One Important Reason This Crash Is Different From 2008

What The Stock Market Usually Does After Big Political Votes

Good morning. Here's what you need to know.

 

• Asian markets got hammered overnight, following yesterday's disaster in the US. Things started off awfully in Europe, but have comeback quite a bit. US futures are rallying.

• Europe continues to see lots of turbulence, as a resolution to the crisis does not appear forthcoming. Of note are widening German CDS.

• In the US, the comeback in markets comes ahead of the FOMC release at 2:15 ET. The world is waiting for some kind of indication that the Fed will ease, and stabilize markets, but a full-fledged QE may have to wait. Now here is a thorough look at the downgrade and what it means for the economy >

• China's inflation soared to 6.5% in July, from a year ago, and up from 6.4% in June. This has been its fastest rise in three years and was driven by a 14.8% rise in food prices from a year earlier. It also lowers the odds that China will be able to re-lift the world economy via further stimulus.

• UK continues to get battered by weak economic data. Factory output fell 0.4% in June from the previous month when it was up 1.8%. With a drop in manufacturing, the trade gap widened indicating that recovery is slowing. The riots in London are also beginning to become a concern for investors worried about growth. Meanwhile, German exports fell 1.2% in June to €88.5 billion hurting economic growth. Now check out the 10 countries that will dominate world trade in 2050 >

• Freddie Mac said it would need an additional $1.5 billion in taxpayers funds to help make-up for losses from weak housing markets. The company registered a net worth deficit of $1.5 billion in part because of the dividends it needed to pay out to the Treasury. Now here are 15 cities still getting killed by foreclosures >

• In earnings news,  AOL posted total revenue of $542.2 million and 16% growth in domestic display ad sales. MGM Resorts International reported Q2 net income of $3.44 billion or $6.22 a share, beating estimates as its operations in Nevada recovered, and it took control of a Macau joint venture. Icahn Enterprises meanwhile, posted Q2 net income of $289 million, on revenue of $3.2 billion, up from $1.9 billion a year ago.

• Tokyo Electric Power Co. posted a $7.4 billion net loss for the three months from April - June as it grapples with compensation costs and the Fukushima Daiichi nuclear disaster. The Nikkei was down 1.68% in overnight trading.

• Indian energy giant Reliance Industries received approval from the government to sell some of its oil and gas blocks to BP for $7.2 billion.

• Gold hit a record $1,778 an ounce in its biggest three-day rally since 2008, as investors turned to the precious metal amidst concerns over the global economy stemming from European and U.S. debt. Check out the only currencies that have outperformed gold this year >

• BONUS - Anne Hathaway was in New York for the premiere of her latest movie One Day.

Senate Majority Leader Harry Reid:

 

“The action by S& P reaffirms the need for a balanced approach to deficit reduction that combines spending cuts with revenue-raising measures like closing taxpayer-funded giveaways to billionaires, oil companies and corporate jet owners. This makes the work of the joint committee all the more important, and shows why leaders should appoint members who will approach the committee’s work with an open mind - instead of hardliners who have already ruled out the balanced approach that the markets and rating agencies like S& P are demanding.”

GOP Presidential Candidate Jon Huntsman:

" Out-of-control spending and a lack of leadership in Washington have resulted in President Obama presiding over the first downgrade of the United States credit rating in our history. For far too long we have let reckless government spending go unchecked and the cancerous debt afflicting our nation has spread. We need new leadership in Washington committed to fiscal responsibility, a balanced budget, and job-friendly policies to get America working again."

GOP Presidential Candidate Mitt Romney:

" America’s creditworthiness just became the latest casualty of President Obama’s failed leadership on the economy."

Sen. Mark Kirk (R-IL): 

" President should recall Congress to reduce borrowing."

GOP Presidential Candidate Rep. Michele Bachmann:

“Tonight’s decision by S& P to downgrade our credit rating to AA+ is a historically significant and serious event for the United States. The United States has had a AAA credit rating since 1917. That rating has endured the great depression, World War II, Korea, Vietnam and the terrorist attacks on 9/11. This President has destroyed the credit rating of the United States through his failed economic policies and his inability to control government spending by raising the debt ceiling. 

