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PrimeX Update: It's On Like Donkey Kong
On Friday, Zero Hedge broke the story of the "next ABX", in the form of PrimeX, or the game of jumbo prime whack-a-mole. It appears that was indeed the beginning. Here is today's update from Morgan Stanley in a market which had gone suspiciously silent since our post, and has now gotten quite vocal again with a vengeance.
From MS sales:
On a day where most macro indices point to bullish sentiment, PRIMEX is getting clobbered again. Last week, it felt like px action was driven by dealers hedging cash inventory/unwinding index longs, with retail providing a bit of a short-covering bid. Today, however, it seems that the short-covering bid has gone silent, and the marginal buyer can't be located under his desk. Given the move in ABX over the past few weeks, and the high (2 premium tranches!) $px in PRIMEX makes it an appealing target for both hedging and new entrants to the space setting shorts. One "risk sentiment neutral" trade we like here is the ARM1 vs. ARM2 steepener, as you pick up 5c of CE and 12% less DQ for ~11 points. With ARM2 already taking losses, anyone looking at the product (from the short side) for the first time might be attracted to the less negative carry implied by that tranche, against the 2-3 year multiple you achieve in ARM1s to a 5-8% writedown in those. Outright, however, until we see retail come in to set new longs, it's look out below in PRIMEX. We have traded ~250mm on the day.
the actual markets:
Cpn Bid Offer Chg from Close Factor
PrimeX.FRM.1 442 103-16 / 104-16 -0-120 0.47
PrimeX.FRM.2 458 93-16 / 94-16 -0-206 0.49
PrimeX.ARM.1 442 99-08 / 100-08 -0-223 0.41
PrimeX.ARM.2 458 88-08 / 89-08 -1-152 0.44
And graphically:
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Sub-zero out there...
...when you think about it, everyone wants to spot the next Black Swan and here it is... housing... again!
BTW I love that fuckin' monkey.
Question: So how many more tax payer shoulders do we need for this upcoming bailout?
Answer: All of them.
Love your fiat masters and everything will be ok. Here, just take this Prozac.
its quiet almost too quiet
It's like some Pavlovian experiment.
I see the monkey and get wood.
Now that's funny!
Wooden barrels, getting wood. Monkey - a double pun for a double dip
How much of the weakness in PrimeX is due to speculation of a massive Federal refi program taking out the premium mortgage paper?
I would bet a lot.
Someone tell us what has happened to convexity since 2008.
Enjoy your coverage on PrimeX ZH crew, but remember, this is as illiquid of an 'asset class' as it gets.
250mm notional traded today is actually quite decent - week prior we saw under 200mm and the week before 550mm in about 60 trades. So yes, any desk trading this obviously knows the risk involved. If getting clobbered involves hitting the bid to get some inventory out there, many people would be willing to take a loss on an already shitty supply.
250MM by one desk. Hopefully one of the smaller desks, because the last thing MS needs is to be a PrimeX in addition to French bank exposure derivative. Also, what is the underlying Jumbo Prime notional? Feel free to arb it if you think the synthetic is too "illiquid"
I want charts. MS exposure to BnP will be enough to have them 'discovering' new losses for another taxpayer backstop.
This... is just the cherry on top.
Hard to chart the shadow banking system and its interconnectivity when one does not even know the notional derivative exposure related to these assets, no?
And it's even harder for those of us that don't know what half those words really mean!
I am a good copy paster.
In the end, I believe, no one really knows (or is telling the public) who owns what and what/how many bets are against those assets.
http://www.zerohedge.com/news/primex-time-next-subprime-trade-has-come
PrimeX cliff dive.
Also, the notional amount is almost useless. I buy 10 SPY puts to short 1000 SPY shares, notional amount $119,650. The transaction was $200. Anyone using notional amount is trying to make a bigger deal out of it than it actually is.
Notional becomes real when you exercise or settle. SPX goes to zero and someone needs to pay you $119,650. That's pretty real to me.
Something like this.
http://theroxylandr.wordpress.com/2007/02/01/abx-he-bbb-06-2/
It's possible that the ass-whipping in CMBS and the last few months' widening in RMBS is creating margin calls across the entire asset class. Maybe the pain has just arrived to jumbo prime. It's already visited everything else.
"jumbo prime whack-a-mole"
poirot & sherlock depend on tyler where "illiquid" syntetics are concerned
the game is afoot, BiCheZ!
$11bn gross notional on PrimeX.
Anyway,
I sincerely hope MS mortgage traders are the final straw that broke...
