No Home Price Stabilization

The November Case Shiller home price index data was released today and the numbers confirmed the acceleration in home price declines we first witnessed in the median price indexes. While I think its safe to say that no one thought these numbers would be pretty, I imagine few thought we would see 2% declines across the board:

According to my calculations San Diego is now down 16.3% from its peak in November of 2005. The 10 City Composite is down 9.4% since its peak in June 2006 and the 20 City Composite is down 8.6% since its peak in July 2006. Trillions of dollars of home equity have already been lost and price declines are not showing any signs of slowing.

When you break this data down into tiers and you adjust the numbers for inflation the data gets even more depressing. In San Diego the real price of "low-priced" homes (its all relative because for San Diego a $446,000 home is considered low-priced) has fallen by nearly 30% since its peak:


Because this post has been fairly depressing up to this point I figured I would take the first graph and invert it so that it "looks" like home prices are actually going up. I have found that charts that show prices going up and to the right generally make people very happy. So here goes:


Okay maybe that didn't work for anyone else, but it brought a smile to my face . . . .

Hat Tip: S&P Case Shiller, Piggington

Why Home Prices Won't Stabilize in 2008

Many economists are calling for home prices to stabilize in 2008. I think that this belief results from little more than wishful thinking. There is nothing in the fundamentals that supports the belief that home prices will reach a meaningful bottom this year. Inventory is still far too high, foreclosures don't appear to be slowing down and economic indicators are pointing towards a general economic slowdown and perhaps a recession.

The boom in home prices at the turn of the century was dramatic. From January 2000 to November 2005 the Case Shiller national home price index doubled and home prices in San Diego increased 2.5 times. Much of this increase was due to loose lending standards that resulted from global liquidity and low real interest rates. The ongoing liquidity crisis has led to a curtailment of many of the loose lending practices that defined the home price boom - 100% financing, negative amortization, no doc, "liar loans" etc. The lending led home price bubble will take a long time to unwind. I fear the unwind may end up being just as dramatic as the run up in prices. Below are the Case-Shiller home price index numbers from 1987-2007 for several cities and the 20-city composite. I am tempted to label this graph "The Anatomy of a Bubble":


At current levels all San Diego home buyers who purchased homes with no money down since April 2004 are underwater. Those who put 10% down are underwater if they bought between July 2004-December 2006. Those who put 20% down are probably not underwater unless they bought a condo downtown. Why does this type of analysis matter? Put simply, home buyers who are underwater are far more likely to walk away from their mortgage when it resets to a higher payment. Unfortunately every 1% decline in home prices pushes 1,000's more homeowners underwater and increases the probability that we will see higher foreclosure rates and more "must-sell inventory" to work off before we can establish a meaningful bottom in home prices.

If the real estate market throws the economy into a recession all the analysis gets much worse. Higher unemployment and slower wage growth along with general economic malaise will only exaggerate the correction in home prices. Until we see a stabilization in foreclosure rates, a fall in inventory, an increase in sales and an improved general economic picture our prediction remains that home prices will not stabilize in 2008.

If you bought a home in San Diego at the peak of the last cycle in July of 1990 it took a full 8 years before your home price returned to its original purchase price. This time around home prices may take even longer to return to their November 2005 price level. Since the average homeowner only stays in their home for 7 years, a lot of homeowners will be literally "trapped" in their home and, unable or unwilling to buy their way out, they will likely just walk away.

I don't like making long-term predictions about home price trends, but I'm thinking another 7-8% drop in in the Case Shiller home price index in 2008 is in order. We'll look at 2009 when it comes, but something tells me we won't be much more optimistic then.

Catching a Falling Knife

Anyone want to buy a house in San Diego? We could use some buyers . . .


By the time we see a meaningful recovery we could see a 40-50% correction in condo prices. We still have a year's worth of inventory on the market. I think its safe to say the blood is running in the streets . . . .

I Never Get Sick of These!

Hat Tip: TBP

Only Funny Because it's True

Hat Tip: Jim the Realtor

Where Do Home Prices Go From Here?

The closest guess I have about home prices is what is assumed by the Chicago Mercantile Exchange (CME) housing futures market. Across the 10 major markets home prices are predicted to drop 8% in 2008 with no signs of stabilization. We are looking for home prices to form a bottom in 2009-2010. But, from there we don't expect significant appreciation. The bottom line is there is still no reason to be optimistic about home prices in the near term.


