This page has been archived and commenting is disabled.
PrimeX - The Time For The Next "Subprime Trade" Has Come
Several years ago Paolo Pellegrini, Kyle Bass, Michael Burry and several other visionaries were well ahead of the conventional wisdom groupthink curve by not only sensing that the housing market was massively overvalued and riding on the crest of a huge leverage bubble (many others agreed) but by finding a ridiculously cheap, low theta way of expressing an uber-bearish long-term outlook with negligible downside and virtually unlimited upside by purchasing billions in ABX index notional at a cost of a few basis points, and watching it explode as one after another asset manager figured out just what "subprime" means and why it may not be conducive to a healthy career in finance. Virtually all of them ended up being very, very rich in just a few short years having had the foresight and, more importantly, the way to express that vision. Lightning may be about to strike twice as the Subprime implosion of 2007 becomes the Prime implosion of 2011. Back in December 2009, when musing on the very interesting topic of the advent of a new ABX-like index, this time tracking Prime mortgages, we asked, rhetorically as so often happens, "Will The New ABX Prime Index Be The Reason For The Next RMBS (And Thus, FHA/GSE) Collapse?" (for more on this index which MarkIt now markets as PrimeX see here). And while the rest of the world is fretting about Europe, Morgan Stanley, lack of decisive political decision-making in a pseudo union of 17 different countries, lack of decisive monetary intervention, a Chinese hard landing and everything else that makes front pages these days, slowly our prediction is starting to come true. But you won't hear about it anywhere else, because if the market understands that in addition to a global solvency crisis, America has another Subprime contagion on its hands actually being expressed in the markets as we type, and potentially costing banks, pension funds and various asset managers billions in losses behind the scenes, that may well be the last straw.
The symptom
Yesterday a blast Bloomberg message from a Barclays trader had this to say (emphasis ours):
PRIMEX - OVER THE LAST 2 DAYS PRIMEX HAS REALLY SOLD OFF AND IGNORED THE RALLY IN STOX, CREDIT, AND CMBX. HARD FOR ME TO PINPOINT A REASON WHY ALL THE SUDDEN HATE FOR THE SECTOR BUT I THINK THAT AT THESE LEVELS WITH A 442BP AND 458BP COUPON AND 4-6 YR DURATION ITS WORTH DIPPING YOUR TOE IN THE WATER. IF YOU HAVE ANYTHING TO DO PLS LET US KNOW.
In addition to telegraphing to the world that Barclays, and incidentally virtually every other dealer, is very much wrong way in the trade confirming that history does in fact repeat, the fact that Barclays was not able to "pinpoint the reason", doesn't mean others were also unable to do so.
The underlying cause
What happened a day prior is that Fitch came out with an eagerly anticipated report titled, "U.S. Prime RMBS Performance Declines Continue- Negative Equity Drives Weak Performance" (linked here) which may just have been the nail in the RMBS Prime coffin. The report prompted real estate expert Mark Hanson to release a note to clients in which he said, among many other things, that "Digging a little deeper into yesterday's Fitch jumbo sweep (initially thinking it would not be too significant), Barry points out that the PrimeX ARM1 took a much bigger hit than he expected...the biggest hit by a decent margin in term of notches in a long time." He then followed up by saying, 'This morning I profiled ARM 1 and Fixed 1, as the hardest hit by Fitch. This was big. BUT we just discovered this on ARM 2 had it's recovery ratings torn apart. This is not as big as the downgrades on the 1's but it means ARM 2 -- already the weaker of the two ARMs -- is just am Alt-A disaster."
Digging into the actual Prime constituency, it appears that the bulk of holdings are California private label jumbos, which are ~50% third party originated, ~55% based on "stated" income and ~60% with second liens subordinated to the firsts. Translated, this means that forecasts that just one in three homeowners being upside down are woefully wrong, and the real number is far higher. When Fitch catches up to this particular reality, the bottom out of the Prime market will fall out and go practically bidless... Just like ABX did back in 2007.
