Debt Downgrade Fallout: Stocks Shattered, Gold Soars, Europe a Wasteland

At 9:00 pm Eastern time on Friday night, August 5, S&P officially released their downgrade of US debt from AAA to AA+, prompting widespread panic and sharp rebukes from the White House, who claimed, in effect, that S&P had made what amounted to "math errors."

Over the weekend, much was made of the downgrade, as the Obama hit the airwaves with gusto, rebuking the call from the ratings agency. Fitch and Moody's had previously reaffirmed the US debt as AAA, the highest possible sovereign bond rating, but S&P would not back down, and the downgrade remained in effect.

What S&P reasoned was that the US government did not take the necessary steps - in its theatrical production of waiting until the last possible moment to pass a debt ceiling increase - to address the structural problems facing it. S&P rightly concluded that US debt levels were and continue to rise and discretionary spending levels have not been controlled. Therefore, they downgraded the nation's debt and threaten to do it a second time, sometime around November, if the 12-member congressional committee charged with dealing with long term debt does not come up with actionable, concrete, debt reduction proposals.

As markets opened on Monday, the effects of a global panic were evident, especially on the heels of a 10% decline in US indices over the past two weeks and Thursday's dramatic sell-off of over four per cent on major markets.

First, it was the Asian markets which tanked at their various openings and continued through the day to sell off anywhere from 1.5 to 4.0%. Next up was Europe, where the crisis over bailing out Italy and Spain have reached a point of no return. EU officials stressed that they would be in the market with the ECB, buying up italian and Spanish debt, but that did little to change the outlook of investors, which had turned sour over the past fortnight.

Appetite for risk was at a low, as European markets suffered steep losses. England's FTSE was the best of the lot, down only 2.62%. France's CAC-40 took a 4.68% loss and Germany's DAX shed 5.02%. Other Euro-zone markets fell between 3.76 and 6.11%.

By the time US markets were to open, index futures had been hammered down to presage an inauspicious opening. Within minutes of the bell, the Dow was down more than 200 points, the S&P had taken a 25-point hit and the NASDAQ fell more than 70 points, though those declines were nothing compared to the carnage that lay ahead.

By the end of the day, after a minor rally in the first 15 minutes of the final hour, stocks were trading at or near their lows, with the Dow Jones Industrials surrendering the 6th-worst performance in its history. While the Dow suffered a 5.5% decline on the day, the other indices were actually much worse, with the NYSE Composite topping them all, coming home with a 7.05% loss.

It wasn't just the debt downgrade that spurred the sell-off. Conditions in Europe have worsened significantly over the past few months, to the point that European Union officials are without reasonable solutions to the debt contagion spreading across the region. While the ECB has managed to prop up smaller countries like Greece, Portugal and Ireland, Italy especially poses a much larger concern.

All the European leaders could muster on Monday was a terse statement which offered no concrete proposals but plenty of assurances, which was be roundly written off by markets. To wit:

We are committed to taking coordinated action where needed, to ensuring liquidity, and to supporting financial market functioning, financial stability and economic growth

That was the extent of the communique from the magnificent seven of the United States, Canada, Great Britain, France, Germany, Italy and Japan.

The irony is that one of them, Italy, has been the source of the most recent anguish.

Essentially, the funds available to the ECB fall short of meeting the debt purchases needed to save Italy and Spain. Europe will have to engage in quantitative easing, as was the case in the United States over the past two years, to stave off defaults and the threat of a cascading crisis which would envelop all of Europe and likely doom the 11-year-old Euro currency.

If the EU decides upon cheapening the currency - which it almost certainly will do - theknock-on effect will be to sink the Euro, probably close to parity with the US Dollar. As the dollar would grow in strength, commodities, particularly oil and gas for auto use, would plummet, a boon to US drivers and to the general economy. Costs of imports would also decline, on a relative basis, giving American consumers more purchasing power.

