It is real now: US government debt is "not risk free" anymore

Honestly I did not expect that S&P, one of the biggest ratings agencies, would keep their words to downgrade the U.S. long-term debt from AAA to AA+. They finally shows some courage but still they are way behind the curve. I have said before and will say it again that the US has been bankrupt already. There is no way for the US to repay all its debt. Based on this, even an AA+ credit rating for the US is too high. So why can the US survive till now? Simply because the US dollar is the world reserve currency and the US government can print the money without a limit. However, just like an immature adult who has been given a signed empty cheque, the US has abused his credit too much with extreme profligacy. Unfortunately such a spendthrift game will end eventually and end very badly! It is just a matter of time.

If you want to protect your assets for your retirement, the only way is to back up them with sound money, the precious metals. I will highly suggest that you use any pull back to add more or to establish new positions for gold and silver. The dire trend for the US dollar has become more and more unambiguous. It will take a long long time for the ultimate end to come; so it is not too late at all.

For the immediate term, as I said, this is a uncharted water that no one has any experience with. It has long been thought as unthinkable for the US not to have the highest credit rating. Therefore the psychological impact could be huge. On the other hand, this is not really something totally surprising since S&P has talked about this possible downgrading for a few months. In reality, there is no other currency which can replace the US dollar as the world reserve currency in any foreseeable future. Even with an imperfect rating, the US debt is still much "safer" than any other country's debt, given the US government can print money as much as it wants. So my bet is that the market may plunge severely on Monday but some reality reckoning may step in and brave investors may start to take the opportunity to buy. After all, the market has been extremely oversold at the current status and a turnaround in the near term is not something unthinkable. Anyway, the most important thing for you is to stick to your exit principle with stop loss in place for your positions. Don't run due to panic or act emotionally. Stay calm and only take action rationally, which will let you beat most of others in the market.

Don’t try to time the exact bottom or top

As I have explained before, when I will initiate a position, especial for long-term, is not really determined by the price; rather it is largely determined by the trend and the price action in the context of its fundamentals. This is especially important for a stock when it is falling. A common mistake for amateur investors is that they always try to pinpoint an exact bottom or top simply based on the price of a stock. So if they like a stock and it is falling significantly, they will be very anxious and attempting to get in simply because they think the stock is very cheap and has hit the bottom because its price has come down so much. They just cannot tolerate to miss the exact bottom if the stock indeed turns around immediately. I know this mentality very well because I was there also and behaved as such exactly. But you know what? Trying to buy a falling stock is equivalent to trying to catch a falling knife. It often hurts, and likely hurts very badly! Regardless how low a stock price is, it can always further dropping till zero if the underlying company has significantly problems. No one can consistently pinpoint the exact bottom or top. And it is actually not necessary if you are not a day trader. I learnt this a hard way over years. I was lucky a few times to get the exact lowest entry price but most often I lost money by doing so.

Take a real example of mine. I once shorted a star company, Sirius XM Radio Inc (SIRI), in early 2000s. This company provides satellite radio services via paid programs. I remember at that time a star host joined the company, which generated a lot of euphoria for it. But its business model was really questionable since it was already extremely competitive in the radio business with abundant choices of free programs. So I shorted it when it was around $20. In a couple of months, it dropped to around $10. I figured it was cheap enough and might be at its bottom. So I covered my positions with a nice profit. You know what? It continued to plunge in the next few months till it reached its ultimate bottom at below $1. I didn’t lose money in this example but I could have made much more money if I hanged on.

Therefore, don’t buy a stock simply because it looks cheap by its price. You need to know if it is worth it in valuation. Buffet’s company, Berkshire Hathaway, is the most expensive stock in the world. Its A share is traded at $107,300 per share. But from the valuation perspective, it is very cheap actually and you should buy it if you can afford.

Panic everywhere but not me; hope not you as well

No where to hide! That's the sentiment toady in the market. Panic, panic and panic, everywhere. For me? Not at all! Of course, I'm not a prophet and I cannot pinpoint to the exact moment for the market movement. But as repeatedly said before in my blogs, I have being waiting for this moment for over a year. I actually was thinking that something like this would have occurred shortly after Jun 30, the financial D-day as I called it. It didn't happen so soon. As I said 2 days ago, if the market decisively pierces through the support line at 1250 for S&P, it will be really ugly. Definitely everyone feels that now.

From the investment and trading perspective, I'm happy to see this happen. Why? Because the best money is made when the world seems to come to its end. I hope I will be wise and brave enough so that when the extreme pessimism comes, I will know and be able to jump in with full force. I have been waiting for this moment and I am definitely eager to dancing with it.

So what to do immediately now? Stay calm and be patient. Don't panic and watch your positions. No one knows for sure what will happen immediately in the short term. Either direction is possible.  Before I take any sizable decisions, I want to see a clear trend in place, which takes time to develop.  As I said before, regardless how much a stock plunges, it can drop further lower. Don't try to catch the falling knife. It will hurt you and hurt you badly! It will be stupid to try to pick the exact bottom. You may be lucky once or twice but most often you will be trapped. So let the opportunities come to you, not you to chase them. Of course, it is a different story if you simply want to speculate for some short-term opportunities which look really promising. I may also attempt for that but definitely with small money which I can lose.  

I suggest you read my April 15 blog again entitled "Successful Investing (3): Be Vigilant". I'm sure it will be helpful with respect to how to handle the current dire situation. Most importantly please respect your exit strategy, better with trailing stop or stop loss for your general stocks.  I will be less concerned with the world dominating companies such as Wal-mart, Microsoft, or Intel etc. Personally I will not sell such companies easily as the risk of total failure for such companies is virtually nil. All in all, reserve your cash capital as much as possible and be ready to jump in. Great opportunities are waiting for you ahead and don't miss them when the right moment comes. The worse it goes, the better you may get.

