Wednesday, April 16, 2008

giving credit where it's due

credit ratings have gotten a bad rap because of the subprime crisis. but when it comes to the established areas of corporates and sovereigns, credit analysis is still one of the best indicators of what the future holds.

better credit ratings beget borrowing, which spurs demand, feeding employment and investment. people get richer and assets go up in value. companies that get upgraded frequently see their shares rally. (examples include GT and ABB).

that's why I noticed this from Moody's today:

Middle East, Africa and Latin American regions have more issuers on review for upgrade than on review for downgrade

three times as many issuers in the United States and Canada have negative outlooks as opposed to positive outlooks.

more European issuers are on review for downgrade thanreview for upgrade

once again, we see the trajectory. it will be hard for US stocks to rally when credit is pointing in this direction. this has been predicted by NYU Stern credit guru ed altman, who sees bankruptcies and defaults spiking higher this year. we've already seen the demise of bombay & co, buffets, sharper image, the near death of bear stearns and linens and things, plus several others. saying stocks will make new highs under these circumstances is to hope for what has never been and cannot be. however, it's still logical to expect continued strength abroad. right now, one of my favorites is the middle-east and african ETF (GAF).

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