Within the same scenario, however, are pitfalls for the global manufacturers and companies that populate the S&P 500, NASDAQ and the Dow. A stronger US Dollar would make them less competitive in foreign markets, shrinking margins and thus, profits. Thus, the great selling rush today was more of a statement on the global condition rather than that of the debt downgrade, which, when all is said and done, won't amount to a hill of beans. In fact, treasuries were up sharply today, as yields fell to their lowest levels in over a year.

The benchmark 10-year note fell 25 basis points in just one day, from 2.56% on Friday to 2.31% on Monday. The 30-year bond fell 19 basis points, to 3.65% as the yield curve continues to flatten. Money is going out of stocks and into bonds, and whether they're AAA or AA+ doesn't matter to those seeking a safe haven. The ridiculously low yields offered are a moot point. As one trader put it, "Investors aren't looking at making money; they're more concerned with getting their money back."

And, therein, the next crisis, in bonds, especially if the US government doesn't get its house in order soon. Higher rates and another downgrade could trigger a default of impossible proportions as the US would be unable to roll over its debt and fund itself without incurring higher borrowing costs. Ditto for Europe. Rising interest rates signals the end game for fiat currencies globally and back to some form of honest money, most likely on a gold standard.

The market events of the past few days, in which the major indices lost more than 10% are not the end of the crisis, but rather the beginning of the end of a great generational bear market that began in 2007 and will eviscerate all risk assets until nobody wants to hold anything any more.

Markets have entered the final stages of the third leg down. QE 1 and 2 staved off the collapse, but there will be no bailouts this time around. It's every man, woman, child and company for itself. There will be some winners, but mostly there will be losers, anguish, agony and the disappearance of great hordes of wealth.

Dow 10,809.85, -634.76 (5.55%)
NASDAQ 2,357.69, -174.72 (6.90%)
S&P 500 1,119.46, -79.92 (6.66%)
NYSE Composite 6,895.97, -523.10 (7.05%)

The internals were equally as stunning as the headline numbers. Declining issues decimated advancers, 6553-375, a ratio of 17.5:1. It was truly one of the deepest, broadest declines in stock market history. On the NASDAQ, there were four (4) new highs next to 725 new lows. The NYSE had just three (3) new highs, but 1292 stocks making new 52-week lows. The combined total of seven (7) new highs and 2017 new lows rivals or exceeds the figures presented during the fallout of 2008-2009.

Volume was at the highest levels of the year, exceeding that of last Thursday, which was then the high volume day of the year. Investors aren't just scared, they are trampling each other running through the exits at breakneck speed.

NASDAQ Volume 4,002,857,250
NYSE Volume 11,046,384,000

Crude oil futures were pounded again, as the front-month contract on WTI crude fell $5.57, to $81.31. Gas prices will soon fall below $3.50 - and possibly below $3.00 - a gallon as current supplies are depleted and replaced by less expensive distillates. According to AAA, the average price of gas in the US is now $3.66 per gallon, but the deep declines have not yet been factored into the equation. That will happen over the next two to three weeks.

Gold was the big winner of the day, soaring $61.30, to $1,713.20, another all-time record price as investors, companies, nations, central banks and housewives scrambled to find reliable assets. Silver, still constrained by high margin requirements, gained $1.17, to $39.38. Silver is almost certainly the most under-appreciated asset in the world, though that will soon change. As the crisis escalates and governments make more and more bad moves, the precious metals will skyrocket to unforeseen heights.

The banking sector took it on the chin, but none more than Bank of America (BAC) which is on the verge of a well-deserved bankruptcy. shares of the nation's largest banks fell 20% on the day, losing 1.66, to close at 6.51. Just a few weeks ago, BofA was trading at a price nearly double that. The unfolding mortgage crisis, brought about by Bank of America's 2008 purchase of Countrywide, has become a fatal blow to the once proud institution.

David Tepper's Appaloosa Management Fund has reportedly sold its stake in Bank of America (BAC) and Wells Fargo (WFC), while significantly trimming Citigroup (C) from the portfolio.

