Geoff Cutmore - Morning Thoughts

Who is Rating the Ratings Agencies?

Geoff Cutmore

A fine old storm we cooked up on the show this morning, and as is often the case the viewers were asking some of the toughest questions. Why had it taken the ratings agencies so long to decide some subprime debt needed reviewing? What else could be out there and are the agencies playing catch up?

This issue may look somewhat detached at the moment from the current second quarter earnings reports, but it will be interesting to see if any of the financials in particular seek to raise provisions to meet anticipated bond related losses. Will any downgrade force the holders of mortgage backed debt or cdo's to recognize the losses through marking to market?

The U.S. financials as a sector have struggled to match the overall market - there are money managers like Hugh Hendry who argue this is a leading indicator to broader market weakness to come. Does this feel like the last chance saloon? Hugh also makes the point that despite his intellectual concerns about the macro picture, he is a bear without big shorts!

Bob in Chicago sent us a great email on the U.S. housing market. He points out tighter lending standards and higher rates have pushed fixed rates to about 6.5% for a loan - the big problems will come with so called reset mortgage's issued in 2004 and 2005 that will kick into higher payments in the next few months. He says people who can't meet the 30% higher payments will foreclosed by the winter - analysts guess that could affect more than half a million homeowners.

There is always an opportunity to make money on news like this - apparently some hedge funds were able to make as much as 40% in June by betting the subprime spreads would widen on continued weakness.