Bombay: Baby, You Will Go Down With Them Dominoes! Why did the specter of collapse in far-away Hungary help sink the Dow by 323 points on Friday? And why did similar scenarios in Greece, Spain, and Portugal trigger the Dow's 1,000-point Flash Crash one month earlier? Is it because those countries are so important to the future of America's blue-chip corporations? Not quite! It's because investors around the world are finally waking up to some shocking realities: Shock #1 is that these countries are canaries in the coal mine — the first of many that could suffer the wrath of investors fed up with runaway deficits. Shock #2 is that, in the UK and the US, federal deficits and total debts, as a percent of GDP, are similar to — or even larger than —those of Greece, Spain, Portugal, or Hungary. But Shock #4 is the biggest and most dangerous of all — not just random deceptions by a few companies or a few countries, but a global deception in the credit ratings that investors rely on for nearly ALL companies and countries! With gathering momentum right now, investors are beginning to realize they can't trust the ratings issued by established agencies like Moody's, Standard and Poor's, and Fitch. But this is not merely bad news for the agencies themselves. It's also a powerful force that can drive global stock and bond markets into a nosedive.
Needless to say, this transformation is too massive to happen overnight; it will progress in three phases. Phase 1 In the first phase, regulators, analysts, and investors begin to raise serious questions about the validity of ratings: Is a bond really triple-A? Or is the rating agency just maintaining the high grade because it wants to protect a good client that's paying fat fees for its ratings? Beyond triple-As, what about the hundreds of thousands of corporate, municipal, and sovereign bonds that currently boast other "investment grade" ratings? How many are really speculative grade — junk — in disguise? Right now, Congress is asking these questions daily, attacking the rating agencies and getting ready to take action against them as part of the upcoming regulatory reform. And the assaults on the rating agencies by independent commentators are even more strident ... In "Answers on Credit Ratings Long Overdue," Andrew Sorkin of the New York Times puts it this way:
But that same evening, on a Kudlow Report segment, "The Future of the Credit Rating 'Cartel'," both the CNBC host and commentator said flatly that ... The ratings issued by Moody's and S&P are "garbage." CNBC commentator Don Luskin added:
On the same CNBC segment, I was asked for my solution, which I'll get to in a moment. But first, let me tell you my forecast regarding the next phase ... Phase 2 Here's what I see happening ...
This forecast takes no particular foresight. As illustrated by the recent barrage of attacks on the rating agencies, the global risk reassessment has already begun. And as illustrated by recent sharp price declines — in sovereign bonds, corporate bonds, derivatives, and common stocks — the selling has also already begun. Phase 3 My next forecast, however, does require looking further ahead:
I have no doubt this will happen. The only major uncertainty is: when?
Either way, we can now see the makings of an all-out selling panic — first in corporate bonds, then in the most vulnerable common stocks. It is the natural outcome of the global downgrading of ratings and rating agencies themselves. It's coming very soon. And it's going to hit hard. Too Late for Easy Solutions At Weiss Ratings we don't take a dime from the companies we rate. We're not even beholden to the companies for the supplemental data we request. If they choose not to give us the information, we rate them based exclusively on publicly available data. The Next Big Question ... If even a company's supposedly "investment grade" bonds are suspect, how can anyone trust their shares? The answer to this question is about to come very soon. So if you haven't done so already, be sure to batten down the hatches. Move swiftly. Do not procrastinate. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints. Nothing in this article is, or should be construed as, investment advice. |
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