U.S. Loses it Triple AAA status, what does it mean, ideas for Monday?

For the complete report from S & P click here.   Why listen to what others are saying before reading S&P downgrade of U.S. Sovereign credit itself?

As for what it will do Monday morning, my guess is that it will go down and undercut the lows of Friday. That was 1166 on S&P 500 and 11,139 on the DJI, so I expect us to undercut the lows.  Apparently a lot of people knew about the impending downgrade on Friday and that explains the market volatility that day.   The market swung wildly about 416 points ending mostly unchanged although NASDAQ was down about 1%.  If the Government and S&P were squabbling about the impending downgrade on Friday, that most certainly means people knew about it on Thursday.  No one had a rational reason for the market plunge on Thursday but now you know.  As usual people with a lot of money were aware of it and already trading on it. In fact John Chambers of S&P said they talked to a lot of people and they said it would be least disruptive if they did it on a Friday.

The downgrade most certainly hurts confidence.  And on some level the markets are all about confidence.  So there is less confidence for an already fragile market.   That’s certainly not good for index players, like the SPY ETF’,S&P 500 futures, and the multiple ETFs levered and un-levered to the major indices like S&P 500.  But then again it’s not likely to raise interest rates and dividend yielding companies with the ability to return cash to the investor should continue to provide some support. Buying on the lows Monday will could be a good short-term profitable trade if the Dow opens down 200 or more points. If there is no rebound by 3:30PM EST plan on getting out with a stop limit or loss.  On a longer term basis, I expect consumer confidence to be shaken by partisan politics and  that a retest of the 1020-1060 support range is entirely possible.  Each S&P point is good for about 8 Dow points and that means a minimum of 140 and a maximum of 180 points on the S&P 500 or 1120 to 1440 Dow points.  I also expect to see significant insider buying.

Apparently the Wall Street Journal published content that elaborated in more detail about nuances of the downgrade than S&P was prepared to release.  This is now slated for Monday.  The reason that I say this is that I spent a long time looking for news article I read Friday evening and it has apparently been removed.  Before you frown your brows in rightful skepticism, you should know that the Wall Street Journal as a matter of official Government policy because it is a news organization is allowed to receive all kinds of material information before hand.  For examples deals to buy out companies are regularly announced on the wires after they are signed sealed and delivered.  The official SEC website which is not run by the Government at all but instead by Keane, a government contractor, routinely delivers insider trading info to the Journal before it is even published on the SEC’s own web site.

The S&P downgrade was quite ambiguous and subtle.  A brilliant move or gamble by S&P by the way.  It’s far from certain whether they get credit for boldness or blame for a bad, misleading call.  Warren Buffett has already declared it misguided. It was quite audacious in that it purported to pick winners and losers by not downgrading all of the U.S. sovereign debt.  For example AAA status was preserved for banks and broker dealers ( not even sure what that means except Wells Fargo or your Merrill Lynch account will still be AAA I guess by way of FDIC and SIPC ) yet Fannie Mae, FHA, and certain Military programs that are currently backed by the full faith and credit of the U.S. will now be AA+.  That should be a real controversial subject Monday as people reexamine why they own a gazillion $worth of Fannie Mae.  It’s not likely people will doubt that the word of the U.S. government is good so S&P risks a firestorm of criticism Monday for picking losers and winners in future budget debates.   None the less I expect Fannie Mae paper to go down in value Monday and the people who hold a lot of it which I suspect is banks, broker dealers, insurance companies, pension funds, and of course the Chinese will register their disappointment with the call that anything less than the full faith and credit of the U.S. is unacceptable to them.  So basically if Fannie Mae paper goes down much at all it’s a good buy.  We are not going to let the whole banking system go down.   Yet then again they were actually contemplating just that last Tuesday when they reached a deal to raise the debt ceiling once again.  Marc Faber is quoted in the press as predicting a war.  I think it will be more like a civil war.

Anything military related that was guaranteed by the U.S. is going to get downgraded.  I think you can just sell anything military dependentt  until the next war.  People are not going to choose to give up Social Security payments just yet to fight an enemy we seem to have a tough time finding.  Pure play names, LLL, LMT, NOC, RTN,GD to short will be like shooting fish in a barrel.  Companies with significant exposure to defense contracts, BA Boeing(40% revenues),Navistar  NAV(12.3%),Honeywell HON (12%) , Oshkosh OSK,(72%)COL,Teleydne TDY(44% and significant insider buying here),Goodrich GR (25%),ATRO,AIR(38.6%), Heico HEIC (18.8%), Esterline ESL (35%), Triump (TGI)significant insider buying, Precision Cast Part PCP (13%), Ceradyne CERD (17.5%),CPI Aerostructures CVU (90%),Aerovironment AVAV (100%) Moog MOG.A (35%), Hexcel HXL( 26%),GeoEye GEOY(66%),ITT, UTX,Cubic, CUB,Curtis Wright CW,Ducommun, DCO, GY,  ( The entire sector can be attacked with one ETF,PowerShares Aerospace & Defense Fund (NYSE: PPA  )and ITA iShs DJ US Aerospace & Defense. Try to short that if you can borrow it.  I have a feeling it won’t be easy.

There are a lot more names I’m researching and will post as soon as I have come up with a list.

The most obvious losers from this are the banks and financials.But they have been losing all year.  If I were to buy anything in that sector, I’d look at Morgan Stanley MS which I just bought a couple of days ago in part on the $2 million purchase by the CEO.  I’ll probably buy more of that Monday.  I’d be careful shorting anything other than defense on the open.  Like I mentioned at the beginning a lot of market players knew about this downgrade  and the market has been going down.  You have to put yourself in the head of the short seller.  If you have been short, this would be a good time to cover Monday morning.