a major problem.

S&P’s action is the most tangible vote of disapproval so far by Wall Street on the deal between President Obama and Congress to cut the deficit by at least $2.1 trillion over 10 years. S&P has said that it wanted at least $4 trillion of deficit reduction.

The downgrade is likely to be used as a weapon by both Republicans and Democrats as they argue the other side has not taken deficit reduction seriously.

Other credit rating agencies — Moody’s Investors Service and Fitch Ratings — have decided not to downgrade the United States credit rating. But they’ve warned that, if the economy deteriorates significantly or the government does not take additional steps to tame the debt, they could move to downgrade too.

In April, S&P first said it might downgrade the U.S. credit rating on concerns that lawmakers would not be able to come to a deal on reducing the debt. In July, as efforts stagnated, S&P said the odds of a downgrade within three months had moved up to 50 percent.

The ultimate deal between Obama and Congress ultimately failed S&P’s benchmark. Obama administration officials have been critical of S&P for making what was essentially a political judgment and for failing to conclude that the country was making a strong first step to reducing its deficit.

The Debt Crisis Is A Trojan Horse To Cause The Fall of America
August 2, 2011

“A sovereign nation can always find the money to pay debts owed in its own currency. The U.S. could, if it wished, pay its bills using debt-free U.S. Notes or Greenbacks, just as President Lincoln did to avoid a crippling debt during the Civil War. Alternatively, it could eliminate the deficit with Ron Paul’s plan, which amounts to the same thing.” – Ellen Brown, “Forget Compromise: The Debt Ceiling Is Unconstitutional.”

Behind all the flim-flammery of this manufactured “crisis,” we are watching the creation of a new form of government — or rather, the further mutation of the new form of government that the United States has been crawling toward for a long time. We called it a “neo-feudal oligarchy backed by a militarist police state” here the other day. No doubt there are many other ways you could describe this murderous, ravenous, lopsided monstrosity of a system. But the one thing you cannot call it is a “republic.” – Chris Floyd, “If the Republic Had Not Died A Long Time Ago, This Would Indeed Be the Death of the Republic (Reprise).”

“Well, we are reportedly 48 hours out from a total default on the debt to the foreign governments and private Federal Reserve that have taken over this country through economic fraud, and have engaged in a conquest that the British Empire couldn’t succeed in, that Hitler couldn’t succeed in, that the Soviets couldn’t succeed at. They have conquered us through fraud by stealth. But, the moment you become aware of the private banking cartel’s global government that they’re publicly admitting now they’re setting up, that you’ll pay your VAT taxes to, your carbon taxes, and the rest of it – the minute you’re aware of it then their power begins to wane.

That’s why the banksters are setting up a homeland security control grid in every country they’re in under international agreements and rules to crackdown and go after anybody that criticizes the private central banks running those nations. When you get the internal training manuals from England to Australia, from Germany to Canada, to the United States, it is the same thing. The public is told, “Give your rights up because al-Qaeda is hiding underneath every table,” but when you get the actual manuals its people that don’t want to give up their sovereignty to the global government.” – Alex Jones, “The Debt Crisis: Banksters, Thugs and Crooks,” from 04:42 to 06:04.

“They are slaves who dare not be in the right with two or three.” – James Russell Lowell

The long transformation of America from a relatively free society into a full-fledged, technocratic police state is now complete. President Barack Obama and political leaders from both major parties are getting ready to completely turn over America’s sovereignty to the traitorous private banking cartel and multinational corporations.

The gang of liars and crooks behind the private Federal Reserve Bank seized America’s sovereignty on December 23, 1913, when the illegal and unconstitutional Federal Reserve Act was signed into law by President Woodrow Wilson.

The Act ensured the protection of a criminal monopoly of America’s credit in the hands of a few powerful banking families who have no loyalty to any nation, people, or system of law: they only have loyalty to their own power and their own bottom line.

With America in their pockets, the private banksters went ahead with phase two of their deceitful plan to dominate the world’s credit, natural resources, and peoples – the creation of a global authoritarian state that is beholden to their interests.

