S&P throws down the gauntlet! Prepare for the consequences!

by Mike Larson

Almost one year ago, Weiss Ratings challenged the major credit ratings agencies. The gist of the message? Stop dillydallying around and downgrade the long-term sovereign debt rating of the United States in order to help protect investors and prod Washington to fix its finances … before it’s too late.

In the release, Weiss Ratings Chairman Martin D. Weiss wrote:

“The U.S. government’s triple-A rating is an anachronism. Given the rapid deterioration in our nation’s finances and the spreading threat to sovereign debt overseas, a downgrade is long overdue.

“By reaffirming the government’s triple-A rating, the three leading rating agencies help entice savers and investors to pour trillions more into a potential debt trap, or, at best, to be severely underpaid for the actual risks they are taking. The rating agencies give policymakers a green light to perpetuate their fiscal follies, further degrading our government’s ability to meet future obligations. And, they help create a false sense of security overall. Recognizing and confronting our nation’s financial troubles with honesty is the necessary first step toward solving them.”

Now, it appears the agencies are finally starting to get the message! In a landmark cannon-shot fired across Washington’s bow, Standard & Poor’s warned that the U.S.’s AAA credit rating is at risk. 

If I’m right, this could be the start of a major upheaval in the fixed income, currency, and stock markets. That turmoil will likely have serious consequences for your portfolio, so there’s no time to waste. You have to start preparing now!

The Beginning of the End for Our
“AAA” Stamp of Approval?

So what exactly happened on Monday? Well, the major ratings agencies (S&P, Moody’s, Fitch) don’t just rate the creditworthiness of corporations. They also rate entire COUNTRIES. 

They evaluate everything from debt-to-GDP ratios to budget deficits to the political environments of various sovereign nations, then determine what letter grades their debt securities should earn. They also issue outlooks about the future — whether rating increases or downgrades are more likely down the road.

S&P has given the U.S. a “AAA” — its top rating — since the agency’s founding in 1941. It has also always given the U.S. a “stable” ratings outlook. But that changed this week, when S&P slashed that outlook to “negative.” 

Specifically, the agency warned that the U.S. has “very large budget deficits and rising government indebtedness and the path to addressing these is not clear to us.” The agency further said that “more than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on a strategy to reverse recent fiscal deterioration or address longer-term fiscal pressures.” 

Bottom line: There’s at least a 1-in-3 chance the U.S. will lose its AAA rating between now and 2013.

S&P Following Weiss’ Lead —
Expect More to Follow!

We’ve established before that the ratings agencies are often behind the curve with ratings actions — and that’s clearly the case once again. As I noted earlier, Martin urged action on the ratings back in mid-2010, and I’ve been sounding warnings on the U.S. debt and deficit situation for months on end.

In early January 2011, for example I said that the deficit picture was getting worse and worse, and that politicians were failing to do anything about it …

“Just a few weeks after pledging a new era of fiscal responsibility and releasing a supposedly ‘landmark’ deficit-cutting plan, Washington politicians went back on their word. They announced a massive tax cut and stimulus package that will drive the budget deficit to more than $1.3 trillion in fiscal 2011.” (Editor’s Note: Since then, the deficit forecast has risen to $1.65 trillion.)

In December 2010, I pointed out that many European countries were collapsing under the weight of their huge debts and deficits. But did policymakers take the advance warning provided by Greece, Portugal, Ireland, and the others to heart? My response was crystal clear …

“You’d think U.S. policymakers would be learning an important lesson from the European debt crisis. You’d think they would take drastic steps to get OUR national finances in order … before a similar sell off hits home. But you’d be dead wrong!”

Heck, way back in March 2010, I warned that market players with billions of dollars on the line were trading Uncle Sam’s debt as if it was riskier than debt issued by certain U.S. corporations! My warning …

“Treasury Secretary Tim Geithner recently sat in front of ABC News cameras and made a solemn pledge. Asked about whether the U.S.’s credit rating would drop below AAA, he said, ‘Absolutely not.’

