November 21, 2007
CMBS BBB- Spread: Code Red Critical Emergency
It’s been awhile since I posted the Commercial Mortgage Backed Security BBB- spread chart, mainly because I’ve been busy living in denial. This is a terrifying chart — the credit crisis is huge and is still raging.
Countrywide in the single digits, Fannie and Freddie blowing up, E*trade approaching zero, nearly all of the regional banks and other financial stocks I’ve bought will likely slash their dividends (I bought them for the dividends) — everything I thought was a bargain I’ve been dead wrong about.
Live and Lose and Learn.
Cat: | Time: 11:00 am (utc+8)
November 21st, 2007 at 11:42 am
you’re not alone - over at accuredint.blogspot he wrote yesterday he dumped his WM bonds, and it wasn’t pretty. he relates that at an investor day on Nov. 7 the ceo refused to state how much of the bank’s own portfolio was made up of no doc loans. so i guess you could say its more than even they would like. then you add on the NY AG fishing around and you see that even if the fed had rates at zero they have serious problems. CFC is basically a subsidiary of BAC now. I’ve heard that BAC is hedged down to 12 on their investment in CFC - dont know how true that is. If BAC does buy CFC, they won’t average in until its much, much lower.
November 21st, 2007 at 12:38 pm
Chairman,
Where do you get that without having a Bloomberg machine? I just look at Markit CMBX, why are Markit’s spreads so much wider than the ones you show?
Thanks
November 21st, 2007 at 1:30 pm
They have been glorious shorts. Doubles and triples. The Canadian banks and commercial construction could be in for a whoopin’ soon.
Unfortunately, it’s a traders market right now, not an investors.
November 21st, 2007 at 2:42 pm
@chad: Yes, I read accruedint’s post … and I regret saying that BAC was smart to buy into CFC when they did — what the heck do I know?
@Cartman: You probably can’t get it without having a high-end data feed … it’s a Morgan Stanley product so if you’re a client you could ask someone there for it maybe. Bloomberg doesn’t carry the Makit indexes so I don’t look at them.
@CapGain: Yes, alas I’ve been thinking that I’m smart enough to value these things but obviously I’m out of my depth. If I were approaching them like a “dumb” trader (trend following), then I’d be looking at them from the short side instead — too bad I’m so damn smart. ;-)
November 21st, 2007 at 5:29 pm
Chairman, just curious as to how you came to the conclusion that the financial stocks will be cutting their dividends. I know the banks haven’t been the most forthcoming about their liquidity situations recently, but it seems like cutting their dividend, especially if they can raise adequate capital in other ways, would be the last thing they’d want to do. Cutting dividends seems like it would just crush the spirits of any investors holding onto the stocks and cause an outpour of liquidity from the financial sector as a whole.
November 21st, 2007 at 6:02 pm
Also, could you maybe describe what the chart is showing? This is the spread of lower level “investment grade” bonds backed by commercial mortgages vs. the interest rate on 10-year treasuries? Is that chart showing the widening spread between the yields on 10-year treasuries and the yields on BBB- rated CMBS? I’m just not sure what significance it’s demonstrating, save the fact that it’s skyrocketed from under 150 to over 650 points in the past 8 months. Do you maybe have a link that would explain the relation between the two? Thanks!
November 21st, 2007 at 6:58 pm
Bryan said:
“Cutting dividends seems like it would just crush the spirits of any investors holding onto the stocks and cause an outpour of liquidity from the financial sector as a whole.”
You may have just explained the action over the next 2-3 months for these stocks.
November 21st, 2007 at 7:10 pm
@Bryan: I’m not certain if many financials, like WM, will be cutting their dividends, but it’s now the popular view and I think the stock prices already reflect this, i.e. I don’t think share prices will collapse when they do in fact cut dividends (poor Freddie is an example of a stock where a dividend cut was not anticipated by the market).
Right, the chart shows that prices for BBB- CMBS continue to fall as prices for Treasuries continue to rise, i.e. spreads are widening … the point is that risk aversion is at record levels and shows no sign of reversing.
November 21st, 2007 at 9:58 pm
CM, on the being wrong part, does that mean you’ll take some action related to this, like dumping those stocks for now or selling puts or something else?
November 21st, 2007 at 10:12 pm
eyal: No, I’ll just sit and suffer in classic loser style (which I can afford to do, fortunately).
November 22nd, 2007 at 12:57 am
If you bought recently, I believe you’re suffering will be relatively short - one year or so - and then you’ll be very happy with your entry price.
November 24th, 2007 at 3:48 am
This is not just a subprime issue, not at all. How much of the recent $1.2B write down by Freddie Mac was subprime?
None.
http://tinyurl.com/2vlzzb
Although David Einhorn is largely talking his book here, unfortunately he is also largely correct.
http://tinyurl.com/2phqel
UBS CPDO investors take 90% loss. Yes this is a small deal, but also likely just the beginning.
http://tinyurl.com/392afu
The estimate here of $300B in exposure is only a fraction of what has been realized to date. It is also at least $200B lower than what some (who have been very accurate) believe to be a more likely estimate.
http://tinyurl.com/377mge
Not trying to be a bear or a bull here - I am agnostic with both long and short trade positions as well as a substantial buy and hold portfolio - just looking for accurate information.