United States of America Long-Term Rating Lowered To 'AA+' On Political Risks And Rising Debt Burden; Outlook Negative
We have lowered our long-term sovereign credit rating on the nited States of America to 'AA+' from 'AAA' and affirmed the 'A-1+' short-term rating.
We have also removed both the short- and long-term ratings from CreditWatch negative.
The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.
More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.
Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government's debt dynamics any time soon.
The outlook on the long-term rating is negative. We could lower the long-term rating to 'AA' within the next two years if we see that less reduction in spending than agreed to, higher interest rates, or new fiscal pressures during the period result in a higher general government debt trajectory than we currently assume in our base case.
Rating Action
On Aug. 5, 2011, Standard & Poor's Ratings Services lowered its long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA'. The outlook on the long-term rating is negative. At the same time, Standard & Poor's affirmed its 'A-1+' short-term rating on the U.S. In addition, Standard & Poor's removed both ratings from CreditWatch, where they were placed on July 14, 2011, with negative implications.
The transfer and convertibility (T&C) assessment of the U.S.–our assessment of the likelihood of official interference in the ability of U.S.-based public- and private-sector issuers to secure foreign exchange for debt service–remains 'AAA'.
Rationale
We lowered our long-term rating on the U.S. because we believe that the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process. We also believe that the fiscal consolidation plan that Congress and the Administration agreed to this week falls short of the amount that we believe is necessary to stabilize the general government debt burden by the middle of the decade.
Our lowering of the rating was prompted by our view on the rising public debt burden and our perception of greater policymaking uncertainty, consistent with our criteria (see "Sovereign Government Rating Methodology and Assumptions," June 30, 2011, especially Paragraphs 36-41). Nevertheless, we view the U.S. federal government's other economic, external, and monetary credit attributes, which form the basis for the sovereign rating, as broadly unchanged.
We have taken the ratings off CreditWatch because the Aug. 2 passage of the Budget Control Act Amendment of 2011 has removed any perceived immediate threat of payment default posed by delays to raising the government's debt ceiling. In addition, we believe that the act provides sufficient clarity to allow us to evaluate the likely course of U.S. fiscal policy for the next few years.
The political brinksmanship of recent months highlights what we see as America's governance and policymaking becoming less stable, less effective, and less predictable than what we previously believed. The statutory debt ceiling and the threat of default have become political bargaining chips in the debate over fiscal policy. Despite this year's wide-ranging debate, in our view, the differences between political parties have proven to be extraordinarily difficult to bridge, and, as we see it, the resulting agreement fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged until quite recently. Republicans and Democrats have only been able to agree to relatively modest savings on discretionary spending while delegating to the Select Committee decisions on more comprehensive measures. It appears that for now, new revenues have dropped down on the menu of policy options. In addition, the plan envisions only minor policy changes on Medicare and little change in other entitlements, the containment of which we and most other independent observers regard as key to long-term fiscal sustainability.
Our opinion is that elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt burden in a manner consistent with a 'AAA' rating and with 'AAA' rated sovereign peers (see Sovereign Government Rating Methodology and Assumptions," June 30, 2011, especially Paragraphs 36-41). In our view, the difficulty in framing a consensus on fiscal policy weakens the government's ability to manage public finances and diverts attention from the debate over how to achieve more balanced and dynamic economic growth in an era of fiscal stringency and private-sector deleveraging (ibid). A new political consensus might (or might not) emerge after the 2012 elections, but we believe that by then, the government debt burden will likely be higher, the needed medium-term fiscal adjustment potentially greater, and the inflection point on the U.S. population's demographics and other age-related spending drivers closer at hand (see "Global Aging 2011: In The U.S., Going Gray Will Likely Cost Even More Green, Now," June 21, 2011).
Standard & Poor's takes no position on the mix of spending and revenue measures that Congress and the Administration might conclude is appropriate for putting the U.S.'s finances on a sustainable footing.
The act calls for as much as $2.4 trillion of reductions in expenditure growth over the 10 years through 2021. These cuts will be implemented in two steps: the $917 billion agreed to initially, followed by an additional $1.5 trillion that the newly formed Congressional Joint Select Committee on Deficit Reduction is supposed to recommend by November 2011. The act contains no measures to raise taxes or otherwise enhance revenues, though the committee could recommend them.
