Fitch Shows Vigour in Re-Rating Subprime Debt

How about that share market? Every day, getting higher and higher. One day it’s the big miners powering ahead. Yesterday the banks and financials carried the load.

It sure feels like time for a rest in share prices. However there a few resource blue chips we have our eye on we’d like to buy on a correction. The energy sector in Australia has been over-shadowed by the miners. Sometimes you can find over-looked value in the shadows.

Globally, the brokers and bankers are taking their subprime losses all in one lump. Merrill Lynch plans to write down US$4 billion in fixed income assets. It will get to that now that it’s fired Osman Semerci, formerly head of fixed income at Merrill. Morgan Stanley is restructuring its Mortgage business and firing 500 people.

Meanwhile, ratings agency Fitch had second thoughts about some of its previously rated subprime debt. And what do you know, it decided to re-rate $173 billion worth of the stuff. Upon further review, Fitch found that $18.4 billion worth of bonds backed by subprime mortgages deserved a downgrade. That’s 11% of the entire package of debt re-rated.

Is it good or bad news that Fitch has changed its mind on just 11% of the re-rated debt? It probably doesn’t matter. The subprime-backed debt was bought before the re-rating, when the world was full of confidence that American homeowners would make their mortgage payments. At least Fitch is finally showing some vigor, even if it’s only an exercise in covering an considerably exposed backside.

Gold and oil are coming down off their dollar-induced high. Expect to seem some consolidation in their recent gains. Don’t expect the dollar rally to amount to anything substantial. 

Dan Denning
The Daily Reckoning Australia

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