The S&P downgrade could have an impact on all of us via interest rate hikes.
Gold rose an amazing 66 points today to set another all time record.
Here are the top financial stories of the day:
1) Dow Slides 5.5%, Ending Below 11000-From The Wall Street Journal
U.S. stocks tumbled in a Monday rout that sent the Dow Jones Industrial Average down 5.5%, plunging below 11000 for the first time since November, as investors fled from risky assets in the first trading session since Standard & Poor's downgraded the federal government's credit rating late Friday.
The Dow Jones Industrial Average sank 632 points at 10813, ending at the day's low, in preliminary closing figures at 4 p.m. Eastern time.
The Standard & Poor's 500 stock index tumbled 78 points, or 6.5%, to 1123, with financial and energy stocks falling hardest. The Nasdaq Composite slumped 168 points, or 6.6%, to 2364.
The Russell 2000 index of small-capitalization stocks was hit hardest, falling 63 points, or 8.9%, to 651. Small caps tend to make more exaggerated moves and are generally viewed as riskier than the widely held shares of large companies.
Investors' flight from risk was on full display Monday as S&P added downgrades of clearing bodies, entities such as Fannie Mae and Freddie Mac and lowered outlooks for companies including Warren Buffett's Berkshire Hathaway, following the Friday U.S. credit rating cut to double-A-plus from triple-A. Major stock indexes cascaded continually lower through Monday's session, much like they did during last Thursday's plunge, when the Dow lost nearly 513 points.
Gold futures soared above $1,720 an ounce for the first time as market partipicants scrambled after assets viewed as havens. One winner was U.S. Treasurys, which remained a haven for many investors despite the downgrade. Yield on the 10-year note fell to 2.3548% in recent action.
"Everybody is looking for whatever they perceive as a safe haven, even if it's just plain illogical," said David Kelly, chief market strategist for J.P. Morgan Funds. "Things are pretty dismal right now."
President Obama did little to assuage investor fears Monday afternoon as he said that the S&P downgrade should provide a "new sense of urgency" to tackle the deficit. Indexes hit fresh lows while the president spoke, and after.
"Everyone's running to the fiat currency, gold," said Dave Kavanagh, president of the Grant Park Fund in Chicago. "The market's telling [Washington] right now that we don't think that you can get your spending under control," he said.
The fact that Monday's stock-market swoon came right on the heels of the Dow's biggest weekly point loss since the financial crisis in 2008 set up many market participants for forced sales and margin calls, traders said. That made some of the losses self-perpetuating. It also raised the prospect of capitulation, the point when losses snowball and sentiment craters, helping markets find a bottom.
"There is a lot of forced liquidation," said Lorenzo Di Mattia, manager of Sibilla Global Fund, and such actions "might last another day perhaps."
Last week's swoon came as investors lost faith in European leaders' ability to stave off a debt crisis, and as fears grew that the economic slowdown would deepen into a recession. The losses sent the Dow down 5.8% and the broader S&P 500 to a 7.2% loss. The Nasdaq Composite fell 8.1% for the week. All three major U.S. stock indexes are in negative territory for 2011.
For some investors, worries about the strength of the global economy loomed just as large, if not larger, than the credit matters. Growth worries have reverberated through markets in recent weeks.
"The market is probably more concerned with the economic risk than with the S&P credit rating," said Bernie McDevitt, vice president of institutional trading at Cheevers & Co. Investors have "clearly decided we have further work to do [falling] lower."
The U.S. downgrade competed for investor attention with sovereign-debt headlines in Europe. European stocks erased early gains as the European Central Bank's pledge to buy sovereign bonds failed to restore investor confidence for long, with the Stoxx Europe 600 hitting a 15-month low.
Asian bourses were pummeled, with China's Shanghai Composite dropping nearly 4% to a 13-month low. The Group of 20 leading industrialized and developing nations statement that they were prepared to act in coordination to stabilize markets also failed to stem the selling tide.
Crude-oil futures slid below $82 a barrel amid worries about the economy.
The U.S. dollar fell against the yen, but moved higher versus the euro.