I hate to agree, but this story seems overdone. This is the definition of dealer to dealer as well. The idea of arbing the collateral is the banks balance sheet exposure and although there are ARM CDO's it is a very hard arb as the CDO's are balance sheet driven as well.
The losses in CMBS are real losses among the "retail," sans not dealer inventory losses and they are greater over the last three months than $PX which is down, what, $6 off the highs...
The gross notional is what is reported to DTCC. Incremental billions can be created (and destroyed) at a whim. Once again: 1) the question is how big is the underlying, and 2) how liquid it is. If it was simply a question of liquidity driven mispricing it would have been arbed 20 ways from Sunday first thing on Monday.
The underlying hasn't been liquid in 3 years, why would it be liquid and be able to be arbed 20 ways on Monday?
The balance sheet CDO market is dead and the seasoned tranches that the $Px represents are illiquid.
Still a hard trade trying to find someone with 2003/2004 or 2006/2007 underlying. Not that it can't be done but the bid/offer is going to kill the arb there...
$Px was setup for interdealer hedging from the start, no?
Again besides a frantic BBG msg from a BCS trader, the losses in AAA/AJ/AA CMBX/ABX HE over the last two months should be the story...
Again besides a frantic BBG msg from a BCS trader, the losses in AAA/AJ/AA CMBX/ABX HE over the last two months should be the story...
Can you shed some more light on this for those of us without a bloomberg terminal?
thanks in advance.
Exactly. That was the point I was trying to make above in my response to Tyler.
The whole mbs complex is getting margin calls.
The discussion of these trades just shows how far wall street has gone from actually producing anything. Steepeners? Blah blah blah. A rigged casino hell bent on the next bonus - and the shearing of clients. And the creation of credit to facilitate the fiat debt-money beast.
With steepeners and flatteners you get multiple trades to bid/offer instead of only one.
Made the street go nuts when fly's becamse the norm on Treasuries because you lost out on the multiple trades.
newly renamed EX-Prime its a buy!!
off setting winnings with loses? how long? or arbing 1st and 2nd tranche?
You know all that high-end real estate which was built around the end of the 19th C, and you can see it in many of America's former industrial towns? And you know how alot of that stuff now serves as rooming houses, dentist offices, or has been bought by govts for offices or simply lies fallow? Yeah, that's what I'm taking about.
Because the inventory of million dollar+ homes in this country is gargantuan, and the system is no longer producing a new army of buyers for that tranche of single family RE.
GG
The way America is going everybody will be millionaires. Just like in Zimbabwe.
That's how capitalism works, right?
Of course it does. Capital comes from a printing press. Saving is for pussies.
Saving in cash is definitely for pussies.
Speculating in cash is different.
I have occasionally "speculated" for up to three or four months at a time.
Or would that be short term savings? Haha
I love ZH - but there are some posts that I read and realise I might as well be someone from Congress voting on the new fin reg. It looks like it should mean something ....... but I really dont know what!
K@
Same here but I think of it like an immersion into a foreign language. It's the fastest way to learn and googling is a great assist.
Read the prior article hyperlinked in the text of this one. Just think subprime of 2008 fallout and multiply that by a shit ton.
+1 Yep, working for me.
That is why you come here to read and learn...
So in life, you don't end up like a douche-hole clueless politician...
What it means is this. Some of the first chinks in the armor of the housing boom occurred when the ABX, and index that tracks that performance of subprime mortgage backed securities, began to decline below face value and significantly below face value over time.
Well, now we are seeing this same behavior with PrimeX, which tracks the performance of prime mortgages. Thus, what we have is a situation where problems that were limited to subprime mortgages are now reaching prime mortgages, mainly because more borrowers are in negative equity along with the fact that you have 16.5% unemployment and underemployment.
Now, take it one step further. The PrimeX measures the performance of 'private label' mortgage backed securities. This means that it tracks the performance of mortgage bonds issued by banks like Citigroup and JPMorgan. If the loans in those deals are having problems, it begs the question whether the same applies to the trillions in prime mortgages owned by Fannie Mae and Freddie Mac.
We are potentially on the cusp of a much more terrible phase to the financial crisis. Subprime was relatively small relative to the total supply of mortgages. Well, prime mortgages are not so small. They are HUGE. What happens when these prime loans start defaulting. The U.S. fully backs Fannie and Freddie principal and interest payments on those mortgage backed securities. Disaster in the making that could make 2008 look like a walk in the park.
PrimeX is jumbos as well. Don't forget this key...
Correct, which makes the potential for losses that much worse.
+1 to Coxxy, and the only thing id add to your analysis MR is that this time i believe it is quite diferrent in the sense that rates won't be increasing until at least mid 2013, as per the Fed. Seeing as how subprime went to shit due to r increases, i dont imagine $Px suffering until at least those first rate increases come to fruition.