The act further provides that if Congress does not enact the committee's recommendations, cuts of $1.2 trillion will be implemented over the same time period. The reductions would mainly affect outlays for civilian discretionary spending, defense, and Medicare. We understand that this fall-back mechanism is designed to encourage Congress to embrace a more balanced mix of expenditure savings, as the committee might recommend.
We note that in a letter to Congress on Aug. 1, 2011, the Congressional Budget Office (CBO) estimated total budgetary savings under the act to be at least $2.1 trillion over the next 10 years relative to its baseline assumptions. In updating our own fiscal projections, with certain modifications outlined below, we have relied on the CBO's latest "Alternate Fiscal Scenario" of June 2011, updated to include the CBO assumptions contained in its Aug. 1 letter to Congress. In general, the CBO's "Alternate Fiscal Scenario" assumes a continuation of recent Congressional action overriding existing law.
We view the act's measures as a step toward fiscal consolidation. However, this is within the framework of a legislative mechanism that leaves open the details of what is finally agreed to until the end of 2011, and Congress and the Administration could modify any agreement in the future. Even assuming that at least $2.1 trillion of the spending reductions the act envisages are implemented, we maintain our view that the U.S. net general government debt burden (all levels of government combined, excluding liquid financial assets) will likely continue to grow. 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% of GDP by the end of 2011 to 79% in 2015 and 85% by 2021. Even the projected 2015 ratio of sovereign indebtedness is high in relation to those of peer credits and, as noted, would continue to rise under the act's revised policy settings.
Compared with previous projections, our revised base case scenario now assumes that the 2001 and 2003 tax cuts, due to expire by the end of 2012, remain in place. We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act. Key macroeconomic assumptions in the base case scenario include trend real GDP growth of 3% and consumer price inflation near 2% annually over the decade.
Our revised upside scenario–which, other things being equal, we view as consistent with the outlook on the 'AA+' long-term rating being revised to stable–retains these same macroeconomic assumptions. In addition, it incorporates $950 billion of new revenues on the assumption that the 2001 and 2003 tax cuts for high earners lapse from 2013 onwards, as the Administration is advocating. In this scenario, we project that the net general government debt would rise from an estimated 74% of GDP by the end of 2011 to 77% in 2015 and to 78% by 2021.
Our revised downside scenario–which, other things being equal, we view as being consistent with a possible further downgrade to a 'AA' long-term rating–features less-favorable macroeconomic assumptions, as outlined below and also assumes that the second round of spending cuts (at least $1.2 trillion) that the act calls for does not occur. This scenario also assumes somewhat higher nominal interest rates for U.S. Treasuries. We still believe that the role of the U.S. dollar as the key reserve currency confers a government funding advantage, one that could change only slowly over time, and that Fed policy might lean toward continued loose monetary policy at a time of fiscal tightening. Nonetheless, it is possible that interest rates could rise if investors re-price relative risks. As a result, our alternate scenario factors in a 50 basis point (bp)-75 bp rise in 10-year bond yields relative to the base and upside cases from 2013 onwards. In this scenario, we project the net public debt burden would rise from 74% of GDP in 2011 to 90% in 2015 and to 101% by 2021.
Our revised scenarios also take into account the significant negative revisions to historical GDP data that the Bureau of Economic Analysis announced on July 29. From our perspective, the effect of these revisions underscores two related points when evaluating the likely debt trajectory of the U.S. government. First, the revisions show that the recent recession was deeper than previously assumed, so the GDP this year is lower than previously thought in both nominal and real terms. Consequently, the debt burden is slightly higher. Second, the revised data highlight the sub-par path of the current economic recovery when compared with rebounds following previous post-war recessions. We believe the sluggish pace of the current economic recovery could be consistent with the experiences of countries that have had financial crises in which the slow process of debt deleveraging in the private sector leads to a persistent drag on demand. As a result, our downside case scenario assumes relatively modest real trend GDP growth of 2.5% and inflation of near 1.5% annually going forward.