Hat Tip: Bespoke

Only Funny Because it's True

A New Mortgage Reset Graph

I'm a big fan of mortgage reset graphs. They are a great way to end a discussion about the near future of housing prices because they are just so difficult to argue with. At any rate, here's the latest from the WSJ and Bank of America. I have also attached the other mortgage reset graphs from previous months:


This is from Credit Suisse. Please note that the red arrow denoting "You are Here" is now 3 months out of date. In December we will be at the peak of the first mountain:


And this is from the IMF:
I think this last graph really validates my prediction of a 2012 stabilization in home prices.

Happy Thanksgiving!!

Only Funny Because it's True

Hat Tip: Peattie and Taylor

Foreclosure Wave is Not Over Yet

I think this IMF chart is self explanatory:

Hat Tip: Calculated Risk

What is this Super SIV thing?

Over the weekend several readers asked me questions about the video clip I posted last week. They wanted more background on Structured Investment Vehicles (SIVs) and the Master Liquidity Enhancement Conduit (MLEC) that has been in the news this week (I foreshadowed the potential for such a fund back on September 5th). Then today the Wall Street Journal had a nice little article about what SIVS are, how they work and how they are related to the subprime situation:

Structured Investment Vehicles (SIVs) and similar instruments called conduits are entities that issue short-term, low-yielding notes called commercial paper. SIVs use the proceeds from selling such paper to buy longer-term, higher-yielding instruments such as credit-card debt and mortgage-backed securities. SIVs differ from conduits in that they can also issue longer-dated notes and use leverage. Though banks typically keep SIVs off their balance sheets, they usually assure that some or all of the vehicles' IOUs will be repaid.
The Pros: SIVs are a source for investors of commercial paper, typically considered a safe-haven investment. They can be profitable for affiliated banks, while generally keeping the risks associated with their higher-yielding debt off their sponsor banks' balance sheets.
The Cons: If the vehicles either can't sell commercial paper or suffer losses in the assets they hold, their affiliated banks could wind up having to help by lending funds to keep the vehicles operating or taking some losses back onto their balance sheets, potentially resulting in a massive hit to profits.
The Context: The popularity of SIVs has boomed since the strategy was invented by two Citigroup bankers in the late 1980s. But they became a source of worry for bankers and policy makers when a credit crunch that began this summer sapped demand for both commercial paper and risky asset-backed securities -- a double-whammy for SIVs. The Treasury Department recently brokered the creation of a $100 billion fund to buy assets from SIVs in hopes of kick-starting the moribund commercial paper market. Some critics call the fund a bailout of Citigroup, the largest sponsor of SIVs. The fear is that trouble for SIVs could compound problems in the credit market, hurting the broader economy, while also slamming the balance sheets and reputations of major U.S. banks.

Citigroup is the bank at the center of the storm. They have the most exposure -- some $80 billion -- to off-balance sheet entities like SIVs and conduits and as such are taking the lead on structuring the "super fund" that will take on the assets of the struggling entities. As you might expect there are a quite a few skeptics out there. Nouriel Roubini calls the whole thing a "Super Bailout Shell Game." Clearly those aren't words of confidence. It seems Roubini has more questions than answers:

What should we make of the SIV rescue plan, the so called Master Liquidity Enhancement Conduit (MLEC), also informally referred to as the Super-Conduit? Does it make financial and economic sense? Is it all a smoke and mirrors con game or a serious attempt to deal with the liquidity crunch in the SIV/ABCP market? Is it another case of moral hazard – with the US Treasury playing a critical role – or is Treasury only solving the collective action problem of coordinating the actions of many players? And is this just another musical chairs game or “don’t ask, don’t sell” game – reshuffling SIVs assets and liabilities with nice fees for the participating dealers – with no financial effect on the underlying illiquid assets or a way to defrost such illiquid assets? And how similar is this rescue plan similar or different to that of LTCM? Is this effectively a scheme to bail out Citigroup that is the most SIVs-exposed US bank? And are the implicit claims of Treasury and the Fed that this is not a bailout where there is no public money at risk credible?

Roubini has had his finger on the pulse of this credit issue since earlier in the year. He has been saying all along that this isn't just a liquidity issue, that this is an insolvency issue. No amount of financial engineering or wizardry is going to keep subprime borrowers seeing 30-50% jumps in their mortgage payments from defaulting on their mortgages. If that truly is the case and the issue here is that most of these SIVs hold low quality assets linked to risky borrowers then this whole scheme would seem to only delay the inevitable.

