A number of years ago, Standard & Poor's (S&P) gave me a desk in one of their offices on Wall Street. In those days, I was providing energy analysis for a short-lived S&P publication called Emerging Global Markets.
I never felt comfortable in that office. Actually, whenever possible, I avoided going there.
What happened this past weekend reminded me why.
S&P's horrendous decision Friday afternoon to lower the U.S. credit rating has rattled global markets, pushing Wall Street deeper into negative territory.
Jack Bogle, the legendary founder and former-CEO of the Vanguard Group, calls S&P "the gang that can't shoot straight." I think this is an apt way to label a disgrace masquerading as a ratings agency.
You see, these are the same guys whose "advice" was regularly dismissed as almost laughable during the subprime mortgage debacle. The same greedy goons who made considerable money slapping triple-A ratings on collateralized mortgage obligations, directly contributing to a worldwide credit crisis.
Seems the opportunity to make 400% or more in fees over regular ratings decisions was too much for them to pass up. Forget that they barely reviewed the packages, never rated the underlying paper, and never understood them anyway.
Ratings agencies do not make money by downgrading countries. They make money by rating paper issued by companies. And for that, they need to be visible.
Well, judging by the fact that nobody of consequence at the 55 Water Street headquarters is answering the phone this morning, S&P got the visibility it so badly wants.
The downgrade is essentially a political lecture to Congress.
It's just hard to appreciate when it's delivered by the clowns who cavalierly missed the single biggest credit mess in memory... one in which their ratings activities were centrally complicit.
What's Next?
There will now follow a series of other downgrades required by the move on the U.S. sovereign rating, almost certainly beginning with the clearinghouses that deal in that debt.
U.S. Treasury Secretary Timothy Geithner was absolutely correct when he said S&P showed "terrible judgment."
The other two ratings agencies - Moody's Corp. (NYSE: MCO) and Fitch-ICBA - have put the focus where it belongs.
A ratings downgrade decision more properly takes place after the 2012 election. With the new debt ceiling in place and a partial Congressional roadmap set up to begin addressing the budget problem, there must be time provided to see what happens.
Instead, the S&P honchos prejudged the issue entirely.
It almost makes you wonder whether they have some vested interest in the money currently being made by broadly shorting the market. After all, I suspect they could make some money rating synthetic paper cut on those maneuvers as well.
And then there is the ongoing debt contagion mess in Europe. This is actually the more pressing of the problems.
The European Central Bank (ECB), to be followed by the European Investment Bank and a range of national and commercial institutions, will now begin buying sovereign debt again from Greece, Italy, Portugal, and perhaps Spain.
In response, the market decline yesterday (Monday) is par for the course. Given the forward concerns over demand, debt concerns on both sides of the Atlantic are moving oil prices down more than the market as a whole.
So where does that leave us?
Stay the Course
I repeat the advice I gave you last week: We stay the course and move as soon as trading stabilizes.
This is a seriously oversold market.
Since there are no further shoes to drop after the downgrade, we will begin to see some amazing buying opportunities emerge later this week, along with options plays providing risk protection.
Once again, the market reaction to the turmoil has depressed forward estimates of energy demand. That, in turn, has further driven down sector share values.
Yet, on a global basis, the demand itself remains.
That means this is a psychological reaction, not a data-driven one.
And that means you could be making some significant money once the dust clears.
Dr. Moors has been smuggled in and out of Cold War Russia and trudged through the frozen tundra of arctic oil fields. Now he's investigating a seismic shift that's underway in the energy market - a shift that could deliver 11,100% growth to a single natural gas company.
You can look for more information on that company to come later this week. You can also sign up for the Energy Advantage, Dr. Moors' energy-sector advisory service by clicking here.]
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About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.
With Greece default predicted in the next few months, which will have a domino effect on other over-indebted countries, this is probably the first wave of sellings. This is likely to be followed by other waves of selling. We have a long way to go before we reach the bottom, then it will be the time to buy. To buy now, (even if there are some short-lived gains) people will be likely loose in the next few months when the losses will be even more severe.
You money analists are doing nothing but calling foul. If my wife and I were up to our eye brows in debt, and could not agree how to remove that debt, some one (the bank advisors) are going to warn the bank of our problem. Its a wake up call. Do somthing about it instead of crying. Thank God someone is standing up, and calling a spade a spade.
