“Fundamental Analysts: You don’t need them in a Bull market, and you don’t want them in a Bear market.”
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I started out in this business on a trading desk. The head of trading who trained me was a crusty no bullshit former Marine Jungle Combat Instructor. He was not keen on Fundamental Analysts, and I vividly recall that quote above as one of his favorite expressions about them.
I was reminded of that no-nonsense attitude when reading about the recent threats of a US credit rating downgrade by S&P and Moody’s.
There are three problems with the NRSROs:
1. The Ratings Agencies completely missed the biggest credit risk and collapse in a century. Why should anything they ever say be trusted by investors again?
2. They subverted their own business models from objective analysts to paid shills in pursuit of greater profits. Hence, they have failed in even their most basic obligations to investors, as well as their fundamental business structure.
3. Their status as Nationally Recognized Statistical Rating Organizations (“NRSROs”) reduces competition in analysis and ratings, and gives them unnecessary credibility.
After the colossal clusterf$#% they helped creat, why on eart are they afforded any special privileges or competitive advantages?
It is time to eliminate the special NRSRO status, radically open up the ratings space to real competition, and force bond buyers to do their own homework.
It is the 21st century. Perhaps out regulatory structures should reflect that . . .
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
Why is anyone afforded special privileges? Why should the conduit for new money pass through several sets of hands, each taking their cut of it, before it makes its way to the spending class (if it makes its way at all)? Why do bankers get bonuses instead of being investigated, indicted and tried? Why are fraudulent GAPPs being allowed? Why does a corporation have more rights and fewer responsibilities than a natural "person"? Why do the Fed, Fannie and Freddie hold worthless assets and collateral? What makes a muskrat guard its musk, in the misty mist of the dusky dusk? (sorry "” it's early).
Corporatism.
I significantly, but not totally agree with the above. Many of the failures by the ratings agencies relate to their adventures in structured credit and securitized products, and the mis-begotten marketing strategies that they adopted in order to line their pockets. The traditional rating of ongoing “legitimate” credits, such as municipal general obligations and essential service providers, corporations, and plain vanilla securitized products has a much less blemished record, and for investors that require some sort of independent quality threshold for their bond investments, they still don’t have many alternative places to turn. Yes, I’m familiar with Egan-Jones, and I’ve met Sean before, think he’s got a great competing business model, but even he hasn’t convinced me that his firmn is immune from conflicts of interest.
Several aspects of their business are fixable, but it means that their corporate parents need to be satisfied with being more of a utility, and less of a fast growing, quarterly results-driven publishing house.
Petey gets it mostly right.
Having said that; we need rating agencies but the fellas running these currently should be exposed, investigated, prosecuted and imprisoned. The obvious solution that no wants to address.
Considering that JPM has increased its profit (and, no doubt, bonuses) by simply proclaiming that its bad loan losses decreased by $2B, how can anyone take any “analysis” by the in-crowd seriously. http://www.reuters.com/article/idUSTRE70D2BM20110114
And for all those analysts who keep telling us how China will save the world economy: http://www.cnbc.com/id/41071922
Yield is often a good guide to risk (better credits should have a lower yield). If you can’t do your own analysis, I’d trust market rates much more than credit ratings.
If you’re not sophisticated enough to do your own analysis, you should be buying funds or, at least, a diversified enough portfolio of major issues that individual credits don’t matter.
1. Amen.
2. How does any of that tie into the threats of a US credit rating downgrade by the firms, which is what triggered your thoughts on their credibility? Are they overreacting? Are they too late and a dollar short in reacting to that situation? What?
Or in other words, how would genuinely independent competing credit assessment firms assess the U.S.’ credit situation and how might that differ from what S&P and Moody’s are now hinting at doing?
It seems to me regulators pay far more attention to credit default spreads than ratings when conducting their own analysis, but then are happy when investors look at ratings.
BR, are you proposing DEregulation here? Radical! You mean 70 years of regulating the rating agencies hasn’t woked? Of course it hasn’t. The SEC has preserved an oligopoly for S & P, Moody’s, and Fitch, while making sure entrepeneurs like Meredith Whitney get no federal imprimatur and suffer severe competitve disdvantages. Another case where regulators are captured by a segment of the industry–as public choice theory would predicit. And this is the case under both Republicanas and Democrats, it doesn’t matter.
Alternative sources for investment ratings and a good deal of regulatory investigation could be both motivated and funded by a bottoms-up market approach it seems to me.