“We were warned by all of the credit agencies that a failure to deal with our debt would lead to a downgrade in our credit rating, but instead he submitted a budget that had a $1.5 trillion deficit and then requested a $2.4 trillion blank check. President Obama is destroying the foundations of the U.S. economy one beam at a time. I call on the President to seek the immediate resignation of Treasury Secretary Timothy Geithner and to submit a plan with a list of cuts to balance the budget this year, turn our economy around and put Americans back to work."  

Democratic Whip Steny Hoyer:

" Tonight's announcement serves as yet another wakeup call that we must put politics aside as we work to put our nation's fiscal house back in order. S& P has made it clear that they expect us to reach a balanced, comprehensive agreement to reduce the deficit. The joint committee must be ready to put everything on the table so that we can restore our credit rating and return our nation to a fiscally sustainable path."

Speaker of the House John Boehner:

“This decision by S& P is the latest consequence of the out-of-control spending that has taken place in Washington for decades. The spending binge has resulted in job-destroying economic uncertainty and now threatens to send destructive ripple effects across our credit markets.

Republicans have listened to the voices of the American people and worked to bring the spending binge to a halt. We are no longer debating how much to spend, but rather how much to cut. Unfortunately, decades of reckless spending cannot be reversed immediately, especially when the Democrats who run Washington remain unwilling to make the tough choices required to put America on solid ground.

The Administration and Democrats in Congress had sought an increase in the debt limit without any spending cuts or reforms. Republicans made clear the American people would not tolerate that and fought for the largest spending cuts possible. With the Budget Control Act, we made a positive first step toward reducing the debt, but much more must be done.

In May, I warned, ‘if we don't act boldly now, the markets will act for us very soon.’  It is my hope this wake-up call will convince Washington Democrats that they can no longer afford to tinker around the edges of our long-term debt problem. As S& P noted, reforming and preserving our entitlement programs is the ‘key to long-term fiscal sustainability.’

Republicans remain committed to ensuring the United States always meets its obligations. Though we are outnumbered in Washington, we will continue to press Democrats to join us in taking meaningful steps to rein in our debt and deficits.”

Sen. Tom Coburn (R-OK):

" This announcement is probably long overdue.  For decades, political careerism has trumped statesmanship in Washington.  Both parties have done what is safe, not what is right.  The dysfunction in Washington is the belief that we can live beyond our means forever.  We can't.  The moment to make the hard decisions we have long avoided has arrived.  There is no where left to kick the can."

‘This was an entirely predictable consequence of the mess that the Congress created a few weeks ago when they couldn’t agree on lifting the debt ceiling,’ British business secretary Vince Cable told Sky News.

‘But they have now agreed that, and the United States’ position is pretty secure.’ ‘What it tells us about the wider picture is that financial markets are now focusing on the credit worthiness of governments. Three years ago it was on the banks and the banks’ stability, and now it’s on government debt.

‘And that’s why the UK is in a fairly good position. The markets perceive that we have got a stable government… and we are getting on top of the deficit problem and we have got a very clear programme to deal with it.’

Turning to the euro zone debt crisis, which is currently threatening to engulf Italy and Spain, he added: ‘The euro zone countries have agreed a broadly sensible strategy to deal with the weakness of southern Europe.’

“The primary focus (of the rating review) remained on the current level of debt, the trajectory of debt as a share of the economy, and the lack of apparent willingness of elected officials as a group to deal with the U.S. medium-term fiscal outlook,” S& P said in the statement.

“None of these key factors was meaningfully affected by the assumption revisions to the assumed growth of discretionary outlays, and thus had no impact on the rating decision.”

S& P cut the long-term U.S. credit rating by one notch to AA-plus on concerns about the government’s budget deficits and rising debt burden. The decision could eventually raise borrowing costs for the American government, companies and consumers.

“We take our responsibilities very seriously, and if at the end of our analysis the committee concludes that a rating isn’t where we believe it should be, it’s our duty to make that call,” David Beers told Reuters in an interview.

S& P has been under a lot of fire from the Obama administration for basing its decision and analysis too much on the acrimonious debt-ceiling debate that led to an eleventh-hour agreement on Tuesday to avert a U.S. default.

Beers, who is the head of sovereign ratings at S& P, acknowledged that the agency’s decision was highly influenced by a change in Washington’s “political dynamics” that hampered members of Congress from reaching a more comprehensive plan to cut the deficit.

“From the standpoint of fiscal policy, the process has weakened and became less predictable than it was,” he said.

“That’s the story around the difficulty highlighted in the debt-ceiling debate, cobbling together some type of fiscal policy choices.”

