In the early part of 2008, months before the market collapse in the fall of 2008, there were rating agencies still giving good ratings to numerous financial institutions that would soon either go bankrupt or would receive massive amounts of tax dollars to remain afloat. Naturally, questions about their “independence” and relevancy arose from this absolute failure on their part. Those questions remain today, but still the agencies rate and still investors/traders listen. Frankly, I don’t get it. Not only do I not get it, but today I suffered a trading setback because of this confounding reality – traders/investors still pay attention to these agencies.
Starbucks (SBUX) has come a long way back from poor management and the market collapse of 2008. In fact, since Howard Schultz has returned to run the company, its performance has improved dramatically in all areas. Its most recent earnings report produced great numbers and the future looks so good for the company, it announced a dividend just yesterday. I expected a ‘”pop” that would bring me closer to exiting. Unfortunately, yesterday a single rating agency downgraded the company from “outperform” to “neutral,” and this is all it took to drop the stock almost 2.5% in a market that is surging in all sectors from news that the European debt issue is on a path to resolution and jobless claims drop more than expected.
In the midst of this resurrection, I bought SBUX, looking to trail its trend until it hit what I believed would be the near-term price peak, just about $26.50. Two days ago, SBUX hit $26.00 (52-week high), and my trade looked like it would be a winner with a huge profit. It appeared that nothing could keep it from hitting my ambitious profit target. The big picture looked good and the fundamentals were in place.
And then, boom, the unexpected poor rating arrived, erasing a good portion of my gains. Although this is a bummer, I am not worried, as I still believe in the stock. I have only suffered a temporary setback. It simply means my cash will be tied up a bit longer in this trade, and I might have to reduce my profit target, as it is clear that others do not have as much faith in SBUX as I do. I will watch how it responds today.
My point is that although I believe the rating agency concept in place today is a dinosaur and needs to go extinct, it has not, and so it still has influence with market participants that believe the concept is still relevant. My lesson is that I fell in love with the good performance, and I probably set my profit target too high. In fact, if I might admonish myself, I would say I failed to expect the unexpected. I should have known from my experience that very few markets ride a strong trend without some jolting interruption from a rating agency. I should have known …
Trade in the day; invest in your life …
