S&P Inconsistencies

"On the other hand, it's hard to think of anyone less qualified to pass judgment on America than the rating agencies. The people who rated sub-prime mortgage-backed securities @ AAA are now declaring that they are the judges of fiscal policy? ...Really???" - Paul Krugman

You might have heard that Standard & Poor's downgraded the US credit rating from AAA to AA+. OK. Everybody knows. Here's the result of their calculations on our debt.

“Under our revised base case fiscal scenario — which we consider to be consistent with a AA+ long-term rating and a negative outlook — we now project that net general government debt would rise from an estimated 74 percent of G.D.P. by the end of 2011 to 79 percent in 2015 and 85 percent by 2021.”

That's debt =
74% GDP by end of 2011
79% GDP by 2015
85% GDP by 2021.

The US government initially cried "foul" because it saw a $2 trillion error in S&P's estimates of our GDP. That's "trillion" with a "t". Oops. Careful with that decimal point. After the correction, S&P reiterated its downgrade, perhaps to avoid looking even sillier.

The US does have the capacity to print its way out of debt. Having a printing press gives it flexibility in how it attends to population increase and debt payouts. Yes, inflation robs the population of its wealth, but the government wants to pay everyone back. Printing dollars certainly helps, because it gives the government monetary options to go with its fiscal options.

S&P currently has a AAA rating on France. According to S&P's models, France’s debt will be 83% of its GDP by 2015. That's higher than the US's 79%. Also, France cannot print its way out. No monetary options. In addition, they are directly affected by the poor financial situations in Portugal, Italy, Greece, and Spain (PIGS). Yet, they are rated higher by S&P. Why is that?

If you've read last week's comments, then you know that it's confidence in government. S&P is more confident in France's government with its relatively higher debt and fewer options than in the US government - despite the fact that 12 member debt panel has yet to form and construct a fiscal plan to be voted on.

Is S&P wrong for downgrading us? With its spotty track record, it hasn't been right very often. Given the status that it has enjoyed, that level of incompetence deserves the corporate death penalty. Still, S&P could be right downgrade only because it should have done it a long time ago (pre-Obama). Only it could be wrong by its own metric since it weighs political factors so heavily. Only it could be right because blah blah blah. I can argue both sides of this interminably.

May it's right or maybe it's wrong. I just don't understand why France is less risky when politicians, French or otherwise, are cut from the same cloth. Others have pointed this out and now, so logically, there are rumblings of a possible France downgrade too. The crowd has to point things out first before credit agencies act. And when they act, they do so long after the writing is on the wall.

If that isn't enough, some think S&P will downgrade the US again by year's end to AA . Should this idea gain momentum, does that mean that France comes with us?

Stock Market Stuff

Fed Chairman Ben Bernanke reiterated the Bernanke Put this past week by declaring that rates will stay on the ground floor for the next two years. In addition, he made cryptic allusion to using other market tools to help keep things going. Beyond, that, he offered nothing. That disappointed many who were hoping for a QE3, but really? The purpose of QE is to hold bond rates low so that banks can borrow at a low rate and lend out at higher rate, making money on the spread and thus repairing their balance sheets. Europe is already doing that for us by bailing out Italy. They are taking that cash and buying US treasuries for safety. That increased demand is driving rates to the floor. If US Treasuries are being bought, then there is no need for QEX. After an initial selloff, the market rallied hard into the close. When a market rallies on bad news, that means something. A line in the sand for the bulls. ... Earnings from other companies rleased this week have been overshadowed by the stock market liquidation this week, but it's still important to pay attention to earnings to see which ones are going to fine. Most companies will be unaffected by a US downgrade or debt issues, and some are actually recession proof. For example, do you think Altria (MO) is going to be hurt by all this? Heck, MO might actually benefit. MO sells cigarettes and this type of market is bound to drive people to smoke. ... With Bank of America (BAC) diving, whispers of capital raising are starting to creep in. BAC's stock is diving because of the mortgage overhang and increasing difficulties of passing that trash to Fannie and Freddie. The AIG lawsuit of course doesn't help matters either. I don't see BAC going to zero because of implicit federal support, and I wouldn't mind buying some. Seeing it fall to $6.50-$7, I wouldn't mind dipping a toe in - at $4. ... Cisco (CSCO) returned to its 2009 low. Still a favorite of many mutual funds, CSCO has gone the way of Microsoft (MSFT): the numbers indicate a growing company, but it's falling out of favor because everyone sees slim growth potential. ... Parts of Europe have banned short selling (sell high borrowed shares, then buy back low) for a while, and that's a bad thing. When we did that here in 2008 on selective sectors, stocks sank even further as the shorts just simply target stocks in other sectors. It simply redirects it and the contagion spreads. While shorts can definitely cause the market to fall, they also help cause bottoms. When they cover (buy back their shares), that causes prices to go up and when buyers step in, that adds fuel to a rally. ... A bit of irony: the downgrade is now being viewed as a harbinger of negative things to come for S&P. Given its questionable logic, many institutions will not rush to get a rating on their debt. McGraw-Hill (MHP), which owns S&P, saw its stock take a shellacking this week. When will the downgrades come for MHP's stock?

