S&P May Downgrade Germany and the Market Yawns

Germany could be about to lose their prestigious triple-A rating on their debt, and U.S. investors aren't freaking out. What's wrong with this picture?

Standard & Poor's has warned Germany, France, the Netherlands, Austria, Finland, and Luxembourg that each country is on credit watch negative, "meaning there is a one-in-two chance of a downgrade within 90 days," Financial Times reported Monday afternoon. Shortly afterwards, The Wall Street Journal reported that Standard & Poor's will place all 17 European Union nations on ratings downgrade watch negative.

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It's hard to decide what's more shocking: That Germany could lose its coveted triple-A rating, or that stocks weren't tumbling hard. U.S. stock indices pared gains but were still in positive territory for the day. The Dow Jones Industrial Average was up 55 points to 12,074, after climbing as high as 12,186 earlier in the day. The S&P 500 is still gaining 9.5 points to 1,253 after the news reports broke, while the Nasdaq is rising 22 points to 2,649.The resiliency in U.S. stock markets may seem surprising, but for professional investors like Keith Goddard, CEO and president of Tulsa-based Capital Advisors, this is simply news catching up to reality. Instead, it's actually an encouraging sign that equities aren't in a fiery wreck."I believe many investors already assign a below investment credit rating to Germany," Goddard says. "The good news is that I think the market has gone a long way to discount this news. It doesn't cause everyone to jump out of the window."The bad news, Goddard says, is that nothing has even come close to solving the long-term debt crisis. He argues that investors need to start looking at the total debt to GDP of these European countries. That would include not just government debt to GDP but, in the case of Germany and other countries, the price to recapitalize banks."It's easy to argue, when you consider the total of public sector and private sector debt, that no country in the eurozone deservers a triple-A rating," he says. "Something that would've shocking three years doesn't move the market now. People realize that the three-to-five year outlook is a real struggle because there is so much debt. We're all worried about missing a rally if you get a central bank move or an ECB bazooka."Goddard says that his firm has elected to trade around the day-to-day noise of Europe as best they can. However, he notes that his firm has a larger-than-usual cash balance because the long-term picture for debt is so troubling."What makes this environment so tricky is that there is so much noise day to day that causes wide enough swings in the market. You're forced to pay attention to it," he says. "We actually raised the cash level from 12% to 16% in this rally.".>To follow Robert Holmes on Twitter, go to http://twitter.com/RobTheStreet.>To submit a news tip, send an email to: tips@thestreet.com.

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