“You know what though? Talk is cheap. Policymakers can bloviate all they want. But the bond market renders its verdict on the credit quality of everyone from municipalities to corporations to governments each and every trading day … and right now, the trading action proves the U.S. is guilty of running a profligate, debt-ridden operation, one that’s in worse shape than some American corporations.”

What to Expect Next …

 

What to Expect Next …

Now that the ratings agencies are starting to walk down the trail that Weiss first blazed, you can expect far-reaching consequences.

Indeed,

• If we do not get off this dangerous path …
• If Republicans and Democrats in Congress and the Obama administration don’t restore fiscal sanity and …
• If the Federal Reserve doesn’t put a halt to its disastrous monetary policy …

The purchasing power of your dollars will collapse. Precious metals will explode in value. The price of key commodities like crude, cotton, copper, and cattle will surge even further!

Plus, the cost of borrowing will soar as bond yields shoot higher. And stocks will eventually implode as all the money printing in the world can’t overwhelm the real economic fallout of those events forever.

Do you want to leave yourself exposed to all these dire consequences? Do you want to be left twisting in the wind when the U.S. loses its AAA rating? I trust the answer is no. 

So if you haven’t already, please view the American Apocalypse video we’ve prepared for you. It’s available for free, online — just click here.

Until next time,

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SILVER STILL SOARING

By Carl Swenlin

While we don’t often cover silver, it is worth noticing that it is about 6% below its all-time highs of 48 (closing basis) and moving up quickly. Technicians will assume that there is probably strong long-term overhead resistance at 48, and, considering that silver is in the vertical phase of a parabolic advance, there could be serious problems when the resistance is reached. Perhaps that is true, but I think there are other considerations.

First, let’s consider the overhead resistance, which is presumably caused by people who bought at $48 in 1980, failed to exit when silver crashed, and are ready to dump their holdings as soon as they can exit on a break-even basis. Well, their could be some people still have their holdings after all these years, but 30 plus years is an awfully long time.

Next, the fundamentals are much different. In 1980 the move to $48 was caused by massive speculation, driven by the Hunt brothers attempt to corner the market in silver. Currently, people are being driven to precious metals seeking shelter from the insanity of sovereign debt buildup.

Even the technicals are profoundly different, as demonstrated by the PMO on the above chart. The PMO is based upon a rate-of-change calculation. In 1980 we can see how sharp speculative price moves drove the PMO to historical extremes. More recently the PMO has moved to the overbought side of the normal range, but it is not even close to being extreme because the price move has been more steady and deliberate.

As fo sentiment, Let’s look at Central Fund of Canada (CEF). CEF is a closed-end mutual fund, that owns gold and silver exclusively — the metals, not stocks — at a ratio of 50 oz. of silver to 1 oz. of gold. 

Closed-end funds trade based upon the bid and ask, without regard to their net asset value (NAV). Because of this, they can trade at a price that is at a premium or discount to their NAV. By tracking the premium or discount we can get an idea of bullish or bearish sentiment regarding precious metals. Currently, CEF is selling at a premium of +2.8% (less than the markup on bullion) which shows that there is not the least bit of froth in the precious metals markets. The chart below shows that is a far cry from the bullish extremes of the past.

Bottom Line: As a technician, looking at a parabolic up move heading toward long-term resistance gives me heartburn, and we can observe that silver is prone to some extreme volatility. Parabolic and/or vertical advances are extremely dangerous. There is simply no way to know when they will end, but they usually end badly, with vertical declines as steep and speedy as the ascent.

However, there are reasons to believe that fundamental and technical conditions exist that will continue to be positive for precious metals. We could hope that, once silver reaches resistance, there will be a nice correction to provide an opportunity for those who missed the boat to get on board. For those who bought at much lower prices, from a long-term point of view I see no reason to be concerned about any pullbacks. The kind of extreme financial crisis that precious metal advocates have long predicted is now actually upon us.

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The Truly Remarkable Run of Silver

by Bespoke Investment Group

As gold continues to receive all the headlines, silver continues to look at the yellow metal in the rearview mirror. 

