Friday, March 21, 2008

Goldman, Lehman Credit Ratings cut by S&P

Happy Friday everybody. Well well well, on a nice quiet holiday Friday, S&P quietly dropped a bomb on Goldman Sachs and Lehman Brothers. S&P lowered their credit ratings outlook to "negative" saying that profits at the firms could fall by as much as 30%. I find it funny how Wall St. loves to release their bad news on a three day holiday weekend when the markets cannot react.


``Our current expectation is that net revenue could decline'' at least 20 percent for independent securities firms, S&P said in a statement today. S&P affirmed its long-term credit rating of AA- for Goldman and A+ for Lehman. Both companies are based in New York.
The Federal Reserve's decision last week to open a lending facility for brokers and provide financial support for JPMorgan Chase & Co.'s emergency takeover of Bear Stearns Cos. ``mitigates liquidity concerns,'' S&P said. ``Nonetheless, we see some possibility, were there to be persisting capital markets turmoil and sharply weakening economic conditions, that financial performance could deteriorate significantly."

S&P also commented on the market conditions:

"`Market Sentiment'
The ``near-term earnings prospects remain at least somewhat brighter'', S&P said in its statement today. Goldman, Lehman and Morgan Stanley have ``benefited from the strength of equities trading activity,'' while wealth management and asset management businesses have also ``remained relatively strong,'' the ratings company said.
S&P said it still can't ``rule out the possibility that market sentiment will turn more severely against some firms, undermining the effectiveness of even the most extensive preparations against liquidity stresses.''

My take:

Well this is just more proof that the market conditions for the banks look to be deteriorating. Wall St. keeps talking about a two quarter recession followed by a second half recovery. S&P is telling you the exact opposite: Things are ok for now but it looks shakey down the road. I think all of 2008 will be rough and 2009 down't look so hot either. The housing bust is just now starting to hit. Foreclosures are accelerating and this is why S&P had to drop their outlook to negative.

What Wall St. is trying to do is to get everyone to think that this crisis os over and we are back better then ever. The truth is its just beginning. S&P did not want to throw Goldman and Lehman undeer the bridge as Wall St. struggles. These are the pockets that pay them! They had to do it to keep their credibility and I think also to protect themselves as the SEC starts to get involved in this. The Fed is just trying to clean up this mess. Since its too late and the problem is too big the blame game will start.

As this crisis detiorates into a severe slowdown Congress will rule with an iron fist and look for someone to blame. When you are looking for clues as to where the market is going look at the forclosure rates, the bond market, and certian financial news sources like Bloomberg. Short term treasuries being at a 50 YEAR LOW at .3% in the bond market should tell you everything you need to know. Think about that for a second. Most big invetors would rather earn 1/3 of 1 percent in guaranteed treasuries versus owning stocks. The bond market is basically telling you the SKY IS FALLING.

This ratings negative outlook on two os the big investment banks is another warning sign of whats about to happen. I urge you to look at the data and start tuning out Wall St. The worse this gets the louder they will be yelling everything is ok. Folks, everything is far from being OK. Please invest accordingly and avoid debt at any cost.

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