Credit Ratings: The Ultimate Contrarian Indicator?

by ETFguide | June 25, 2012 11:30 am

Moody‘s (NYSE:MCO[1]) gave its token downgrade to a dozen global banks (NYSE:IXG[2]) including five of the six largest U.S. banks. And financial stocks responded by going up.

The SPDR S&P Bank ETF (NYSE:KBE[3]) closed ahead by 1.36% while financial stocks (NYSE:XLK[4]) within the S&P 500 (NYSE:SPY[5]) ended higher by 0.92%.

Before the 2008-09 U.S. financial crisis, Moody’s and other rating agencies inflated credit ratings and now they’re trying to earn back their credibility. But the crookedness of their credit analysis is still here.

The Wall Street Journal reported that Morgan Stanley’s (NYSE:MS[6]) CEO James Gorman “can pat himself on the back after four months of back and forth and public lobbying” to convince Moody’s not to downgrade the bank by too much. Did it work? Moody’s reduced Morgan Stanley’s credit rating by just two notches and the bank escaped much worse expected cut of three notches. It pays to lobby.

It’s no secret the creditworthiness for global banks is in a spiral, but we don’t need no stinking ratings to tell us what we already know. During the boom years, credit ratings were inflated. And now during the bust, they’re still probably inflated, even after the token cuts.

The Select Sector Financial SPDR (NYSE:XLF[7]), which includes Bank of America (NYSE:BAC[8]), Citigroup (NYSE:C[9]), Goldman Sachs (NYSE:GS[10]), JPMorgan Chase (NYSE:JPM[11]), and Morgan Stanley as components is ahead 10.6% year-to-date.

  1. MCO:
  2. IXG:
  3. KBE:
  4. XLK:
  5. SPY:
  6. MS:
  7. XLF:
  8. BAC:
  9. C:
  10. GS:
  11. JPM:

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