Below we highlight a few charts and tables that show just how remarkable the run for silver has been. Had you invested $100 in silver ten years ago today, your investment would now be worth $1,037. A $100 investment in gold would be worth about half that at $569, and a $100 investment in the stock market (S&P 500) would be worth -- wait for it -- $107.48.

The two main silver ETFs (SLV and DBS) have gone absolutely parabolic over the past few weeks. Both are currently trading more than two standard deviations above their 50-day moving averages, and just when they seem about as overbought as they can possibly get, they get even more overbought.

We track nearly 200 ETFs in our daily ETF Trends report over at Bespoke Premium that cover every asset class out there. Below is a list of the ETFs across all asset classes that are currently trading the farthest above their 50-day moving averages. As shown, SLV is currently 26.24% above its 50-day, and the second most overbought ETF -- EWY -- is not even in the same time zone as SLV.

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China stockpiling to cut risk of cotton price fall

by Agrimoney.com

Investors may have overdone their gloom at prospects for cotton prices, which may prove more resilient than had been feared thanks to stockpiling by China, the top consumer of the fibre.

Standard Chartered restated a forecast that New York cotton futures will maintain a downward path, averaging 166 cents a pound for the year compared with a price on Thursday of 185 cents a pound for the near-term May contract.

New York cotton hit a record 227 cents a pound last month, up 175% year on year, supported by a fall in stocks in the US, the top exporter, to a record low in 2010-11.

"We look for prices to trend down as global supply improves, particularly in China but also Pakistan," the bank said.

'Limited risks'

However, investors may be factoring in too gloomy an estimate for prices in the fourth quarter of 2011, which will average 140 cents a pound, some 10 cents above the current level that New York's December lot is trading at.

Although supplies will be improved by increased sowings in many major producing countries, including the US, prices will gain support from a seven-month Chinese programme of cotton stockpiling set to start in September.

The scheme will activate state purchases of cotton at 19,800, equivalent to about 140 cents a pound, yuan a tonne whenever Chinese futures prices fall below that level for five working days.

"Downside risks [to cotton prices] will be limited by the price stabilisation policy in China," Standard Chartered said.

Furthermore, the bank said it expected cotton supplies to stay "tight" in 2011-12 despite the rise in sowings, although this squeeze "will not be fully apparent until later in the season when new crop stocks are drawn down".

'Too dry'

Indeed, China, which is also the top cotton consumer and producer, has designed its stockpiling programme to encourage domestic sowings, over which there have been doubts given the attractive returns to be gained from growing grains, and the losses growers ran up in 2008 ramping up in the fibre.

In the US too, the official forecast for spring sowings of the fibre, at 12.6m acres, is short of initial expectations, a shortfall blamed on a reluctance by farmers to splash out on specialist cotton equipment to exploit a price rally which may not last for long.

And much of the land in America's southern cotton heartland that has been allocated to the crop is not being sown amid a drought in many areas. Farmers in Texas, the top growing state, had sown 12% of their cotton as of Sunday, down from a long-term average of 16% by now.

"Conditions remain too dry for planting in non-irrigated areas," Terry Roggensack at Hightower Report said.

Chart signal

Mr Roggensack added that, technically, for New York's old crop cotton contracts "the path of least resistance is still down", with levels of open interest "on a slight decline" and speculators holding a large net long position.

The July contract, which stood 0.01 cents lower at 167.05 cents at 14:10 GMT, had "147.88 cents a pound as a longer-term downside target", to judge by signals from a so-called head-and-shoulders chart pattern.

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Unemployment Claims

by Bespoke Investment Group

Today's initial jobless claims report was higher than expected and marked the second straight week that first time claims topped 400K. Even with the rise, however, jobless claims remain in a well-defined downtrend.

One often overlooked aspect of the weekly unemployment insurance (UI) claims report is the number of total unemployment claims. This indicator includes first time, continuing, and all other state and federal emergency UI claims. Like initial claims, this indicator has also been on the decline over the last 12 months. From the peak reading in January 2010, total UI claims have declined by 29%. However, putting this decline in perspective shows that total UI claims have a lot further to go before getting back anywhere to what were once considered normal levels. At a current level if 8.5 million, total UI claims are still more than 150% above the average weekly level from 2001 through 2007 (3.3 million).

