Nov

17

Some questions about the Fitch announcement:

1. When a ratings service says there is a potential for contagion if the situation worsens, is this bullish or bearish.

2. If it were true, is it bullish or bearish.

3. What are the chances it is true?

4. Why does it happen at 310 so as to liquidate longs.

5. Is it subsumed by the next highly important piece of data like the state of manufacturing in the phil area?

6. Does is serve any purpose except to create friction so the strong can take chips from weak.

7. When the market drops 2 % in a half hour like it did, is it bullish or bearish?

8. Is the sentiments of a rating service related to the threat by the French to vet all their methodologies and to switch in the future? How does this relate to the profit margins and survivability of the services

9. Do the sentiments of one rating service tend to be unduly reversed by an announcement from the next rating service?

10. What other queries would seem relevant?

Rocky Humbert adds: 

About the Fitch announcement:

1. Why do people tend to attribute market price moves to announcements by credit rating agencies? Has there been a single news story that notes that the US Treasury is higher versus when the USA lost its AAA; whereas the French 10 year is roughly 8 points lower since it held its AAA at the same moment in time.

2. Why do people think that falling gasoline prices are bullish but spiking WTI prices are not bearish? Why do people choose to pick particular headlines as "explanations" but ignore the other hundreds of headlines that appear coincidentally? (i.e. MF Global's bankruptcy judge yesterday withheld his ruling on the release of billions in frozen collateral (which isy leveraged into massive liquidity)…and this non-decision arguably has a much bigger impact on the day-to-day price moves)…etc.

3. The ratings agencies receive no compensation for their ratings of the G7 sovereign debt. They do this as a "public service" and a legacy. Why do they do this? If they ceased to issue sovereign ratings, would anything change? Would that be bullish or bearish?

4. After a multi-week/multi-month period of downward prices, a 2% spike in the last 30 minutes brings out the naysayers "the market cannot be trusted," "it's a bear trap," etc. But I've found with absolutely no statistical significance (due to insufficient data points) that it's often a very tradeable bottom. In contrast, a 2% decline in those conditions rarely makes the news.

5. What does bullish or bearish mean?

John Floyd makes three points: 

1. Today's action in Europe provides and interesting contrast. Amongst other negative factors the Spanish bond auction was by almost accounts a failure and yet spreads are tighter between Spain-Germany, Germany yields are up, the Euro higher, etc. So perhaps there are many factors at play that determines what drives prices and it is instructive to observe how the market moves relative to a given piece of news in comparison as to how one would expect it to react. For example if Spanish bond spreads had been tightening the past few days prior to the auction would they react the same?

2. I am not sure given the daily volatility in SPX and the track record or operations of rating agencies that they are able to time and focus on the minutia of the market in such a way. I would need to look but I imagine there are instances like the Spain one above where the market acts in opposite fashion as to what one might expect.

3. I would liken the rating agencies to a biker in the back of a peloton, or a swimmer behind a pack of others, they are getting dragged along by other forces en masse, not breaking new ground. There is the consideration however that a ratings change may cause sales (or buys) buy making an asset class unavailable or available to a subset of market participants. 


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8 Comments so far

  1. Gary Phillips on November 17, 2011 12:02 pm

    it’s the eternal dichotomy of the “story”,

    always open to bullish or bearish interpretation.

    it is the flag of convenience

    under which the market sails,

    and a corollary of bias or self-interest.

    so, not quite sure what the answers are;

    but the questions themselves,

    form a compelling argument for empiricism

  2. john smith on November 17, 2011 8:28 pm

    Fitch is actually not a rating agency… they just pretend to be one;)
    Their statement is a mix of some propaganda methods already known to us: card stacking, testimony, transfer and plain folks, I would say. And it’s not any less random than the market move. Finally, the only non randomness here is their timing.

    Quite amusing.

  3. Emmett Moore on November 17, 2011 11:07 pm

    Vic I didnt find any -2% move during any 30 minute time span. Did you mean 60 minute time span?

  4. pacific SW on November 18, 2011 5:07 am

    Would love to read a review of the alchemy book (in which we learn about one bond trader niederhoffer) in the spirit of this website. I could use some clear thinking in trying to understand HOW DOES HE DO IT.

  5. Ed on November 18, 2011 10:58 am

    I have always felt the late day trap door down, particularly after a period of accumulation suggests that the cycles are changing. However I do not have a good method for testing on intra-day data.

  6. david on November 18, 2011 12:25 pm

    when you’re a corn seed in the ground and there’s a rain cloud overhead, that is bullish. When there ain’t it’s bearish. I like the word ephemeral, and sayings like ” buy the rumor sell the fact”,like in gold running up to 1900 cause of euro hitting skid row and now that it has gold is tanking…ha well in an ephemeral way…………..

  7. kora on November 20, 2011 12:10 am

    found this funny tweet , “There’s a need for rating agencies that specialize in rating rating agencies. Of course, this has a risk of infinite regress ” - Kaushik Basu ,Chief Economic Adviser, Government of India

  8. douglas roberts dimick on November 23, 2011 2:30 am

    The Interrogatory

    Having consulted the “goracle” who believes nothing that he hears, less what he sees, and requires human sacrifice to bank on what lies in hand, now comes the respondent…

    1. Which ratings service(s)?
    2. If snapback indications, then bullish initially, otherwise bearish.
    3. We have reduced ourselves to a country that produces little while having amassed 15 trillion dollars of debt absent any “trust with verification” plan enacted for returning to pre-Glass-Steagall regulatory and fiscal regimes… enough said.
    4. The system is rigged that way.
    5. Depends on depth of teams (e.g., funds) aligned with institutional players on each side of the buy-sell line.
    6. See answers to Questions 4 and 5.
    7. Varies according to degrees of relevance to as well as implications embedded within rationale of answers to Questions 4, 5, and 6.
    8. Rocky’s comments (1-4) initiate lines of questioning into perceived economic prowess of French and German contingents; Bank of America’s $5 fee saga is instructive concerning margins and fees.
    9. See John Floyd’s comment, Point #3, concerning the “en masse” affect/effect.
    10. Assuming the relevance of such queries are to elicit direct proof or establish proximate causation of “potential for contagion,” a Top 5 list may include:

    (i) “[C]orollary of bias or self-interest” (as referenced in Gary Phillips comment) both (a) among rating services and (b) the states and entities being so rated.

    (ii) G8 social-economic underpinnings of 1933-1999 “empiricism” (as referenced in Gary Phillips comments) correlations with contra-intuitive G20 elements of nationalism.

    (iii) “Nonrandom” (as referenced in John Smith’s comment) sequencing of watershed political (e.g., regime change, constitutional and statutory ratification/repeal) and macroeconomic (e.g., national, bilateral, regional equity, debt, or currency leveraging/deleveraging) events.

    (iv) Pre-1990 comparison to post-1999 indexing of deviations in ratings related to “making an asset class unavailable or available to a subset of market participants” (as referenced in John Floyd’s comment); related, correlation(s) with ISDA association(s), document architecture, and default and termination events (e.g., see ISDA CEO Stepping Down, http://www.zerohedge.com/news/isda-ceo-stepping-down a la “ISDA Says 50% Greek Bond Haircut ‘Appears’ Voluntary,” http://www.zerohedge.com/news/isda-says-50-greek-bond-haircut-appears-voluntary.

    (v) Perform both (non)quantitative exercise for “rating rating agencies” (as referenced in Kora’s comment).

    dr

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