Most Jumbos and Prime loans originated in CA!!
Nice summary, people like you who take the time are really important in raising awareness out there.
This may or may not shed more light for newbies, like myself:
http://ftalphaville.ft.com/blog/2011/10/11/699021/a-primex-primer-also-featuring-abx/
Basically, it could be strategic default by the sheeples or an actual problem to pay. Either way if it continues it'll be epic.
Thanks mucho, MR, for the 'splaining.
I know you have to dig a long way down before finding the actual underlying to these derivatives of derivatives (i.e. actual mortgages), but don't the bulk of the underlying mortgages reset this year?
I know BB has been pushing down the curve, residential mortgage 30yr fixed is 425bps (which is insane BTW), but even that will probably cause repayment stress to those on teaser or introductory rates.
Does this mean the Fed is about to embark on a Prime MBS purchasing program?
me too. i read somewhere that 2/3 of ZH readers are traders so it must make sense to them. funny thing though, even when i don't know what the hell TD is talking about either he or a commentator makes me laugh
Same here AND I sure would love to know how to make a buck off the information. Can I buy PrimeX directly? Is this one of those option plays? It's as if all the info is geared to seriously experienced traders.
So far, I've made some small profits off of investments in ETF's directly like SDS, SKF, etc. But that's directly purchasing those instruments. I know folks make serious gains using option trading, and I've read about puts and calls in general, but haven't made an option trade yet, even though it seems like ZH has good information on which to take a risk or two.
+1 (Ditto and well put!)
The homes will sell, when they go to true mkt value.
Expect another 30%-40% correction, before that happens.
Those w/ dry powder, will be able to make a killing.
Make a killing? That again assumes some eventual rebound. I agree to the coming drop but think that will be the steady state going forward. Homeownership is is inflation protection at.best, but really just a myth of the FIRE parasites.
Make that a 70$-80% correction in real terms. The USD is soon to be gone so the government will no longer be able to support the housing market Consider that 90%+ of newly issued mortgages are backed by the government and that interest rates are set by the government. Without being able to borrow, entitlements and most gov't jobs will disappear, and the service sector will collapse causing citizens to be so poor that they will choose to move in with family and friends in order to have money for food, which will further expose how great the excess of housing is. And already, 60% of mortgage holders have less than 10% equity.
housing will revert to cash value before any rebirth. the whole misguided govt/fed directive of focusing on housing growth will come to an end when they realize the futility of it.
Home ownership is a joke, you never own it...youre always just a renter and the bank always owns it. Just try not paying your property taxes for a couple years and see what happens.
Yeah get a hundred acres in montana and pay three hundred a year in taxes. You are still renting, but it is cheaper at least
But then I can't co-locate my HFT server at the stock exchange. Nanosecond latency is a bitch!
Jumbo mortgage holders have been hiding from all just how desperate and potentially delinquent they are. Now the depression is cornering them into an illiquid state of potential default.
Against Gold house prices have fallen @80% since 2007!
The mcmansions are doomed for destruction. As we go peak everything, smaller is going to be a necessity. as in cars, families, homes, appetites, body size, etc. I live for the day when all these fabulously fucking fat asses are dead and gone!
You guys are right on housing but likely very wrong on the outcome...you are betting on an organic reaction of oversupply in a tightening credit world w/ diminishing qualified buyers resulting in lower housing prices. Likely not gonna be as bad as you'd expect. 2nd order government programs via FHA, Ginnie, VHA originated loans all to be gobbled up by Fan / Fred all at Twist mandated below market indefinite rates. Expect more or this to maintain the "prop" - housing market will still suck flatish or down 10%'ish but not collapse. Expect the Geinthner Refi program. All destroy intermediate chances for recovery to avoid a short term collapse.
If you want to short something, find a way to short the tax payer and short the dollar. That is where the price will be paid for this idiocy.
Geez, makes one wish to not be a taxpayer any longer!
is there an etf to short prime-x? if so, which one?
Maybe the homebuilders etf XHB would be a good proxy.
