S&P is relevant, even now!

This is the second time the question of relevance of S&P (Standard & Poor's) is being raised.

The last time it was raised had been in 2008 when the world reeled into yet another round of recession, after unsuspecting investors heavily bought into the AAA rated CDO (Collateralized Debt Obligation), rated by these very Credit Rating Agencies (CRA).

The act ultimately shoved capitalism into a ventilator, if not sanctioned it a death certificate.

Now, when the bond markets rally, the question of S&P’s relevance is questioned again!

"It (bond market rally) just shows that the financial markets have concluded on their own that US Treasurys are the highest credit quality bonds that are available .There's no substitute for the safety, liquidity and basically the quality of US Treasurys. That's the market's conclusion. S&P has a different view of that and it hasn't changed market perceptions in any way."Jim DeMasi, chief fixed income strategist at Stifel Nicolaus in Baltimore was quoted by CNBC as saying.

But it should not be forgotten that Moody’s and Fitch, two other CRAs, have for the time being, retained their respective AAA rating for US debts.

This must have lent the bond markets some momentum. Still, the question of S&P’s relevance exists.

A hornet’s nest has been kicked up with the news of S&P’s downgrading of US debt, given the organisation’s past track record.

But, if for once, someone committed an error; can it be deemed that the person/institution is error-prone, always?

S&P may have committed an error (the nature of that error being contentious) when it graded the CDOs. But, suppose they are right this time and the world is wrong?

That can be even more precarious a happening which can have wider consequences!

Further, the rating given by Moody’s and Fitch is not a permanent affirmation of US’ credit status.

“Over time, this status(AAA) could be threatened if further measures to address the long-term fiscal situation are not adopted, but it is early to conclude that such measures will not be forthcoming,” Moody analyst Steven Hess was quoted by Reuters.

“…the recent deal to raise the U.S. debt ceiling was an important first step but not the end of the process towards putting in place a credible plan to reduce the budget deficit to a level that would secure the United States' 'AAA' status over the medium-term.” Fitch was quoted by Wall Street Journal as saying.

Both the rating agencies—Moody’s and Fitch-- could review the US’ credit rating in a while. And if that happens and turns out to have a negative outcome, stock markets can tumble further and bond markets will not rally; especially when Europe too is in a bad shape.

Clearly, this is not a situation ripe to shoo away S&P, and worse, to ignore the case it has presented.

(Meanwhile, Rick Santelli, CNBC, On-Air editor has predicted a bear bond market in the offing, taking cues from technical analysis! He says a 21 year bearish bond cycle is in the reckoning from August 22, Monday!)

As published in: http://www.commodityonline.com/news/SP-is-relevant-even-now!-41475-3-1.html