Alan Greenspan also has his concerns. (Is anyone surprised that Alan has an opinion on this matter? This guy can't stay out of the news these days)

I for one am not all that confident that this is the solution. I think that there are a lot of big banks and hedge funds who are realizing that when they finally find a market for some of the assets on their books the mark downs they will take could be devastating. There just hasn't been a lot of good news in the ABS markets. For those of you who have been following the ABX indices you may have noticed that after finding stable footing for a while in late August the BBB-rated indices are in a dramatic free fall once again. After starting the year over 90, the ABX HE-BBB-07 index is now trading just over 20. The ABX index itself probably won't last too much longer. There are far fewer than 20 eligible subprime securitizations this year, not enough to establish a liquid index according to Markit's rules. The index itself is not even two years old, but without subprime originations the liquidity in the existing index might begin to dry up putting further downward pressure on the index. I don't care how you slice it, which fund you put it in, what fancy name you put on it, or who helps organize it, the underlying "Super-SIV" assets are toxic waste and for every dollar market participants put in only pennies are likely to come out.

Do you Support a Congressional Bailout of Foreclosed Home Speculators?

As home prices decline and many overextended homeowners face foreclosure some are calling on Washington to step in with taxpayer dollars and bail them out. Keep in mind there are always foreclosures, many of which are caused by legitimate causes: loss of a job, serious medical issues etc. Unfortunately for those homeowners there are no government bailouts. However, this most recent wave of foreclosures has largely been caused by "speculators" who can't afford the home they bought but figured that if home price appreciation continued they could make a quick buck. Why should they get a bailout if the normal foreclosure victims never got one?

I for one do not support a bailout for two reasons. First, I think it creates a moral hazard problem. If the government steps in every time speculators take on too much risk the speculators will never learn their lesson. Second, I don't think that a spike in foreclosures is enough to derail the "real economy" and as a taxpayer I am willing to take that risk before I give my hard earned money to speculators.

Pimco's Bill Gross is one prominent investor who is pro-bailout:

``Why is it possible to rescue corrupt S&L buccaneers in the early 1990s and provide guidance to levered Wall Street investment bankers during the 1998 LTCM crisis, yet throw 2 million homeowners to the wolves in 2007?'' Gross wrote. ``If we can bail out Chrysler, why can't we support the American homeowners?''

Gross does have a point. The Federal government has engaged in or organized bailouts of the private sector in the past. But, this just goes to illustrate my point. If every constituency "expects" to be bailed out if they get into trouble what is to prevent them from taking on too much risk in the future? People have to fear the worst in order to prevent them from making mistakes in the present. Oh and by the way I also think that what Bill Gross mean to say is "if we can bail out Chrysler, why can't we support the American home speculators?"

If you agree with my sentiment I encourage you to check out and sign an online petition that can be found here.

Uncertainty and Fear Grip the Markets

There is apparently more to fear in today's markets than there is to be excited about:

• The CBOE Volatility Index (VIX) has shot up in recent weeks and is approaching 30, putting it near where it lived from 1999-2003 during the bursting of the tech bubble.
• Subprime contagion has spread to Alt-A and A paper as measured by the ABX indices. It seems investors are fearing the worst for just about every mortgage backed loan. The ABX HE BBB Index, which tracks subprime paper, has fallen 60% since February. Meanwhile the ABX HE AAA is off almost 8% after flirting with 10% earlier in the year. This is a large drop for AAA rated debt.
• Our inverted yield curve whip-sawed over the past two weeks as investors snapped up short term treasury bills. The 3 month treasury bill is now trading at levels not seen since the beginning of 2006.
• Quantitative Hedge Funds have taken it on the chin in August. Goldman's Global Equity Opportunities fund lost $1 billion, over a third of its value in the first week of August. Goldman injected $2 billion of its own money into the fund to reduce its leverage but CFO David Viniar refused to call that move a "rescue." He insisted Goldman was being opportunistic. AQR Capital Management reported "shockingly bad" losses in its quantitative strategy, which lost 20% of its value in the first week of August. AQR, like Goldman, was able to raise an additional $1 billion even after the fall. The king of the hedge fund world, Jim Simons (pictured to the right), sent a letter to his clients announcing that RIEF was off 8.7% in August alone, after a bad July. So much for absolute returns.
  