@ 'inspector'_gadget: hi to your 4th post, here!
etf? not sure wtf this is: Markit PrimeX
tyler publishes his own stuff here, as well as comments on others' stuff he puts out. and comments on his own stuff on the boards, too, like today in this very piece:
250MM by one desk. Hopefully one of the smaller desks, because the last thing MS needs is to be a PrimeX in addition to French bank exposure derivative. Also, what is the underlying Jumbo Prime notional? Feel free to arb it if you think the synthetic is too "illiquid" (End Paste)
as we participate here, we learn about the fighting in the "economic & monetary wars & halls of public opinion and dastardly bastardlies"
this helps us realize the power of the illusions and the motives, and attitudes of the players and keeps us from feeling totally helpless, b/c we can begin to understand more, as individuals; not just join another group. here, as everywhere, understanding takes a certain amount of very close attention
slewie, u r a good rat. greenie on ya x 2, but, unlike Chicago and Boston, here I can only vote once :-(
- Ned
The major banks still have a lot of this garbage on their balance sheets, but I would suggest that the real targets should be mortgage REITS, especially the crown jewel, NLY. Call me crazy, but juicy yield spreads only work when the underlying principal remains solid, and (yes, you can call me crazy again) AAA ratings are just as bullshit as they were before.
They need to lure retail back to the game but retail has gone to the occupy thing.
Nah....reader2010, most retail still uses middleman like Edward Jones: where it is always time to buy. And the broker brigade is who gets the marginal idiot into the game to be slaughtered. OWS folks likely are part of the 50% crowd that own very little in the way of assets.....
True, they're on the opposite side of assets, which is liabilities.
They are short assets and long student debt?
It is more like a play on volatility. Looks like a proxy for going long the VIX.
Those crafty speculators!
Ah....midday ramp has begun. expect a 1+% rise by end of day, and almost the entire move coming in last half hour. Some things never change, until they do. The marginal buyer? Well, that is Ben and his new HFT toy of course. They just are daring the marginal buyer to come in so they can eventually be gang raped again.
Ben Bernank has done an excellent job of making sure everyone, everywhere will somehow get completely fucked.
Nah theyre just seeing if any last RoboTraders are out there with a couple dollars to throw at this Ponzi.
Meanwhile, markets are STILL lower than they were in 1999.
EWZ my man, EWZ
one of these days you will wish you had taken the advice of an anonymous internet troll.
Prime X? Seriously? 250 mln of it has straded uuuuuhhhhhh ahhhhhhhh wow omg. Its a 30 trillion dollar mortgage industry peops. Wake the F up. Some bufoon wants to show he is hedged and buys this thing and thats it.
The trillions dont exist but on paper.
If all the "good" mortgages in a pool get refinanced at lower rates, does that just leave the crap in the pool? What does that do to the MBS?
Marc Faber today's appearance on cnbc.
http://marcfaberblog.blogspot.com/2011/10/cnbc-video-interview-october-11th.html
Financial earnings coming up... Any guesses?
JPM 10/13
WFC 10/17
C 10/17
BAC 10/18
MS 10/19
Only that JPM will NOT mention silver - at all, in the report.
JPM = Silver = 32.20!
When a million dollar home sells for 30k, what price do you think your home will fetch?
Prime is the top when it drops everything below it drops as well.
To say nothing about the derivitives and contracts based on those real assets.
It was a great plan: sell a thing you dont own, to someone who doesnt want to own it, for more then it was ever worth.
It is not proportional. The bigger/pricier the home, the further it has to fall.
Tax & maintenance etc etc become a millstone very fast on a big, aged trophy house. A well made, more modest dwelling in a decent location will not torment its owner so badly.
I was told realtors are buying because they believe its' the deal of a lifetime.
http://www.calculatedriskblog.com/2011/10/las-vegas-home-sales-stay-strong-in.html
Yea real estate agents care about 1 thing, their cut off a home sale. Most of them dont have the slightest clue about greater economics, I know I have a couple of the tards in my own family!
That article doesn't describe realtor buying, it describes investor buying. I think there are some decent properties you can buy and rent out there right now. You're going to pretty much be paying 100% cash to get it though, the banks continue to be heavily allergic to property deals. I really wouldn't describe this as a "deal of a lifetime" market, only that the prices are entering the zone where it's justifiable to start picking up certain properties that are going to be rentable. I still see about a 15-20% downside before this really stabilizes nationally.
Still seems very expensive. Consider ARM2:
The rate to actually get an 5/1 ARM loan is ~3%. 5 year treasuries are at 1.15%, so we're looking at 2.6x the RFR for retail. The 30 year treasuries are at 3.12%; I would probably want to get paid at 2.6x that 30 year RFR, which implies a yield of 8.11%. I would suggest that the fair value of ARM2 should be around 56.47. It's current price is 89.08, so we'd be looking at about a 36.6% further drop in price before this is correctly valued.
And mortgage rates are climbing again (due to "good news" from Europe).
http://ftalphaville.ft.com/blog/2011/10/11/699021/a-primex-primer-also-featuring-abx/