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Prime ABX: A Reminder
With the topic of shorting real estate once again all the rage, we take this opportunity to remind readers that the next substantial event in real estate (in addition to the multi-trillion CRE maturity roll) will be in the continuously worsening Prime RMBS data. To capitalize on this inflection point MarkIt recently introduced the Prime ABX index (which we initially discussed in July 2009) which will "allow investors to synthetically gain exposure to Prime RMBS collateral." A brief summary of the key index features according to MarkIt: "In addition to creating sub-indices by vintage and collateral, Markit will create and administer an aggregate ABX.PRIME index combining all 6 sub-indices; ABX.PRIME.AGG will trade via CDS contract and will serve as a macro indicator for the entire asset class; Each relative sub-index will be equally weighted in the aggregate, sub-weighting will be applied in the same manner." As we reported recently, the lack of any cash offers in corporate loans is forcing the investment community to seek derivative exposure for yield chasing. We expect Prime securitization to explode soon as the Fed still continues to rule over capital markets with an iron fist and guarantee all sub-5% returns, cutting marginal loss risk by about 50%. The question is now that banks are doing reverse inquiry into Prime ABX participation, which hedge funds, allegedly like Magnetar and Paulson, are creating Prime portfolio structures that will be hedged by this new index? Inquisitive investigative reporters - take it away.
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Remember being at a private real estate symposium held at the Mandarin in NYCin 2008, when a panelist was asked how the MBS began its meltdown. The gentleman who bought MBS for his insurance company said, it fell apart when his company like other companies looked at the top quality piece of the sliced and diced MBS product and realised it was not triple A.
So the guys who manufactured up the product diversifying the mortgages by servicer, region of the country, and quality, were able to get the raters to give it a AAA rating and yet the yield on the product was that of a much lower quality product, and the raters okayed it due to diversification.
However there was a real slice of AAA mortgages at the top of the credit pyramid, but it had lower yields, but was good enough for insurance companies paying 3% on annuities.
When these guys looked at the top slices in 2007, they found out even they were not really AAA, and the push to create MBS product for the system, had run out of good product. When they began to fail to sell the best mortgages, the sham was exposed for what it was.
one of the best posts i have seen in weeks - a story with facts from eye witnesses....thank you.
The real estate collapse is accelerating. Residential sales in February hit a wall. It's not reflected in many stats yet due to the lag involved in closing and reporting, but watch for it. It went down like this...
No one in the galaxy wants to finance US real estate. Wonder why? So the government is the only source of loans. FHA delinquency rates went to 5.6 % and climbing, so they changed the rules. "Buyers" had to come up with an actual 3.5 % down payment. They went apey! "What? I have to write a check with a comma in it, BEFORE moving in???" No sale.
Check Zillow, the least awful of the reporting services, for any area you know well. Look on the right side of the screen and compare recent listings with recent sales. You will be amazed. This is the spring buying season, and it ain't happening.
Commercial is worse, if such a thing is possible. Reggie Middleton is up on this and his charts look like swan dives. There is empty office, retail, and industrial space in most of the country. This matters because local and regional banks get honest to god audits.
This stuff is typically on the books for a few million. The bids are more like 39 cents. Really, what is the discounted present value of a massively negative cash flow? How does an empty building burn down? I'm no expert, but I think it usually involves jelled rocket fuel.
Look for another free fall in home prices.
PS Thanks to all for the analysis of ZIRP and its effects. Light years ahead of the MSM.
The assets behind the rmbs and cre are overvalued by the banks to keep their balance sheets presentable. The math will not work anymore as foreclosures get really rolling, and the mortgages and CDOs are realised to be worth a fraction of their original value.
The small banks will take the hit first, as is already happening with more being taken over every month. Eventually, the complex cobweb of leveraged derivatives will snare the bigguns in their own web.
The leveraged derivatives game has to change, and that process is really just beginning. The bigguns are still playing the game with the thought of "Too big to fail protection". It looks like this will not be the case soon.
The whole leveraged monetary system will be under the gun. The reserve amount banks hold should be raised, and the assets contained audited independently on a regular basis. I could go on forever.
Like the song says "Send lawyers, guns and money because the shit has hit the fan." While your at it stop fascism in its path by ending the fed, banning lobbyists, outlawing leveraged derivatives, and busting the bank bubble.
I think the government, or at least the SEC, realized the game is about over. The difference between now and 2008, is when things start hitting the fan again the current government has the defense of investigating it.
True that. Also, by getting the stock market to correct they drive investors to their bonds which started to show a crack. They want to keep the illusion going.
good solutions except for lobbyists.....however concerned citizens should form their own lobby groups....banning them will fail....
fuck the fed.
