I’ve been largely uncertain of the claims of fraud brought against $GE and haven’t cared all that much, but have been seeing more articles with regards to it’s credit rating recently. Being the Autistic intraday trader I am I don’t care all that much for credit ratings as a metric, however once $GE hits junk bond status (not to far, currently sitting at 2 or 3 grades above junk depending on rating company) a huge chunk of ETF’s, mutual funds and just about everything else that holds General Electric stock will be forced to dump shares.
Most of these ETF’s and funds are passively managed and adhere to guidelines that prohibit holding shares of companies with poor credit ratings. Considering just over 5.3 Billion (~61%) outstanding shares of GE are controlled by institutional holdings, that could represent a huge outflow and decreased demand which will drive the price even lower. Regardless of whether the SEC or DOJ is quick to act on the alleged fruad (unlikely) Moody’s, Fitch, and many others are likely pouring over past financials and looking to reissue a statement of credit. I think the play moving forward is to long puts over a longer term basis and wait for their credit rating to dip. What’s nice is that the report doesnt even have to be acknowledged by any acting government agency, just the speculation of accounting fraud on even a small scale could send credit ratings tumbling and have harsh effects. Regardless of whether the report holds any real meaning, GE still has an unstable Debt to Asset ratio (~82% if there isn’t actually any fraud) and poor cashflow.
Let me know what you think, I may be going full retard here. My main lack of knowledge is whether credit raters have a good history of being quick to act and with what degree they usually respond. How seriously do you think they will take the report or do you think it’s already been dismissed?