When comparing the U.S. to sovereigns with 'AAA' long-term ratings that we view as relevant peers–Canada, France, Germany, and the U.K.–we also observe, based on our base case scenarios for each, that the trajectory of the U.S.'s net public debt is diverging from the others. Including the U.S., we estimate that these five sovereigns will have net general government debt to GDP ratios this year ranging from 34% (Canada) to 80% (the U.K.), with the U.S. debt burden at 74%. By 2015, we project that their net public debt to GDP ratios will range between 30% (lowest, Canada) and 83% (highest, France), with the U.S. debt burden at 79%. However, in contrast with the U.S., we project that the net public debt burdens of these other sovereigns will begin to decline, either before or by 2015.
Standard & Poor's transfer T&C assessment of the U.S. remains 'AAA'. Our T&C assessment reflects our view of the likelihood of the sovereign restricting other public and private issuers' access to foreign exchange needed to meet debt service. Although in our view the credit standing of the U.S. government has deteriorated modestly, we see little indication that official interference of this kind is entering onto the policy agenda of either Congress or the Administration. Consequently, we continue to view this risk as being highly remote.
Outlook
The outlook on the long-term rating is negative. As our downside alternate fiscal scenario illustrates, a higher public debt trajectory than we currently
assume could lead us to lower the long-term rating again. On the other hand, as our upside scenario highlights, if the recommendations of the Congressional Joint Select Committee on Deficit Reduction–independently or coupled with other initiatives, such as the lapsing of the 2001 and 2003 tax cuts for high earners–lead to fiscal consolidation measures beyond the minimum mandated, and we believe they are likely to slow the deterioration of the government's debt dynamics, the long-term rating could stabilize at 'AA+'.
On Monday, we will issue separate releases concerning affected ratings in the funds, government-related entities, financial institutions, insurance, public finance, and structured finance sectors.
Markets Alert from The Wall Street Journal
A mathematical error discovered late Friday by Treasury Department officials threw into limbo, at least temporarily, plans by ratings firm Standard & Poor's to downgrade the top-notch AAA credit rating the U.S. has held for 70 years, people familiar with the matter said.
The wild back and forth between the Treasury Department and S&P Friday afternoon illustrated the dramatic stakes as the ratings firm moved to downgrade the debt.
http://online.wsj.com/article/SB10001424053111903366504576490841235575386.html?mod=djemalertMARKET
A mathematical error discovered late Friday by Treasury Department officials threw into limbo, at least temporarily, plans by ratings firm Standard & Poor's to downgrade the top-notch AAA credit rating the U.S. has held for 70 years, people familiar with the matter said.
The wild back and forth between the Treasury Department and S&P Friday afternoon illustrated the dramatic stakes as the ratings firm moved to downgrade the debt.
http://online.wsj.com/article/SB10001424053111903366504576490841235575386.html?mod=djemalertMARKET
In Honor Of The Market Crash, Here Are 18 Meaningless Market Phrases That Sound Smart On TV
Meaningless?
Yes, meaningless.
Much of what these folks say will sound smart and sophisticated, but if you listen closely--and think about what you've just heard--you'll realize that the pundits aren't really saying anything.
(The art of sounding smart while saying nothing is critical to survival in a business in which folks are supposed to be able to predict the future. No one can reliably predict the future, so this supposition is ludicrous, but that doesn't stop everyone from trying.)
To prepare you for this onslaught, we're republishing our list of 16 Meaningless Market Phrases That Sound Smart On TV -- and adding a couple more that you hear especially often during a crash. You'll hear a lot of these over the next few weeks.
And, by the way, in case you're curious, here are the real reasons the market's crashing:
- Because stocks are expensive on one of the only valuation measures that is actually valid--"normalized" P/E ratios
- Because the global economy is deteriorating rapidly
- Because corporate profit margins are near record highs and therefore only have one way to go (down)
- Because interest rates are already near zero (hard for Fed to rescue us)
- Because the United States has not even begun to address its massive debt and deficit problem
- Because there's almost no way our government would approve another stimulus plan
- Because Europe is imploding, and there's just no way to save it for good without massive disruption and pain
- Because investors have gotten complacent and are now suddenly remembering that stocks are risky investments
But valuations are still high, the economy's still a mess, and the government is basically paralyzed, so it's not difficult to imagine that there will be more weakness ahead.
"Don't catch a falling knife"
When you'll hear it: When the market's dropping rapidly--like now.
