Wall Street's Unending Profit-Taking

by John M. Curtis
(310) 204-8700

Copyright April 18, 2011
All Rights Reserved.                                         

         Downgrading the U.S. credit outlook, Standard & Poors sent Wall Street into a mini-tailspin, dropping the Dow Jones Industrials over 200 points or 1.7% and giving traders the latest excuse to take profits.  Sending economists into another inexplicable seizure, S&P’s credit downgrade caused the U.S. dollar to rally, as Europe’s ongoing sovereign debt crisis returned to the spotlight.  It’s beyond counter-intuitive that currency traders bid up the U.S. dollar while the world’s most prestigious credit-rating agency downgrades U.S. credit.  Go figure.  Wall Street’s ways follow no economic theories only the machinations of insiders, using any excuse to either unload positions and take profits or buy back stocks and reinvest.  S& P’s downgrades or Europe’s debt problems have little or nothing to do with how currency traders decide to unload euros and buy back U.S. dollars.

            Economists point to indexes like the CBOE volatility index [Chicago Options], the so-called “fear index” which surged 17% to reflect growing global uncertainty.  With the civil war raging in oil-rich Libya and protest movements spreading over the Middle East, investors find excuses to lock-in profits.  Today’s sell-off reflects not S&P’s credit downgrade but a bull market whose curve doesn’t go up in a straight line, incrementally rising in an upward series of stair-steps, falling backwards to take profits while it lurches relentlessly forward.  “The global economy is becoming increasingly unstable yet investors in the U.S. have been either excessively optimistic at worst or at best, complacent,” said Bruce Bittles, chief investment strategist of Nashville’s Robert W. Baird & Co., offering yet another convenient excuse why the nation’s biggest funds decided to take some profits.

            S&P’s latest downgrade reflects growing dissension among U.S. lawmakers about what to do about mushrooming debt.  While the White House and Congress agreed to $38 billion in budget cuts, it’s a drop in the bucket with respect to the projected $1.6 trillion annual budget deficit.  Lawmakers can’t agree on either more cuts or how to add jobs and grow the economy.  While foreign automakers remain ahead of the curve choosing to relocate to the U.S., electronics and appliance manufacturers haven’t yet followed suit.  White House and Congress must incentivize foreign companies to begin assembling big screen TVs and large appliances in the U.S.  Creating more manufacturing jobs in the U.S. should help add jobs and increase the tax base and reduce future budget deficits.  Slashing budgets can’t keep pace with government expenditures to manage a growing population.

            Wall Street’s power investment banks like Goldman Sachs know that profit-taking discounts share prices, creating renewed buying opportunities.  When stocks inflate and price-to-earning rations go up, buyers stay on the sidelines waiting for eventual bargains.  S&P’s credit downgrade provides the perfect excuse to take profits and discount share prices. Counteracting S&P’s downgrade is a series of strong earnings by some the country’s most profitable big-cap companies, e.g., oil serving giant Halliburton, drugmaker Eli Lilly and commercial bank Citigroup, all posting sizable gains.  Despite today’s sell-off, Wall Street continues its bullish trend, adding more jobs, lowering unemployment and eventually reducing budget deficits.  As the deficit’s percent of Gross Domestic Product declines, S&P will be forced to upgrade the U.S. credit rating from negative to stable.

          China’s central bank increased its liquidity requirements for the fourth time this year, a move to combat renewed inflation.  S&P’s and China’s recent moves drove down commodity prices, especially crude oil, welcomed relief when you consider that runaway oil prices threaten the global economy.  S&P’s downgrade to negative, could drive up U.S. interest rates, especially on the national debt.  While America hasn’t lost its AAA credit rating yet, S&P sends a shot across the bow to Congress to get its fiscal house in order by restraining government spending.  S&P caused treasury prices to fall, as interest rates ratcheted up.  “We believe there’s a material risk that U.S. policy makers might not reach an agreement on long-term budgetary challenges by 2012 . . .” said Mark Dow, Pharo Management’s chief fund manager, urging Congress to show fiscal restraint while the economy adds more jobs.

            Wall Street isn’t bothered by S&P’s recent downgrade of U.S. credit, seizing the opportunity to take profits.  “You have to be careful:  You can’t yell fire in a crowded theatre,” said Dow, criticizing S&P for its recent downgrade.  To fuel the current bull market, investors have to believe in stable long-term growth with low inflation.  S&P’s recent move anticipates the need to control inflation by increasing interest rates.  If the White House and Congress can agree on fiscal policy and, more importantly, on path forward on growing the stock market, creating new jobs and inducing foreign companies to manufacture in the U.S., today’s growing deficits will begin to shrink.  Credit-rating agencies like S&P can do more harm than good triggering sell-offs in the stock market.  To keep the stock market rising and jobs flowing, S&P should stop hitting the panic button about U.S. debt.

 John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.

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