Bottom line, the Prime market, just as we suspected back in December 2009, just got its inflection point catalyst, courtesy of the dealer community waking up to the reality that Prime is really Subprime in sheep's clothing, and that Dealers are now scrambling to find a justification to mark their PrimeX positions higher... or else. Which, naturally means, getting buyers. The problem, however, is that the biggest potential marginal buyers are already quite pregnant with exposure and as of a few days ago just became net sellers, as instead of liquidating precious metals during the second part of the market rout, they turned to PrimeX.
The evidence
As always, one chart is worth a thousands words. In this case, we present a few charts via Bloomberg.
Needless to say we will have much more to say on this topic in the coming days, as we watch the imminent devastation in this latest index quietly from the sidelines. If we are correct that the inflection point has finally come, then everyone who missed the sheer panic associated with unwinding the Subprime trade back in the lofty days of 2007 will have the pleasure of observing it all over again... and with it the arrival of the next black swan that nobody could have possibly foreseen...
»
- 40837 reads
- Printer-friendly version
- Send to friend
- advertisements -
The advice is worth what you paid for it, but...
I'm superlong physical gold and silver plus survival items, long FAZ, short BAC, JPM, and MS. About to dump my VXX at about a 20% profit over the past month or two. I'm just expecting the whole financial world to go belly up (or tits up since we're here at ZH) and/or be nationalized to wipe out all shareholders...
And waiting until I can buy a farm for just a few ounces of my precious...that's the lifestyle choice and not the trade, though.
Everyone who is looking for a "trade" needs to be sure of what they are asking for. Are you looking for a quick day-trade, or a position for a couple of weeks? Perhaps something longer term? Everyone's situation is different so you won't get advice here that you can use to trade. It takes years if not decades to learn trading. Very few are born as natural traders with such a Mozart like gift.
Really @treemagnet provides much wisdom in far fewer words than I need to use. There is a difference between trading (speculating) and preserving your buying power. If you're interested in preservation of life and purchasing power (maybe yes on both counts) then search for Ferfal's "Surviving Argentina's Collapse in 2001" articles.
Sell stocks buy firearms and food.
This could be the last chance to get cheap PM so buy physical you cannot go wrong, or you could listen to the smart investors on CNBC or MSN and buy BAC or MS.
Good PM is hard to come by here in Western Colorado. At a recent coin show the dealers all hid their junk silver because peckerwoods kept asking for the spot price (~$30.50). I finally nailed one guy down to $38/oz but he doinked out by saying his partner couldn't drive over from Denver with the coins. We went tulving instead.
TRUE! If you held physical silver (pre-1965 coins) would you sell? For a clearly manipulated "paper silver" price.
Me: No Fukking way!!!
Silver and Gold are LONG investments. After:
I will give you a greenie for being a nice honest person.
Educate yourself. Dont listen to anyones advice including mine.
I recommend you do what I am doing now. Put everything into ewz and.dollar cost average additional money over the next ten years
TCT: additional barter goods would include tampons. Goodness knows what those would trade for. ;-)
Just saying...
Step away from the etrade account and learn how to actually make something real in the physical world.
Then why are you here? Shouldn't you be out "making something"????
Computer: "What is the trade?"
Spock: "I don't understand the question."
Computer: "What is the trade?"
Spock: "I don't understand the question."
Computer: "What is the trade?"
Spock: "I don't understand the question."
Mom: "But the computer KNOWS that you're half-trader!"
:-) ... (no offence intended .... couldn't help myself)
Trading DRV/DRN.
It looks bad. But how about a dollar comparison? 2007 was $2T(?) and this is $100B(?). I'm making these up. Just wondering if anybody has size comparison.
Plus, what is the derivitave event?
Where did you find the statistics on the constituents?
Particularly, "~60% with second liens subordinated to the firsts."
I'm looking at the Markit materials right now and it says that second liens are not allowed in the index.
http://www.markit.com/assets/en/docs/products/data/structured-finance/Documentation/PrimeX%20Marketing%20Presentation.pdf
The documentation standards numbers may be right though.
