Standard & Poor

[Our longtime friend Tom McCafferty, a veteran commodity trader and author of numerous books on the subject, knows a thing or two about making hay when stocks and commodities turn volatile. In the essay below, he explains why the markets have been so nervous lately.  Fortunately, in the violent swings that have been occurring from day to day and week to week, he sees the trading opportunities of a lifetime. RA] Recently, Rick did some of that great technical analysis he is known for, and after he studied the formation the bones made on his sacred cloth and cut open a few toads to check their entrails, he came to the conclusion that the Dow Industrial Average is headed for a bull rally.  Next we took a look at the fundamentals – the European banking situation, upheaval in Africa, labor problems and loss of competitive edge in China, the U. S. job and housing markets—and we grew very bearish.  In other word, today’s Market is like a Joyce poem: you can read into it just about whatever you want. We become further confused when we see so many strong companies sitting on tens of billions of dollars, and, at the same time, they are laying off staff.  With their fat bankbooks, there are just too many of them striving to get leaner and meaner.  On top of that, quarterly earnings are pretty damned good.  We needed a good reason for this behavior. Then it dawned on us.  It was so simple we were embarrassed.  The whole world is suffering for a “Compliancy Complex.”  You will not find that dysfunction described in any medical textbook, but we know in our heart of hearts what it is.  There is just too much unexplainable information overwhelming us at one time, to wit: •          

[In the daily give-and-take of the Rick’s Picks forum, Mario Cavolo, an American expatriate living in Shanghai, is the perennial optimist, sort of. While hardly unmindful of America’s steep decline, he sees offsets in a rising global middle class, particularly in India and China, and in an upper-class America that will continue to flourish even in hard times.  Skeptical though we are sometimes about his thesis, we must admit that a drive through Palm Beach, Florida, the other day reminded us that there are concentrations of wealth in this country so deep that even if 90% of it were to vanish tomorrow, the super-rich will still be driving Bentleys and shopping on Worth Avenue and Rodeo Drive.  For a summation of Mario’s thoughts as U.S. stocks continue their descent into Hell, read on. RA] Let's begin this commentary by asking exactly what specific Lehman-type crisis recently occurred or will occur to justify the nasty global equities decline and its continuation as, perhaps, the 2011-2012 Crisis? We can quickly dismiss the idea that it was Standard & Poor’s credit downgrade of U.S. debt.  I mean, come on folks, it has been beyond obvious that global credit markets are awash in debt and therefore higher-risk. Things were known to be bad before the downgrade, and the downgrade itself did not make the fundamental problems any worse. The credit downgrade was a message to Washington, long overdue, but it probably did more to soil S&P’s reputation, since it is still well recalled that the firm rated sub-prime junk as triple-A a few years back. So let’s move on to more substantive issues to identify what is wrong with the  global economy right now. Can we say it was the recent "realization" that Washington bankers and politicians have been pillaging the financial system greedily? 

And how did Treasury paper do following Standard & Poor’s bombshell downgrade of U.S. debt?  Why, T-Bonds, Bills and Notes came through unscathed, thank you. Actually, they did much better than that, rallying so sharply yesterday that one might have inferred the U.S. was the last citadel against the panic, confusion and fear that rein elsewhere in the world. Which is more or less true, relatively speaking.  We hesitate to describe yesterday’s tidal surge in Treasurys as counterintuitive, however, since, officially, U.S. debt is still rated AA+.  That’s a tad optimistic, if not to say delusional, given the fact that U.S. borrowing is eventually headed north of $20 trillion.  How could debt not be about to go parabolic now that Congress has discovered that the debt ceiling can be raised without exacting a fiscal price, or even a political one? Even so, and as the mortgage boom/bust demonstrated, institutional investors base their allocations not on fundamentals or even reality, but on the official say-so of the ratings agencies.  And although we all understand that the AA+ rating is conferred with a wink and a nod, it has always been in Wall Street's best interests to pretend to take it seriously. Keep in mind as well that neither Moody’s nor Fitch’s has gone along with the downgrade, at least not yet.  This will suffice to allow those who have been mindlessly pouring cash into the Treasury of a nation edging toward bankruptcy to credibly claim down the road that, at the time, the U.S. was still officially the safest place on earth to park one’s cash.  They’ll be correct about that, too, since U.S. Treasury paper has become the only sanctioned safe haven for the very biggest money.  George Soros undoubtedly recognized this when he decided to shut down Quantum.  These