Adding to the irony, AIG has sued Bank of America for $10 billion, citing "massive fraud" in its representations of mortgage-backed securities (MBS).

However, Citigroup analyst Keith Horowitz takes the booby prize for reiterating a "buy" rating on Bank of America shares this morning. Timing is not one of Mr. Horowitz's strong points, it would appear.

On top of all this, the FOMC of the Federal Reserve will issue a policy statement Tuesday at 2:00 pm EDT, followed by a news conference from Chairman Ben Bernanke. That alone should equate to another 300-point decline in the Dow.

For those with a morbid curiosity, check out the slideshow of the 10 worst days on the Dow, already outdated, as August 8, 2011, will go down in the history books as the 6th worst day for the blue chip index of all time.

Henry Blodgett and Aaron Task have a nice summation of the situation in the video below:

Euro Debt Crisis Exacting Heavy Toll on Global Markets

Make no mistake about it, today was the start of the great reckoning. The beginning of the end of easy money policies, of kicking the can down the road, of failing to come face-to-face with the reality of the global credit crisis that began in 2008 and never really ended.

Oddly enough, it comes on a day in which the US President, Mr. Obama, is headed to Europe for a meeting of the G-8, in which the globalist governors will mete out whatever they see fit for the peasantry of their populous nations. It's a little like playing Russian roulette with all the chambers loaded. You're going to get it no matter how lucky you are.

The interesting aspect of the day's trading happened not specifically today, but actually last Friday, when futures went limit down shortly after the US close. It was a weekend warning shot that the powers in control would be taking their various pounds of flash come Monday. And they did, sending markets around the planet down by one, two and three per cent.

Here in the USA, one-month lows were the order of the day, though that's hardly exciting news. The pertinent take-away is that the great unwind of asset values has begun - or resumed - as the major indices finished the session today less than 4% off their recent multi-year highs.

What was notable was the changing of the guard on the new highs - new lows indicator. For more than two years - with only slight variations - new highs have exceeded new lows on both the NYSE and the NASDAQ. Today, new lows outnumbered new highs on the NASDAQ and the gap narrowed on the NYSE. Even though this is not the first time this has happened recently, its frequency and narrow range makes it a particularly potent indicator at this point in time. Once this turns, it tends to remain in place for quite a while, periods between changes in leadership are measured in years.

Market movements are often subtle and difficult to pinpoint, though this one has been telegraphed for quite some time. The debt condition of Greece, Portugal, Belgium, Italy, Spain and Ireland are unsustainable situations as is the salve of QE2 and ZIRP here in the US. Japan, literally and figuratively, has been swept off the face of leading economic nations and uprisings across the Middle East and North Africa (called the MENA region, for short) threaten the global economy.

Even the leaders of the most powerful nations know that this little game of chicken, complete with artificial stimuli, bailouts, buybacks, swaps, jawboning and other gimmicks cannot proceed forever. Europe must get serious about its long-term structural deficiencies and the US must confront the debt limit and its own burgeoning solvency problem, and both must do so quickly. Thus, preparedness for financial armageddon is underway, and, if one listens closely to the pundits and analysts populating the airwaves and internet, most are calling upon investors to take a pause, pare back on stocks and raise cash, which is, in the parlance of Wall Street, like saying, "run for your life!"

There's an opportunity for the globalist agenda to sail through this period of austerity, consolidation and downgrading of the private sector fairly unscathed, but be assured that the plan is afoot and the stock indices will bear the brunt of what will amount to a massive global deflation. In a year or two, they will once again announce victory over the forces of debt and monetary destruction and proceed to blow the bubbles once more.

In this environment, no asset class is safe, though cash and equivalents, gold and silver, are good starting points. Growth will be minimal, as measured by GDP, if positive at all, and the opportunity for fresh recessions are abundant. Today was just another in a series of well-timed warning shots. Prepare or die.

