Bottom Calling

The government and financial press are working overtime to sell the last market low as the bottom. As this is the third bottom that's been sold to us, you might want to wait before going all in on SPY or DIA. Yesterday, CNBC posted the Reuters wire report below. Thus, as the DJIA rallies another 250 points today and the financial press struggles with producing a plausible explanation, you may want to ponder who is doing all of this euphoric buying. As callous as it sounds, anybody that continues to lose money in 401(k) account mutual funds has nobody to blame but themselves.

Moody's downgraded $1.76 trln U.S. corp debt in Q1
NEW YORK, April 1 (Reuters) - Corporate America's credit quality collapsed in the first quarter, with Moody's Investors Service downgrading an estimated $1.76 trillion of debt, a record high, the rating agency said on Wednesday. The downgrades included a record number to the lowest rating categories, signaling the approach of the worst defaults since at least World War Two, Moody's chief economist John Lonski said in an interview. "These are numbers that just underscore how risky both the financial and economic environment remain," Lonski said. The downgrades reflect how badly corporate balance sheets have been hurt by the slump in consumer spending amid the deepest economic contraction since 1982. "Business sales and profits fell off the table in general during the final quarter of last year and have continued to deteriorate in the first quarter in 2009," Lonski said. U.S. corporate profits plunged a record $120.1 billion in the fourth quarter, depressed by tumbling consumer spending and exports. Downgrades of investment-grade companies shot up by 153 percent from the year-ago quarter to a record 96, while downgrades of junk-rated companies surged by 147 percent to 287. The rating downgrades were led by industries with exposure to the ailing housing industry, including homebuilders, mortgage insurers and major money center banks. Some 70 of the quarter's downgrades were housing related. "The most prominent new driving force behind credit rating reductions would be deterioration of commercial real estate," Lonski said. That is taking a toll on regional banks and companies that manufacture equipment and material used in construction, he said. The downgrades included one of the largest on record, $326 billion of bonds and preferred shares of General Electric Co and its units. Other major borrowers downgraded included Ford Motor Co, Citigroup and Bank of America. In addition to housing, sectors under rating pressure included automakers and auto parts suppliers, media companies, casinos and retailers. Among the downgrades were 22 fallen angels, or companies cut to junk status. In addition, 82 ratings were downgraded to the lowest categories, Caa3 or lower. That means that the U.S. high-yield default rate, which stood at 5.7 percent in February, is destined to climb sharply in short order, Lonski said. Moody's has forecast that the U.S. default rate will peak around 14.5 percent in November.


  1. It sounds like the Shortbus got caught in a short squeeze.

  2. Actually, my only speculative position is a long call SPY spread which has almost played out. The current rally was hyped for a week before it started, so you'd have to rather dense to get hit by that bus.

  3. Major lows are rarely put in when they're surrounded by this much optimism.

  4. Worth noting the discrepancy between Lonski's $120.1 billion drop in 4Q corporate profits and what the BEA said:

    Profits before tax decreased $499.2 billion in the fourth quarter, compared with a decrease of $56.3 billion in the third.

    See: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

    Rather than targeting consumer retrenchment, think that I'd go with the impossibility of perpetually substituting credit inflation for profit, i.e. corp profits have been ballooned and now returning to earth.

  5. fordmw: Particularly when the basis of optimism is an accounting obfuscation. Much of what we are seeing makes more sense when you start looking at who is left in the market.

    Anon: That's a very interesting discrepancy, especially when you consider which source is lower.

    "Rather than targeting consumer retrenchment, think that I'd go with the impossibility of perpetually substituting credit inflation for profit, i.e. corp profits have been ballooned and now returning to earth."
    We've been masking a lack of real economic growth with credit for so long that our current situation was inevitable. Building the second story of your house with the timbers from the first is usually a poor strategy.