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Ratings Agencies as Dr. Kevorkian

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Too much power with too little understanding.

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Some recent headlines:

"Morgan Stanley (MS) Extends Drop as Moody's Says Rating May Be Cut": MS sells off more in Europe this morning.

Yesterday at about 3PM ET: "S&P May Cut GM to Junk". General Motors (GM), already down some 20%, drops another .75 in the last hour to close at a 60 year low

Yesterday at 3PM ET: "S&P Cuts Outlook to Negative". Alcoa (AA), already down sharp on the day falls another 10%.

The S&P 500 fell over 50 points, more than 5%, in the last 70 minutes of trading yesterday. The Dow Jones Industrial Average fell 490 points in the last 70 minutes. If you think there's no connection between the actions of the ratings agencies (S&P, Moody's (MCO) and Fitch, for the most part) and the final hour plunge on Thursday, in my opinion you either aren't a professional trader or you simply aren't paying attention. There are no coincidences in financial markets.

When an already weak market goes into free-fall in the last hour it isn't because of "traders panicking." It isn't a buyers' strike. Traders only sell stocks which are already down sharply for a reason. In this case, I believe "The Reason" consists of a bunch of a sub-par analysts with the ability to make press releases and the power to kill any company in America.

Corporations' cost of capital is determined by two forces: What the market will bear and what the agencies price it at. What the market will pay is largely seized. When the Fed throws money at the banks they, in effect, are trying to unlock the gears of corporate America bidding for each other's debt.

What Moody's and S&P did last night and this morning illustrates, to me, the futility of Fed actions to date. By noticing the glaring and obvious long-standing problems of General Motors and Ford (F) last night, S&P effectively raised GM and F's cost of capital infinitely. GM is in the middle of a "capital raise." It was going to be expensive before S&P raised the price of GM paper. Now, after S&P's downgrade threat, it's going to be impossible.

GM is dead, in my view. It may have died anyway but it's almost certainly dead now. S&P killed them.

Despite their huge drops over the last few weeks, stocks still aren't "cheap." Their price of doing business continues to rise. The Fed actions and the public "lynchings" of ex-CEOs like Lehman's Richard Fuld may be gratifying to the masses but I feel they fix nothing. They are a day late and billions of dollars short.

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As long as faceless, nameless drones at credit agencies are able to capriciously raise the price of capital of already ailing corporations, particularly on such mind-numbingly observations as "we've noticed difficulties in General Motors' business model," there's simply no way to effectively make a valuation argument for any American corporation. The agencies' analysts are underpaid, arguably under intellectually-horsepowered agents of destruction. As I've said before, I believe they are like 3-year-olds with hand guns: They have no idea what kind of damage they can cause but you are a fool if you don't give them a wide berth.

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No positions in stocks mentioned.

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