The market is reeling following Friday’s downgrade by Standard & Poor on the U.S. government’s AAA credit rating. The move dropped us to a AA+ rating but with a negative outlook. The reason was simple as S&P said the U.S. government had become less stable, and their plan to deal with the debt ceiling was not good enough as they wanted to see more cuts.
If that weren’t enough, S&P tossed salt on the wound as they also downgraded the credit ratings of Fannie Mae and Freddie Mac (FMCC, $0.28, down $0.05), as well a slew of other agencies linked to long-term U.S. debt.
All the downgrades were from AAA to AA+, which reflects the same downgrade from Friday. We said this morning money will be getting more expensive to borrow because most interest rates are pegged to the yields on Treasuries. Fannie and Freddie’s fall from grace have been well documented by us and it’s hard to believe they still own or guarantee about half of all U.S. mortgages.
The current turmoil has taken its toll on Bank of America (BAC, $6.99, down $1.18) which is hitting new 52-week lows faster than Congress can take a vacation. We profiled the September 7 puts (BAC110917P00007000, $1.00, up $0.55) at 15 cents last Thursday but the options have gapped higher the last two sessions at the open. We aren’t sure if they will continue higher, and we don’t want to chase, but shares look like they are headed to $5 or worse.
Somebody call American International Group (AIG, $23.09, down $2.01) a wAmbulance. The company is crying and plans to sue Bank of America and its Merrill Lynch and Countrywide units over the quality of mortgage securities that were sold to the insurer.
AIG is attempting to recover nearly $10 billion of the $28 billion it invested but that might be harder than squeezing blood out of a turnip if BofA keeps tanking. Perhaps BofA can call S&P to the witness stand when it goes to court because they were the ones who gave the subprime mortgages the AAA ratings.
As far as the market, all of the talking heads and professional money managers are telling you to get out of the market. We don’t get it and it’s why the general public doesn’t know how to short the market. We told you if there was continued selling pressure to NOT get nervous or scared. We have been telling you put options could do very well on a continued selloff.
As a matter of fact, we have more good news to report on some of the current positions we opened. Our recent Rambus ($10.50, down $1.08) put option recommendation is up over 1,200% and another trade we opened last Thursday is up over 200%. Of course, we still have to be on the lookout for a snapback rally but we have been locking in profits on half positions and will continue to do so.
We plan on playing both sides of the market over the next few weeks and months and the Trade Alerts will be coming fast and furious. We try to keep to our scheduled print times of 9am and 1pm but please sign up for our Twitter alerts to catch any updates posted outside of these times. Due to the volatility, we expect the current environment to continue and we don’t want you to miss the action.
As we head to press, the Dow is lower by 304 points to 11,140 while the S&P is off by 42 points to 1,157. The Nasdaq is down 95 points to 2,437. Subscribers, check the Members Area for the latest and greatest.