Degrading GE

For a while now, we’ve seen the situation where bad news has seemed to cause the stock market to drop farther and farther. If the prices of stocks do one thing only, they model the future expectations of investors – and the worse the news gets, the farther the markets fall.

An odd consequence of this anticipation was the constant inverse market reaction that seemed to be in place not that long ago. The stock market believed so strongly in Federal Reserve policies, that good economic news caused the market to fall, and bad economic news caused it to rally. The market valued the policy response to the news more than the news itself. You remember – back when people walked around amazed at how brilliant Alan Greenspan was, or at least – the Senators couldn’t figure out what he was saying which is a good start.

In the same vein, when a company is expected to lose a lot of money and it realeases information that it lost less than expected, its stock will zoom upwards. Sure, maybe the company isn’t doing well, but the market thought it was worse. Oftentimes, the result can border on the comical.

Today, General Electric, a company founded in the 19th century by Thomas Edison, had it’s credit rating cut – it’s stock promptly went up over 12%. You see, GE is in such bad shape that the market was surprised that it’s credit rating was only cut a little bit.

Specifically, S&P cut GE from AAA to AA+ and it lowered the rating at financial arm GE Capital to A from A+. If you haven’t heard of GE Capital, you probably haven’t been paying close enough attention, but let’s look at the Marketwatch article a little more closely:

GE Capital faces significant write-downs in its consumer- and commercial-loan businesses as well as from its real-estate assets, as the economy contracts and fewer people and businesses are able to repay their debts.

Got that? The people who make lightbulbs, appliances, Christmas lights and aircraft engines also happened to have a huge corporate wing devoted to finance. And, yep, there’s the magic word, “real-estate assets”. Hmm, I wonder what worthless gems that portfolio of derivatives contains.

The most curious thing to note, however, is that the market is still listening to the credit rating agencies. These agencies have completely failed the marketplace. Of course, it’s doubtful that they’ve failed because they are corrupt, but only because their methods of analysis end up being more quaint than useful.

I’d imagine, though, that the rating agencies are a little better at judging a corporation’s credit worthiness than say, a mortgage backed security or a credit default swap. That’s all well and good, but how does that help anyone if the corporation owns securities that the rating angencies can’t begin to understand?