"Not more than 60%, in the case of PRIMEX.FRM Index, and not more than 75%, in the case of PRIMEX.ARM Index, of the Residential Loans backing the RMBS Transactions (in each case measured by aggregate unpaid principal balance of mortgage loans as of the Deal Cut-Off Date for the RMBS Transaction), may have been originated under a limited or reduced documentation program under which an obligor’s income and/or assets are stated by the obligor but not verified."
Would just appreciate where pool characteristics were found.
Link for second quote: http://www.markit.com/assets/en/docs/products/data/structured-finance/Documentation/PrimeX%20Index%20Rules.pdf
So, what's the best trade that an outsider retail slob can make on this one?
humorous? anecdote: Over the years my broker would ask me this question. "Why don't you invest in financials?" Answer always: "I don't know how they make their money.."
Punchline a few years later after the crash: "I didn't own them (financials) because I didn't know how they were making money, and it turns out I was right! I didn't know..."
my investment suggestion is buy UNG. a Natural Gas powered car costs half as much to drive as a conventional vehicle. (Electric cars are a fraud, just like Obamas Solar Fraud.) Your service station will have NatGas within a year I predict, and the price will go up. Get in now.
UNG is not the smartest way to invest in Nattie. In fact it is in my top 3 etf's to absolutely blow up.
It will take ten years to build out the natural gas infastructure to the extent necessary for it to become a viable transportation fuel.
Natural gas is a great long term purchase. However, natttie will see $2mcf before it sees $6 again.
Dont want any companies, just want the commodity. companies blow up too. if we had a rational president, just 13 months, this would happen. there are a range of different types of natural gas compressors, (might want to think about the company that does that as well), and for home use as well. (yes we were once afraid of electricity too)
what are your ideas?
Lead? S&W stocks
It´ll soon be back to hand-wringing over Europe.
Spain has 41% of the external debt of the US and an economy about one tenth the size.
One way to trade = SRS look at its' 3 year chart to see what can happen when it hits the fan.
Sell stocks, buy MASH tents. I love mine. Home - RDDUSA Military Surplus
buy the one with the medical red cross symbol and maybe it will prevent a drone attack by homeland security.
Probably not.
You wanna talk about moral hazard?
The guy (or gal) running the drone sitting in a HQ in Nevada is lookin' at a screen and they have their orders...
Just another video game.
I see a short/month out puts on home builders, banks and associated RE/constructionn ETF's.
Need to backtest what went down hardest in '08 when SHTF...those will be great indicators of what to short as well.
Long HFT overload circuit-breaker manufacturers, Long private jet companies booking 1-way flights out of NYC and D.C.
2011-2012 is 2008-2009 all over again! Even worse because there are 10s of thousands of traders who have since learned the most optimal way to leverage and accelerate their shorts against MBSs in the meantime.
2009-2009 to the second power with a debt supercycle meltdown 1.0 thrown in.
Flip side of ABX is plastic. Asset-backed bubble coupled with a Movement to End Usury* could be the one-two punch of an epoch. Driven by real need, a lot of folks choose their mortgage over the credit card pile until they finally say "fuck it" and put the phone on dnd.
*Name compatible with the vast, onomatophilic, lolcatz/tumblur mentality. Mew!
All the crap bankers, traders, and academics come up with is just making a simple thing overly complicated so the average person will just take the word of the manipulator that things are fine.
Economics is actually very simple but it is made complicated so the billions made trading worthless paper seems to be worth it. Terrible statistics are turned positive, books are cooked to turn loss to profit. Nothing is what it seems.
Comps are the most manipulated number put out there. Somehow retailers are beating the crap out of last years comps on far less inventory. It doesn't make sense. My guess is that audits have been called off completely and corporations have been given a free pass to falsify data to make the economy look better.
When you talk to average people and none of them tell you they are doing better and have cut back on spending, how can the economy truly be expanding? I am having a hell of a time even getting meetings with buyers. They all tell me their open to buy dollars have been slashed. All retailers are scared to death of inventory right now, many of the buyers are telling me business is terrible, yet the numbersthe company puts out on its books tells you a different story.
