The Value of REAL Sovereign Debt Ratings

Mike LarsonIf there’s anything we’ve learned about the major ratings agencies, it’s that they’re almost ALWAYS a day late and several bucks short.

In the early 1990s, they failed to downgrade or adequately warn about ailing life and health insurance companies … until it was too late.

In the early 2000s, they didn’t cut Enron’s debt ratings until days before the company went broke.

In 2008, Moody’s actually rated Bear Stearns “A2″ on the very day the firm failed! Standard & Poor’s gave it an “A.”

Just a few months later, when Lehman Brothers crumbled, they screwed up again! On the very morning the giant investment bank collapsed, Moody’s still gave it a rating of A2; S&P gave it an A; and Fitch gave it an A+!

Finally, we all know that the agencies blessed billions and billions of dollars worth of crappy mortgage securities with tip-top AAA ratings. Those securities subsequently imploded, helping precipitate the worst credit crisis in the history of the U.S.

That’s why I’m incredibly excited that Weiss Ratings is throwing its hat into the sovereign debt ring.

For far too long, the public debt markets have been dominated by the same major agencies that screwed up royally in the private debt markets. Weiss aims to change that by publishing accurate, timely, and conflict-of-interest-free ratings.

And this week, I’m going to tell you how you can put those ratings to work as an investor.

Practical, Real-World Uses for
Reliable Sovereign Ratings

By this point, you’re probably already using the Weiss Ratings to identify safe and sound banks that are deserving of the money you keep in checking accounts, savings accounts, and certificates of deposit. You’ve also probably used the stock ratings we publish in conjunction with TheStreet.com to identify the equities that offer the biggest margins of safety, and greatest profit potential.

The Weiss sovereign debt ratings can help guide your investing strategy as well. Think of our A, B, C, D, and E ratings as stamps of approval or disapproval. Just like you wouldn’t want to place $1 million in unsecured deposits in a D-rated bank, you wouldn’t want to invest too much of your money in the bonds of a country with a lousy rating.

Sovereign credit ratings don’t just impact bond prices, either. Big money investors take them into account when deciding which international currencies and stocks to buy as well. Timely sovereign ratings, like those published by Weiss, can help guide your investment decisions in those markets, too.

Following sovereign credit ratings could also help you anticipate moves in currencies.

Following sovereign credit ratings could also help you anticipate moves in currencies.

Here’s an example: Sweden is rated B+ and the U.S. is C. Sweden’s economy grew at a 7.3 percent year-over-year rate in the fourth quarter, while the U.S. has been growing much more slowly … 2.3 percent YOY in the most recent quarter.

Sweden’s central bank is also taking its inflation-fighting job much more seriously than the U.S. Federal Reserve. It has raised interest rates six times since last July while the Fed has just twiddled its thumbs!

Investors have rewarded Sweden by dog-piling into its currency. The Swedish krona has jumped roughly 36 percent in value over the past 12 months while the U.S. Dollar Index has tanked 18 percent.

If you were able to follow the lead of the Weiss Ratings, you could have generated hefty profits …

All you would have had to do was buy the currency of the country with the stronger rating (using something like the CurrencyShares Swedish Krona Trust, or FXS) and sell the currency of the country with the weaker ratings (using, say, the PowerShares DB US Dollar Index Bearish Fund, or UDN).

Foolproof? No.
Extremely Valuable? Absolutely!

Now I’m not going to suggest the Weiss Ratings are completely foolproof. Other factors influence the price of sovereign bonds, currencies, and equities, and they must be taken into consideration. Those factors include relative growth outlooks, interest rate differentials, fiscal policy approaches, and more.

But I do believe you now have another powerful tool to put in your investing toolbox — and you’d be wise to use it! If you haven’t already done so, I recommend you click here to go to the Weiss Ratings website and learn more about the ratings as soon as you can.

Until next time,

Mike Larson
Money and Markets

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