The flood of bearish news continues…

The flood of bearish news continues... More signs of a slowdown... 'Junk' bond stress is soaring... A huge round of downgrades... An update on our Bear Market Survival Program...

This week, we received more signs that the U.S economy could be slowing...

On Monday, the Institute for Supply Management ("ISM") said U.S. manufacturing activity fell in January for the fourth straight month. The ISM's gauge actually rose slightly from 48 in December to 48.2 last month – suggesting the decline may be starting to slow – but any reading below 50 means the sector is still contracting.

Meanwhile, the latest data suggest the U.S. service sector – which accounts for the majority of U.S. economic activity these days – could also be weakening.

Yesterday, the ISM said its gauge of nonmanufacturing activity dropped more than two points, from 55.8 in December to 53.5 in January. Again, a reading above 50 means this sector is still growing... But the big monthly drop suggests even this area of the economy could be in trouble.

The news from the markets isn't much better...

According to ratings agency Moody's, stress in the high-yield (or "junk") bond market has now soared to a new six-year high...

This week, Moody's said its Liquidity Stress Index – which measures the number of companies that carry the agency's lowest liquidity rating, and is predictive of future defaults – jumped from 6.8% in December to 7.9% in January.

Not only is that the highest reading since December 2009, but it's also the largest one-month increase in the index since March 2009.

Regular Digest readers know the energy sector has been one of the largest abusers of high-yield financing.

Porter summarized the issues energy is facing in the September 25 Digest...

Nearly all the growth in the U.S. high-yield bond market over the last decade is related to oil and gas exploration and production. Since 2010, more than $500 billion worth of new corporate debt was raised for U.S. onshore oil and gas producers. It's this capital that financed the oil boom – which is responsible for all the net job creation in the U.S. since 2009.

These debts cannot be repaid with oil prices at less than $60. And yet they're all coming due between 2016 and 2020.

As these debts go bad, even major oil companies will see their bonds downgraded and their dividends cut. There will be a huge opportunity for patient and liquid investors to buy tremendous energy assets out of these defaults. But for the banks, insurance companies, private-equity funds, and pension funds that provided this initial capital, there's a tremendous amount of pain ahead. Expect major bank collapses in Texas.

While the energy sector continues to be the main driver of weakness, Moody's also noted that it is seeing weakness spreading further outside of the energy and commodities sectors.

Late last month, Moody's also put 120 oil and gas companies – representing nearly $500 billion in energy debt – on review for a downgrade. Of note, the list included several blue-chip "Big Oil" companies like Royal Dutch Shell (RDS) and BP (BP).

Royal Dutch Shell is about to close a $50 billion merger with fellow energy giant BG Group. We asked our in-house resource expert Matt Badiali for his opinion on the deal. Here's what he told us in a private e-mail...

The breakeven oil price for the deal to work was $60 per barrel. Today's oil price – around $32 a barrel – means Royal Dutch Shell paid way too much. The company will use up most of its $20 billion of cash reserves on the deal, too.

And the shares issued makes it hugely dilutive to shareholders. What you're left with is a major company forced to sell assets at the bottom of the market and borrow money to pay its dividend.

Today, oil major ConocoPhillips (COP) cut its quarterly dividend from $0.74 a share to $0.25 a share. Like most other oil companies, it also lowered its capital expenditures guidance from $7.7 billion to $6.4 billion.

Meanwhile, oil giant BP announced a 91% decline in quarterly earnings and a record annual loss of $5.2 billion this week. Still, the company is committed to keeping its dividend. As CEO Bob Dudley told analysts in London this week...

We know how important the dividend is to our shareholders. We're not going to drop the company off a cliff. But I think the balance sheet is strong right now.

The only problem: BP added $5 billion of debt to its balance sheet in 2015, bringing its total to around $150 billion. And that debt pile is growing.

So... does BP have some secret weapon it's holding back to avoid cutting its dividend like its fellow competitors? No, it doesn't. It's reeling like every other oil company.

But lots of pensioners hold BP shares. And Dudley doesn't want to be the guy to tell the British investors he's cutting their beloved dividends (even though it's prudent business to do so).

But the pain in the oil patch still gets worse...

On Tuesday, Moody's rival Standard & Poor's (S&P) went one big step further, announcing it was taking "rating actions" on 20 investment-grade oil and gas companies, including actual downgrades on 10 firms.

The downgrades included Chevron (CVX), Apache (APA), Continental Resources (CLR), Devon Energy (DVN), Hess (HES), and Marathon Oil (MRO), among others. It was Chevron's first S&P debt-rating cut since 1987.

The company also put ExxonMobil (XOM) – one of only three remaining AAA-rated companies in the U.S. today, along with software giant Microsoft (MSFT) and Big Pharma icon Johnson & Johnson (JNJ) – BP, and French oil giant Total (TOT) on "credit watch with negative implications"... meaning they could be next.

S&P says it will decide whether to downgrade these companies within 90 days. If it does, it would mark Exxon's first downgrade in 86 years. The company has been rated AAA by S&P since 1930... 86 years.

In other words, the company has maintained its stellar rating since the beginning of the Great Depression... yet it's in danger of losing it today.

Should BP – and the other oil companies – experience a rating cut, borrowing to maintain that unsustainable dividend will become even more expensive.

But it's naïve to think that the problems stop with energy...

A week ago, investment bank Deutsche Bank announced a $7.3 billion annual loss, its first since the financial crisis. Today, investment bank Credit Suisse announced a nearly $6 billion loss for the quarter. Shares fell to their lowest levels since 1991.

In an attempt to justify the losses, CEO Tidjane Thiam said...

The environment has deteriorated materially during the fourth quarter of 2015 and it is not clear when some of the current negative trends in financial markets and in the world economy may start to abate.

But the problems in the financial sector go further than these European giants...

Since mid-July, the Financial Select Sector SPDR Fund (XLF) has consistently and dramatically underperformed the benchmark S&P 500 Index. You can see this underperformance in the following chart...