WHY JOIN A MARKET HARAKIRI?
July 2nd 2008 00:00
Pardon this newbie’s stupidity today, but somehow, I feel that logic is not working in many places these days. To understand where this stupidity is coming from, let’s have a bit of history...
Back in the days when the subprime borrowers and collateralized debt obligations are the rage, organizations like Moody’s, S&P and all the financial institutions that rate the performance of other companies and debt instruments are like the gods that declare who can be and who cannot be trusted.
What they say, or what ratings they give to a particular company, state, sovereign country or debt instruments, determines the financial fate of the said company, state, sovereign country or debt instruments on the short term. Short term here means until their ratings are changed by those rating institutions.
As most of us already know, many of the collateralized debt obligations received favorable, if not sterling grades, from these rating organizations and that is why a lot of people made a lot of money from them. But those same ratings are the same reasons why a lot of people lost a hell lot of money lately, and those ratings are the very same reasons why the whole darn world is in this financial mess right now.
The guys who are rating the other guys are supposed to be the best guys in the business. Otherwise, nobody is going to care what they say about the others guys right? Who are they rating? They are rating the guys who are supposed to be like them, the best guys in the business. In fact, they are rating each other like nobody’s business. They act like they are the only authority in the business of others and yet all of them, like us, are in the same financial mess – maybe even a lot worse.
And the whole darn world is in this mess because of them. I know, I already said that, but I thought I better say it again.
But then again, there is the rub. We are in this mess because of their ratings and yet they still continue to occupy the rating pedestals and the whole investing world still hold their breaths every time they speak. Like, they cannot say anything that is not gospel truth.
And maybe that is true. But then, why are we in this mess?
Just a few days ago, these guys downgraded the ratings of every other guy in their street and, each time it was followed by the tumbling of the price of the shares of the organization (company) that has been downgraded. These are the guys (the rated and the rater) that hold a lot of money and whatever happens to them sends a shockwave that rattle the world markets!
And so, we plunged into a deeper and deeper pit. All of us, and yes, even the non-investors.
Why including the non-investors? Well, wasn’t everybody just enjoying their good life before the US housing market lost ground and drag everyone else down? Credits tightened, stock markets crashed, the dollar plunges, oil prices go up, businesses stalled, economies contracted, jobs are lost, consumer confidence ebbed, inflation soared, etc., etc.
Aren’t we all just connected in a beautiful worldwide financial web that slowly strangles everyone when something big goes wrong?
Obviously, we all are.
But do we need to contribute to the demise of our own investments by treating the words of these ratings organizations as the unimpeachable truth, and therefore we have to unload every time they say something negative about a certain entity? Sure, dispose of the shares of the financial institution that has been downgraded if you have them, especially if the reason for the diminished rating is valid and if its future is now bleak.
But why dump everything else (shares of the companies that have nothing to do with the downgraded firm) simply because those guys are tearing each other apart? I mean, the people employed by those organizations (the ones who actually make the ratings) are not even demigods.
And have you read that story about Moody’s plan to discipline its own employees for not following certain guidelines in issuing grades about certain companies in Europe?
Well, if you ask me, not very many people can say words that are cast in stone
Back in the days when the subprime borrowers and collateralized debt obligations are the rage, organizations like Moody’s, S&P and all the financial institutions that rate the performance of other companies and debt instruments are like the gods that declare who can be and who cannot be trusted.
What they say, or what ratings they give to a particular company, state, sovereign country or debt instruments, determines the financial fate of the said company, state, sovereign country or debt instruments on the short term. Short term here means until their ratings are changed by those rating institutions.
As most of us already know, many of the collateralized debt obligations received favorable, if not sterling grades, from these rating organizations and that is why a lot of people made a lot of money from them. But those same ratings are the same reasons why a lot of people lost a hell lot of money lately, and those ratings are the very same reasons why the whole darn world is in this financial mess right now.
The guys who are rating the other guys are supposed to be the best guys in the business. Otherwise, nobody is going to care what they say about the others guys right? Who are they rating? They are rating the guys who are supposed to be like them, the best guys in the business. In fact, they are rating each other like nobody’s business. They act like they are the only authority in the business of others and yet all of them, like us, are in the same financial mess – maybe even a lot worse.
And the whole darn world is in this mess because of them. I know, I already said that, but I thought I better say it again.
You, planning to join the guy in the middle? Illustration pic source: Wikipedia
But then again, there is the rub. We are in this mess because of their ratings and yet they still continue to occupy the rating pedestals and the whole investing world still hold their breaths every time they speak. Like, they cannot say anything that is not gospel truth.
And maybe that is true. But then, why are we in this mess?
Just a few days ago, these guys downgraded the ratings of every other guy in their street and, each time it was followed by the tumbling of the price of the shares of the organization (company) that has been downgraded. These are the guys (the rated and the rater) that hold a lot of money and whatever happens to them sends a shockwave that rattle the world markets!
And so, we plunged into a deeper and deeper pit. All of us, and yes, even the non-investors.
Why including the non-investors? Well, wasn’t everybody just enjoying their good life before the US housing market lost ground and drag everyone else down? Credits tightened, stock markets crashed, the dollar plunges, oil prices go up, businesses stalled, economies contracted, jobs are lost, consumer confidence ebbed, inflation soared, etc., etc.
Aren’t we all just connected in a beautiful worldwide financial web that slowly strangles everyone when something big goes wrong?
Obviously, we all are.
But do we need to contribute to the demise of our own investments by treating the words of these ratings organizations as the unimpeachable truth, and therefore we have to unload every time they say something negative about a certain entity? Sure, dispose of the shares of the financial institution that has been downgraded if you have them, especially if the reason for the diminished rating is valid and if its future is now bleak.
But why dump everything else (shares of the companies that have nothing to do with the downgraded firm) simply because those guys are tearing each other apart? I mean, the people employed by those organizations (the ones who actually make the ratings) are not even demigods.
And have you read that story about Moody’s plan to discipline its own employees for not following certain guidelines in issuing grades about certain companies in Europe?
Well, if you ask me, not very many people can say words that are cast in stone
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