Sunday, August 7, 2011


Picking up where the last blog left off, let me try to make some sense of the Downgrade of the Debt Status of America.
Much of this talk and the response is purely psychological. The market always over-reacts. It will happen again this week. It is the sign of the times.
I mentioned in the last blog that if the talking heads this weekend continue to parse, comment on, and try to explain away that which is about to happen, it will make the matters worse. That has happened. Every show I turn on, every radio program I listen to, it's all about the S & P Downgrade. One twist is the Democrats fabricating the truth and saying the stupidest things. It is their fault. Imagine the bragging they would be doing if the Stock Market went up 700 points in two days instead of down 700 points.
There are several things to think about:
1) The interest rates of the current debt has been higher in the past. No one wants to see the credit status changed, but it is what it is. We need to deal with it. Teleprompters will not come to the rescue.
2) It won't happen right away. Current debt will not be changed. This is very important. There are people saying even a 1% rise in the interest rates will cost billions more---even trillions more over a longer period. This is a statement that is not entirely based on the truth. The current debt (All $14.3 Trillion) has interest rates in place. The new rates will apply to new debt.
3) Another point on existing debt. It is not "callable." This means China or the Bank of England, or The Maltese government cannot call our debt in and make us pay it off. It's like a mortgage. If you make the payments, you're just fine. You can pay the debt off early, but China can't force us to pay off the principle.
4) And speaking of that: Why is there no talk of using current rates (they're much lower than 6 to 8 years ago) and creating new debt at say 2 1/2 Percent and paying off the higher rate debt? It's like refinancing your mortgage. We could save billions in annual interest. Yes, this is from the mind of a cabdriver. Democrats don't like this because they want to borrow to spend more on their wasteful programs.
5) We don't have to borrow at the higher rates. What say, we cut spending immediately. Just say no. Don't borrow, or do so at a rate that is still right. S & P and Moody's do not control the world.
I say sit this one out. Confusion and uncertainty mean "NO." It will be a rocky road for the next few weeks. I think the market will sell off tomorrow, and by this I mean the Dow. It may go down about 200 to 400 points. Try practicing on a put. Look at the DJX $114 Puts, representing the DJIA at 11,400. As the Dow goes down, these puts should increase in value. Try to get a double. Practice trade this before you ever put real money in harms way.
Next, the market, the Dow and the broader market will be looking for a bottom, a support level. It may take a few days, but it will happen. If the liberals are not replaced this will be a tough row to hoe---for several years. We need fiscal sanity, by true conservatives, true believers in free markets, small and limited govrnment and individual freedom.
                                                                                                   By Wade Cook

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