If I could do day trading now.......

It is really ugly and dire in the stock market right now. General investors and traders are very bearish and terribly overwhelmed by all kind of bad economic data and prospects. Is any of such data really new? Nothing actually! Investors and traders were just in the illusionary mode in the past 2 years with a dream that the US and Europe had miraculously survived the worse financial crisis and had got a successful jump-start with Fed's phony money stimulus. All the things the Fed and the US government are doing right now is simply to add more debt, which will obviously not solve the debt problem with more debt. Just in opposite, it has made the situation much worse every day. It is almost like that everyone now suddenly wakes up to realize this reality and rushes to the exit door.

When everyone is bearish and depressed, I start to be more bullish, at least in the short term. Purely from the technical charting perspective, the market has actually done nothing but just moving in a side way. In the past 6 months or so, S&P 500 has been boxed into a tight trading range between 1250 to 1350. Today S&P is at 1254, still sort of in the "normal range". So it is very close to its support line at 1250, merely 4 points away. There is a high chance that the market may bounce back from this support level. Having said that, if S&P indeed breaks through this support to <1250, then it would be really ugly. A much more severe correction will very likely follow. If I were a day trader and could be swiftly in and out, here is my game plan: I'd trade via SSO options to bet the market will rally from here. But I will closely watch the level of 1250 for S&P. If it drops through this level, I will exit immediately for a small loss. Of course I cannot do this with my day work and it is a pure speculation. It would be fun to see what happens in the next few days.

Just so you know, I'm actually a bit "bearish" now for gold and silver. Especially for gold, it is really on fire right now to have reached its all time high at $1661, a $40 jump today. A pull back is very likely in the card. However, any meaningful pull back would be a good buying opportunity. As I said, I have a strong hunch that gold and silver have resumed its next uptrend leg.

Painful but sill hopeful

The stock market would rebound strongly and the precious metals could plunge. That was what I was predicting and it was exactly what happened till about one hour after opening today.  There is nothing more painful than to see your great profits evaporate helplessly. This is unfortunately what I have seen now when I reviewed what was going on today. The stock market shot up really high at opening but the rally was ruined by the very poor manufacturing data while investors and traders were still not sure about the fate of the debt ceiling deal. If I were able to act quickly at the opening, I would have got over 100% profit for my bet via SSO for a market rally. Of course, I had to work and could not do that. All in retrospective speaking. Honestly, my real thought was that the market would open high and went even higher to close. So even if I were able to trade, I would not have taken my profit at the opening. After all, I'm human being and I have no crystal ball to know how poor the manufacturing data would be to derail the market. Having said that, I'm still very hopeful for my bet for 2 reasons:

- The DOW plunged over100 points during the day but came back all the way to only dropped by 10 points at closing. Purely from the technical perspective, this is a bullish behavior and quite often indicates there is a strong buying interest out there in the market to jump in. Often it is correlated with high markets in the next few days.
- My bet with SSO options still have a few weeks to go. I'm still very much believe that the stock market is oversold in the short term and should be able to rebound fiercely with any positive catalyst. I'm quite confident about that.

Status of Annaly

Annaly (NLY) plunged on Friday, lowest at -15% at one point. What happened? The major concern is about the possibility of a credit rating cut for the US debt, from AAA to AA. As I have explained before, NLY invested all in the mortgages backed up by the US government. With a AAA rating, their investment is considered risk-free and no one has ever questioned about the safety of anything backed up by the US government.

Now a crack starts to appear. With the ever worsening debt problem for the US and the amazing childish political fighting between the president and republicans regarding the debt ceiling, now S&P has warning that there is a 50-50 chance that they may downgrade the US credit rating. If so, the cost for NLY to borrow and invest will increase and it may have to cut its dividend.  While I'm a firm believer that the US has already been bankrupt and its debt rating should have already been cut many times since long time ago, I doubt S&P and any rating agency will have the gut to really cut the US credit rating. These official credit rating agencies have already lost their own credibility in the past few years as they are actually one of the major causes leading us to where we are now with all kinds of financial messes. My gut feeling is that the market is a bit overreacting as always. NLY recovered quite a bit late Friday, which probably indicated that.

Let me be clear. This is an uncharted water and no one has any experience about it. I don't want to leave you with an impression that I have a crystal ball that I know for sure NLY won't drop further. I DON'T KNOW! If you have bought NLY, the best thing for you to do is to stick to your exit strategy. The wisest strategy for me is a stop loss or a trailing stop. If it drops to the price level you set for exist, you should honor it and sell it immediately. Otherwise, keep it with a close watch.

The current market: oversold and overbought

Ugly and Beautiful! These are the only two words coming to my mind if you ask me about the overall market in the past week. How can I use these two antonyms to describe the market at the same time?

Well, the stock market was really doing badly, while it couldn't be better for the precious metals, especially gold which has reached its all time high at $1631. If you bought gold or silver recently, you should be really enjoying what is going on with your metals. But I must warning you: in the very short-term, the stock market is quite oversold and the precious metals are quite overbought.  What does it mean? The market has a tendency to return to its mean, which is probably true for everything in the world of the nature. When it is too far away from its mean either direction, it will likely move to the opposite direction regardless what is the overall trend for it. My gut feeling is that the stock market is very much oversold at the moment and is very likely to snap back fiercely. The catalyst is most likely the debt ceiling deal in the next 2 days. In contrast, the precious metals are quite overbought and most likely will contract significantly in the next few days. Mentally you should be prepared for this scenario. I would take this temporary sell off to get in more for the precious metals. I have a strong hunch that the precious metals have gone into another leg of ascending. Please don't panic regardless how violently it may look like. Don't be chicken!