In my opinion, the downgrade was both well deserved and telegraphed far enough in advance that the actual downgrade can hardly be a shock. It took a great deal of cajones from S&P to pull the trigger on the rating but they had the courage where other ratings services were blind or cowards.
Is there a silver lining, that this could finally be the wake up call to Congress to disregard politics and do whats best for the country? I would hope so but I’m not that optimistic. In my opinion, for across the aisle cooperation to occur the Tea Party would have to dilute their flawed dogmatic view on tax income which would allow Boehner greater flexibility in negotiations.
In the meantime: Equity markets are extremely stretched on the downside. According to Sentiment Trader.com the only two similar examples are the market crash of 1987 and the German invasion of France in 1940. 30 days later the S&P 500 was up 8.4% and 9.1%.
Our Gold, Silver and Swiss Franc hedges: They have worked remarkably well and while I still believe they’ll continue to work well longer term, the market for these commodities is too hot to handle right now. But I’m not a seller. The Swiss government has been stating their currency is wildly overvalued, but in turn it likely represents the most solid balance sheet currency. Considering the plight of the Dollar and Euro I don’t see any reason to reduce our SF holding.
This morning JP Morgan estimated gold could reach $2500 by year end, we’re at roughly $1700. This bulletin has the air of a buying panic which may indicate an intermediate term top. Should the S&P rally as previously stretched markets are capable of, our hedges will be a source of funds and likely decline. Keep in mind they have been in bull mode for several years and are likely to remain so, hence any pullback is an opportunity to add to holdings.
This is not the end of the world, this is not even 2008. Very soon we will likely make a volatile market bottom that will market the low water mark for equities. I don’t intend to increase equity exposure at this point, regardless of the selloff and the potential for a rebound. I believe the low water market will represent a market bottom that will be retested at least one more time, possibly more. Hence, the rebound which will likely be dramatic will be viewed as a chance to reposition our equity holdings into strong growth companies from cyclical stocks and add further hedges.
Brad Pappas
Long GLD, SLV, FXF