• LBOs seems to be a thing of the past. I still remember the heady days back in Q1 when you couldn't go 24 hours without a few billion dollar deals. Instead we are seeing the LBO premium unwinding and the S&P now down for the year. The end of cheap money may well spell the end of the bull market, which at least in its final stages was fed primarily by cheap financing for LBO's and stock buybacks.
  
• Mortgage Lenders and REITs have gotten absolutely crushed. Countrywide is off 41% this month. Thornburg Mortgage is down 60%. NovaStar is off 76%. ECC Capital is off 66%. New Century is finally throwing in the towel and is down 65% this month.
• The Fed isn't budging on rates. While it will inject liquidity, it is serious about inflation. Just this evening Fed governor William Poole had this to say: ``I don't see any impact as yet on the real economy or on the inflation rate,'' he said in an interview in the bank's boardroom. ``Obviously, there could be an impact, but we have to rely on some real evidence.'' Poole says he will be watching monthly jobs, retail sales and industrial production data to determine his stance at the next Fed meeting in September.

Given all the headlines above, are you optimistic about strong stock returns?

Liquidity Injections and GRE Portfolio Caps

A lot of ink has been wasted talking about our Federal Reserve and Central Bank's around the world injecting liquidity into the market over the last few days. The WSJ had a nice breakdown of some of the activity:
Reading about these liquidity injections sounds scary, but they are not a big deal. While the Fed is currently targeting a Federal Funds rate of 5.25%, the actual rate moves with the market and the Fed must use open market operations to keep the overnight rate as close to 5.25% as possible. When it drifted up towards 6% on Thursday/Friday the Fed acted to bring it back in line. If you go to the NY Fed website you can see that this activity is very normal. The Fed has intervened 25 times since July 19th, the only difference over the last 3 days has been the increase in volume and the statement that the Fed released. All of these operations are temporary "Repo's" and represent nothing more than 3 day loans to banks at 5.25% with MBS as collateral.

The second piece of information that has been floating around is the potential to restore calm to the market by raising the GRE portfolio caps allowing Fannie Mae and Freddie Mac to buy loans above the current $417,000 conforming limit. While this is certainly an option, there is no need to jump to this conclusion now. The OFHEO has already released a statement that they have no intention of raising the caps at the present time.

At a volatile time like this in the market non-news can seem like a big deal. But, after a closer look really not be that big of a deal at all.

Hat Tip: Calculated Risk

Who Will Subprime Get Next?

The big game in the market these days is figuring out which company or hedge fund will be stung next as a result of fallout from the housing market and the 'too loose for too long' mortgage lending market. First it was the borrowers themselves. After all none of this would be a problem if borrowers weren't defaulting on their home loans. Here's a shocking statistic: foreclosures are now up over 800% year over year. Yes, its safe to say subprime borrowers were the first and hardest hit by the housing slowdown.

Next came the monoline subprime lenders like Accredited Lenders, New Century Financial, Fremont Investment, NovaStar Financial etc. Those firms were hit hard in early March as banks noticed the high default rates and pulled financing. Many ceased operations within weeks and many are no longer 'going concerns'. Subprime lending as we knew it from 2003 - 2006 is almost completely gone.

Next came the homebuilders and the first wave of hedge funds. These hedge funds held either the stocks of subprime lenders or those who held subprime debt, including Thomas K. Brown's Second Curve fund which I wrote about several times back in March.

There are more subprime casualties coming to light every day: almost every single major bank and financial firms has been hurt badly and a small army of hedge funds including Sowood Capital, several Bear Stearns funds and hedge fund legend Paul Tudor Jones' (pictured above) Raptor Fund.

So who will be next? I think there are three areas of interest. First, the banks that did all of the pier lending (a bridge to nowhere) on private equity deals that haven't yet closed. They could be in for a big surprise if the credit markets don't clear up. Second, hedge funds and financial firms that are still marking their subprime debt holdings to model. Once more of this stuff starts hitting the market more and more blow-ups should be uncovered. Finally, foreign investors, governments and insurance companies should get hit very hard. If you check out the graph below you will see that they are some of the biggest buyers of agency mortgage backed securities. We can also presume that they also make up a large portion of private ABS securitizations.
Graph courtesy of Credit Suisse.

Is the Credit Meltdown Finally Here?

The trickle of disturbing data about the credit market has reached a veritable flood in the last few weeks. We are seeing the subprime meltdown continue as well as problems in the high yield debt market. Here are a few of the highlights from the last week:

1. According to Bloomberg there have been over 20 postponed or restructured financing deals in recent weeks and more on the horizon.
   
