Recently, rating agency Moody's came around and started downgrading various sundry mortgage backed securities. As a result they are now getting shut out of rating new deals as issuers shop for the best rating. Further evidence of an extreme conflict of interest. One of many on the street.
From Bloomberg article:
Moody's has been shut out of nine of the past 13 deals as underwriters sought better ratings from rival companies, Tad Philipp, a managing director at Moody's said today in a telephone interview. The securities had a face value of more than $25 billion.
``There's no doubt in my mind that it's because of the change'' said Philipp, who included a chapter titled ``Rating Shopping is Alive and Well'' in a report released today. ``Normally, we'd rate 75 percent of the issues, not 30 percent. I guess this is sort of like, no good deed goes unpunished.''
Linkhere
Thursday, July 19, 2007
Tuesday, July 17, 2007
Beware!
Ladies and gentlemen...the shit is officially hitting the fan. Bear Stearns has announced that their (two troubled) aforementioned credit hedge funds have essentially evaporated. The equity is gone. Ouch, that's gotta hurt. Not just Bear Stearns either. "The Skeptic" wouldn't touch (go long) any US based financial company with a ten foot pole. Not even with your ten foot pole. The reality is that there is so much bad paper that we can't really be sure where it is hiding (likely it's everywhere). Don't expect any one of the holders to own up to it either. Until they are forced to. That will happen soon enough at this rate.
After hours tonight many of these financial stocks are trading down. Bear is down $5. Funny, I recall Cramer end zone dancing about the fact that BSC, after the initial revelations, had seen a bounce in it's stock price off of the lows. So surely this subprime mess is overblown and the bears are all assholes. Wrong! This debacle is in the early innings. It doesn't please me to say so but on the other hand the perma-bulls have it coming.
Another ramification to consider is the effect this mess is going to have on the dollar. The dollar index is sitting just above 80. This is a key number. I cannot stress how important the 80 level is. In fact, the dollar index has never had a sustained move below that level. We break that and there is no support for the dollar. Where it eventually stops falling is anyone's guess but it won't be pretty. Seriously, this is a BIG DEAL! This will affect every American citizen. As the dollar collapses inflation will surge. Commodities are priced in dollars and as the dollar erodes it will take more dollars to pay for things.
The way our house of cards is currently situated we rely on foreigners to finance our overconsumption. With a collapsing dollar we will need to make other arrangements. Why would foreigners want to own, much less buy, US assets during a dollar depreciation? Any positive return would be cancelled out by exchange rates.
What can be done to avoid a collapsing dollar? The Fed can start tightening. The result of which would be a severe recession but it would save the dollar and tame inflation. If we dealt with our problems we could probably emerge in one piece after some short term pain. But is that likely to happen? No. The Fed will do everything in it's power to avoid dispensing the medicine. As recent history clearly shows, the Fed will do whatever it can to bailout risk-takers.
It would be wise to consider hedging your exposure to the dollar. You need to have a plan. "The Skeptic" remains a long term buyer of gold. Good luck.
After hours tonight many of these financial stocks are trading down. Bear is down $5. Funny, I recall Cramer end zone dancing about the fact that BSC, after the initial revelations, had seen a bounce in it's stock price off of the lows. So surely this subprime mess is overblown and the bears are all assholes. Wrong! This debacle is in the early innings. It doesn't please me to say so but on the other hand the perma-bulls have it coming.
Another ramification to consider is the effect this mess is going to have on the dollar. The dollar index is sitting just above 80. This is a key number. I cannot stress how important the 80 level is. In fact, the dollar index has never had a sustained move below that level. We break that and there is no support for the dollar. Where it eventually stops falling is anyone's guess but it won't be pretty. Seriously, this is a BIG DEAL! This will affect every American citizen. As the dollar collapses inflation will surge. Commodities are priced in dollars and as the dollar erodes it will take more dollars to pay for things.
The way our house of cards is currently situated we rely on foreigners to finance our overconsumption. With a collapsing dollar we will need to make other arrangements. Why would foreigners want to own, much less buy, US assets during a dollar depreciation? Any positive return would be cancelled out by exchange rates.
What can be done to avoid a collapsing dollar? The Fed can start tightening. The result of which would be a severe recession but it would save the dollar and tame inflation. If we dealt with our problems we could probably emerge in one piece after some short term pain. But is that likely to happen? No. The Fed will do everything in it's power to avoid dispensing the medicine. As recent history clearly shows, the Fed will do whatever it can to bailout risk-takers.
It would be wise to consider hedging your exposure to the dollar. You need to have a plan. "The Skeptic" remains a long term buyer of gold. Good luck.
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