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.

It's Not as Good as They're Saying; Lows-Highs Flip

To anyone who follows capital markets and the world of high finance closely, the material deficiencies in the US and global "growth" stories are glaring and have been for many months. While the financial press - CNBC, the Wall Street Journal, Bloomberg - and the spokespeople for the various central governments around the world continue to feed the public the "recovery" fable, the facts, now beginning to see the light of day, contend that the global economy is still, two-and-a-half years after the grand cascading crash of 2008, in precarious straits.

Five separate stories sealed the fate for global markets today, beginning with China's announcement late Wednesday night (in America) that their trade balance was negative for the month of February.

About the same time, RealtyTrac delivered news that foreclosures had come to nearly a halt in the United States, with their numbers for February dropping 14 percent from the previous month and a 27 percent decrease from February 2010. Normally, that would be good news, but in the current environment of illegal and unethical actions by large, foreclosing banks, it meant that the mess that began in October, 2010 with the robo-signing scandal, was keeping banks from courthouses and clogging up the real estate market in a worsening manner.

Prior to the market opening, two more news items spooked the investment community. First, Moody's downgraded Spain's debt (about time for that!) to Aa2 and then, at 8:30 am on the East coast, the double whammy of new unemployment claims (397,000) and the US trade deficit, which expanded to -$46.3 billion in January.

Then, in mid-afternoon, as if the market had not received enough bad news, a story out of Saudi Arabia said that protesters had been fired upon by government troops.

That final bit of news sent the major indices - which had recovered somewhat off the day's lows - down once more, and stocks finished the session breaking into new depths.

The Dow and S&P broke through various levels of support, with the Dow finishing under the 12,000 mark for the first time in two months and the S&P crashing through it's 55-DMA. The NASDAQ and NYSE Composite each suffered similar pain.

It's becoming plain and clear to everybody living in the real world - not the fantasy land of fund managers, politicians and central bankers - that things are not going so well. Housing is an absolute catastrophe, global trade is grinding down due to higher imput costs and soaring energy prices, Europe is a full-blown basket case on the brink of dissolving, and US stocks are so wickedly overvalued that the path of least resistance is to sell them all, hurriedly, on the first sign of negative news, and there certainly was plenty of that to go around today.

Dow 11,984.61, -228.48 (1.87%)
NASDAQ 2,701.02, -50.70 (1.84%)
S&P 500 1,295.11, -24.91 (1.89%)
NYSE Composite 8,200.07, -179.37 (2.14%)

Declining issues led advancers, 5501-1072, a ratio of better than 5:1. New highs on the NASDAQ were just 33, overtaken by 68 new lows. On the NYSE, just 27 new highs and 31 new lows. This is a critical juncture for the markets, because if the number of new lows remain higher than new highs on a daily basis for long, say, six to eight trading days, it would confirm a hard change of direction, which has been in the cards since the double-engulfing session last Tuesday.

Volume was elevated as is the usual case when sellers outnumber buyers.

NASDAQ Volume 2,374,073,000
NYSE Volume 5,320,324,500

Commodities also took it on the chin, though in not such a dramatic fashion as stocks. Crude oil futures on the NYMEX fell $1.68, to $102.70, due to massive oversupply in the US of unrefined crude. Gold slipped $17.10, but remained below the psychologically-important $1400 level, ending the day at $1,412.50. Silver also was sold off, losing $98 cents, to finish at $35.07, though it should be noted that on days of hard reversals, a lot of precious metals are liquidated by speculators to cover margin calls.

A final note should not be ignored. Bill Gross' PIMCO, the world's largest fixed income family of funds, has slashed its holdings of Treasuries to ZERO. This news, first reported by the avant garde financial blog, zerohedge.com, holds unknown, but potentially damaging conditions. Gross and PIMCO have more or less registered a vote of "no confidence" on the policies of the US government and the Federal Reserve Corporation.

With stocks hammered down repeatedly over the past two weeks, the highs of February 18 look like specs on the horizon and the truth about the real conditions in the global and US markets is finally coming out. The cataclysm begun by the Wall Street banks in 2003-2006 and accelerated by then-Treasury Secretary's $700 billion holdup of the US mint in October, 2008, has many more acts still to be played out.

The rush for the exits began a week ago and the passageway out is beginning to get quite crowded.