Asked about news reports that there had been a back and forth between the agency and the government during the past 24 hours over the justification of the decision, S& P spokesman John Piecuch said the agency always gives a debt issuer the opportunity to review the announcement before it is made.

“They can go through it and look for numbers, look for calculations — that is what happened,” Piecuch said.

Given the size of the US economy and the pre-eminent role of the dollar worldwide, the cut to Washington’s credit rating ought to spill over throughout the global economy.

But for the same reason – that the dollar and US debt are so widely held and relied on in finance and trade – many analysts think the impact will not be too heavy, at least in the short run.

Standard & Poor’s cut the US’s top-rank triple-A rating down a notch, to AA+, for the first time ever on Friday, technically signalling that the country’s reliability for paying its debts had decreased. S& P rejected Washington’s efforts to demonstrate it had embarked on a clear path to slash the country’s deficit and reduce its debt load.

The debt burden topped US$14.6 trillion (S$17.7 trillion) this week, 100 per cent of GDP, virtually the same ratio as Italy, whose debt has been dumped in markets over rising default fears. Meanwhile the government continues to borrow some 40 cents for every dollar it spends, while the economy is barely growing and unable to generate the revenues needed to support its fiscal path.

The consequences of a downgrade are difficult to predict. Japan, cut twice in the past decade to stand at AA now, has a debt-to-GDP burden over more than 200 per cent, but continues to pay extremely low rates to borrow. Goldman Sachs warned last month in a study that the consequences of a downgrade were not easily foreseen.

Theoretically, the ratings cut should at least raise the borrowing costs of the government, to rates higher than AAA countries like Germany, and serve as a warning to get its fiscal house in order. Moreover, it should push down the dollar’s value relative to other currencies from strong economies. And because the dollar and Treasuries are so crucial – China alone holds more than US$1.1 trillion worth of US debt and Japan, US$900 billion – any questioning of Washington’s ability to pay its debts should unnerve the global financial system.

China’s Reaction

‘has every right’ to demand the United States address its debt problem following its downgrade by Standard and Poor’s, the official Xinhua news agency said on Saturday.

Standard & Poor’s has cut the US rating a notch from the top flight triple-A to AA+, saying its politicians were becoming less able to get to grips with the country’s huge fiscal deficit and debt load.

In a stinging commentary, Xinhua said Washington needed to ‘come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone’.

S& P gave a negative outlook for the US, saying there was a chance its rating could be cut again within two years if progress is not made cutting the government budget gap. Xinhua said that unless Washington made substantial cuts to what it called the ‘US gigantic military expenditure and bloated social welfare costs’, the downgrade would simply be a ‘prelude to more devastating credit rating cuts’.

‘China, the largest creditor of the world’s sole superpower, has every right now to demand the United States to address its structural debt problems and ensure the safety of China’s dollar assets,’ the English-language commentary said. ‘To cure its addiction to debts, the United States has to re-establish the common sense principle that one should live within its means.’

The commentary also hit out at ’short-sighted political wrangling’, saying Washington had allowed domestic electoral politics to take the global economy hostage.

Good morning! Here's what you need to know:

 

• Big war of words between Google, Apple and Microsoft over Android patents! Google wrote a blog post accusing those companies, along with Oracle, of being part of a " hostile, organized" campaign against Android with " bogus patents."
  
  
• Microsoft shot back by releasing an email showing it tried to work with Google over buying mobile patents. Boom! Ka-plow!
  
  
• Apple god John Gruber thinks Google's stance is ridiculous, but our friend Dan Frommer at SplatF thinks Google's right.
  
  
• In other news: JP Morgan says Russian Internet stocks are a buy, because the online advertising market there is going to shoot up faster than everyone thinks.
  
  
• Analyst: Apple is going to sell 30 million iPhones in Q4.
  
  
• Zynga is suing Google, which is a major shareholder. This is over Zynga's lawsuit against Vostu, a big-in-Brazil social games shop. Google's social network Orkut is huge in Brazil and has lots of Vostu games. Awkward.
  
  
• Tons of people want to buy Facebook stock. We introduce you to some of them.
  
  
• Meet Gnip, a startup that's figured out a way to make money from social data.
  
  
• Mark Zuckerberg's sister Randi leaves Facebook to start her own social media company.
  
  
• BONUS: Who's the worst-dressed man in Silicon Valley?

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