Bottom Line: Enjoy the (jackhammer-like) bounce while it lasts. It could just be a pause before more selling takes place. So if your stuff stops going up, then sell it.

Current Positions: 50% cash - AAPL, BIDU, HS, MO.

Stuff That May Only Interest Me

Deer antler spray is now on the list of drugs that athletes use as an HGH replacement. Immature deer have high levels of IGF-1 (insulin growth factor) in their antlers. The antlers are ground up, then put in a breath spray. Major League Baseball issued a warning to players not use it, but not because of the IGF-1 (which it can't test for). The warning is due to a possible testosterone contaminant in the spray that MLB does test for. How's that for goofy? That's like warning people not to walkout onto a freeways blindfolded because an accident would deface the driver's car. ...
 Has anyone noticed that with all the negative publicity the different czars got in the first two years of Obama's presidency that we don't have a Healthcare Czar? It would make sense to have one, wouldn't it? ... Experts are now tossing around the idea that the price of gold could reach $2000 an ounce. I don't think they're aiming high enough. A very real possibility is $3000. ...

Last week while Obama celebrated birthday #50, the income tax turned #150. Originally, the income tax came to be when Abraham Lincoln needed money to finance the civil war. The result was a 3% on people with incomes over $20500 (in today's dollars). The Revenue Act has come a long way since then. Know anyone being taxed just 3%? I know a few companies that get that kind of treatment, but certainly no people. ...
 Here's why the Chinese complaints about dumping the US dollar in favor of a new world currency sound silly: they want sell their goods here. To do that, they have to expect compensation in US dollars, because last I checked, we don't use rubles or pesos. And what do you do with all those dollars? If the dollar is the world's currency, then it could buy oil or gold or Treasuries. If it isn't the world's currency, then it's just Treasuries. Yeah, it stinks for them if the US just simply prints the money it needs to pay the interest and debt, but since the yuan is linked to the dollar, they aren't exactly losing with dollar depreciation. ...
BTW, guess what China's credit rating is? AA+, same as ours. ...
The crisis in Europe over Italy, plus the diving stock market, is causing investors to reallocate their money to Treasuries. Yes, the same ones S&P downgraded last week. Because of that, interest rates are dropping to the floor. Which is why we are examining the idea of refinancing our home again. We are hoping to shave off at least another 1% or better. We've been quoted in the mid 3% range.  The negative:  home values have slid (don't believe the hype about housing prices bouncing), so it could mean bringing in more money for the minimum 20% capital requirement.  ...

