Rapid Ratings’ Market Alert: US Equity Market Approaching Highest Risk in 9 years

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Rapid Ratings research indicates that 46% of stocks in the S&P 500 are rated sells while buy recommendations shrink to a 9 year low of 32%.

Global ratings agency Rapid Ratings today released its Equity Risk Calls Summary covering the period 1997-2005 for the stocks in the S&P 500 and for the 1300 companies Rapid Ratings covers for major investment banks and brokerage firms.

“Dr. Patrick Caragata, CEO of Rapid Ratings, speaking in New York, said: “Our assessment of the US equities market in the year ahead is not overly optimistic. It will be increasingly difficult to find stocks likely to provide adequate compensation for increasing levels of operating risk that companies have had to assume in order to remain competitive. There continue to be opportunities for strong buys, buys and speculative buys in any market, but what concerns us is that the balance of our assessments between buy, sell and hold has shifted. For stocks in the S&P 500 in 2005, our prospective buy calls for the next 6 -12 months (31.7% of the total) are being outpaced by sells (45.9%) for the first time in the last nine years. It is time for investors to reposition for capital preservation and income if they have not done so already.”

“The figures are very similar (Buys at 36.2% and Sells at 42.0%) to our calls for the approximately 1300 US listed companies we rate for major investment banks and brokerage firms. This reinforces our conclusion that the US equity market is experiencing its highest risk level this year as compared to the last 9 years. This perspective is supported by our analysis that the US credit cycle is peaking this year and suggests that for the next few years there will be a deterioration of credit quality and higher default rates.” Supporting tables are available on request.

In 1997, the year following Alan Greenspan’s “irrational exuberance” speech, for stocks in the S&P 500, 82.1% of Rapid Ratings’ equity calls were buys, while sells were only 10.6%. This dropped to 77.4% v 14.7% in 1998, 71.5% v 15.3% in 1999, 62.9% v 22.2% in 2000, 56.8% v 26.9% in 2001, but rebounded to 67.3% v 17.7% in 2002 and 73.2% v 10.7% in 2003, only to drop again to 52.9% v 24.5% in 2004 and then to 31.7% v 45.9% in 2005.

Dr Caragata stated: “It is clear that our results show we were very bullish for the years 1998-2000, and then we became bearish in 2001 and 2002, bullish in 2003 and 2004 and have become progressively more bearish since August 2004 because much of the capital gain has already been taken by existing or previous investors. These results are driven only by our proprietary models and software, which measure the financial health of companies and track it relative to trends in the share price (an external benchmark). We strongly support the results given our credit rating system’s track record in anticipating problems for Enron, Parmalat, General Motors, Ford, Delphi and our successful track record in anticipating downturns and upturns for the share prices of individual companies.”

He noted that Rapid Ratings’ general conclusions were unrelated to, but consistent with, other warning signs such as the recent deterioration in consumer confidence, the low national savings rate, the property market bubble, excessive total US debt relative to GDP, high commodity prices peaking at the end of the business cycle, steadily rising interest rates, the prospect for further devaluation of the US dollar because of the unsustainable deficits (current account (6% of GDP) and fiscal deficit) and Alan Greenspan’s recent remarks: “history cautions that extended periods of low concern about credit risk have been invariably followed by reversal, with an attendant fall in the prices of risky assets”.

Dr. Caragata said that the timing of the release was triggered by an article in the Wall Street Journal (Money and Investing section) on Monday September 19th entitled “Desperately Seeking Research” which stated that Independent Research Providers (IRPs) “assigned ‘sell’ ratings on [only] 8.9% of the stocks they covered in 2004, according to Thomson Financial, slightly less than the 9.1% issued by Wall Street brokerage analysts. Dr. Caragata added: “These average statistics could be hiding the true differentiation of some IRPs from brokers, but others need to speak up as Rapid Ratings is doing now to demonstrate that differentiation.”

He commented: “market expectations assumed that, in aggregate, Independent Research Providers would add extra insight and different perspective, on the upside and downside, as compared to investment banks and brokers in the aftermath of the collapse of Enron and WorldCom. Finding alpha (out-performance of the market) is all about finding inefficiencies and asymmetries in the market and measuring them. But if these reported average statistics are accurate, then the market will be disappointed.” For more information about Rapid Ratings assessment of alpha please ask for our presentation on Measuring Asymmetry in Capital Markets.

Rapid Ratings’ System

Rapid Ratings is a new generation corporate rating agency offering solutions for global debt and equity markets which now rates over 15,000 companies in 6 countries using its proprietary software. At the heart of Rapid Ratings’ software-driven research are 24 industry-specific quantitative multivariate econometric panel data models that generate credit risk ratings for approximately 15,000 global companies. Rapid Ratings uses audited publicly available corporate financial data as inputs to generate a credit risk, and compares the trend in that estimate of financial health relative to the trend in the share price to determine an equity risk rating. Each industry model employs 62 financial ratios and a sophisticated global benchmarking system. The models include a database of over 300,000 companies that reference about 30 years of corporate financial data from more than a dozen countries. (http://www.rapidratings.com).

Rapid Ratings’ Background

Rapid Ratings is 78% owned by Collection House Limited, an Australian company that is listed on the ASX. Rapid Ratings has offices in New York, London, Toronto, Singapore, Sydney, Brisbane and Wellington, New Zealand and provides reports on both listed and unlisted companies for investment funds, brokers, private banks, banks, insurance companies, international accounting firms, large creditors, financial planner networks, financial advisors, and retail investors. Rapid Ratings is a member of the Investorside Research Association in Washington D.C (http://www.investorside.com).

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James Mccallum
SUM2,LLC
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