Rebel Traders – Analysis Without The Hype

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

Standard & Poors has cut the sovereign credit rating of Ukraine and says the outlook is negative.

From Standard & Poors:

S&P DOWNGRADES UKRAINE’S SOVEREIGN CREDIT RATING TO ‘CCC+’ (DISTRESSED) FROM ‘B’ (ONE NOTCH); OUTLOOK NEGATIVE

The recovery rating on Ukraine’’s foreign currency debt remains ”4”, indicating Standard & Poor’’s view that post-default recovery would be in the 30%-50% range. [...]

The downgrades reflect intensifying execution risks associated with Ukraine’’s Standby Arrangement with the IMF, due to the absence of broad political backing for necessary budgetary revisions and banking system reform ahead of the January 2010 presidential elections.[...]

The negative outlook indicates that the sovereign ratings on Ukraine could be cut again if there are further protracted delays in disbursements of official loans, and should the hard economic landing push the government to consider alternative measures to free up cash flow in order to raise current expenditures in the run-up to presidential elections in early 2010.