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John W. Rodgers Jr.: My Favorite Indicator

CEO, Ariel Investments

We have expanded the areas we watch for early signs of debt problems. We are now actively monitoring the credit default swap, leveraged loan, and bond markets. Prices in these markets are available in real time from many places, including Bloomberg. (BusinessWeek is owned by Bloomberg LP.) We translate prices in these other markets to create implied credit ratings that might be different from the official rating issued by agencies like Moody's Investors Service (MCO) and Standard & Poor's (MHP).

During the economic crisis we often found that these markets were ahead of the rating agencies—and even the stock market—in seeing signs of credit trouble. For example, the credit default swap market could be pricing $10 million of default insurance on Company A at $250,000. Our analysis might show the company's implied credit rating at B3 even if Moody's gives it a higher rating at Baa3. The idea is to monitor multiple sources of information for early warning signals.

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