Think the economy is getting better? Not me.
I still maintain my long term bearish outlook for the U.S. economy and the stock markets. And as long time readers well know I have discussed the deterioration of corporate earnings for a very long time, even as far back as 2007 when I discussed the deterioration that was beginning.
Tonight we received word that $1.76 Trillion worth of corporate debt has been downgraded due to collapsing corporate balance sheets.
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.[...]
[...]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 (GE.N) and its units. Other major borrowers downgraded included Ford Motor Co (F.N), Citigroup (C.N) and Bank of America (BAC.N).[...]
[...]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.[...]
Source: Reuters
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Whenever equity and credit markets say too different things, the latter are usually correct.
Or even *two* different things. Need my morning coffee.
More downgrades could occur, earnings could be bad, but we really need to see how the market digests the bad news. If it doesn’t react too negatively that is an encouraging sign.
An encouraging sign of what? That the market still has an appetite for Kool-Aide? I’d love to be bullish, but the more lack of negativity displayed by this half baked market will only lead to a very precipitous drop in the future. Also, this false euphoria is only drawing more $ from the sidelines, folks who withdrew money in Oct/Nov., who will be chasing this rally – just more innocent blood will be spilled. No, if the market does not react too negatively, it will be a sad sign.
Just to back up Chuck’s assertion that things are still grim, check out this compilation of economic indicators and graphs from March: http://www.calculatedriskblog.com/2009/03/march-economic-summary-in-graphs.html
So where is the higher earnings going to come from? Printing money is not creating wealth!
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