McGraw-Hill: S&P Needs To Burn On This One (So Does Moody's)

The McGraw-Hill Companies, Inc. (MHP) is a global information services provider serving the financial, education, commercial and commodities markets.

This is a vol note, as the implied in MHP exploded on some scary news yesterday. Let's jump right into it:

The Justice Department, along with state prosecutors, plans to file civil charges against Standard & Poor’s Ratings Service, accusing the firm of fraudulently rating mortgage bonds that led to the financial crisis, people briefed on the plan said Monday.

Up until last last week, the Justice Department had been in settlement talks with S.&P., these people said. But the negotiations broke down after the Justice Department said it would seek a settlement in excess of “10 figures,” or at least $1 billion, these people said, which would wipe out the profits of S.&P.’s parent, the McGraw-Hill Company, for an entire year.

McGraw-Hill earned $911 million last year. -- Source: DealBook via Yahoo! Finance; U.S. and States Prepare to Sue S.&P. Over Mortgage Ratings, written by ANDREW ROSS SORKIN and MICHAEL J. DE LA MERCED.
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Just to be clear, $1 billion is the smallest 10 figure number there is... Just think about that for a sec... I'll give my conclusion up front; and this is Ophir Gottlieb's (me) opinion, not Livevol's.

"I rarely give political opinions (actually, what? I do it all the time), but S&P needs to burn on this one (and so does Moody's). I think $1 billion would be a shame -- if it has to be "10 figures", how about this number: $9,999,999,999?" That's also 10 figures.

This is an incredible turn of events IMHO, as the housing debacle of 2008 for which blame can be levied on several types of firms (and people), had the feel of a "broom and a rug" if you catch my drift... and I know that you do...

But, again, IMHO, the ratings agencies were the worst of them all -- they were the single bottleneck that could have prevented all of it. They are for profit enterprises, but not "for fraud" enterprises -- at least that was what we thought... what we trusted... what we believed... Don't get me wrong, the I-Banks are filthy in the stench that's left behind, but if S&P and Moody's didn't "pay-for-rate," this entire debacle is 75% mitigated (or whatever).

OK, off the soap box and onto the options stuff. Let's start with the two-year Charts Tab, below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20™ - blue vs HV180™ - pink).


On the stock side we can see a very nice stock appreciation over the last two-years, which means a few things:

(1) Business is still good.
(2) Business has carried on
(3) There's a long way to fall if the courts decide that "10 figures" means $5 billion+.

I've included the one-year vol chart below for easier viewing.

We can see the abrupt rise in vol off of the news -- it was / is a surprise. Adding a special little wrinkle to all this is the fact that MHP has earnings due out in a few days...

Finally, let's turn to the Options Tab.

Across the top we can see that Feb vol has exploded up 15.5 vol points or a 68% rise today. Mar vol is up 5.6 vol points but just to 25.48% -- the news and earnings are pumping up that Feb vol.

I rarely give political opinions (actually, what? I do it all the time), but S&P needs to burn on this one (and so does Moody's). I think $1 billion would be a shame -- if it has to be 10 figures, how about this number: $9,999,999,999?

Disclosure: This is trade analysis, not a recommendation.

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