2. High yield spreads have widened 27% since June 1st, yet still remain at historic lows. I am inclined to think that once a major LBO collapses we could see spreads widen substantially in the weeks and months ahead.(Hat Tip:Bespoke Investment Group)
3. Cerberus announced today that the tighter credit markets forced them to sweeten their Chrysler financing from 3.25% above LIBOR to 3.75% above LIBOR. I expect similar changes on almost every other major deal (yes First Data, I mean you) still out there . . . of which there are about $200 billion.
4. I'm scared everyday when I go online and check the Markit indices because everyday I am shocked and awed by the declines. Today was no different. The LCDX Index that tracks bank loans is approaching 96 with a spread of 229:

   Time / Date	Price	Spread
   4pm Close (17Jul07)	96.14	229.1
   Midday (17Jul07)	96.60	214.7
   4pm Close (16Jul07)	97.06	200.9
   Midday (16Jul07)	97.42	190.4

5. In the subprime world, investors in the troubled Bear Stearns hedge funds were told today that: "preliminary estimates show there is effectively no value left for the investors in the Enhanced Leverage Fund and very little value left for investors in the High-GradeFund as of June 30th." That is scary news.
6. The Markit ABX Index continues a plunge that the WSJ market blog calls a "bloodbath". The BBB index is down to 45 from 97 in January, the A index is at 68 from 100, the AA index is at 88 from 100 and the AAA is at 95 from 100. Clearly every credit quality is getting hurt, not just subprime. But I have to admit this BBB chart is by far the ugliest:

So what is an investor to do?

• If you have a bond portfolio I would recommend two actions: 1) focus on high credit quality, 2) shorten your duration.
  
• If you are very ambitious you can look into buying an ETF or mutual fund that tracks the inverse of the junk bond market. Check out this article from the Wall Street Journal from a fund that was launched 2 years ago.
• You may want to stay away from Blackstone and Fortress for a while in case investors flee quickly out of fear that PE management companies aren't where you want to be if the market dries up.
• Don't ditch your long term asset allocation, but you may want to focus on large cap equities and blue chip stocks for the time being as their borrowing costs will stay lower during a swoon in the credit market.
  

Tracking Commercial Real Estate with the CMBX Indices

It was through NYU economist Nouriel Roubini that I first learned about Markit's series of ABX indices that track subprime mortgage debt. So it is no surprise that it is through Roubini that I learned about Markit's CMBX indices. The CMBX Indices track the Commercial Mortgage backed securities market, which is the commercial equivalent of the residential mortgage backed securities market (RMBS).

I've written about the potential for weakness in commercial paper before. In fact I wrote a post back on May 2nd entitled "Froth in Commercial Real Estate." In that post I described how lenders were using insanely high rent growth projections in order to justify loans. The scary thing is the way the commercial market is unraveling is eerily similar to the subprime problem on the residential side.

1. First the lenders tighten up or disappear. This step is already happening. This is from the Wall Street Journal: "In the last three months, lenders have pulled back somewhat, tightened covenants and required borrowers to put up more cash. " While this is obviously different than say what happened to New Century Financial on the residential side, it is clear that lenders are at least starting to tighten up.
2. Investors price in the risk and the Markit indices show the change. This is already occurring. The CMBX index for the riskiest commercial loans has already widened considerably. See below:
3. Finally, the existing debt gets crushed in the secondary market as more and more borrowers default. This hasn't yet happened on the commercial side. In fact defaults are still at a low point historically. But, the rating agencies are calling for rising defaults in the months to come.

Is the commercial mortgage market the next shoe to drop? Nouriel Roubini thinks so, and he sure did call the subprime meltdown.

Foreclosures Jump 87%

I mentioned yesterday in a post on the subprime meltdown that I thought the next round of foreclosure data would be particularly brutal. Well it is. But before we dive into the numbers please check out this "foreclosure heat map" courtesy of Barry Ritholtz. I think its safe to say things are going to be getting a lot hotter as the summer goes on.

Okay, now on to the numbers. This morning Bloomberg reported that US foreclosures increased 87% in June:

There were 164,644 loan default notices, scheduled auctions and bank repossessions in June, led by filings in California and Florida, where home prices have plummeted, and Ohio and Michigan, where automotive-related businesses have fired workers. Those four states accounted for half the national total, RealtyTrac, a seller of foreclosure data, said today in a statement.