Dow 12,381.26, -130.78 (1.05%)
NASDAQ 2,758.90, -44.42 (1.58%)
S&P 500 1,317.37, -15.90 (1.19%)
NYSE Composite 8,236.55, -120.98 (1.45%)

Losers soared over winners on the session, 5257-1342, a 4:1 ratio, though hardly a complete rout. It could have been much worse. On the NASDAQ, 37 new highs, but 86 new lows. The NYSE recorded 51 new highs and 44 new lows, the smallest gap in nearly two months. Taken together, the 88 new highs do not reach up to the 130 new lows, and that is the important set of figures to watch, the combined number. Continued weakness has been forecasting a more serious tumble for the past two months. Volume, despite the massive decline, remained at severely low levels. Once again, the major players have been unable to draw in the usually-gullible public, which is tapped out and wants no part of the Wall Street circus. Thus, they play amongst themselves, like a pack of starving wolves who will eventually turn upon each other.

NASDAQ Volume 1,806,104,625
NYSE Volume 3,761,192,500

Crude took another turn down, the front-end NYMEX contract for WTI losing $2.40, to $97.70. Gold managed a gain of $3.70, to $1517.20, while silver advanced by only a penny, to $35.07.

The major indices completed three straight weeks of negative results on Friday. Monday's opening gambit to the downside portends worse to come. March Durable Goods Orders data on Wednesday and the second 2nd quarter GDP estimate on Thursday will most likely add to the sense of pervasive desperation.

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.

Major Market Madness as EU Faces an Abyss

Greece has exploded into near-anarchy. Most of Southern Europe is about to enter similar circumstances, as Italy, Spain and Portugal face the same kind of debt crisis that is sweeping the globe. Ireland and Iceland have already felt the wrath of economic unwinding and the panic doesn't stop at small-country borders.

The unprecedentedly-swift breakdown which occurred today on US stock markets is a symptom of a wider contagion, a currency, central bank, sovereign confidence crisis.

Around 2:00 pm, with stocks already suffering significant losses and live video of protesters being attacked by riot police in Athens airing worldwide, markets turned even more dire, doubling their losses in a matter of minutes. By 2:15, the wheels were off as the Dow fell from 250 points down to a 990-point loss in the blink of an eye. For about 10 minutes, markets were in freefall. Traders reported a near-complete capitulation, with buyers completely absent from the market in almost all stocks.

Once again, however, the slide was staunched by some heavy-handed trading in futures and the more-than-likely subterfuge of the major investment banks and their allies in crime, the government-approved President's Working Group on Financial Markets (Plunge Protection Team. i.e., the PPT). As quickly as the markets fell, the rebounded. The Dow recovered to a loss of roughly 400 points and seemed to stabilize at that point. After a wild 15 minutes of trading that left everybody stunned and questioning exactly what happened, the markets churned onward toward the close, ending with massive losses, nonetheless.

Dow 10,520.32, -347.80 (3.20%)
NASDAQ 2,319.64, -82.65 (3.44%)
S&P 500 1,128.15, -37.72 (3.24%)
NYSE Composite 7,011.92, -246.10 (3.39%

The substantial declines on the day were more than bourn out by the internal indicators. Declining issues completely overwhelmed advancers, 6015-742, or, by a margin of about 9:1. It was one of the biggest one-day routs in recent years, and there have been a good number of those. The key measure was the number of new highs to new lows, which completely flipped over from a year-long trend. There were 612 new lows to 196 new highs, a complete reversal, which, if history is any kind of guide, is a loud siren that the bears are firmly back in control.

Another screaming indicator was the day's volume, literally off the charts. This is the kind of volume seen only at the extremes, likely one of the 5 or 10 highest-volume days in the history of US stock markets. Since the direction was decidedly to the downside, more selling should be expected in days to come.

NYSE Volume 11,772,131,000.00
NASDAQ Volume 4,292,823,500.00

Concerning the heavy selling that sent stocks into a short-lived abyss, the commentators on CNBC cited such simplistic theories as a computer glitch, false prints and other preposterous theories, all along avoid the obvious truth: the economic crisis did not end in March of 2009, when stocks began a year-long rally. Financial markets are still fragile, one might say, tenuous, and only clandestine moves by insiders kept stocks from recording a record sell-off.

