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Pros: Does Negative Outlook Warrant Monday’s Sell-Off?

Monday, 18 Apr 2011 | 1:35 PM ET

On Monday market chatter was all about the controversial S&P downgrade in which the ratings agency downgraded the outlook for the United States to negative, saying it believes there's a risk U.S. policymakers may not reach agreement on how to address the country's long-term fiscal pressures.

As you likely know, the downgrade triggered a flight to safety with gold and ironically the US dollar both higher.

And perhaps more visibly, the downgrade triggered broad selling with the Dow , Nasdaq and S&P 500 all lower.

Did the market get it right. In other words, did the downgrade really warrant the sharp decline in riskier assets, such as stocks? CNBC's Fast Money traders weren't so sure.

Instant Insights with the Fast Money traders

Trader Brian Kelly thinks the market did, in fact, get it right. He says the sell-off in stocks is warranted because “the downgrade will pressure the government to get its fiscal house in order. And that translates into slower growth – that’s why the S&P is down,” he says. And he adds investors are bullish on the 10-year because a better credit rating will improve borrowing costs.

OptionMonster Jon Najarian thinks market weakness is “more than a 1-day play.” He points to the big jump in the Vix as his 'tell.'. “Until we find out how the government will cut its debt a host of sectors could be in trouble – most notably the financials,” he says.

Zach Karabell is on the other side. He says in the modern world its global growth that drives corporate profitability and nothing in that arena has changed. He's particularly skeptical of the ratings agencies and reminds the desk that they were late to the party before. In his view they “distort market signals. Who died and made S&P god?” he says.

Trader Stephen Weiss thinks that the sharp sell-off may actually have little to due with the S&P ratings warning. Instead he points to a confluence of other events. They include:
- On Monday, OPEC said that oil is over supplied and oil prices are $15-$20 too high.
- Also on Monday, Europe’s financial woes resurfaced with financial markets increasingly convinced Greece will have to renegotiate the terms of its debt, because its economy cannot grow fast enough to service it.
- Over the week-end, China central bank Governor Zhou Xiao-chuan said his nation would continue tightening monetary policy for “some time.”

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DROWNING IN DEBT – GOOD FOR THE ECONOMY?


Could a U.S. default actually be good for the economy and U.S. equities?

Find out why Institutional Risk Analytics managing director Chris Whalen thinks debt restructuring could actually strengthen the dollar and help the economy.

Watch the video now!

Word on the Street Now
A look at how to profit and protect your investments after S&P's negative credit outlook, with the Fast Money traders and Christopher Whalen, Institutional Risk Analytics.


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Trader disclosure: On April 18, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Weiss owns (BTU); Weiss owns (AKAM); Weiss owns (CMA); Weiss owns (JPM); Weiss owns (HBAN); Weiss owns (GDX); Weiss owns (DRR); Weiss owns (UUP); Weiss owns (TBT); Weiss owns (TWM); Weiss owns (DVN); Weiss owns (COP); Weiss owns (HK); Weiss owns (VZ); Weiss owns (QCOM); Weiss is short (AKS); Weiss is short (X); Weiss is short (FCX); Karabell owns (GOOG); Karabell owns (AGQ); Karabell owns (RIMM); Jon Najarian owns (MA) is short (MA) calls; Jon Najarian owns (AXP) is short (AXP) calls; Jon Najarian owns (CBOE) is short (CBOE) calls;’ Jon Najarian owns (CME) is short (CME) calls; Jon Najarian owns (NYX) is short (NYX) calls; Jon Najarian owns (TYC) is short (TYC) calls; Jon Najarian owns (SLV) is short (SLV) calls; Jon Najarian owns (SLW) is short (SLW) calls

For Amelia Bourdeau
**No disclosures

For Zachary Karabell
Karabell and River Twice Capital are long (GS)
River Twice Capital is long (IBM)
River Twice Capital is long (DD)
River Twice Capital is short (QQQ)
River Twice Capital is short (XLF)

For Brian Kelly
Accounts Managed by Brian Kelly Capital are long (DBA)
Accounts Managed by Brian Kelly Capital are long (GLD)
Accounts Managed by Brian Kelly Capital are long (SLV)
Accounts Managed by Brian Kelly Capital are long (AGO)
Accounts Managed by Brian Kelly Capital are long (CLNE)
Accounts Managed by Brian Kelly Capital are long (TBT)
Accounts Managed by Brian Kelly Capital are long (EWP)
Accounts Managed by Brian Kelly Capital are long VIX calls
Accounts Managed by Brian Kelly Capital are long SPY puts
Accounts Managed by Brian Kelly Capital are long CLF puts
Accounts Managed by Brian Kelly Capital are long wheat futures
Accounts Managed by Brian Kelly Capital are long soybeans futures
Accounts Managed by Brian Kelly Capital are long gold futures
Accounts Managed by Brian Kelly Capital are long silver futures
Accounts Managed by Brian Kelly Capital are long natural gas futures
Accounts Managed by Brian Kelly Capital are short (XLF)
Accounts Managed by Brian Kelly Capital are short (SMH)
Accounts Managed by Brian Kelly Capital are short U.S. Treasury bonds

For Chris Whalen
**No Disclosures




CNBC.com with wires.

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