For kicks, we floated the idea to a loan originator of someone else applying for a home loan. He filed bankruptcy four months ago and owns nothing. As it turns out, he did qualify for a loan - from a private investor. The price: 9% + 6 points. The loan originator tells us 9% is good because normally 15% would be offered if it were offered at all. Yikes. ...
 Tiger Woods is a much better golfer when he's out of control and hooked on Ambien.  This sober (or somber) Tiger just doesn't roar like he used to.  ...
The Fed's monetary policy might be helping the banks repair themselves and it may give incentive for them lend to help give businesses a push, but it really punishes savers. If you are looking to save money by putting it in a CD or money market account, then you aren't going to get much of anything back. Current monetary policy encourages investment and spending, especially since it is pushing the "inflation" button. The problem is that though banks have the Fed's help in repairing their balance sheets, people are getting hurt with regard to their own balance sheets since the result ultimately is higher prices. ...
What will ultimately help people's home budgets is wage growth (which I will address in next week's blog). Fiscal policy has splashed around with apparent aimlessness. The cries for austerity are loud ones, but not necessarily the best course of action since rates are so low. You don't get much return on your money. What government needs to focus on is how to spur investment in the US that will put people back to work longterm and give opportunities for wage growth. Everything should be on the table - including NAFTA. Any fiscal policy should also include education in the conversation. We are still smarting from NCLB which focused on testing and accountability on math and reading, yet heavily neglected curriculum. Produce smarter, more well-rounded people, and the jobs won't go overseas. ...
The best critique of the Iowa Republican debate was on MSNBC. Ed Shultz, who is rarely in control of his emotions, made some very solid and measured analysis. FOX gave atta-boys to every candidate with a focus on who gave better anti-Obama points. Pawlenty did his homework on Michelle Bachman and found several chinks in her armor, but showed little substance on what he was about in going the Schwarzenegger "vote me because the others stink" route. Santorum did his best "me too" impression all night in trying to ride Pawlenty's thunder, Romney was a wishy-washier Mr. Center-Right, Herman Cain was still on his soapbox, and Ron Paul continued with isolationist policy theory. Commentators found it curious that the crowd applauded whenever Paul said "can't we all just get a long and leave Iran alone so that we can focus on the inner us", but they forgot that the debate took place on a college campus. College students vote only in Presidential elections and tend to vote for the one with the hippest, give-peace-a-chance viewpoints. ...

 The best was probably Gingrich. He found some new supporters after this debate. Agree or disagree with him, but he knows better than the other candidates how Washington works. Gingrich clearly demonstrated that if Obama had the kind of experience and understanding he has, Obama would be a more effective leader. Of course, if Gingrich had the kind of restraint Obama has, he'd have a lot less baggage and would be more electable.  I can see someone choosing him for a vice-Presidential running mate.  Don't think so?  If Joe Biden can get in the White House then anything is possible.  ...
One predominant theme during the debate was that all candidates claimed to be fiscally conservative. That hasn't really been true of any president during the last few decades. Democrats spend on social programs and Republicans overspend on defense. Both spend just as much and judging by the wars, Republicans spend more. ...
Spain is struggling as are Spanish banks like Bankia. This week, Bankia IPO'ed to raise cash and did so successfully, raising enough to get it above the minimum requirements for passing the 8% capital stress test level. So why do I find this remotely interesting? Because Bankia helped finance Real Madrid's (that's a soccer team) acquisition of two coveted players - Ronaldo and Kaka. If the IPO didn't bring in enough money, they would have aggressively sought a loan from the European Central Bank and put these two players up as collateral. That's probably worse than "I'll gladly pay you Tuesday for a hamburger today," but who knows? Maybe Ronaldo and Kaka are really good at monetary policy, too. Gooooaaaaall!!!!!!!!! ...
Right now, I'm reading Diane Ravitch's new  book "The Death And Life Of The Great American School System." Worth your time. It demystifies a lot of the rhetoric involving education reform and identifies statistics that contradict many popular ideas vouchers, choice, small schools, and testing. Some great stuff on San Diego too and it details how Tony Alvarado's (some would say "mixed") success in New York was poorly implemented by Alan Bersin, how the legacy of Bersin still haunts us here (that dude does not know how to run a toaster oven, not to mention a school district), and how his virulent leadership qualities live on in New York (Joel Klein and Michael Bloomberg are Bersin-spawn). ...
Rick Perry is running for President. Aaaaah! I don't think this country can handle another dose of Texas. Its phony testing and accountability program for education became the backbone of NCLB. I can only hope he garners just enough votes to tie Ron Paul and perhaps winds up in a cameo in a Bruno sequel. ...