Why it's smart-sounding: It implies wise, prudent caution. Stocks are dropping. No one knows where the bottom is. Obviously you shouldn't step in and buy because you'll just get clobbered.Why it's meaningless: Because no one ever knows where the bottom is. Sometimes stocks drop sharply...and then keep dropping sharply. Sometimes stocks drop sharply, and then rebound sharply--rewarding those who had the balls to buy while everyone else was selling. Except in hindsight, no one can tell the difference.
What's actually smart: As counter-intuitive as it sounds, the more stocks fall, the more attractive they become. American companies are not worth zero, so the closer stock prices get to zero, the more likely you are to be buying them at a discount to what the companies are actually worth (which, by the way, no one knows for certain, so don't get fooled into thinking that someone does). So the more that knife falls, the more you should want to try to catch it.
"You have to wait until you see the whites of the market's eyes"
When you'll hear it: In the middle of a market crash like this one.
Why it's smart-sounding: It suggests that there's a way to tell when the crash is about to be over--so you can safely buy in while everyone else is selling out. The idea is that, if you "wait until you see the whites of the markets eyes," you'll buy right at the moment of mass panic. Then, as soon as you have bought, there will be no more sellers left, and stocks will soar.Why it's meaningless: Because it's meaningless. "The whites of the market's eyes"? Give us a break. One alternate version of this concept--"wait until the 'puke point,'" is equally meaningless. All the way down in the market crash of 2008-2009, pundits talked about waiting for the "puke point." And when the market finally turned, without investors suddenly "puking" or without the market revealing the "whites of its eyes," everyone missed the move.
"Buy on weakness"
When you'll hear it: Any time a guest doesn't have the balls to say "buy" but wants to be able to say later that he/she told everyone to buy if the stock should happen to go up.
Why it's smart-sounding: It sounds highly informed. It sounds prudent (don't be stupid and chase the stock here). It sounds like common sense. It allows you to take credit for predicting any bullish move in the stock, while also being able to say "I said buy on weakness" if it crashes. It hedges all future outcomes.Why it's meaningless: It's too vague to be interesting or helpful. It can be applied to almost any stock or market at almost any time. It reveals that the speaker has little or no conviction about what he or she is saying and just wants to have it both ways.
"Sell on strength."
General: The corollary to "buy on weakness."
When you'll hear it: Any time a guest doesn't have the balls to say "sell" but wants to be able to say later that he/she told everyone to sell if the stock goes down.Why it's smart-sounding: It sounds highly informed. It sounds prudent (don't be stupid and sell the stock here, when it's already down). It will allow you to take credit for predicting any downward move in the stock, while also being able to say "I said sell on strength" if it soars. It hedges all future outcomes, at least over the near term--by implying that the stock will eventually trade higher than it is today, and lower.
Why it's meaningless: It's too vague to be interesting or helpful. It can be applied to almost any stock or market at almost any time. It reveals that the speaker has little or no conviction about what he or she is saying--and, instead, just wants to have it both ways.
"Take a wait-and-see approach"
General: A perennial favorite, especially when stocks are going down and worries are increasing.
When you'll hear it: Any time a guest doesn't have the balls to make any predictions or recommendations whatsoever.Why it's smart-sounding: It sounds prudent and cautious. It sounds appropriately skeptical. It plays to the viewer's sense that, somehow, things are more uncertain now than they usually are. (Absurd--the future is always uncertain.) It sounds like there's a specific event or events that you're waiting for that will suddenly turn you into the Donald Trump of Conviction, instead of suggesting that you're just perpetually wishy-washy. But it doesn't actually specify what this event or events are.
Why it's meaningless: It means nothing. How long are you going to wait? What are you waiting for? Why, when what you're waiting for finally arrives, won't everyone else see it at the same time and bid prices up or down? Why will the future be any less uncertain tomorrow, or next week, or next year, or whenever it is you're planning to "wait-and-see" until? What are you waiting for?
"The easy money has been made"
When you'll hear it: When a guest is asked whether investors should buy a market or stock that has already gone up a lot.
