Monday Morning Musings

The markets are down sharply this morning, seemingly in reaction to the news that S&P has downgraded the US debt rating to AA+ from its longstanding AAA rating.



I say seemingly because the selloff is not affecting US Treasuries one bit. There is furious buying in long-term Treasuries, such that the yield on the 10-year Note has plummeted to 2.35%. So sentiment for the safety of US bonds has not been impaired.



The ECB came out and said it would be a buyer of Spanish and Italian bonds, but the markets seem disappointed that they didn't do more. I think they could have cut interest rates in a surprise move if they really wanted to elicit a market response.



I think the bigger concerns this morning are for the potential of a global recession, or at least recession-like growth. This is what the plunge in yields is really signaling. The flight to safety is also on in a big way today with respect to gold prices. Gold has spiked more than 2.5% higher today to top the $1700 level.



The opposite is occurring in the energy markets, with oil prices slumping down near $83.50.



Asian markets were also down sharply overnight, led by China's 3.8% drop.



Trading comment: Doesn't seem like anything has changed much from last week. The VIX is screaming higher today, up 25% to the 40 level. So the panic selling is palpable, and history tells us no one ever makes a dime selling into panics. It's not like Lehman Bros. declared bankruptcy over the weekend. But I think the fears of 2008 are still haunting investors. I still think the best course of action here is to remain calm, and wait for the oversold bounce to do any repositioning.