Who should I believe, the guy in charge of purchasing product and has the sale percentage of every product he buys. Or the accountants in charge of making numbers look good for shareholders. One person is right and on is wrong but which guy.
So for those only with a retail brokerage account, how to take advantage of this?
GLD and SDS
PHYS not GLD please.
Sell MS
Long Kimberly-Clark and Pfizer (Kleen-Ex and Preparation H) because soon there will be many more butthurt weepers.
Prep H on cotton balls makes a great fire starter. Try it.
Please, can someone help me understand the
"Interest Shortfall Payment Amount" versus the "Interest Shortfall Reimbursement Payment Amount"? and who's doing the reimbursing?
A PowerPoint, on slide #2: http://www.fpml.org/_wgmail/_cdwgmail/pptImYv3Ryk3B.ppt
BIG SCARE WILL COME. NO MARK TO MARKET CHANGES, FED WILL BUY THE PROBLEM AND HIDE IN ITS WAREHOSUE. THEN WE MOVE ON
Are the Fed's the new tenants at Area 51? I saw someone has been forklifting documents into a new warehouse just west of the runway, funny? I didn't see any boxes labled Enron? Just boxes that say "Sub Prime cluster f#(k '07 " and "Derivitives market" "How we fracked Lehman Brothers" "SEC documents" Containers labled Top Secret.
Shred Baby Shred
Posts like this make me love ZH. I wantz to haz Tyler's baby...now all I need is a uterus and a quick online virus scan.
Please, can someone help me understand Interest Shortfall Payment Amount versus Interest Shortfall Payment Reimbursement Amount shown in the Markit PrimeX Current prices? Who's doing the reimbursing?
(see post above)
Gotta love BAC here. Maybe WFC, too. Last time I checked BAC's 10-Q's, etc., they seem to have 39% of there residential mortgage portfolio in Southern California and South Florida, both of which were probably sources of a lot of Prime loans, jumbo at that. Ironically, many of those loans were home grown and cannot be blamed on the Countrywide merger.
Doctor Bubble has good charts on the SoCal jumbos
http://www.doctorhousingbubble.com/shadow-inventory-shadow-inventory-improves-nationwide-not-in-california-beverly-hills-shadow-real-estate-9-times-as-large-as-mls/
They set up everything according to their plan. They set up the Tech Bubble, the Housing Bubble, the BRIC Bubble, and the soon-to-come Population Bubble. Shock-n-Awe indeed. You've got BEEF? Where is today's Abbe Sieyes? Where is today's What Is the Third Estate?
Accumulate
Portable Toilets
Guns, Ammunition, Pepper Spray, Knives, Clubs, Bats & Slingshots
Big Dogs
Bicycles, Tires/tubes/pumps/chains, etc
SO Bass and those guys had insurance products created for the CDO's right? There is no short PrimeX ETF lol. Rather than play on builders or financials what is the play for the average guy? You Think Warren knows about this with BA? I bet he and Bernake know what's up, but then again?? Walking away from payments might up retail
I need huge cash for a reclusive farm what's the big play (don't say gold bitchez!) for so many here smarter than me.
“Meaningless. Everything is meaningless.”
Remember this from April of 2009:
“Without the government money,” said Bloomberg, “Goldman, Merrill Lynch & Co., Morgan Stanley, Deutsche Bank AG and other firms could have become some of the biggest creditors in a bankruptcy filing by AIG, the world’s largest insurer, because of the billions in losses on subprime bonds and corporate debt…
“[S]aid Joshua Rosner, a managing director at investment research firm Graham Fisher & Co. in New York,” We didn’t just save AIG. We saved the counterparties…as the bailouts engineered by Paulson and Federal Reserve Chairman Ben Bernanke began to shift money to Wall Street firms involved in subprime mortgage lending.”
