Is Black August a Bad Omen?
Is “Black August” a Bad Omen?
By Ron DeLegge, Editor
August 8, 2011
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 (NYSE: MCO), Fitch Ratings, and Standard & Poor’s (NYSE: 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.
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.