2) US debt downgrade could mean rate hikes for all-From the AP
Lawmakers weren't able to prevent the country from losing its coveted AAA debt rating.
Although the downgrade late Friday by Standard & Poor's was historic, it wasn't entirely unexpected. The three main credit agencies, which also include Moody's Investors Service and Fitch Ratings, had warned during the fight over the debt ceiling that if Congress did not cut spending far enough, the country faced a downgrade.
And just like a lower consumer credit score implies that a borrower is a less reliable, a lower credit rating for government bonds implies there is more risk involved in lending money to the government.
Prices for U.S. government debt rose in the first few hours of trading on Monday, a sign of increased demand despite the downgrade. But it is unclear what will happen in the long term, because of the unprecedented nature of the lower rating and the decisions by Moody's and Fitch to keep their highest ratings for now.
"If they all were saying exactly the same thing that would clearly have more impact than with a split rating," Alex Pollack, a fellow at the American Enterprise Institute in Washington.
If investors get skittish and Treasury prices reverse course, that could send the interest rate on Treasury bonds up. Essentially, the rate, or yield, would climb in order to make the bonds more attractive to investors.
That could lead to higher borrowing rates for consumers, because the rates on mortgages and other loans are often pegged to the yield on Treasury bonds.
Not every type of consumer borrowing has a direct tie to the government's credit rating, but there are potential ripple effects for individuals.
-- Mortgage and home equity loans
S&P's downgrade may have several implications for homeowners.
For starters, early Monday S&P downgraded the credit ratings of mortgage giants Fannie Mae and Freddie Mac, which are both backed by the U.S. government. That could mean higher mortgage rates for new borrowers. Freddie and Fannie together own or guarantee about half of all mortgages in the U.S.
Anyone hoping to buy a home in the near future likely has some time before they'll see rates climb. Still they should ask their bank or mortgage broker about the process for locking in a rate. Mortgage rates have been at historic lows in recent months, but fixed-rate mortgages are typically directly tied to the yield on 10-year Treasury bonds. Higher mortgage rates would follow any increase in the Treasury yield. But so far it appears that Treasury yields won't rise simply as a result of the downgrade.
Variable rate mortgages and home equity loans could become more expensive as well.
The high failure rate for adjustable rate mortgages during the housing meltdown means that today the number of new home loans with adjustable rates is minimal -- less than 5 percent of the market, according to Stephen Malpezzi, an economics professor at the University of Wisconsin Business School who follows the housing market.
What's less clear is how many older loans with adjustable rates remain out there, he said. With interest rates low in recent years, many homeowners who held adjustable rate mortgages have refinanced to fixed-rates.
For homeowners who still have ARMs, any potential change in their interest rates depends on whether their loan was linked to Treasury rates or some other benchmark, like the prime rate or federal funds rate.
Meanwhile, home equity loans, or HELOCs, are almost always variable rate loans and typically adjust more frequently than first mortgages, sometimes even monthly.
Homeowners with such loans could see shifts in their rates and payments while the markets absorb the downgrade.
One caveat is that many ARMs and most HELOCs are tied to the federal funds rate, which is set by the Federal Reserve, not to Treasuries. That should help insulate borrowers. The Fed, which meets Tuesday, has already said that it plans to keep rates low for "an extended period."
"The Fed is not likely to increase the federal funds rate anytime in the near future, especially if there's another problem with the economy as a result of the whole debt ceiling thing," said Gibran Nicholas, chairman of the Certified Mortgage Planning Specialist Institute.
-- Credit cards
Consumers across the country, who carry an average $4,950 on their credit cards according to TransUnion, will be relieved to know that any changes as a result of the downgrade won't be dramatic. And to the extent there are changes, certain protections are in place.
Most accounts with fixed rates were converted to variable rates in 2009 in response to the economic downturn and new regulations.
Banks don't publicize the rates they're charging current customers, but nearly 96 percent of the offers sent out for new cards in the first six months of this year carried variable rates, according to Mintel Compermedia, a market research firm.