Bernanke and Paulson then steamrolled a solvent Bank of America into taking on a deadly dose of the toxic waste debt, and intentionally killed it, as I then predicted.
I found one sale that sold for $40k over high-market-value which is EXEMPT from paying county taxes because they are going to rent to under class. SCAM in favor of Banksters!! NO TAXES!!!! BS!!!
I think Operation Twist was directly targetting the 2006-07 Prime herd. The 5-year teaser rate resets were killing these people, since even after the massive drop in rates since 2007 they would still see a rise in monthly payments, and their original payments were maxed out for the biggest home they could grab.
-1.5% on 30-years via Twist helps ease the burden on the Option ARMS yet to reset, and while it hurts banks lending profits, most of this "lending" has involved buying long Treasuries so banks will get a one-time pop in holdings. Possibly if this shores up home prices by halting further growth in housing inventory overhang remains to be seen.
QE2 only boosted gas prices and high net worth spending, as seen by the Walmart emails, so QE2.2 was a non-starter.
So Prime-X may not be as big an opportunity as sub-Prime.
I think Operation Twist was directly targetting the 2006-07 Prime herd. The 5-year teaser rate resets were killing these people, since even after the massive drop in rates since 2007 they would still see a rise in monthly payments, and their original payments were maxed out for the biggest home they could grab.
-1.5% on 30-years via Twist helps ease the burden on the Option ARMS yet to reset, and while it hurts banks lending profits, most of this "lending" has involved buying long Treasuries so banks will get a one-time pop in holdings. Possibly if this shores up home prices by halting further growth in housing inventory overhang remains to be seen.
QE2 only boosted gas prices and high net worth spending, as seen by the Walmart emails, so QE2.2 was a non-starter.
So Prime-X may not be as big an opportunity as sub-Prime.
Is there a more detailed geographical breakdown of where these loans are?
Just so happens I got a report on the Prime and ABX indexes today. Prime 60+ dqs are up in Sept for FRM 2 and ARM 2.
Most of us sheeple with prime credit will continue to pay our mortgages. Our credit rating is more important than the disruption caused by trying to save 400 a month by reneging on the mortgage. I just dont think most people with prime credit mark to market their house each day and calculate the savings of a default.
I live in a recourse state anyway.
well, well, well...Herb Greenberg talking about Prime-X on CNBS!!
Looks like ZH has gone mainstream...LMAO!
KEEP UP THE GREAT WORK TYLER(S)!!!!!!
Yeah, I just watched that too. CNBC's been stalking ZH for a while now, but in recent weeks it seems to have become more frequent and blatant. Every time I catch it, I shoot an email to them telling them to give ZH it's props, but to no avail thus far.
They are stalking ZH because they are, and always were, useless schills for Wall Street. But now they are losing market share and are desperate to be useless schills with some content, but they are so clueless, it has to be someone else's content.
whores
You should have heard Kyle Bass on the Strategy Session Wednesday with David Faber, wow, "no such thing as a controlled default for Greece", etc., etc.
Ron Paul's speech at the National Press Club also on Wednesday, wow again, laid it all out in about 10 minutes.
Meanwhile, back in fantasy land, Cotton Candy spinners say the markets are a buy.
Frantic notes and flyers from TIAA-CREF this quarter about the "value of a diversified portfolio" and "buying for the long term" and "we're so solvent it hurts" talk.
*cough*
Tyler Herb mentioned the article on CNBC today. Nice job.
But Herb said that he got his information from "his friends" whom he talked to yesterday. Herb didn't mention zerohedge at all.
Maybe they anticipate interest rates rising. Real Estate hasn't gone anywhere with low rates, rising would be the loss of hope..? Sovereign default? That is about all that is left I guess...
gh
As I keep thinking about this, it occurs to me that if dollars become more valuable the cost of borrowing dollars should rise, should it not? It is usually interest rates that lift the currency, but maybe this time is different. (Yikes)
gh
Thanks Ghost and green
Where do I sign and what do I short?
Great!!! thanks for sharing this information to us! sesli chat sesli sohbet