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Marc Cuniberti: AAA ratings disappearing

And now there are only two. AAA rated companies that is.

That’s because Standard and Poor’s downgraded Exxon from AAA to AA+ leaving only Johnson and Johnson and Microsoft remaining with the coveted highest rating. Automatic Data Processing (ADP) lost its AAA rating earlier this month, downgraded to AA following its decision to spin off it auto dealers services arm. ADP held the AAA rating since the mid 90’s but now like Exxon, the rating is history. Exxon had held its rating for 67 year but like all good things, it came to an end last week.

More than 60 companies held the highest rating in the 1980s but that number has been dwindling. In 2008 there were only six AAA companies and now there are only the two.



Low oil prices have bludgeoned Exxon profits along with many other companies in the oil industry. Massive debt loads incurred by many oil producers while oil prices were soaring are now causing stress in the debt markets of the world as it is estimated 38 percent of private company debt is related to the energy markets. Companies borrowed funds from everywhere to produce oil when higher prices made it profitable to do so. Now that oil prices have hit historic lows, paying off all the debt has been challenging for many.

More than a few energy companies have hit the skids. Both oil and coal producers are suffering from the rout in energy prices caused by a combination of environmental concerns, bad press, oversupply and falling demand from overseas markets. The problem is magnified because as prices drop, companies tend to want to produce more to pay the bills in lieu of shutting the doors, which further adds to the supply glut, pushing prices lower still.




Reduced in rating, Standard and Poor’s added that Exxon’s debt level has more than doubled in recent years due to share buy backs, dividend payments and capital spending in the face of falling profits. The rating company maintained its “stable” outlook on the energy giant.

With only two remaining AAA rated companies, you have to wonder what is transpiring in America over the last three decades to cause the vast majority of previously rated companies to fall from grace. Is it environmental, labor or regulatory costs that are bleeding balance sheets dry or is the overall economy suffering from macroeconomic maladies that are slowly pushing companies closer to the abyss?

With massive government stimulus in the form of monetary policy and ballooning government deficits adding even more money into the economy, one has to wonder where all the cash is ending up if not in the hands of our finest companies.

As always, this article is not a recommendation to buy, sell or hold any particular security. Past performance is not a guarantee of future price movements. Always consult with a qualified investment professional before making any investment decisions and do your own research before investing.

This article expresses the opinions of Marc Cuniberti and should not be construed or acted upon as individual investment advice. Mr. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc Cuniberti can be contacted at MKB Financial Services 164 Maple St #1, Auburn, CA 95603 (530) 823-2792. MKB Financial Services and Cambridge are not affiliated. Website: moneymanagementradio.com.


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