European Downgrades Will Resonate

 | Dec 16, 2011 | 6:29 PM EST
  • Comment
  • Print Print
  • Print

Are the downgrades and outlook cuts "in the market" as so many agued today? When Moody's and Fitch take the ax to whole countries, doesn't everyone expect it and therefore it doesn't matter?


Because a lot of money is run strictly by the agency watchwords, in that many, many institutions can't hold on to paper that is downgraded from where they bought it because of charter reasons. You may think that it's wrong or silly. You make think the agency raters are such a bunch of empty-headed simpletons that it doesn't matter, but it is how the ratings are used. They are red flags, and institutions dump when their bonds get downgraded, particularly because when one is downgraded, you can just go buy another that still fits your criteria.

Of course, it is just as important to consider that lowered outlooks make it harder for countries to refinance their debt -- it's more costly, and tougher to find buyers. In this environment, that means higher rates and lower prices for existing bonds that might be held by banks which lent against those bonds as if they were cash. Now they need to sell to raise money to meet capital standards.

That means that when you get to this critical phase, not like the AAA to AA phase for the U.S., that there's a real and very negative impact.

Does that mean the stock market can go higher Monday? Sure, the linkage isn't minute to minute. But these downgrades aren't going to stop. They are going to accelerate if we don't get growth in their economies or help from the richer countries. Neither seems likely.

So stop thinking they are "in" the market and instead think about how to protect yourself. That's what matters.

Columnist Conversations

today is a good day to lighten the load and take some positions off the table. SOLD WB OCT 85 CALL AT 11 (i...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
I reached out last week to my close friend Ken Shreve, who is a prominent writer for the IBD.  I asked Ke...
View Chart »  View in New Window »



News Breaks

Powered by


Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.