Rating Agency Goes Bonkers

Morgan Stanley Extends Drop as Moody's Says Rating May Be Cut

S&P May Cut GM to Junk

At this kind of situation. rating agencies are being foolish to compound the failure of the financial system.

When companies are improving their earnings, asset price increases, rating agencies will rate them AAA. But they don't have an idea that in good times, asset prices are inflated to good times. How are prices determined? By market forces of course. Who are the market forces? You, me and everyone in the world. At that time of rating, everyone is optimistic and so on, thus everything looks good.

By cutting the rating of major blue chip companies, they are forcing the companies to harakiri. If they cut the rating, the cost of capital for those companies will increase because it will be seen as more risky, requiring a higher interest on debts.

I thought that rating agencies are supposed to regulate not disintegrate. They are pushing ratings of companies either Up to a peak or down to a pithole without a equilibrium.

Well, God Bless America....

Next short term step

Goldcorp is having an uptrend despite physical gold's volatility. Its upside resistance is around Can$37. A breakout means a home run.

A change in trend will be below a support of Can$30.

The Next Bubble

Yes, the plot for the next bubble has been set. It is alternative energy. With the multi-billion dollar incentive to spur investments in alternative energy, who don't want a share of the pie? With other industries facing distress and thinning margins, those with similar capabilities will switch, or already has switched in to alternative energy such as solar. With this incentive, a larger amount of investment dollars will be strategically shifted to concentrate on the next big thing to replace oil.

The bubble may form within 10 years and will be the next favourite in the next Bull Market. In the past bull market, investors were sceptical about alternative energy companies related to biomass, hydropower etc. This will change.

Maybe, you will see venture corp merging with semb industries or keppel to be the next solar giant. Who knows?

Next turn of events

Next, you would see companies with high debt leverage and/or unable to pay debt interest will be the next to fall. Those that has interest coverage that is close to being unable to pay will be in danger.

Companies with lots of cash are here to stay and take advantage of today's distressed times.

Companies with high inventory are also prone to increased debt to asset ratio. It is most probable that their inventory are priced at a premium due to past high production and material cost. They will be unable to undertake extra loans to secure more working capital to at least survive until the next boom.

One company, Olam, has high debt gearing. With the fall of commodity prices and the low profit margins it can generate, It is a question on how long they can sustain their growth. It is true that people still needs to eat. But it does not give assurance on the impact of price change. Consumption is rather inelastic, where swings in prices does not really impact the consumption. Look out for their next quarter report and there may be some clues of the next turn of events of this stock.

Some S-shares have plunged below their NAV, some even close to the amount of cash per share. these stocks don't even have any debt. So how Efficient Market Hypothesis explains this?

Bad News is Good News

This is a point where most news are pessimistic. There are still some buy calls. Asian Indices still have some way to fall. This is a time where no one wants to buy and everyone wants to sell to cut loss. This is a time where most people will put their money under the mattress.

Taking a risk now can be rewarding.