Foreclosures are soaring amid a glut of properties and as interest rates close to an 11-month high make it more difficult for borrowers to refinance. Defaults may rise further as owners with adjustable rates see their payments soar. The share of people taking out all types of adjustable-rate home loans averaged 29 percent during the past three years, compared with the 17 percent average of the prior three years, according to Freddie Mac data.

RealtyTrac also said that 58% of the foreclosures are from subprime borrowers. What does this mean? It means that the lower end of the real estate market will be hit the hardest. Which states are the worst? You guessed it, the two states with perhaps more subprime lending than any other:

Nevada had the highest foreclosure rate in June with one filing for every 175 households, more than four times the national average of one per 704, RealtyTrac said. Nevada had 4,722 foreclosure filings, more than three times its total a year ago.

California had the second-highest rate, with one filing per 315 households, and the most filings overall, 38,801, for the sixth month in a row. Foreclosures in California, the most populous state, increased almost three-fold over a year ago.

Why am I so sure that foreclosures will continue to pick up? I hate to beat a dead horse, but if you look at the chart below we are just now entering a huge wave of resetting subprime loans. There really won't be much relief for the next 16 months. (Click to Enlarge)

This alone wouldn't be a huge deal if it weren't for the following three things that will lead many of these borrowers into foreclosure:

1. Tighter Lending Standards - There is virtually no subprime lending going on right now.
   
2. Lower Home Prices - Many if not most of these borrowers are underwater.
3. Higher mortgage rates - See graph below - We are at a 5 year high!

Subprime is Officially Melting Down

Those of us who have been saying for a while that our subprime problems are far from done have been feeling validated over the past few weeks. Here's why:

• Two weeks ago a Bear Stearns hedge fund blew up forcing Bear into a $1.6 billion bailout. That sent Bear's stock tumbling and Bear's CEO James Cayne to the golf course? Yes, that's right Mr. Cayne dealt with a tough situation by pulling out his driver. Check out his scores over the past few weeks below: If you look at Cayne's scorecard you will notice that on June 21st, the day several big lenders were pressuring Bear to increase collateral, Cayne shot a 98. On the 22nd when Bear announced what was then a $2 billion bailout, Cayne shot a 97. How he found 8 hours over those two days to play golf is incredible! I have to admit I admire his persistence, even after this story appeared in the press Cayne has continued golfing and his scores are actually improving!
  
• The ABX BBB Index has fallen consistently from its highs in the 90's at the beginning of the year and is now trading in the 40's with no signs of stopping. No one wants to hang on to subprime debt . . .
• Moody's and S&P completely missed the subprime fiasco, and they are now furiously downgrading subprime bonds and the CDO's that hold them. Moody's said today they are going to cut the credit rating on slices of $5 billion worth of CDO's. This a day after S&P decided to cut ratings on $12 billion of bonds and revamp their entire rating methodology. Fitch also sounded an alarm today about commercial real estate, predicting rising defaults in the months to come. Below is a graph of the number of bonds Moody's has downgraded over the years. Too little too late if you ask me:
• The National Association of Realtors is lowering its 2007 sales predictions again! What good is a prediction if you lower it every single month?
  

Yes folks this subprime thing isn't over yet. The foreclosure statistics for June come out this week and as of two weeks into the month San Diego was on pace for a 36% rise in foreclosures from an already elevated number. Yes, folks, the bottom is falling out of the housing market.

Moody's Is Resilient

The feature article in the Money & Investing section of the Wall Street Journal this morning pointed the spotlight on Moody's Corp (MCO). The gist of the article is that Moody's and the other credit ratings agencies are taking heat for "missing" the subprime debt meltdown and short sellers are betting they will lose clients and revenue. Moody's (MCO) traded down all day on the news, closing down 1.11 to 60.39, a loss of 1.8%. In after hours trading it has dropped another 9 cents.

Personally I would be surprised if Moody's traded significantly below $60/share without the help of broader market declines. Why? Well, Moody's has been through this before. They took a lot of flak when they "missed" the problems at Enron and Worldcom; certainly this is no different. The stock may have already priced in future declines as it is already nearly 20% off of its 52-week moving average. On top of those factors Moody's is a resilient company. It has fat margins, rich clients and very little serious competition. I would watch this one closely in the days in months to come. Don't be surprised if Warren Buffett ups his 17.5% stake in the company if the stock dips into the 50's.