So is there any gvt reporting on the volume of MBS being bundled and sold? That would be interesting to see the change from 2009 to Q1 2010 to beyond when the gvt (supposedly) stopped buying.
If they did stop the volume should drop by 80-90%.
Nic Cage real estate as barometer? Vis...
1) Big mansion in Bel Aire repossessed last week after auction failure. Price started months ago at $35M, declined to $10M. No buyers. Now bank owned. He bought it for $6.5m but lost it all due to other obligations (another story).
2) 18k sq.ft. mansion on 27 acres in Newport RI, bought for north of $16m, currently a "stale sale" at less than $9.95m.
These are both top-notch properties in perfect locations. American real estate has been decapitated.
The devil is in the details. Whole categories of real estate are becoming worthless.
condos - no financing
manufactured housing - crap construction
time sharing? - it is to laugh
vacation/second homes - too far from real jobs/everone wants out at the same time
McMansions - crushing carrying costs
Golf courses from sea to shining sea once looked like a good idea. Now, not so much.
How about this for 'synthetic' exposure to AAA rated credit
Synthetic long: buy a home in Eastern Canada; QC, maybe ON (latter is debatable, but prices arent as bad as in the West of us/cad). Long-term only.
Property is the equivalent of the best rated AAA rated paper because its tangible and there will always be a need for living space. Can't say the the same about CRE or other goods.
Ha,ha,ha!
Anyone want to guess whether a Vancouver house is a mansion or a crack den? This was up on The Market Ticker (http://crackshackormansion.com/) the other day. Just take a look at what sells for over $1,000,000 in Canada. Canada has a very very large real estate bubble, and when it goes ka-boom it will make a further mess of the US.
http://www.crackshackormansion.com/
I clicked on the link and played the game.
Unbelievable. I thought bay area real estate was out of control several years ago.
Vancouver , we know what you are about to experience. Brace for impact...
Oh my God.... some of those selling in Vancouver for 7 figures actually should have 0 (or negative) value - because they are "scrapers" (what we used to call a property in commercial RE when an old building should be torn down and the lot scraped).
It most certainly won't make a larger pop than what is happenening in the US simply due to the volume of houses not being the same.
Much easier to keep a mortgage market of ~15MM homes propped up than the amount in the States.
Also, the rest of Canada (anything East of Manitoba, though again ON is a special case) isn't the same. Toronto is pretty inflated because anything in Toronto (because of its demographic among other things) is inflated to ridiculous proportions.
Not that you'd want to, but if you go into the East Coast provinces (PIE, NS, NB), the same homes you show on that website which are >$1MM (hard to conceive this) are in the area of $25-$50k. So, when this bubble does pop in Canada as you claim it could be worse than the US, people here can move around to another province where homes are still affordable.
QC is a unique case, as ive noticed individual family dwellings have stayed roughly the same in value, whereas properties for rent have dropped instead. And condominiums? Ya, plenty of those. But apparently not enough as they only thing cranes are building here in Montreal (+suburbs) are condos. The developers are shifting the need of appartments towards those who prefer their own and purchase a condo instead. Can't say its good for rent as so far a lot of landlords im in contact with have plenty of appartments available for rent till July 1st (official moving day in the province). This forces them to lower rents to attract the buyer where the $10/month reduced is the difference between renting out your appartment for the year and losing it to the next (identical) building the block over.
I read the main post for this thread about 5x. It *still* blows my mind.
I realize not every investment is for every individual, but I'm interested in learning more.
I have many questions:
1) What kind of min. investment is req. to participate in a venture such as ABX.PRIME?
2) Can any discount broker handle such trades?
2B) Is there a leader broker for CDS & other advanced trades?
3) Commissions/fees?
4) Liquidity/volume?
5) Is there any sort of website or software that has charts for such 'instuments?
I'm not ashamed to admit I'm in the dark on this. Guys that went to Harvard don't even understand it. I'm sure *someone* on here does though... If it's not too much trouble, please enlighten the rest of us on the basics. Thank you in-advance.
See page 17 of 17 above for contact numbers.
Good luck and be careful out there.
I just hope if the person does call those contact numbers on page 17 that he or she isn't considered either live bait or the sucker at the poker table.
I just hope if the person does call those contact numbers on page 17 that he or she isn't considered either live bait or the sucker at the poker table.
Me too, CD.
