Ill-Advised Downgrade Ushers in Buying Opportunities

Source:

"Stay the course and move as soon as trading stabilizes. This is a seriously oversold market."

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. 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.

Get Our Streetwise Reports Newsletter Free

A valid email address is required to subscribe