Why it's smart-sounding: It implies wise, prudent caution. It implies that you bought or recommended the stock a long time ago, before the easy money was made (and are therefore smart). It suggests that there might be further upside but that there might also be future downside, because the stock is "due for a correction" (another smart-sounding meaningless phrase that you can use all the time). It does not commit you to any specific recommendation or prediction. It protects you from all possible outcomes: If the stock drops, you can say "as I said..." If the stock goes up, you can say "as I said..."Why it's meaningless: It's a statement of the obvious. It's a description of what has happened, not what will happen. It requires no special insights or powers of analysis. It tells you nothing that you don't already know. Also, it's not true: The money that has been made was likely in no way "easy." Buying stocks that are rising steadily is a lot "easier" than buying stocks that the market has abandoned for dead (because everyone thinks you're stupid to buy stocks that no one else wants to buy.)
"I'm cautiously optimistic."
A classic. Can be used in almost all circumstances and market conditions.
When you'll hear it: Pretty much anytime.Why it's smart-sounding: It implies wise, prudent caution, but also a sunny outlook, which most people like. (Nobody likes a bear, especially in a bull market). It sounds more reasonable than saying, for example, "the stock is a screaming buy and will go straight up from here." It protects the speaker against all possible outcomes. If the market drops, the speaker can say "As you know, I was cautious..." If the market goes up, the speaker can say, "As you know, I was optimistic."
Why it's meaningless: It's too general to mean anything. It could have accurately described any market outcome in history, merely by adjusting the unspecified time frame. (If you were "cautiously optimistic" in 1929, you were "cautious," which was good, and you were also optimistic, which was also good. Eventually, the market recovered!)
"It's a stockpicker's market."
Another classic. Sounds smart, but is completely meaningless.
When you'll hear it: Especially useful in bear markets or flat markets, but can be used anytime.Why it's smart-sounding: It suggests that the current market environment is different from other market environments and therefore requires special skill to navigate. It implies that the speaker has this skill. It suggests that, if you're talented enough to be "a stockpicker," you can coin money right now--while everyone else drifts sideways or loses their shirts.
Why it's meaningless: If you pick stocks for a living (or for your personal account), all markets are "stockpickers' markets." In all markets, traders are trying to buy winners and sell dogs, and in all markets only half of these traders succeed. (It's a different half each time, of course--and most of the "winnings" of the winners are wiped out by transaction costs and taxes, but that's a different story). It is no easier (or harder) to win the stockpicking game in a flat or bear market than in a bull market, and if you try, you'll almost certainly do worse than if you had just bought an index fund.
"It's not a stock market. It's a market of stocks."
When you'll hear it: All the time.
Why it's smart-sounding: It sounds deeply profound--the sort of wisdom that can only be achieved through decades of hard work and experience. It suggests the speaker understands the market in a way that the average schmo doesn't. It suggests that the speaker, who gets that the stock market is actually a "market of stocks," will coin money while the average schmo loses his or her shirt.Why it's meaningless: Because it's a statement of the obvious. Of course it's "a market of stocks." But it's also a "stock market." And viewing the stock market as a "market of stocks" doesn't help you in any way, other than reminding you that all stocks don't move up and down the same amount. (See: "It's a stockpickers' market.")
"We're constructive on the market."
When you'll hear it: All the time.
Why it's smart-sounding: It sounds generally optimistic, which viewers will like, but it doesn't commit you to any specific recommendation or prediction or time period. It doesn't even require you to to say that the market will go up or down or how you are investing or think the viewer should invest. It just sounds generally optimistic, and it leaves you plenty of wiggle room if the market suddenly tanks.Why it's meaningless: Because being generally optimistic about the market over some unspecified time period is no different than being generally optimistic about life over some unspecified time period: Odds are, whatever happens, life will go on and the world won't be destroyed by an asteroid. And, besides, you're not even saying you're "optimistic." You're saying you're "constructive." That can mean anything!
That's Business Insider's Katya Wachtel in the screenshot above, by the way. She would never say anything as mealy-mouthed as "constructive."
"Stocks are down on 'profit taking'"
When you'll hear it: When a guest is asked to explain why the market (or a stock) is down after a strong run.
