Monday, July 30, 2007

Bloomberg opinion on "subprime infection"

Bloomberg's Mark Gilbert says the tremors from the subprime debacle are being felt in all areas of the interconnected global financial markets.

The pain is being felt in an array of tradeable assets. As Gilbert puts it, "Derivatives, corporate debt, loans, and bank stocks are all getting trashed".

In today's opinion column, he offers up, "Five Signs That Subprime Infection Is Worsening".

Here's an excerpt from that piece regarding short bets on Moody's share price:


...Do Bet Against Moody's

Investors made more than 23 million bets against Moody's Corp.'s share price in the month to mid-July, according to Bloomberg data on the total amount of stock that was sold short and hasn't been repurchased yet. Those trades, known as short interest, have surged from 18 million in mid-June, and have almost quadrupled in the past four months.


Moody's shares have declined about 10 percent in the past two weeks, extending their loss for the year to almost 20 percent. Frederick Searby and Jason Lowe, New York-based analysts at JPMorgan Securities Inc., this month cut their second-quarter revenue-growth forecasts for Moody's to 19.4 percent from 21.5 percent, and their earnings-per-share forecast to 68 cents from 69 cents.


``Should debt markets become less issuer friendly, CDO issuance could be adversely impacted, hurting Moody's results,'' they wrote in a research report.

I find it interesting that Moody's, along with Standard & Poor's ratings service, would stamp their investment-grade ratings of approval on some rather opaque and unsound mortgage-backed securities and CDOs, but we now know these ratings to be part of the greater subprime debacle.

What renews my interest in this aspect of the story is when, in a separate article, I read that S&P and Moody's also maintain lowest investment-grade ratings on the bonds and bank loans of commodity trading firm Glencore.

Like the mortgage-backed securities and CDOs, Glencore seems rather secretive and opaque. Unlike the subprime-laden securities, the Swiss commodities firm is also
highly admired and increasingly profitable!

If you were to judge possible investments solely on the basis of the ratings, you might think that all BBB rated instruments were alike. This is obviously not the case and never has been.

So you see, it pays to examine your investments more closely, and to note any
conflicts of interests when accepting outside "help" from the ratings agencies and analysts.

Okay, tangent over. I just want to highlight one more part of Mark Gilbert's article. This excerpt concerns the role leverage plays in these markets:


Once fear grips a leveraged market, the so-called credit fundamentals aren't worth the paper you print your spreadsheets on. The yield on the benchmark 10-year U.S. Treasury note has declined to about 4.8 percent from as high as 5.3 percent seven weeks ago, as investors seek the warm, comforting embrace of the U.S. debt market.


``While the fundamentals, such as global growth and corporate balance sheets, are at their best for arguably decades, the technicals are as bad as we've ever known them and arguably the worst in the era of leveraged finance,'' Jim Reid, a London- based credit strategist at Deutsche Bank AG, said in a research note last week. ``Never has so much money been thrown at and been levered up in credit and never has there been such a liquid derivatives market to hedge risk.''

Please check out the rest of Mark's article, as there are a number of important points made on the topics of leverage, deal financing, performance of financial industry shares, and more.