Why do you think the S&P is incorrect ? We all know that the rating agencies do not have any predictive value and they are basically run by their customers (issuers of debt). US debt does not even deserve AA+, it deserves junk bond status like Greeks. The debt of US will shoot traight up to 25 t$, FED will print and eventually USD will collapse.
Dear Dr. Moors, I find this whole mess fasinating, considering that the US holds trillions of Iraq dinar…(That I understand is possibly being revaluated TODAY) It's my understanding after two years of research that we actually hold enough to pay off our debt, if the congress would use it correctly. You can bet this downgrade was planned to short, and you are 1000% correct…..I'll also be interested to see who the over 400 arrest warrants are being served to…..You will see a lot of "looking under the rocks" coming soon..Very scary what the future holds for our fine country………Sincerely BJ Vrabel
Kent, I beg to disagree.
This downgrade was perhaps not the best advised one, ill- advised ceertainly in as much as it came years too late and did certainly not go far enough.
Face the fact, the US situation is desperate. The "privilege" of printing money has become the country's curse. In fact it suited everyone in the world, but everyone had its commercial advantage in it, but the bill comes due for everyone and it is going to be very hefty.
As non US citizen nor resident I shall feel the fallout in a secondary way only, but believe me, I just cannot trust governmental America and its beyond my understanding that US citizens dont raise against it.
The Soviet Union was a good example of mis-information, but I believe your government has become what I would call a master in brainwashing hapily followed by the country. I leave it up to you whom to put the fault on, Reps or Dems, they are just both as brilliant manipulators.
As a Dr, it seems to me you do not know how to prove or disprove a conclusion. Your proof or disproof should not based on what some one did last year or five years ago, but based on the rational and logic of their reasoning. The rating agency should not rate something after an election in 2012, they should politically independent. Do not speculate without any facts, otherwise you will lose credibility.
Any way to know if S&P insiders sold or shorted the markets before their downgrade and is it legal for them to do so, if they did?
Sorry guys you are,like the US authorities in denial.The US debt is horrendous
and like the EU the "the chickens willl come home to `roost".About time for a reality check
and S&P are spot on,in my view.
I happen to agree with Dr Moors. The S&P downgrade is meaningless in economic terms (so instead of A+++ the USA is now A++ = zero chance of default on the debt). It is very significant in political terms, being a Fat-Cat-inspired Wall Street hit against President Obama (therefore inspired by millionaire supporters of the Republican Party). It could also very well be a closet manipulation of the market, therefore a deliberately corrupt action by people whose economic incompetence has been proved by their extraordinary failure to predict the predictable ad predicted (by others) sub-prime collapse. For this collusion with finance companies, no one in the rating agencies has been jailed, no one has even been fired, it is business as usual for the corrupt insider-dealers of S&P, Moody and Fitch. In Europe we should tell them their opinions are on no interest. In America, corruption rules OK !
I don't understand people who are criticizing S&P? Since they missed the MBS debacle, doesn't the US govt downgrade show their commitment not to be fooled again?
To all you 'Doctors' out there … like Dr. Moors and Dr. Poulton … why don't you take your arrogance and stuff it. From what I see, the last thing you'll find in Academia is common sense. I won't be renewing my energy newsletter from Moors, he's made plenty of crappy recommendations shooting from the hip while living the 'big life' … NOT IMPRESSED ONE BIT. Yeah, it's easy to tell people to buy stuff when it's OBVIOUSLY low, but then the 'buys' keep coming, the 'sells' never come, including selling to take profits in case of a downturn, and the strategy is 'all over the map' with little or no coherence. Sorry, I can do better on my own, thanks for the lesson.
Comments:
Astute investors base their decisions on the China credit ratings (the US moved from A+ before the budget to just A after the budget). Th purpose of credit ratings is to reveal current credit status to avert didasterous borrowing and default. The US agencies are so far behind the game they are not worth refering to in print.
How did this guy get a Ph.D?
A third grader with a basic understanding of math could tell the self-serving idiots running the US that you simply can't go on spending more than you earn without facing a day of reckoning. S & P are just pointing it out.
Talk about "shoot the messenger"!!
I can't believe I am reading this rubbish in Money Morning.
S & P's AA+ is still way off the mark. JUNK status would be more appropriate for a nation that can only pay the interest on its existing debt by borrowing the money! Jeez. Reminds me of my teenage daughter getting a new credit card to make the payments on her existing maxed out card.
Kent Moors, along with all but the Tea Party in Congress, is simply living in the la la land of denial.