Why it's smart-sounding: It sounds like you know what professional traders are doing, which makes you sound smart and plugged-in. It sounds like common sense: Traders have made a lot of money--now they're "taking profits." It doesn't commit you to a specific recommendation or prediction. If the stock or market goes down again tomorrow, you can still have been right about the "profit taking." If the stock or market goes up tomorrow, you can explain that that traders are now "bargain hunting" (see next smart-sounding meaningless phrase).Why it's meaningless: Traders buy and sell stocks for dozens of reasons. And for every seller, at any time, there is a buyer on the other side of the trade. Whether or not the seller is "taking a profit"--and you have no way of knowing--the buyer is at the same time placing a new bet on the stock. So collectively describing market activity as "profit taking" is ridiculous. Any trade, at any time, in any market, can be described as "taking a profit" or "cutting a loss" or "bargain hunting" or "filling out a position," and so on. You have no way of knowing what's actually going on, and there's always someone on the other side of every trade. But no one will ever prove you wrong!
That's Business Insider's Joe Weisenthal on the left. He knows better than to say "profit taking."
"Stocks are up on 'bargain hunting'"
General: The corollary to "profit taking."
When you'll hear it: Any time a guest is asked to explain why the market (or a stock) is up after a period of weakness.Why it's smart-sounding: It sounds like you know what professional traders are doing, which makes you sound smart and plugged-in. It sounds like common sense: Traders have been sitting on the sidelines waiting for the market to fall--and now they're "bargain-hunting." It doesn't commit you to a specific recommendation or prediction. If the stock or market goes down again tomorrow, you were still right about the "bargain hunting." If the stock or market goes up tomorrow, you can explain that that traders are now "taking profits" after yesterday's "bargain hunting."
Why it's meaningless: Again, traders buy and sell stocks for dozens of reasons. And for every buyer, at any time, in any market, there is a seller on the other side of the trade. Whether or not the buyer is buying because he or she thinks they have found a "bargain"--and you have no way of knowing--the seller is at the same time ditching the stock, perhaps because he or she is "profit taking." So collectively describing this activity as "bargain hunting" is ridiculous. Any trade, at any time, in any market can be described as "taking a profit" or "cutting a loss" or "bargain hunting" or "filling out a position," and so on. You have no way of knowing what's actually going on. But no one will ever prove you wrong!
"More buyers than sellers"
When you'll hear it: When a guest is asked to explain why the market (or a stock) is going up.
Why it's smart-sounding: It sounds like you know what's really going on, which makes you sound smart and sophisticated. It sounds like you understand how the market works, in a way that Joe Schmo doesn't. (Ahh...there are more buyers than sellers! Insightful! Fascinating!)Why it's meaningless: In every trade--every one--there is exactly one buyer and exactly one seller. You cannot buy a stock without having someone sell it to you. To say that the market or a stock is going up because there are "more buyers than sellers," therefore, is not just meaningless, it's wrong. What is actually happening when a stock or market ticks up is that the next buyer is willing to pay more for the stock or market than the last buyer was. What is actually happening when the market or a stock goes down, meanwhile, is that the next buyer is not willing to pay as much for the market or stock as the last buyer was. There are never "more buyers than sellers" or "more sellers than buyers." There are simply different price levels at which a buyer and a seller are willing to trade.
"There's lots of cash on the sidelines"
General: A classic way to suggest that the market will eventually go up.
Alternates: "Dry powder."When you'll hear it: Any time a guest needs to explain a bullish outlook.
Why it's smart-sounding: It sounds like common sense: Wimpy investors are hoarding cash instead of "putting it into the market." When these investors finally grow a pair and use their cash to buy stocks, the market will go up.
Why it's meaningless: There is no such thing as cash "going into the market" or "coming out of the market." In every trade--every one--a seller sells stock to a buyer in exchange for cash. Importantly, the cash used to buy the stock does not go "into the market." It goes to the seller. After the trade, the seller now has cash instead of the stock, and the buyer now has the stock instead of cash--and the overall amount of neither cash nor stock has changed. At some times, some investors--mutual funds, for example--might have more cash than usual in their funds (for a variety of reasons), and this cash might eventually be used to buy stocks, but this cash will not go "into the market." It will go to the investors who own the stocks that the mutual funds buy. In short, again, cash does not go "into" and "out of" the market. Someone always holds the cash, and someone always holds the stocks. So, in a literal sense, the cash is always "on the sidelines."
"We're in a bottoming process."
General: A classic way to describe a stock or market that has fallen a lot and might do anything from here.
Alternates: "Forming a base." "Bumping along the bottom."When you'll hear it: Any time a guest doesn't know what a stock will do but wants to imply that it might eventually go up but hedge him or herself by saying that it also might go down.