Generations of anti-freedom and anti-American turncoats in Washington have went along with this treasonous, century-long plan by elite private banking families and multinational corporations to covertly establish an unlawful global economic, governmental and political infrastructure to phase out the nation-state system and consolidate world power into a tiny global oligarchy. (more)

'Gold Cartel' Losing, Price to Top $3,000: GATA

The price of gold could almost double as central banks' reserves are depleted, according to the chairman of a gold industry association.

"You could see $3,000 to 5,000 to clear the market as the central banks and bullion banks run out of gold to meet the growing demand," Bill Murphy, chairman of the Gold Anti-Trust Action Committee (GATA), which is hosting a conference in London this week, told CNBC Thursday.

"Six years ago when gold was at $436 we predicted that this would happen."

GATA is backed by gold (Exchange: xau=) traders and investors.

Murphy, and GATA, believe that the gold market has been manipulated by bullion banks and central banks like the Federal Reserve and the Bank of England, as well as the International Monetary Fund (IMF).

Not everyone agrees with their theory.

"The notion that central banks are really in control of any asset price, including gold, is probably not really very well founded," Jens Larsen, chief European economist at RBC Capital Markets, who used to work at both the Bank of England and the IMF, told CNBC Thursday.

"The gold price is one of the hardest asset prices to get a handle on," said Larsen.

Mark Bristow, chief executive of gold company Randgold Resources, which announced a 253 percent rise in second-quarter profits Thursday amid the rapidly rising gold price, told CNBC: "There are a lot of things driving the gold price today. One of them is fear; another is increasing demand from Asia. Our industry is ex-growth, so we are not producing a lot more, so everything is in line for the gold price right now."

Larsen pointed out that the Bank of England was pressurized by the Treasury to sell off more than half of the country's gold reserves between 1999 and 2002, when gold was a fraction of its current price.

Murphy spoke of a "gold cartel" and claimed that the sell-off came because Goldman Sachs and the Bank of England wanted to drive the price of gold down.

"If you want the best price for your gold, you don't tell the world in advance what you are doing," he said. In London, where the Bank of England and the London Bullion Market Association are based, GATA was "in the belly of the beast," he added.

"They're losing control of the price," Murphy said, claiming that GATA predicted the recent record run in the price of gold, which hit $1,672.65 earlier this week. "When we started (in 1999), we said that the central banks were flooding the market with gold."

Central banks in South Korea, Thailand and even debt-laden Greece have added to their gold reserves recently.

Dumpster Dive for These 6 Solid (But Oversold) Stocks: GE, KO, DIS, FCFS, AHT, DLTR

There were many lessons to learn following the crash of 2008, and one of the the biggest for investors should have been that a crash takes everything down, not just companies that have weak balance sheets. That means many world-class blue chips were kicked undeservedly to the curb.

Should another crash occur, and by that I mean stocks being taken down 25% or more, here are six stocks I would scoop up without a second thought:

General Electric (NYSE:GE) is the classic long-term hold. Somehow, despite all these years, the company is still projected to grow earnings at a 15% annualized rate over the next five years. It has plenty of cash to pay its 3.6% dividend (after the severe dividend cut that outraged shareholders in 2009, it had better), and its tendrils extend to hundreds of different products all around the world to lend diversity to its operations. Though some folks may be skittish after GE stock took an 80% flop after the financial crisis and a 20% slide since February, don’t forget GE has also tripled off its crisis lows.

Coca-Cola (NYSE:KO) remains the premier soft-drink company in the world. It has created just under $9 billion in free cash flow in the last 12 months alone, has projected 5-year annualized growth of 9% and yields 2.8%. That one can find Coke in the most remote locations on earth, and yet the company still has room to grow tells you all you need to know.

Walt Disney (NYSE:DIS) is the third brand name to aim for. With the acquisitions of Marvel and Pixar over the last several years, the Disney movie brands have powerhouse box office potential, regardless of the economy’s weakness. Just like GE, Disney is looking at 15% 5-year annualized growth, generated $4 billion in free cash flow over the last 12 months, and pays a not insignificant 1.1% dividend. It’s diverse media operations including ESPN and ABC also help keep this company stable.

