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« A Get Together with Doug Casey and Rick Rule | Main | US Financial Sector Continues To Suffer »
Tuesday
Mar042008

Our Rating of the Rating Agencies: Junk

The recent decision by some prominent investment rating agencies to maintain their top quality AAA ratings for some of America's most troubled bond insurers has worried us to say the least. Although some agencies such as Fitch Ratings have been sensible enough to downgrade bond insurance companies like Ambac Financial, others are still grading these companies as top quality investments.

Our Rating of the Rating Agencies: Junk

We view this as a drastic judgement error on the agencies part. These bond insurance companies have insured bonds backed by risky subprime loans which are now defaulting left, right and centre. Therefore the bond insurers are being forced to make big payouts on their policies and the fact of the matter is, they don't have enough money to cover all the home loan defaults that will mount up like a rolling snowball during this severe recession.

So not only should these companies lose their AAA ratings, but they shouldn't even have AA, A or quite frankly anything much more than junk. We cannot understand why companies such as MBIA and Ambac have AAA ratings, whilst truly good, solid companies such as Agnico Eagle only get a B- rating.

AEM S&P Rating

We are concerned that if the major ratings agencies do not move quickly to downgrade bond insurers and the other financial companies that once were “solid and safe”, we could see a drop in confidence in the ratings given by such agencies. This is a cause for concern as if investors lose confidence in what rating agencies are saying, they could cause a panic as investors lose confidence in all highly rated investments and dump them purely on the basis that they no longer trust the investment rating.

The rating agencies could however be under pressure from a third party not to downgrade these investments at all. If they are downgraded from AAA, many investment funds will be forced to sell their holdings, as the brief for their portfolio only allows them to hold AAA rated securities. This sell off would of course push these stocks even lower and mean that investors would lose even more confidence in the financial sector and the market's health in general. We are not making any accusations, but there are organisations that really do not want to see this financial crisis get any worse.

As investment managers and investors ourselves, we always do our own due diligence before putting our hard earned cash into anything, and if you are an investor we think that its a good idea that you do the same. Do not simpley buy a stock because someone at your local bar has bought in, or because an expensive suit and neat haircut on TV thought it would be a good idea, or even just because it has a triple A rating. Do your own research and make your own decisions on what to do with your money.

Aside from beginning to build a short position on the US financial sector, our only investments are in gold, silver and uranium. If you would like to receive one of our FREE newsletters, then please click here for more information.



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Reader Comments (1)

Good advice, although it occurs to me, and it is true in my case also, that many folks are not aware of all the essential components that go into exercising proper due diligence. Oftentimes, it is easier to go with the trend and follow the crowd which could easily result in unpleasant results.

March 4, 2008 | Unregistered CommenterJohn Ell

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