Why it's smart-sounding: It sounds highly informed. The stock is "in a bottoming process." It's "forming a base." It sounds reassuring, without being too precise. Sure, the stock might drop some more, you seem to be saying, but it's generally settling in here--and then it will eventually go up. It sounds like you have command of "technical analysis," which almost always sounds smart (and is almost always meaningless).
Why it's meaningless: Because it describes a price pattern that has happened but does not tell you anything about what will happen. A drop followed by a sideways move does not mean the stock won't drop more. It also does not mean the stock will go up. And it commits to no time frame. It can be used to describe any stock that has moved sideways for a while, without offering the slightest insight into the future.
"Overbought"
General: Another classic way to describe a stock or market that has gone up a lot.
When you'll hear it: Any time a guest doesn't know what a stock or market will do but wants to sound generally bullish while also implying that the stock might be "due for a correction" (also meaningless).Why it's smart-sounding: It sounds highly informed. It sounds like common sense: The stock just went up a lot--so it must be "overbought." It hedges all future outcomes. (Just because it's "overbought" doesn't mean it will go down. What if it gets more "overbought"?) It sounds like you have command of "technical" and "quantitative" analysis, which always sounds smart--even though they're almost always meaningless.
Why it's meaningless: What does "overbought" mean, exactly? Does it mean that traders bought too much of the stock? How can they have done that--the amount of stock in the market didn't change. Does it mean that traders paid too-high prices for the stock? Okay, maybe it means that. But does that mean the stock is going to go down soon? Why? In short, it's a fancy and sophisticated-sounding way of saying nothing.
"Oversold"
General: The corollary to "overbought." A classic way to describe a stock or market that has gone down a lot.
When you'll hear it: Any time a guest doesn't know what a stock or market will do but wants to imply that it might go up.Why it's smart-sounding: It sounds highly informed. It sounds like common sense: The stock just went down a lot--it must be "oversold." It hedges all future outcomes. (Just because a stock or market is "oversold" doesn't mean it will go up. It might get more "oversold.") Again, it sounds like you have command of "technical" and "quantitative" analysis, which always sounds smart.
Why it's meaningless: As with "overbought," what does it mean, exactly? Does it mean that traders sold too much of the stock? How can they have done that--the amount of stock in the market didn't change. Does it mean that traders sold stock at prices that were too low? Okay, maybe it means that. But does that mean the stock is going to go up soon? Why? In short, it's a fancy and sophisticated-sounding way of saying nothing.
"It's a show-me stock"
General: A classic way to describe a company that has blown it.
When you'll hear it: Any time a guest doesn't know what a banged-up stock will do next--especially if he or she is worried that viewers might think he or she was dumb enough to have owned it when it cratered.Why it's smart-sounding: It sounds tough, decisive, and judgmental. You're not going to take management's word for anything--not like those other idiots who just got blown up in the stock. You want to see the results. You want to make management show you that they can deliver, before you entrust them with your clients' hard-earned money.
Why it's meaningless: All stocks are "show me" stocks. If management "shows you" that they have delivered results that beat the market's expectations, the stock usually goes up. If management "shows you" that they have blown the quarter, the stock tanks. Even when applied to the limited realm of companies that have just choked, if management "shows you" that they can deliver, they'll show everyone else, too. The stock will go up before you can buy it. And then, once the stock goes up, management will have to "show you" that they can continue to do better. And so on. By the time you and everyone else finally trust management enough again to buy into their vision of the future, the stock will have soared--and it will then be time for management to show you that they've blown it again.
And sometimes, of course, no matter how smart you sound on TV, the producers will make you look like a sex-crazed zealot
But there's not much you can do about that
Leaders from EU powerhouses Germany and France will hold talks today (5 August) after a global market rout roused fears that Europe's debt crisis is spinning out of control and the US recovery is stalling.
Belying a sense of crisis, many of Europe's policymakers are still on summer holidays, although EU Economic and Monetary Affairs Commissioner Olli Rehn broke away from his to return to Brussels, where he is planning a news conference today (Friday).
French President Nicolas Sarkozy will discuss financial markets with German Chancellor Angela Merkel and Spanish Prime Minister José Luis Rodríguez Zapatero, Sarkozy's office said in a statement.
