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These behemoths, whose word is almost holy to bond investors, grossly overrated bundled mortgages (CMO’s) and other questionable products. They checked their integrity at the door in order to invite in more business, and they have never regained their prior creditability and reliance. That is, until now. Over the last few months, rating agencies have taken on the world in order to rebuild their creditability. First, S&P downgraded US Treasuries below AAA, an almost unthinkable action in years past. President Obama did everything possible to discourage this action, as did Secretary Geithner. Yet S&P took on “the man”, and did the downgrade. The ratings agencies also downgraded France below AAA, and downgraded a number of other European countries and banks. Many American banks have also been downgraded. In sum, downgrades have been about as common as high priced commercials in the Super Bowl. One security downgraded with impunity has been the bundled CMO’s. Some CMO’s rated AAA on 2008 are now rated CCC or lower. Various other securities have been equally harshly downgraded. Indeed, the ratings agencies seem to have drunk the cool aid. They have a new morality in trying to accurately rate fixed income investments. More importantly, this new morality will play a major role as the current Greek tragedy enters its final act.
Here’s where Greece’s private bondholders stand now: A deal is on the table where they would take a 70% haircut by exchanging their old bonds for new ones. If all bondholders agree to this deal, there will not be a “default” on Greek government bonds. However, if some bondholders do not agree to the deal, they will likely be forced into it by Greek legislative action or otherwise. This forced action could well be deemed a “default” on the bonds. As such, it would give effect to credit default swaps written on the Greek bonds. And once this occurs, nobody can accurately predict the interbank and other ramifications that could possibly threaten the world financial system. That’s why it is important for there NOT to be a default. Moreover, whether the ratings agencies call a certain event a default will largely determine whether a default has indeed occurred. That’s why the ratings agencies are incredibly crucial players in this Grecian drama. It will be very interesting to watch how the ratings agencies play the cards they have been dealt. Will they objectively call a default by its name. Or will they play financial shenanigans, like they did in 2008. Clearly, Prime Ministers, Finance Ministers, Presidents, and Central Bankers will come up with hundreds of complex reasons why there has been no default. But a Duck by any other name is still a Duck. In my opinion, the ratings agencies will conclude that there has been a Greek default. They will be objective and correct. They will not do so because of ethics or morals. They will do so in the best interest of their businesses. Ratings agencies deal in creditability. It is their stock in trade. Once gone, it is very tough to regain. Moreover, once gone completely, these companies have nothing left to sell to their customers. That is why S&P downgraded US Treasuries. They made one grand gesture to reclaim their creditability. In my opinion, they and the other agencies will continue down this road. They will not call a default a daisy or a bluebird or a polar bear with feathers. A default is a default and they will call one when they see one.
As indicated above, such an action could wreck havoc with credit default swaps, but Dr. Helicopter Bernanke and his fellow central bankers will know it is coming. They will do LTRO II or QE 3.789. They will allow the world economy to shake a bit, but not to freefall. They are far smarter than I am. They know a “default” is coming and they hopefully have a plan already in place to deal with it. All of which will hopefully lead to a brighter financial environment in the future. The world needs highly respected, creditable ratings agencies. We need ratings that fixed income investors can rely on. It is far better to live in a world where US Treasuries are AA+ (and this rating can be relied on), than in a world where private bankers and central bankers manipulate the ratings agencies, so that CCC CMO’s are rated AAA, and the ratings are about as useful as high heel shoes on an elephant. The world will survive the Greek crisis. And hopefully we will have involved creditable, reliable, honest rating agencies who will never repeat their mistakes of 2008.
By Floyd at KOTM follow me on Twitter @ USKOTM
Italian/French banks are seeing a relief rally in the Euro markets as financials are trading higher. Monday, all eyes will be watching Japan GDP and Mexico IP numbers for the month of December. In US equities, Masco and Nordic American Tanker are preparing to report. Masco, the Street is looking for a loss of $.03 a share, analysts are forecasting total revenue of $7.58 billion for the year. We will see if Nordic American Tanker can beat on its estimated EPS of $.31 and revenue estimates of $7.6 Billion.
