Analyst Downgrades Drag Down Stocks

Have you noticed that analysts are starting to downgrade stocks? Sprint Nextel (NYSE:S), Yum Brands (NYSE:YUM), PETsMART (Nasdaq:PETM), MBIA (NYSE:MBI) and Aegon (NYSE:AEG) were all marked down by analysts yesterday. 

Coverage was initiated on American Express (NYSE:AXP) at "Sell" by Ladenburg Thalman. Boeing (NYSE:BA) and Research in Motion (Nasdaq:RIMM) have also been downgraded in the last few days. 

So what gives? If everyone’s so bullish right now, why are stocks getting downgraded? 

First, stocks have rallied strongly since March. And second, there’s no guarantee that earnings can continue to rise. The analysts may be playing it safe, but investors should take note. 

*****AIG (NYSE:AIG) has doubled in the last three days. If there was ever a company that shouldn’t double, it’s AIG. The government owns something like 90% of the company. And it’s actively selling off its important pieces to pay off debt. It’s highly unlikely there will be any return for common shareholders. 

And if a completely speculative stock like AIG is moving, we might expect to see others. And sure enough, General Motors, which now carries the ominous name Motors Liquidation Company (MTLQQ.PK), has very nearly doubled in the last week. I don’t think that’s a good sign for the health of the stock market. 

*****Word is that more traders think the dollar may have put in an important low. That would be bad for stocks and commodities. To follow the action, watch the iShares Barclay’s 20+ Treasury Bond Fund (TLT). 

When this ETF rallies, stocks are usually selling off. And the chart for TLT shows a pretty decent looking double bottom at $90. 

*****The latest FOMC meeting starts today. Nobody really expects the Fed to raise interest rates. Even the inflation crowd has to admit that the economic recovery is too frail for higher rates. Still, judging by the declines in the stock market, investors are nervous about what the Fed has to say. 

Alan Greenspan used to try to let his words act as monetary policy. Instead of actually moving rates, he would voice his bearish opinion, in the hope that he could keep a lid on asset prices. 

It didn’t work. And I hope Bernanke doesn’t make the same mistake. There’s no substitute for actual changes in rates. And despite the weak economy, investors could probably use a message about asset bubbles and risk.    

*****The Managed America Internet video conference aired last night with great success. You can still catch it if you missed. There’s a replay available HERE if you’re interested in discovering the trends that will affect your investments for the next couple of years and how you can profit from them. 

Ian Wyatt

Editor

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