The heavy sell-off came after the European Central Bank failed to include Italy and Spain in a fresh round of bond buying, as yields on their debt shot above 6 percent, the highest level since the euro was launched over a decade ago.
ECB President Jean-Claude Trichet said there was not full support in the central bank for the action, underscoring deep divisions within Europe over how to handle a debt crisis that has forced Greece, Ireland and Portugal to seek financial rescues, Reuters reported.
Investors are concerned that Italy and Spain, the euro area's third- and fourth-biggest economies, could be next.
Sarkozy said France, Germany and Spain had talked to Trichet.
Investors had hoped the ECB would target Spanish and Italian debt in reviving its bond-buying stimulus program, but it restricted the purchases to Irish and Portuguese securities.
No longer crisis of EU's periphery
Yesterday, Commission President José Manuel Barroso sent an unusual letter to euro zone leaders, asking for a re-foundation of the European Financial Stability Facility (EFSF), which the EU set up in May 2010 at the height of the Greek crisis, as well as the ESM, its extension which will be enshrined in EU treaties. Last March leaders decided that the ESM will in total hold €700 billion to shield eurozone countries from future debt crises.
"It is clear that we are no longer managing a crisis just in the euro-area periphery," Barroso wrote. Without naming Italy or Spain, he urged "a rapid re-assessment of all elements related to EFSF" and proposed that leaders should decide "how to further improve the effectiveness of both the EFSF and the ESM in order to address the current contagion".
Barroso also deplored "the undisciplined communication" of EU leaders and "the complexity and incompleteness of the 21 July package", namely the decisions of the recent euro zone summit which he personally presented as a major breakthrough at the time.
US problems compound uncertainty
In the United States, a similar sense of political paralysis reins.
Just days after a bitterly fought, last-minute deal to raise the country's debt ceiling and avoid default, realisation has sunk in that many elements of the $2.1 trillion deficit reduction plan are short term and not locked in place.
Doubt has spread through markets that Congress will stick to implementing it in full after the November 2012 elections.
This, combined with a bout of poor economic data, points to a heightened risk of another slump. Lawrence Summers, a senior adviser to the U.S. president until last year, argued in a Reuters column that there is a one-in-three chance of recession in the United States.
US employment numbers due later on Friday will be critical to market sentiment. Forecasts are for a tepid 85,000 jobs added in July, but a weak number or even contraction would boost concern that the United States is heading into recession.
Many economists say chances are slim that Congress would endorse a further round of fiscal stimulus now that it is focusing on fiscal spending cuts.
"I don't see a well functioning government that can do something," said Jeff Frankel, economics professor at Harvard University and former White House economic advisor under Bill Clinton. "If everything is blocked politically, especially fiscal policy, there's nothing much you can do."
POSITIONS:
EFSF resources will not be sufficient to bail out a large country, Julien Beauvieux argues in an editorial in the French daily La Tribune. He claims EFSF financial capacity should be increased to the level of about €2 trillion in order to restore its credibility.
The ability of the EFSF to act is hampered by its member countries, who have not yet ratified its establishment, and this ratification is not expected before September, according to experts. The EFSF should rapidly start buying sovereign debt to contain speculation and limit contagion, he argues.
France needs to act quickly since the crisis is not limited to the euro zone periphery, argues Jean-Marc Vittori in the French Daily Les Echos. But Commission President José Manuel Barroso has no credibility whatsoever and the results of the 21 July euro zone summit are not yet operational, he argues.
France has every interest in the world in doing its utmost to overcome these obstacles, because the barometer is already signalling the impending storm headed its way, he writes. On Wednesday, the interest rate on France's sovereign debt was exceeded Germany's by 0.79%, he stressed that this was something which had never happened before.
Only the ECB can halt euro zone contagion, argues Paul De Grauwe, writing for the Financial Times.
He compares bond markets with banking systems, in which the instability of one bank is usually solved by mandating the central bank to be a lender and to print money.
The EFSF will never have the necessary credibility to stop contagion because it cannot actually print money, De Grauwe argues.
Instead an overhaul of the of the euro zone institutions is urgently needed, the most important being the ECB, which needs to take on full responsibility as lender of last resort in the government bond markets of the euro zone, he argues.
