Monday, April 18, 2011

S&P Shocks Markets, Downgrades US Outlook to Negative

Us markets barely shrugged when Japan's nuclear reactors exploded, Egypt's government was overthrown, Ireland and Portugal needed bailouts and the entire nation of Libya was turned upside down in a violent civil war.

But it was something not destructive, threatening or otherwise physically damaging - a downgrade of the economic outlook from neutral to negative for the United States from ratings agency Standard & Poors (S&P) - that caught everyone's attention on Wall Street and in Washington.

The agency - the very same one which rated hundreds of mortgage-backed securities (MBS) as AAA when they clearly were not - verified what practically everyone on the planet already knew: that the USA was spending well beyond its means and that the federal government needs to fix its financial affairs in short order.

While shying away from actually downgrading the rating, the outlook downgrade comes as a kind of warning to politicians on both sides of the aisle. S&P is concerned that long-term high deficits could lead to dire consequences if not reined in soon. Concerned that Democrats and Republicans will be unable to come to terms with glaring deficits and reach a spending and revenue compromise, S&P said, "The negative outlook on our rating on the U.S. sovereign signals that we believe there is at least a one-in-three likelihood that we could lower our long-term rating on the U.S. within two years."

An actual ratings cut could impact the government spending and borrowing programs in a nyriad of ways, making new and old debt alike more expensive to service due to higher interest rates.

Of course, the United States is not just any country. It still enjoys the best rating possible AAA on long term debt and A-1+ on short term borrowings. Nonetheless, Wall Street stood up and took notice, with across-the-board selling right from the opening bell.

The Dow was down as much as 247 points early on, but managed to pull itself higher in the afternoon, shaving off 2/5ths of the decline.

Dow 12,201.59, -140.24 (1.14%)
NASDAQ 2,735.38, -29.27 (1.06%)
S&P 500 1,305.14, -14.54 (1.10%)
NYSE Composite 8,277.11, -123.20 (1.47%)

Declining issues soared over gainers, 5219-1370. New lows exceeded new highs on the NASDAQ, 50-42, and rolled over on the NYSE as well, with 30 new lows and just 22 new highs. Volume was not impressive, though overall breadth was somewhat stunning, with all sectors ending in the red, led by energy, capital goods, basic materials and financials.

The lack of volume is more ominous than it may appear at first glance, significant in that not all investors took this warning seriously and continue to not only hold stocks, but were buying in the afternoon. With the Fed's QE2 program drawing to a close in just two months time, a tough fight for certain in Washington over raising the debt ceiling and the 2012 budget and an economy still not flourishing a full two years after the banking crisis, there are more than enough potential causes for a rapid - and lasting - decline in stocks.

NASDAQ Volume 1,817,444,625
NYSE Volume 5,013,312,500

Besides the potential S&P downgrade, corporate earnings thus far have been short on results. Bank of America's miss on Friday was widely overlooked, but today after the bell, Texas Instruments (TI) also missed, and revised 2nd quarter estimates. Before the bell tomorrow, Goldman Sachs (GS) is due to announce their results for the first quarter, which, if all goes according to plan for the company that supposes to be doing "God's work," then this downdraft will be quickly forgotten and a new era of prosperity proclaimed.

That's another bet on which we're not taking sides.

Once again, commodities and the consumer were the winners of the day as crude oil slipped $2.54, to $107.12 at the NYMEX close, while gold flirted with the $1500 mark, closing the day at $1,492.90, a gain of $6.90. Silver continued to set new 31-year highs, finishing at 42.96, on a gain of 39 cents, though it was well above the $43 mark through most of the day.

In what had to be the least-appreciated news item of the day, Saudi Arabia cut its oil production by 800,000 barrels a day due to - get this - oversupply.

Now, if only somebody can explain to the millions of drivers worldwide just how that supply-demand dynamic works again maybe we can eliminate some of the obvious gouging that's gone on over the past two months. If the Saudis are cutting production due to oversupply, then oil should be more like $40 a barrel, not over $100, and gas should be a heck of a lot closer to $2.00 a gallon than it is to $4.00.

Trust nobody. It's obvious that our own government could care less about the general welfare of its own people. And for those who paid their income taxes today, too bad, because you just threw your money right down the memory hole.

What's in store from here is anybody's guess, but you can count on a number of things: the politicians will continue to bicker and fight like little girls and accomplish next to nothing; the bankers will continue to evade prosecution for their frauds and receive bigger bonuses; and the American people - sheep that they are - will not protest but will still want their iPads, food stamps and football.

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