At some point, CNBC or another expert may release a story explaining the sudden downturn on the back of a rogue trade or computer malfunction. Any such story should be viewed with an additional dose of skepticism if only because of the various levels the major indices broke through during the panic. All of them shattered their 50-day moving averages during the session and closed well below them. Markets have been trending lower for the better part of the past two weeks and this kind of momentum-turning-to-panic trading cannot be discounted as a one-off event.

The likelihood of further market declines in the very near term and extending into the longer term is very high. The debt-deflation bomb has not yet run its course. Not until massive amounts of money and companies are liquidated will the disease be purged from the global economy. Expect widespread panic in European markets as countries fall like dominoes with a side-effect around the world. US markets will not be spared, as the US is only the best among peers at this juncture. Major economies will survive, though France, Germany, Great Britain and the USA will be severely crippled by year's end.

Our beloved "recovery" has been a complete fabrication, fueled by the media and the mechanics of commerce in Washington and on Wall Street. Individual investors have largely shunned equities in favor of bonds and tangible assets such as gold, which was an outside winner on the day. Greece and the rest of the Southern European countries are financially on death's door, facing complete default. Soon, one will capitulate and flee the European Union and denounce the Euro. When that occurs, the ten-year experiment at cross-border governance will be essentially over. The EU will disintegrate and the Euro will be completely unwound. The main hope is that troops do not begin excursions into neighboring nations, as has been the centuries-old history of Europe.

Even today, as it has been throughout the life of the EU, the stronger Norther economies have considerable enmity toward their Southern neighbors. The chance of the entire continent devolving into skirmishes over currencies would neither be unexpected nor unprecedented. Wars are usually how nations resolve major financial squeezes and Europe is certainly in one now.

Besides the dire conditions in Europe, the Gulf oil spill remains unchecked and tomorrow's non-farm employment report - to be released to the public at 8:30 am ET - doesn't offer much optimism. Most of the supposed 185,000 jobs created in April will be attributed mostly to government hiring of temporary census workers and the whisper campaign is that not as many were needed due, ironically, of the efficiency of the operation. Should the non-farm number fall significantly below expectations - a real possibility - an immediate continuation of the plunge will probably occur.

The best hope is for the proverbial, "dead cat bounce," which might ease tensions temporarily, until, at best, the next round of crisis selling. So severely strained and wrought with fraud, inter-leveraging and toxicity, financial markets have entered a semi-permanent state of crisis. When this chapter of global finance is finally unwound, the world won't end, but the pain will have spread deeper and wider than anyone could have expected.

For the baby boomer generation, the nightmare may have only begun. Those without high debt may find themselves in better positions than many of their over-leveraged peers.

Some of the numbers emerging from this historic day in finance (and underscoring the idea that this was not a one-off event):

Crude oil futures continued their steady decline, losing another $2.86, to close at $77.11, the lowest print in months. Safe-haven gold improved by $22.30, climbing above the $1200 mark to finally settle at $1,196.90. Silver couldn't keep pace, losing 2 cents, to $17.49.

All of the major indices have suffered huge blows over the past two weeks, and all closed below their 50-day moving averages.

The Dow Jones Industrials are less than 100 points higher for the year. For the year, the NASDAQ is up only 50 points, the S&P ahead by just 13 points, the NYSE Composite - the broadest index - is down 173 points, all of that loss, and more, occurring today.

All of the 30 Dow components closed lower, many of them with 3.5 to 4.5% losses. Citigroup touched a low of 3.90, closing at 4.01, as all financial stocks were pounded lower.

Treasuries and the US dollar were sharply higher. The dollar index hit fresh highs while the Euro broke down to 14-month lows against the greenback. The benchmark 10-year treasury closed at a 3.40% yield, 55 basis points lower than just a month ago.