December 16th 2011 I am back

Hi, all
Just done with my finals. I am back!
I have not posted something for a while because of the finals and other stuff.
I will be posting some stocks under my radar in the next a couple days and hopefully my tips can be helpful.

Best

Chao

Why we should view the S&P downgrade as the final warning of a US default

Yesterday, Standard& Poor’s, one of the three best known credit rating agencies, downgraded the US debt to AA+ from AAA. Yes, this is a historical moment as the US debt credit has been an absolute AAA since the times of the founding fathers.
There is no question that the downgrade will cause a panic on Monday. Yes, people are not going to dump the US debt because it is still one of the most attractive assets in the world. However, bear in mind that the downgrade will increase the likelihood of a US default on its obligations. Here is why.
The AA+ credit rating means that US will likely to pay more interest on every dollar it borrows in the future. The US hardly avoided a default on Tuesday and a higher cost of borrowing is going to make the situation even uglier. We need to remember that the debt deal reached on Monday is a deal that pays the current obligations by borrowing more. In other words, US has been avoiding a default simply by relying on its low borrowing cost. The US has lost this advantage.
Secondly, with S&P lowered the credit of the US, we cannot be sure that the other two major rating agencies will not do the same in the future. Rating agencies are largely criticized by the public for their failure to perceive the risk of CDOs during the 2007 crisis. It is a positive thing for us to see that S&P has learned a lesson from these criticisms. Fitch and Moody’s will be risking their reputation if they choose to keep the credit rating of the US as it is while the country is having trouble to pay back its debt.
We will see the reaction of the market on Monday, but investors will most likely pull money out of the US stocks and bonds in seeking for a better heaven, such as gold and platinum.

So where are we heading to?

The S&P 500 gets a little support today and closes at 1260 after nine losing days. Even though the market is up today, it does not mean that we can start to buy and wait for the position to surge. Today's rally only shows that investors feel uncertain about the economy and the employment data coming out on Friday. As I have covered in my previous post that we still need to be careful about the US economy even the US has avoided a default on Tuesday.
The compromise on the Capitol Hill does not change the fact that US has a large gap in its budget deficit. The economy is getting weak and I do not see any good reason for the job market to improve.
So what should we do now? From a pure technical point of view, we are still in a very bearish environment. The Double Top Pattern and a break out of the support line have told us that the market is still negative. Tomorrow's initial claim will likely to be disappointing and investors’ bearish mood will get confirmed.
Gold is still my biggest buy as we can see it makes new high every day. We can also put some value stock in our watch list, such as Google, Apple and Microsoft. These stocks have been brought down by the broad market and they will offer a good return once the market comes back.

Weekly Market Direction (0801)

The market rallies on the news that the two parties have reached a debt deal. This certainly gives investors a relief that the US will not default on Tuesday. However, before we get too optimistic, we need to understand that we are still facing a weak GDP for the second quarter, a high unemployment. The gold prices have showed us that investors are still a little bit skittish about the economy and the future of the US credit. Today's rally does not necessarily ensure a trend change. My suggestion would be to wait for a trend change and then get in.
Stocks that will perform well include GOOG, APPL, MCD, MOS.

US is doomed to default, may be not now, but someday in the future

The impasse of the US debt deal has driven the US stock lower today, with the NASDAQ down more than 2%. As the August deadline approaches, investors are worried that the US may not be able to borrow money legally and pay the bill on time. At this stage, I think our main concern should not only focus on whether US will be able to pay the bill this time but whether it can pay its bills in the future. Even if the politicians can reach an agreement before next Tuesday, I believe the US credit is affected.
A major problem of the US political system is that administrations, theoretically, only need to take care of this country for eight years and leave all the crap to the descendent .The US debt ceiling has been increasing constantly since the 70s and every government simply left the debt problem to the next one. Even the US is still the world’s strongest power with the highest GDP number, eventually; it will be dried up by all the interests incurred by these debts. The question will eventually turns out to be: who is the lucky president in office when this happens?
Investors like China and Japan will eventually lose confidence in the US’s ability to pay back the US treasury and choose to diversify its asset allocation. When that happens, US will be in deep trouble. The cost of borrowing will be higher. This means that US will pay more interest on every dollar it borrows. The debt burden increases with the interest and thus a vicious spiral continues.
The solution is simple but politicians are just too selfish to make it happen. The US needs a spending cut, an austerity package like the ones in Europe. However, the reality is that government is in office for a maximum of eight years, nobody would like to risk losing popularity by cutting the social benefits and increasing personal income taxes at the same time. So if that is the case, a US default will eventually happen and people will suffer, I mean everyone.
We all know that American’s living standards are largely based on borrowed money, so someday we will pay it back, in an almost cruel way.

What I am reading this week

1. Michael Burry Profiled: Bloomberg Risk Takers (Bloomberg)

2. Richard Branson Revealed: Bloomberg Game Changers (Bloomberg)

3. Forty-Five Years in Wall Street by W.D Gann

4. Howard Marks on the U.S. Debt Ceiling: Oaktree Capital Commentary (Market folly)

5. Confronting Antitrust Issues in a Giant Merger (Dealbook)

Weekly Market Direction 4/3-4/9

I apologize for not posting anything for the past couple of months. I have been very busy with my schoolwork this semester. We definitely see some positive economics indicators this month so far with the fourth quarter GDP growing at about 3% and the unemployment rate falling to its lowest in almost two years. As the riots in the middle east continues, we just saw the WTI jumped to $113, the highest in two years. There is a risk that the high oil prices will slow the recovery by pushing up the the inflation rate. However, I do not think it is going to happen in the near future. First of all, there is question on whether the high oil prices will sustain. We know that the supply of certain types of oil will be affected as a result of the recent political instability in the northern Africa. For example, the sweet oil produced by Libya. However, bear in mind that the Libya is just too small to be accounted for a major supplier of oil with a world market share about 2%. In addition, there is no evidence that the current situation is going to get worse. With the weapon embargo imposed on the country, Qaddafi is having really limited options to get arms to crack down the pro-Democrats. Eventually, he will be forced to negotiate or flee away. The oil prices will return to a more reasonable level in the next couple of months as people realize that Qaddafi is fighting a war that he is doomed to fail. The equity market is undergoing a big return after the bearish environment following by the recent devastating Japanese earthquake. The VIX dropped nearly 45% in just a few weeks. I am expecting the market to become a little bit more volatile in the next coming weeks as people are still waiting for more positive confirmation from the economy.