Rick Perry

Perry's idea of praying for rain to end the Texas drought doesn't seem like assertive policy, so I can't say that I'm a big supporter of that theory. The only thing I do agree with Perry is repealing the 17th amendment. Currently, senators are elected by the public. Instead of the public or the state legislatures, I'd rather state governors not named "Blagojevich" appoint them. The House is supposed to represent the people whereas the Senate represents the states. People voting on senators kinda makes the Senate pointless. Otherwise, I'd be fine with eliminating the Senate. ...

Meredith Whitney

Meredith Whitney is a very smart analyst when it comes to banks and bonds, but CNBC is going too far in letting her voice opinions on everything else. Her view of public education (we need pay for performance and vouchers) and the Tea Party (it consists of freaked-out, unemployed white men) wreaks of simple-minded idiocy. Just stick to subjects pertinent to your college major. ...

Michelle Malkin is way off her rocker. She clearly does not understand teachers and the education system. Having a mother who was a teacher does not give her street cred, and nor does having children in a charter school. A charter school is a school that exists between the islands of public and private, so that doesn't really give her any insight into public schools. She brings up the classic "teachers work only 180 days and get a nice salary with benefits" without acknowledging that teachers really work 184 real days, not 184 nine-to-five days. That's like saying she only works when she types up her articles - never mind the research, homework, preparation, and review (though this article indicates substantial absence of all these). She doesn't acknowledge that the level of mastery and schooling teachers must attain is not comparable in salary to that of other professions with similar level of credentials and studies. And with regard to LA's superintendent claiming that "too many ineffective teachers are falling into tenured positions - the equivalent of jobs for life?" If they are rated "ineffective", they don't get tenure unless there is no one else that's better or available. It's LA. You take what you can get, because there really isn't a line outside of qualified individuals. Oh, by the way, LA isn't known for paying its teachers well. Maybe that has something to do with it. Lastly, she has bought into the whole reading- and math-only curriculum and bottom-line results equals reality. While you can't test everything, she seems to be in favor of not exposing children to everything either. All there is to life is reading and math. Very narrow-minded, she has much more research to do. As far as this article is concerned, I can tell she didn't do any. Alluding to Guggenheim's "Waiting For Superman" with its several factual inaccuracies hardly qualifies as solid argument point. "I saw a movie on it" is hardly persuasive.  Michael Moore's "Sicko" didn't do it for her on healthcare, so why should "Waiting For Superman?" ...
Mr. Teachbad has been fired, and he thinks it's due to his blog. Teachbad taught in DC where Michelle Rhee instituted her highly subjective IMPACT program which evaluates teacher performance.   Since his views of administration were quite hostile on his website, that possibly tainted their evaluations of his teaching. While my views are far less incendiary (my point of view of administrators is very different) and I am no longer concerned about a Terry Grier or Alan Bersin, this is probably the last straw for me on this particular blog. Teachers in our district have been warned about social media and blog postings and how they would be used against us if we were made targets. This blog isn't meant to inspire cries of "Attica" at work and in no way will I go the Anthony Weiner route - though I've been told that I'm better-looking, but then again I wouldn't know because I don't A-Rod (study myself in the mirror) - but still, I don't need the potential headache.
Therefore, I will stop posting this blog after next week. A shame, because I enjoyed this. However, Mrs. R has raised this point with me time and again. At last, I will acknowledge her correctness on this issue. If we were keeping score on how often she is right, my balance sheet would look like AIG's.

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