1) Minimum investment is substantial depending on the principal amount--for instance, if the CDS is for $100 million, and the market value is 100 basis points, then you pay $1 million. (1% of 100 million)
2) No discount broker is involved in the CDS market and it is not regulated--you bear serious counterparty risk. Since Markit is owned by banks including Goldman, JPM, and BAC, this product is made for them to hedge their mark-to-myth holdings and allow speculaters to make bets on further declines.
3) I do not know the commission structure but assume 5 basis points at a bare minimum--just a hunch-I could be way low on that.
4) Liquidity depends on the issue but in general, they are not liquid. So the bid/ask spread is probably wide enough to drive a truck through, even on an institutional level.
5) A Bloomberg Terminal offers CDS data/charts.
In essence, CDS are options without the liquidity and are hedges against the default of/or bets for the default of corporations, countries, & in this case large mortgage pools possessing certain benchmark qualities.
You are much better off as an individual investor to use the liquid options market. If you think residential real estate is going to tank, there are no ETF's I know of directly designed on specific pools since they would have to be continually managed as prepays, foreclosures, death, etc. occur and probably incur high expenses which is why they don't exist. Monthly coupon pass throughs, reinvestment, etc. may be why one hasn't been created.
The only real play is at the CME in the futures market. Here's the link. If you are not an experienced futures trader, be careful. Interactive Brokers is the place to be for low cost trading.
http://macromarkets.com/csi_housing/documents/cmehousing_brochure.pdf
On the CRE side, all of the ETF's are based on the REITs--a fatal flaw if you ask me.On the residential side, other than the home builders (ITB--and it's got HD and Lowe's in it with Toll, etc), it's just not that easy. The homebuilders will get shellacked again as the next wave of foreclosures really gets underway i.e Toll, Pulte, Lennar, DR Horton, KB Home, etc.
The problem is, the top in Toll at $58 in mid 2005 is a far cry from the $20.43 price tag you can get it for now. So you upside is limited in the options world unless you just buy puts and/or write calls--with proper stops in place and your timing is right.
Anyone else who wants to chime in, feel free.
My understanding of these leveraged instruments is that the creators are the same entities "policing" it which creates a massive conflict of interest. This systemic flaw allows massive naked short selling that can and has destroyed companies. They need to be monitored on an independent exchange like the rest of the bullshit; preferably on an exchange not run by an ex GS patriot.
True on all points.
Beale, see my comment here please:
http://www.zerohedge.com/article/goldman-thing#comment-306028
I did.
"The Greatest Trade Ever" talks some about what Paulson (hedge fund) and Jeff Greene (rich individual) had to do to bet against this crap. Basically bug the crap out of their brokers for months and pay them (and lawyers) lots of fees. Given what's now happening to Goldman for facilitating that, I'd imagine the barn doors are now shut tight. The book isn't "Reminiscences of a Stock Operator" by any means but it's a quick (1 day) read and helpful for a beginner to understand how some people bet against housing.
Dr. Burry of Scion would be a better kat to copy. Paulson & Co reaped the rewards paved by this young man. In any event, this game is played out and the sharks are circling...like CD mentions above...looking for fresh chum.
Don't be the chum.
Sell your gold and buy Goldman below 140 ;) (Just kidding) ((Well somewhat kidding))
They will select only "orginally AAA rated" but what are the ratings now? Mark to Markit
The new mark to market = marked to market
Overtextended SP500 / DOW daily charts show bearish warnings and the next few days will tell us more.
DOW chart :
http://www.zerohedge.com/forum/latest-market-outlook-0
OK, thanks for the answers & insights. Obviously I'm not a million dollar trader, and even if I were, the 'virtual Wall Street casino' as you describe it is probably not the best place for anyone to park their money. The odds are probably more favorable in Vegas. Thanks again. CDS = not for me.
I believe some company has filed to start a CDS etf. Should be an interesting thing to watch if/when it rolls out...
Hmmmf! Sounds like it may have the makings of the Chinese Yuan ETF from Maria Bartiromo's husband at Wisdom Tree...a loser on all counts--liquidity, volatility, and expenses.
"allow investors to synthetically gain exposure to Prime RMBS collateral"
You know what - what ever happened to simply buying something or shorting something.
We are living in a menagerie where you buy "synthetic this and synthetic that" which could be tied to a counterparty but we're really not sure.
The trouble with our world is that nothing is real anymore.
No thanks I'll buy the REAL short not some synthetic aberation of synthetic aberation which is really tied to this and that and not really tied to anything real but boy it sure feels good to know that you have bought soemthing that could be a real short but isn't cause nothig is real anymore and I'm feeling slightly faint and going to pass out but luckily I bought synthetic tylenol which helps me understand these vague notions that appear in my mind occasionally.
phew I feel better now don't you!