An Update of the CMBS Spreads

Jun.26.07 | About: iShares U.S. (IYR)

CMBS Update

CMBS spreads were mixed last week as AAAs came in a bit while other tranches widened.

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CMBS AAA Chart

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CMBS AA Chart

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CMBS A Chart

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CMBS BBB Chart

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CMBS BB Chart

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CMBS B Chart

Source: The Bloomberg

I'm pimping my book as I own puts on the REIT ETF, (NYSEARCA:IYR). I believe that we have seen the top in commercial real estate, and it is a long, long way down from here.

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IYR 1-yr chart

Goldman Sachs (NYSE:GS) downgraded the REITs to Neutral today because of "macro" conditions. It is interesting that they went to Neutral and not Underweight. This is reminiscent of the tech bubble, when the analysts downgraded the Talking Sock Puppet Companies to Neutral, after they had already fallen 50% from the peak before collapsing to almost nothing.

That will not happen with the REITs, of course, but the reflexive response of the analyst community is to underestimate both the upside, and the downside to which a bubble, and its subsequent aftermath can go.

On Monday, the IYR closed at $77. I believe it will go well into the $60s, and eventually it will probably go into the $50s. By my calculation, if it were to fall to valuation levels of five years ago, $40 is where it would land.

Remember, markets can take prices much farther for much longer than one could ever imagine.