Right now, banks are offering an average annual interest rate of 14.4 percent, according to Bankrate.com.
However, like HELOCs, most card rates rise and fall with the prime rate, which is pegged to the rate set by the Fed. That will help protect credit card users from the market's gyrations in the short term.
The good news is that even if market forces start sending card rates higher, current account balances will be protected from rate hikes under the credit card reforms passed in 2009. That means only new charges would be subject to higher rates. If rates rise several times over a period of months, card users could end up with multiple rates on various balances.
John Ulzheimer, president of consumer education for SmartCredit.com, noted that the law now requires banks to apply any payments above the minimum required to the highest rate balance. That's so those new balances may get paid off faster. But any scenario involving volatility could make for some confusing statements
3) Gold soars over $1,700 on debt fears-From Reuters
Gold surged more than 3 percent on Monday, surpassing $1,700 an ounce for the first time, after Standard & Poor's cut the top-notch AAA credit rating of the United States, setting off an investor stampede for safety.
In a rout reminiscent of the 2008 financial crisis, Wall Street plunged as much as 6 percent and other commodities collapsed as panicky investors sought refuge in bullion and U.S. Treasuries.
Analysts scrambled to revise up gold forecasts and gold volatility spiked as options traders put on bullish bets.
News on Sunday of a European Central Bank bond-buying program to help shore up Italian and Spanish debt proved too little to soothe global market fears of a double-dip recession, greater government intervention and further market turmoil, any of which could extend gold's 15 percent rally since June.
In the first session since S&P's downgrade, U.S. gold futures were headed for their biggest one-day gain since March 2009. Traders are now looking ahead to Tuesday's Federal Reserve's policy meeting, with growing expectations it may hint at an even longer period of ultra-easy monetary policy further.
"Investors are looking upon the ECB bond-buying as the first step toward the same kind of quantitative easing program the Fed is doing. So, gold acts as the only currency that you can't print more of, and you are seeing a huge institutional demand for it," said James Rife, an assistant portfolio manager at Haber Trilix Advisors, which manages $2 billion in assets.
Spot gold was up 3.1 percent at $1,714.09 an ounce by 2:39 PM EDT (1839 GMT), having hit a record $1,719.99 earlier and marking all-time highs against sterling and euros.
Adjusted for inflation, bullion is one of the few in the commodity complex trading below its adjusted all-time highs, estimated at around $2,500 an ounce.
JPMorgan (JPM.N) said on Monday it expects spot gold prices to climb to $2,500 an ounce or higher by year-end, on very high volatility, following the downgrade of U.S. debt. The U.S. bank said that its previous estimate of $1,800 was "too conservative.
The prospect of an even longer period of low U.S. interest rates prompted Goldman Sachs (GS.N) to raise its three-month forecast for the gold price by about $100.
Silver rose 1.9 percent to $39.03 an ounce.
The CBOE Gold ETF Volatility Index .GVZ, which is often referred to as the "Gold VIX" and is based on SPDR Gold Trust (GLD.P) options, spiked 30 percent to its highest since May 2010.
"At any given moment the world's central banks could step-up in an effort to calm a frantic situation. Gold may have been a one-way bet for some investors but as the risks to growth reach boiling point, so too does the price of protecting against a volatile movement in either direction," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group.
As Wall Street tumbled, the shares of gold producers including as Newmont Mining (NEM.N) and Barrick Gold (ABX.N) topped the U.S. percentage gainers, and SPDR Gold Trust, the No. 1 gold exchange-traded fund which largely tracks bullion prices, rose sharply.
The price of the yellow metal also rose above that of platinum for the first time since December 2008. Platinum prices turned lower on worries about demand from the car makers. Platinum was last priced at $1,712.74 an ounce.
Palladium was down 2.5 percent at $721.22. Palladium has fallen by about 14 percent in the last six sessions from a five-month high, weighed on heavily by auto demand worries.
Quote of the Day from Dave Ramsey.com:
Failure is not a single, cataclysmic event. You don't fail overnight. Instead, failure is a few errors in judgment, repeated every day. — Jim Rohn
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