Wednesday, May 14, 2014

Recent evidence that market ignores Moody's ratings


  Governor Chafee invokes the phrase of "common sense" in criticizing those who question his analysis, thus  suggesting hes made no rigorous  analysis himself. His  advisers  report is lacking  connection to the real world.


 The real world is the open market place.The real world has a habit of making prognosticators humble.The Chafee/Licht  SJ Advisor report and the  authors  know that the assumptions used  and predictions  in the report will likely  turn out to be totally wrong and/or foolish.  As is often the case, in Counter-factual theorizing, or "What if" analysis multiple assumptions compound to produce a nearly worthless conclusion. We may never know just how bad this analysis is, because the only way to know for sure is for us to default on 38 studio bonds and then have the rating agencies rate RI General obligation debt "junk" with the  8 to 12 notch downgrades predicted.I f  just those two things happen 1) default  2) 12 notch downgrade , I believe their assumptions will be proven inaccurate within 30 to 60 days.The market will once again humble the authors and the ratings agencies. For the ratings agencies it will not be the first time . Their history is littered with bad callls and bad analysis. After all they rated 38 studios bonds AA and the company went bankrupt in 15 months.
         The reason I find the report speculative and unconvincing is for their analysis  and warnings to be accurate  the market has to actually price Rhode Island  debt as junk and persist for a long period of time. As I've said many times "rating RI General Obligation Debt"  is a very speculative assumption that the markets  will in their own way make S&P and Moody's and Mr Chafee and the this paid for  report  look foolish. 

     Want some real world evidence of the market listen to agencies downgrades? The market ignores ratings fairly regularly. As a real time example lets look at New Jersey recently.Below is chart reflecting the performance in the real market of  an Eaton Vance fund composed only of New Jersey municipal Bonds. Does this look like there were


            REAL WORLD

  There has been a significant amount of ratings activity lately in New Jersey. Yesterday Moodys  cut New Jerseys ratings to A1 matching downgrades in April by both Fitch and S &P. Chafees hand picked report from SJ advisors suggest that yields go up  when ratings go down. Thats often true but not always. In this case "yields went down" the SJ Advisors report doesn't even allow for such a possibility. It doesnt't attempt to quantify it. Instead it applies academia and models that are not altogther crazy to provide "scary" predictions  but certainly there are enough flaws in methodolgy and a real lack of Market experience , to allow me to reject their findings as unconvincing. 

    You can see from the "real world " above, NJ bond prices  have completely ignored the ratings agencies cuts and yields have gone down. They have done exactly the opposite of what the authors of this report would have predicted.  So really how can we take this report seriously?

I don't. 

            mgriley

                       ratings world

New Jersey Rating Cut by Moody’s as Christie Pledges Fix

May 13, 2014 11:24 PM ET
http://www.bloomberg.com/news/2014-05-14/new-jersey-s-rating-cut-by-moody-s-as-christie-plans-fix.html




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