Shares will get violently crushed on Monday at worst, or gyrate wildly throughout the day at best, now that Standard & Poor’s has downgraded U.S. Treasury debt to a still-delusional AA+. Whatever happens in the silly, benighted world of stocks and bonds, it would be a shame if Wall Street’s headless-chicken act overshadows the deaths of 30 American troops in Afghanistan over the weekend. Twenty-two of them were Navy SEALs from the same elite unit that killed Osama bin Laden in Pakistan in May. They were the best of the best among America’s fighting forces, and their deaths will raise further, grave doubts about the U.S. mission in Afghanistan. When the Russians were there for nine years fighting the mujahedin, we marveled from the sidelines at how the insurgents, armed with U.S.-made Stinger missiles, were proving to be more than a match for Brezhnev’s 40th Army. Now it’s our turn to apply all that we have learned about asymmetrical warfare. The generals say the war is winnable – but then, they always say that. Whether it is winnable or not, the pretense is fading that the Afghanis alone will be able to hold a murderous Taliban at bay as the U.S. draws down its troops ahead of Mr. Obama’s re-election bid. Neither should Americans pretend that giving the Taliban free rein in Afghanistan will be without serious consequences.  For in fact, if and when all of our troops eventually do come home, no U.S. company with offices or operations outside of North America will be safe from bombings, shootings, kidnappings and extortions. Problems Dwarf Presidency In the meantime, perhaps the President should follow Lyndon Johnson’s principled example by resigning. With a war that is going badly and an economy that is headed into Depression, the Republicans are going to have

Standard & Poor's downgrade of U.S. debt appears likely to bring back the secular bear in stocks, and even to derail the breathtaking rally in Treasury debt. However, I doubt that it will much affect December Gold's predicted move to at least 1728.  The chart is persuasive on this point, so I'd suggest having a look at today's tout if you need to be reassured.  I will update in any case after the markets have opened on Sunday evening.

Where would you invest $76 billion if you had it?  That’s the size of Apple’s cash hoard at the moment, and it would appear that they have no better idea of what to do with all that money than you or I.  Apple isn’t the only company with this “problem,” if you could call having a mountain of spare cash in the bank a problem. According to Standard & Poor’s data reported by the Wall Street Journal the other day, the 500 largest U.S. companies alone currently hold cash or cash equivalents that totaled $963 billion at the end of the first quarter, up from $837 billion a year ago.  Tech companies in particular are glutted with cash they apparently cannot use. Microsoft’s got $60.9 billion sitting around; Google, $39.1 billion; and Cisco, $43.4 billion. What’s a company to do? Traditionally, high-tech companies have shunned paying dividends because shareholders expect the companies to use the cash more aggressively for growth. But the likes of Apple and Google have been growing plenty fast without dipping into their so-called war chests. Come to think of it, maybe they should start a war with China, Europe or Brazil.  Hasn’t war always been good for business? As for the excuse that they need to hold cash in case a great acquisition opportunity comes along, Apple, Google and numerous other NASDAQ world-beaters could borrow all they want for next to nothing, at any time.  And so they have been. We reported on the surge in corporate borrowing a while back, mystified as to why a corporate sector with nearly $2 trillion to spare was nevertheless borrowing hand-over-fist. The ostensible reason is that the money can be borrowed for nearly nothing – and so, why not?  Indeed.  Even so, we can’t help thinking that a wave