Yes, the rumor The Trader wrote about yesterday proved right. S&P is downgrading the US, despite many well  respected pundits saying that was impossible. Interesting times ahead to continue. Although S&P’s timing is not the best, both for market volatility and their popularity, some of the effects are priced in.

Expect more volatility, as risk has been mispriced for several years. As we have written during the spring, too many young quant academics have been pricing risk looking back at Garch etc models, and giving the past year’s low volatility environment way too much weight. It will take time to rinse out all these wrongly priced risk. For more reading on volatility, check Broken Volatility, not any more…

From Bloomberg,

Standard & Poor’s downgraded the U.S.’s AAA credit rating for the first time, slamming the nation’s political process and criticizing lawmakers for failing to cut spending enough to reduce record budget deficits.

S&P lowered the U.S. one level to AA+ while keeping the outlook at “negative” as it becomes less confident Congress will end Bush-era tax cuts or tackle entitlements. The rating may be cut to AA within two years if spending reductions are lower than agreed to, interest rates rise or “new fiscal pressures” result in higher general government debt, the New York-based firm said yesterday.

Lawmakers agreed on Aug. 2 to raise the nation’s $14.3 trillion debt ceiling and put in place a plan to enforce $2.4 trillion in spending reductions over the next 10 years, less than the $4 trillion S&P had said it preferred. Even with the specter of a downgrade, demand for Treasuries surged as investors saw few alternatives amid concern global growth is slowing and Europe’s sovereign debt crisis is spreading.

“The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics,” S&P said in a statement late yesterday after markets closed.

Full article, click here.

Expect war between the Fed and the S&P. First comments from Fed below. QE3 imminent? From Dow Jones,

Standard & Poor’s downgrade of the U.S. government’s debt will not affect the risk-based capital requirements for U.S. banks, federal regulators said Friday evening.

The Federal Reserve, Federal Deposit Insurance Corp. and other federal banking regulators said in a statement that the lowering of the U.S. government debt rating from AAA to AA+ “will not change” the risk weights for Treasury securities and other securities issued or guaranteed by the U.S. government or government agencies.

“The treatment of Treasury securities and other securities issued or guaranteed by the U.S. government, government agencies, and government-sponsored entities under other federal banking agency regulations, including, for example, the Federal Reserve Board’s Regulation W, will also be unaffected,” the regulators said.

Some more Friday comic. It seems some permabulls always see a buying opportunity as the markets always trade cheaply. Mr Biggs, bullish as ever. Some guys never face the reality.

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For some Comic Friday reading, check out some of the strategist’s targets for S&P. Yes these guys get paid multimillion dollar deals to be off by 25-30%. Bloomberg reports,

Wall Street has never been more sure that the Standard & Poor’s 500 Index will rally in 2011, even after speculation the U.S. economy is heading for a recession prompted the biggest plunge since the bull market began.

Chief strategists at 13 banks from Barclays Plc (BARC) to UBS AG (UBSN) see the benchmark measure of American equity surging 17 percent through Dec. 31, the average estimate in a Bloomberg survey. Their projection that the index will reach 1,401 hasn’t budged in four weeks, while mounting concern U.S. growth is slowing drove the S&P 500 down 11 percent since July 22, including yesterday’s 4.8 percent tumble.

Full article, click here.

While the Markets are moving 3-4% on Italian news, the ECB announcing to buy bonds etc, we present The Economist special report on Italy and Mr Berlusconi, who actually has screwed an entire nation, for a long time.

The Man Who Screwed an Entire Nation report,

The Economist 11 June 2011 – Italy

Well this certainly looks like the Friday before Black Monday. Unless Bernanke steps in, the Lord of Algos will eventually cause the Splash Crash. Some History below.

Fed on the Stock Market Crash of 87

And finally the full report from BLS;

Total nonfarm payroll employment rose by 117,000 in July, and the unemployment
rate was little changed at 9.1 percent, the U.S. Bureau of Labor Statistics
reported today. Job gains occurred in health care, retail trade, manufacturing,
and mining. Government employment continued to trend down.

Household Survey Data

The number of unemployed persons (13.9 million) and the unemployment rate (9.1
percent) changed little in July. Since April, the unemployment rate has shown
little definitive movement. The labor force, at 153.2 million, was little
changed in July. (See table A-1.)

Among the major worker groups, the unemployment rates for adult men(9.0 percent),
adult women (7.9 percent), teenagers (25.0 percent), whites (8.1 percent),
blacks (15.9 percent), and Hispanics (11.3 percent) showed little or no change
in July. The jobless rate for Asians was 7.7 percent, not seasonally adjusted.
(See tables A-1, A-2, and A-3.)

The number of persons unemployed for less than 5 weeks declined by 387,000 in
July, mostly offsetting an increase in the prior month. The number of long-term
unemployed (those jobless for 27 weeks and over), at 6.2 million, changed little
over the month and accounted for 44.4 percent of the unemployed. (See
table A-12.)

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So we are hearing rumours of a Downgrade for the Weekend. Black Monday? Short Gamma roller coaster every 10 minutes…Let us see who will be the first to acknowledge their short gamma exploded and they have to liquidate the fund.

If you are having problems catching the moves, these guys aren’t having those problems. Remember, all moves are extremely exaggerated by the new Kings of the World, HFT Algos.

We can’t but think about Omid Malekan’s (old) must see video on the Tradenators.

Tradeanator 2: Settlement Day from Malekanoms on Vimeo.

Quick figures as bls.gov is down;

Change Non-Farm Payrolls  117k vs. 85K
Unemployment Rate (Jul) 9.1% vs. exp. 9.2%

Are we to witness the Mother of all Squeezes?

So we just got that contrarian contraindicator in place. One of our perma bullish hedge fund managers just called us and proclaimed everything is going to Zero. This is one of the extreme readings we have been waiting for. The market is probably up for a major reversal today, and we won’t be surprised to see Europe going positive later today. Our long term targets are lower, but we think the market is up for a major squeeze. Note Italy and Spain in positive territory. Below, Dax, Ibex, Mib;