August 10th, 2011 9:29 AM by Mel Samick
A lot of things happened last week which are unprecedented and the list is long. To summarize, global markets are very nervous and there is a lack of confidence in the economy right now. To worsen the outlook, S&P downgraded U.S. debt's AAA rating. A stock sell-off continues unabated. Most of the fears that sparked last Friday's sell off were the very real concern that the United States and Europe are headed for another recession. Among all these overwhelming events and its difficult to figure out where to start, so let's take the order of good, bad and the ugly.
It's difficult to find any good news in the financial markets. There was apparently good news on the U.S. Unemployment data but the markets shrugged it soon after. American employers added more jobs than forecast in July and the unemployment rate fell for the first time in four months, payrolls rose by 117,000 while the median estimate in a Bloomberg News survey called for a gain of 85,000. The jobless rate dropped to 9.1 percent as discouraged workers left the labor force. And yes mortgage rates are down so borrowers can feel better. That's it for the good news!
Now let's get into the darker side of the news. A global rout in equities drove the Standard & Poor's 500 Index to its worst slump since February 2009, while Treasury yields plunged to a record low amid concern the economy is weakening. The Dow dropped below 11,000 and there is no end in sight. It's the biggest loss over the same amount of time since March 2009. The state of the stock market was already grim last week before the U.S. credit downgrade - and got worse after Thursday's gut-wrenching slide that marked the worst decline since 2008. The flight to safety continues as investors seek safe assets like Treasuries, despite the downgrade, gold and cash under the mattress. Gold crossed an all time high of $1700 per ounce. The worst outcome is that one bank has started charging for cash deposits now. Bank of New York Mellon Corp., the world's largest custody bank, will charge institutional clients a fee for "extraordinarily high" cash deposits to stem a flight of capital into the safety of bank deposits. It may be a bad news for clients with $50mm in cash and above and unfortunately mattresses are not big enough for them.
And the ugly side of news is the S&P downgrade of U.S. debt. America now carries a rating of AA-plus instead of the coveted AAA rating on its Treasury bonds. Austria, Norway, Germany and Australia are no longer our peers ratings-wise -- we are, instead, in the company of Japan, China, Spain, Taiwan and Slovenia. So the biggest question isn't how much the S&P downgrade is going to affect the stock market on Monday, but how many dominoes will continue to fall as part of the broader crisis of confidence. The downgrade surely won't help - but it's just one more log thrown on the fire that is already burning hot. And contrary to some opinion, U.S. Treasuries are rallying after the news so the market is not penalizing U.S. debts yet.
In the coming week, investors will look forward to the FOMC announcement on Tuesday, and Jobless Claim on Thursday, and Retail Sales on Friday. In these tough times when fear prevails, we can remember Mr. Warren Buffett's famous advice "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."
Thank you for your business.
Information provided by NYCB Capital Markets