Apple made new all-time highs today when it reached $497.62. U.S. consumer confidence slid more than consensus for February, as concerns about job prospects are still very relevant for consumers. Stocks also dropped over concerns that Greece’s plans to avoid a default were in jeopardy. The whole Greece situation is becoming quite comical at this point. On a more Macro level, China’s exports and imports declined for the month of January. This is the first time in over two years where that has happened. Oil took a beating today and closed down 0.90% to $98.94 due to ongoing Greece concerns and the Euro also declined from a two month high. Electronic Arts (EA) and Game Stop (GME) both were down over 3.5% due to a NPD Group Inc. report stating that retails sales for video games were down 34% for the month of January. Amtech Systems (ASYS) plummeted 20% to $9.01 due to lower guidance. Cobalt International Energy (CIE) surged 35% after test results from an Angola well were positive. Goldman Sachs is the company’s biggest investor….go figure. LinkedIn (LNKD) rose 14.84% to $87.72 after the company reported strong profit numbers.
Bill Gross is bullish on the treasury market in 2012. However, he did miss credits biggest move in 2011. Should we fade Bill Gross’s trade? Fighting the Fed has not been profitable as they continue to print money at zero cents on the dollar.
In US equities, there seems to be a shift into high flying tech names such as Dell and IBM. Apple is one of those names that can play both sides of the fence, risk on and risk off. Apple is a safe haven name that investors flee when we are in a risk off environment. Cooperman raises its stake in Rimm thinking there is limited downside.
LinkedIn’s volume exploded to the upside as the stock is trading up 17%. LNKD earnings were good, but not great. Their guidance seemed conservative. The new product outlook is encouraging. LNKD reported that it earned $13.3 million, or 12 cents per share on revenue of $167.7 million for its fiscal fourth quarter and we think it could be a possible short squeeze.
Borgwarner (BWA) – Consensus EPS $1.17, Year Ago Actual $.89, revenue estimate $1.8 billion
Metlife (MET)- Consensus EPS $ 1.24, Year Ago Actual $1.14, revenue est $ 1.25
Abercrombie & Fitch (ANF)- Consensus EPS $1.16, Year Ago Actual $1.38, revenue est $1.17
Agnico Eagle Mines (AEM) – Consensus EPS $.57, Year Ago Actual $.55, revenue est $ 482 million
Cliffs Natural Resources (CLF)- Analysts predict a rise of 14.8% in revenue from the year-earlier quarter to $1.63 billion. The average estimate of analysts is for net income of $1.85 per share. Consensus EPS $1.55, Year Ago Actual $2.82
Energy Transfer Partners (ETP)- Consensus EPS $.70, Year Ago Actual $.65, revenue est $
Apache Corp (APA)- Consensus EPS $2.87, Year Ago Actual $2.19, revenue est $4.3 billion
Barrick Gold Corporation(ABX)-Consensus EPS $1.29, Year Ago Actual $.95, revenue est $3.9 billion
Cloud Peak Energy (CLD)- Consensus EPS $ .52, Year Ago Actual $.29, revenue est $390million
General Motors (GM)- Consensus EPS $.42, Year Ago Actual $.52
VF Corp (VFC)- Consensus EPS $2.31, Year Ago Actual $1.78, revenue $2.6 billion
Eog Resources (EOG)- Consensus EPS $.88, Year Ago Actual $.36, revenue est $2.3 billion
HJ Heinz Co (HNZ)- Consensus EPS $.85 , Year Ago Actual $.84, revenue est $3.1 billion
(the following chart was published on 2.5.2012 in the Market Intelligence Report)
For the week ahead we are bullish but the charts above call for more selectivity and vigilance. We remain long and are looking for intraday chart signals for buying opportunities. However please understand that because of the circumstances laid out above, any significant negative news catalyst will have a magnified selling reaction within the stock markets. So what has transpired since? We see that the SR6 signal, based on volatility mathematics, circled on the chart worked out well. We had a warning of a bounce in the VIX well before the recent developments in Greece. We used this info to begin legging out of our longs this week and being more selective on new trades. The nice thing about where we are now is we have well defined resistance above around 25 (shaded red) and support below in said range (shaded blue). These areas represent the extremes in terms of support and resistance based around volatility. And, money is made at the extremes.