On the smaller side, I would buy First Cash Financial Services (NASDAQ:FCFS). The company owns hundreds of pawn shops and will not only benefit from a deeper recession, but has just scratched the surface in its Mexican expansion plans. The stock is undervalued as it is at 16x next year’s estimates while growing earnings at a 20% clip. Over $40 million in cash, no debt and great management. What’s more recession proof than a pawn shop?

Next up is Ashford Hospitality Trust (NYSE:AHT). This hotel REIT did what virtually all of its peers failed to do during the financial crisis: maintain plenty of liquidity. They hedged interest payments with complex derivatives that actually added revenue to the company. They paid 100% of all preferred stock, and went from a low of $0.86 to a high of $14 after the crisis. With 92 hotels in their portfolio, and no recourse debt coming due in the next year, this is a solid buy for me. It already is 45% off its high, and yields 5.1%.

Finally, I’d add Dollar Tree Stores (NASDAQ: DLTR). I’ve compared all the dollar stores elsewhere, and Dollar Tree is not only undervalued, it has the best balance sheet and best margins. Dollar stores did great in the recession. The company rebounded to $70 off its $15 crisis lows.

So set your brokerage accounts to “buy” should the market tank further.

Living in a Low-Yield World

Paul Larson recently spoke with Josh Peters, an equities strategist and editor of the Morningstar DividendInvestor newsletter about the state of dividend investing today.

Paul Larson: How does the market look to you today?

Josh Peters: It's just a low-yield world.

It's not just income investors who are facing this problem. I think all types of investors are trying to figure out how they can earn a good return from their investments when stock prices are arguably so high in a long-term, normalized context. Bond prices are high and yields are low. Essentially, the whole world is overcapitalized. Too many investment dollars are chasing too few earnings dollars. That makes it a very difficult environment. But it's one where picking individual stocks very carefully, getting to know the businesses that you own, and knowing whether you're in fixed income or equity holdings is absolutely essential in order to not just earn a good return, but preserve your capital for the long run.

Larson: Given today's rates, how have your portfolios performed given the tailwind that dividend-paying securities have had?

Peters: Pretty well. Our strategy tends to split into the Builder model portfolio, which consists of dividend-growth-oriented stocks that have above-average yields, but growth is a more important long-term driver of total returns. The Harvest model portfolio, which has higher-yielding stocks, is the one that's been the best performer all the way through the recovery from the crash and the bear market that ended in March 2009. People are craving stability, they're craving quality, they're craving income, and they're especially craving that combination of big income today and growth going forward. Those are the stocks that have worked best for us. At other points along the curve, we've had some good results from some other stocks, such as Phillip Morris International (NYSE:PM - News), which does have a very solid growth component but also has an attractive yield component, about 5% on the current yield when we bought it.

Larson: What do you think is going to happen to the stocks that you own when interest rates go up?

Peters: Low interest rates, especially at the cash/short-term certificate-of-deposit end of the spectrum, have nudged some money into higher-yielding stocks that otherwise might not be in equities. Think of the investors who would prefer to be getting 2%–4% on a one-year CD. It's under 1% right now, so they're thinking in terms of, "Well, I guess I got to go buy some stock that pays a dividend." That money's going to come back out once short-term interest rates start to go up. And I think that does suggest that you could have a short- to intermediate-term spell when these companies continue to pay out very good dividends and continue to raise their dividends, but you might not get a whole lot in terms of capital appreciation. You might underperform some of the growth areas compared with the pipelines, utilities, and REIT stocks that we own that have high yield.

That said, once you get past that adjustment phase, once interest rates have gotten back to whatever will be a new normalized type of environment, then it's the same old story of total return, which is when you have the opportunity to get a 5% or 6% yield--dividend growth that's 5%–6% a year or better. That's a very powerful total return combination for a long-term investor, and it's very difficult to meet that with the same income component from any other area of the securities market. So, I think that the long-term outlook for companies that do pay decent dividends remains very good, not least because demographics are going to drive more and more people during the next 10, 20, and 30 years toward the companies that can provide a lot of income and provide some income growth to offset inflation. But in the short term, I would not recommend that anybody run out and buy dividend-paying stocks just on the basis of their dividends right now. You have to be looking at that long-term total-return picture.