An acquaintance of mine (in my LinkedIn network), David Brin has written extensively about what he calls “sousveillance”:
These are his own words:
“Brin argues that it will be good for society if the powers of surveillance are shared with the citizenry, allowing “sousveillance” or “viewing from below,” enabling the public to watch the watchers. According to Brin, this only continues the same trend promoted by Adam Smith, John Locke, the US Constitutionalists and the western enlightenment, who held that any elite (whether commercial, governmental, or aristocratic) should experience constraints upon its power. And there is no power-equalizer greater than knowledge.
Brin thus maintains that privacy is a “contingent right,” one that grows out of the more primary rights, e.g. to know and to speak. He admits that such a mostly-open world will seem more irksome and demanding; people will be expected to keep negotiating the tradeoffs between knowing and privacy. It will be tempting to pass laws that restrict the power of surveillance to authorities, entrusting them to protect our privacy — or a comforting illusion of privacy. By contrast, a transparent society destroys that illusion by offering everyone access to the vast majority of information out there.”
Capability ENABLES Responsibility! http://culturalengineer.blogspot.com/2008/10/capability-enables-responsibility.html
LinkedIn http://www.linkedin.com/in/culturalengineer (interest and new connections always welcome!)
I know you still have a bitter taste after dealing with for former publisher, but right you are.
These companies deserve no mercy. But you know this will not happen. Congress does not do the right thing when lobby money tells them to do the wrong thing.
When reviewing companies here for my employer…(we subscribe to S&P – and I obtain the Moody’s reports off Bloomberg when possible) .. I regularly disagree with the reports and wrie about such directly in my write ups. I have told the executives here to save the freakin fee and stop subscribing to S&P. Waste of time in my opinion. We do a better job reviewing companies using the Bloomberg terminal and a little common sense.
Rather coincidentally, here is an article showing what the ratings agencies in question had to say about United States sovereign debt yesterday:
The Ratings Agencies Strike Again – Is the U.S. Triple-A Rating under threat?
This week, once again, both Moody’s Investor Services and Standard & Poors Corporation are “sabre-rattling” about the rating given to the United States on its sovereign debt. These warnings have been issued before but it appears that the market (at least so far) is taking very little notice. Moody’s rates U.S. debt at Aaa, its highest rating, and in its most recent “Aaa Sovereign Monitor” publication which updates the fiscal situation of the four largest Aaa countries – France, Germany, the United Kingdom and the United States, it looks at changes to the “credit metrics” of each of the four countries.
Of the four Aaa rated nations, the United Kingdom and the United States have seen the steepest increases in sovereign debt as a result of the Great Recession. Moody’s notes that the United States has taken a different economic tactic to the seemingly never-ending battle against the Great Recession; the government has implemented a program of additional stimulus which will ultimately add to the level of sovereign debt. In contrast, the United Kingdom, also suffering from a massive debt and deficit problem, has introduced a program of spending cuts in an effort to control deficit growth and ultimately reign in debt levels. The publication also notes that both Germany and France have seen significant debt increases, however, in general, both countries have moved toward deficit reduction, something that the United States has not done, at least not yet.
Barry,
You’re asking a bunch of idiotic egomaniacs to admit they are wrong. I wish they would truly fess up that probably isn’t going to happen.
Eh, idiotic opening.
GOOD fundamental analysts CRUSHED the big cyclical trades out of 2003, the best shorts into the downturn, and the rally trades out of 2009. I would say the largest source of top hedge fund performance (10-30% annual net for decades) is simple, good fundamental research.
But if you suck at it… you work for Moodys, “publish” for clients, or talk about it on CNBC.
The problem with the ratings agencies, even if honest, is the same that plagues all economics, as demonstrated by the debacles of the past few years: a fruitless attempt to achieve scientific credibility by applying mathematics to the unquantifiable. There are way too many factors and way too many unknowns in how these factors affect the ability to repay. By making various assumptions, you can come up with any answer you want, as we have seen.
As curb your risks says, you do a lot better having some smart people you trust digging out their own info and applying common sense.
Conflating an activity (FA) with a behavior(s) (criminal collusion and generalized nincompoopery) may not be the best way to contemplate the issue. Cognos’ assertion regarding FA utility is compelling. There is no reason to refuse the contributions diverse approaches to managing one’s interaction can provide. No need to ‘refudiate’ the value of granular knowledge and good analysis-these things can and should dialogue with TA.
The item which gives me the greatest pause is how we as humans organize ourselves around a ‘sanctus sanctorum’, foolishly allowing ourselves to be manipulated by a small group of people who are able to keep key information in reserve. The key is that that info can be intuited, identified through skillful abductive reasoning. That is to say, the nature of the lie reveals the contour of the truth being hidden. This should provide an adequate basis on which to act.
in the spirit of humor …
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