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What Does $1,500 Gold Really Mean?

By: The_Gold_Report

When the price of Comex gold futures kissed a record high $1,500/oz. Tuesday before settling back to the high $1,400s at day's end, and then topped the benchmark in early trading Wednesday, the smack sounded a lot like "I told you so." The Gold Report's expert contributors explain what this milestone means for investors going forward.

On Kitco News, analysts were predicting that the markets would take a breather for profit-taking and evaluation before moving to whatever came next. Afshin Nabavi, head of trading at MKS Finance, was quoted describing a scenario in which profit-taking was contributing to range trading between $1,485 and $1,500/oz. before moving up again. "In every corner of the world, there is something going wrong geopolitically or economically," Nabavi was quoted as saying. "So obviously, the safe-haven buying continues in gold and silver."

Jay Taylor, publisher of Gold, Energy & Technology Stocks and host of the "Turning Hard Times into Good Times" radio program, said 1,500 is just a number and not really a meaningful one because the measuring stick is the dollar, which isn't a stable unit of measure because trillions of them are being created out of nothing by government entities all the time. "It is less about an increase in the value of gold, than a devaluation of the dollar," he said. Based on the games being played with currency in the U.S. and all over the world, he predicted that number will probably continue to climb. "The next big one will be $2,000/oz."

The exact price of gold in dollars may not be as meaningful a number, according to Taylor, as how much an ounce of gold will buy. Based on that number, the nominal price of gold could even go down, but the relative absolute purchase price could continue to rise. "The real price of gold will remain high for a long time to come," he said.

For that reason, Taylor is bullish on gold mining shares. He pointed to surging profit margins of aggregate gold mining shares as proof that gold is a sound investment today and for years to come. "This is the buying opportunity of a lifetime in gold mining shares," he said.

Not everyone is listening, however. Stewart Thomson, a retired Merrill Lynch broker and author of Graceland Updates, wrote on 321Energy Tuesday that while gold has risen from $1,300/oz.–$1,500/oz., the public has actually become less interested in gold and gold stocks because "this is a crisis and greed will play a diminishing role, while fear plays an exponentially increasing role."

The declining dollar in the wake of a Standard & Poor's rating agency outlook downgrade and increasing oil prices signaling possible inflationary pressures was also good news for silver, which hit a 31-year high of $44/oz. on Tuesday. Taylor called it "the poor man's gold" and said it could also hit historic highs as investors flee an unstable paper market.

James West, publisher of The Midas Letter, agreed that the worldwide counterfeiting of money is driving the demand for gold and, in his view to an ever greater degree, silver. "In terms of pure performance, whereas gold has delivered a solid gain of 26.51% in the course of the last year, silver has outshone gold spectacularly, turning in a gain of 123.55%, making it the commodity trade of the year by far." He ventured to say that $5,000/oz. gold and $300/oz. silver could be a reality in the not too distant future.

Roger "Trader Rog" Wiegand, editor of Trader Tracks, had predicted a cyclical high for gold of $1,507/oz. and a yearly high of $1,607/oz. His silver crystal ball shows the metal rising to $45.25/oz., then as high as $51/oz. before people get scared and start getting out, leaving the wise investors to pick up and take it as high as $55.85 this year. "It's all about cycles and time; it's just math," Wiegand said. Still, he didn't think prices would reach these milestones this early in the year. He follows seven indicators and says geopolitical unrest is only one of the factors pushing prices.

An emerging trend over the last year, which he predicts will be even more prevalent by fall, is the breaking away of gold and silver shares from the rest of the stock market. "People want to be in gold and silver and they will stop paying attention to the regular markets," Wiegand said. His revised forever high number pegs gold at $4,400/oz. and silver at $256/oz. Others have predicted even higher highs. Analyst Alf Field has suggested $10,000/oz. and Economist Martin Armstrong has publicly said $12,000/oz.

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