Larson: In the context of a stock market that is looking, at least in our aggregate view at Morningstar, as being roughly fairly valued, where are you finding some pockets of opportunity for new money today?

Peters: It's very, very difficult. You can call it a problem if you wanted to; I call it a challenge. When you meet the challenge, it works very well for you. First, try to find some margin of safety or try to find a discounted price relative to the intrinsic value of the business, so you've got some room perhaps for things to go wrong, such as some short-term disappointments, a market correction, or what have you, without actually suffering a long-term and permanent impairment of your capital investment. Those margins of safety, right now, are just extremely difficult to find. I think if you're working with new money, you want to think in terms of maybe taking a six-month stretch or a year-long stretch, averaging in very slowly into some companies that have stocks that rotate through different ups and downs day to day, month to month, to pick things up less expensively.

But to me, for the best protection, if you can't get it in terms of price, then it's got to be in terms of quality. So, if I can get a moderate bargain, not something that I'm going to be real excited about from a valuation standpoint, but something I can be satisfied about, and if I can get the other investment-quality metrics that I like to look for, then it's names like Abbott Laboratories (NYSE:ABT - News), Procter & Gamble (NYSE:PG -News), and American Electric Power (NYSE:AEP - News).

These can be boring businesses with not a lot going on, not a lot that's going to catch people's eyes, and not a lot of leverage to an economic recovery. But they're the kind of steady-Eddie businesses that are going to be around for the long haul, that are going to be able to grow their dividends consistently, and that can do that on top of what are historically very attractive yields for these stocks. It's not really easy to move new money in, especially if you're as sensitive to valuation as we are. But give yourself some time and focus on quality, and I think you can still work at being able to build a good portfolio during the course of a six- to 12-month period.

Is Gold a Bubble? 14 Charts, the Facts and the Data Suggest Not

Gold is higher and is trading at USD 1,668.90 , EUR 1,167.10 , GBP 1,018.40 and CHF 1,287.70 per ounce. It is slightly lower in euros but higher in U.S. dollars, Swiss francs, the Japanese yen, and the Australian and New Zealand dollar. Gold’s London AM fix was USD 1,667.50, EUR 1,167.50, GBP 1,016.77.

Gold reached new record nominal highs in majors yesterday and remains close to these record highs today and close to record highs in most fiat currencies. Gold surged 4.2% in Australian dollars yesterday – from $1,478 to $1,540 AUD to 1516 AUD. Gold is up nearly 12% in Australian dollars since July 1st – from $1,380 to $1,551 AUD today.

This shows that gold’s rally is broad based and is not solely a U.S. dollar phenomenon. It shows that markets and currency markets in particular are concerned about slowing economic growth, growing inflation pressures and continuing currency debasement.

After all the noise and theatre of the US debt ceiling debate and the botched deal and kicking the mother of all cans down the road, it is important to again focus on the primary fundamentals driving the gold market.

Is Gold a Bubble? 14 Charts, the Facts and the Data Suggest Not


For more than 3 years - since gold rose above its nominal high of $850/oz in February 2008 - there has been much talk about gold being a bubble.

Nouriel Roubini, professor of economics at New York University's Stern School of Business, is one of the more prominent financial and economic experts who said gold was a bubble and many other experts internationally echoed his sentiments.

On December 10th, 2009, with gold at $1,100 per ounce, Roubini, said, "all the gold bugs who say gold is going to go to $1,500, $2,000, they're just speaking nonsense". Roubini went on to say ,"I don't believe in gold."

Gold has now risen 50% since then and Roubini has been silent on the gold price. (more)

Spain’s 1575 Default Still Leaves Scars

The House Republicans, many of them opposed to raising the federal government’s borrowing ceiling, might take a lesson from the first sovereign debt crisis: Spain’s default in 1575. What events more than 400 years ago suggest is that it’s easy to ignite a dangerous chain reaction in financial and credit markets and inflict lasting damage on the economy.

Republicans today are playing the part of the cities of Castile, whose delegates to the Cortes (the Spanish parliament) opposed raising taxes to service King Philip II’s long-term bonds.

Spain, at the time, was the world’s sole superpower. Contemporaries described it as an empire“over which the sun never sets.” Yet the king needed the cities’ consent to borrow at a reasonable rate. And he needed it for a reason: The cities collected the taxes.

Each of the 18 main cities of Castile levied a special tax earmarked for long-term debt service. The level of this tax was set every six years through negotiation with the king. Tax collections were used first to pay off local long-term bondholders, with the rest sent to the central government. The local long-term bondholders were, in large part, the elderly living in the area. So local taxpayers realized that if they didn’t pay, their parents would be hurt. Thus, this precursor to Social Security had an effective enforcement mechanism -- the ire of the elders.

Confluence of Interests

But the king could only exploit this confluence of interests so far. The Cortes set the earmarked tax rate by majority rule, and that limited the king’s issuance of what were, in effect, his AAA securities. The king also issued other bonds secured by other, non-earmarked revenue. These securities were of a lower grade and sold at lower price.

Thanks to Philip’s expensive military adventures in the Netherlands and the Mediterranean,Spain’s debt had reached half of gross domestic product by 1573. At that point, the cities balked at paying higher taxes. For the next two years, they refused to budge in their confrontation with the king. (more)

Marc Faber Says We have Not Experienced a Major Stock Market Sell Off

Marc Faber was interviewed by Bloomberg Tv earlier today. Basically, he doesn’t think that the current down-leg in markets is a ‘major sell-off’, however he does think that ‘as of today, markets are extremely oversold’. See below for the video & summary.


  • So far we haven’t experienced a major sell-off.
  • ‘The world is mad’ — markets fluctuate and investors have to be prepared to experience volatility.
  • There is a case to be ultra bearish about everything. However, if one is ultra-bearish, it’s still better to be in equities than cash and government bonds.
  • The technical damage done to the markets since November 2010 is enormous. We’ve seen the highs for the year.
  • The market is extremely oversold as of today, we could have a ‘snap-back’ rally that doesn’t make a new high.
  • Maybe we don’t go down to Marc Faber’s previous target of 1100 on the S&P 500 because he can already ‘smell QE3′.
  • The coming weeks will be important to see whether Bernanke is a ‘true’ or ‘amateur’ money printer.

Junior gold stocks suffer in market meltdown - is this 2008 over again?

What a day on the stock markets! Major indices dropped like a stone with the FTSE, S&P and Dow all diving between 3 and 5% in the worst fallout for nearly three years. Will it end here or are we seeing another major market meltdown similar to that of October 2008? The meltdown continued overnight with the Nikkei, Hang Seng and Australian stock exchanges all also plunging around 5% or more.

If indeed we are seeing a new meltdown what lessons are to be learnt from the 2008 crash? Firstly that good stocks fall alongside the dogs and secondly perhaps that although gold itself may fall, its fall will tend to be limited and its recovery far quicker than that of the stock market in general, and of junior miners in particular. Major and mid tier stocks are unlikely to fall as much as the juniors - and silver investors may be in for a particularly rough ride.

But the other lesson to be learnt is that such stock market episodes provide huge buying opportunities. In 2008 some of the better junior miners with strong balance sheets and good ore deposits fell back pari passu with the others, but if you can pick anywhere near the bottom some of the subsequent gains in the better equities made were enormous - maybe 1,000% in some cases. Metals prices likewise. Gold actually fell back relatively little in relation to stocks and made a rapid recovery getting back to its pre-crash levels within a couple of months. Significant gold producers also held up relatively well in comparison with those of other metals - except perhaps iron ore and coal - while base metal prices, the platinum group metals and silver in particular suffered really badly. And, mostly, they took the best part of 2 years to recover fully. One might hazard a guess though that silver's strong subsequent recovery - although it took over a year to really take off - may keep this precious metal's fall relatively muted on this occasion - if there is indeed a full blown market crash.

Gold fell - not because of fundamentals but because people needed liquidity to counter losses elsewhere so anything of value needed to be sold. (more)

The Economist UK - 6th August-12th August 2011

The Economist UK - 6th August-12th August 2011
English | 80 pages | HQ PDF | 73.00 Mb