Vikram Saxena

Monday Market Review: Bulls Back with a Vengence

Respirate: The area between 85 and 90 was strong resistance. It is likely to provide strong support and a good entry point with well defined stops.


On May 19 07:05 AM Respirate wrote:

> Vikram, if you can answer a question: What level are you looking
> at for an OIH trade? $86-87?
>
> I agree that 'Services' is the sweet spot in the oil sector. It's
> easily outpaced the S&P in recent months and may be expensive
> in the short term.
> Thanks -- R

Bank of America: 'Paulson Plan Benefits Mostly Goldman, Morgan'

Mish:

Your interpretation of BAC comments is downright criminal. Just because GS/MS have been very aggressive in markdowns does not mean they will benefit the most. It is likely that in the reverse auction the price paid by the Fed will be closer to where the rest of the banks are marking the assets. Further MS/GS have little to no exposure to Sub-Prime; GS was short and MS took their hits an year ago.

Do you have anything constructive on how to fix the problem? All you do is shill for your asset management firm and spread FUD. The stock market wiped out close to $1.4T in value today, more than double of the $700B requested by Paulson to provide liquidity to the debt markets. You must be popping open the bubbly celebrating as Americans see their pension funds, IRAs and 401Ks get wiped out.

Housing, Credit, Economy: At an Inflection Point

Kunst and ericinNE:

Thank you for your comments.

1. There are several federal programs in the pipeline which will help real home-owners who want to stay in their homes refinance to fixed rate products. This being an election year things are likely to move quickly in DC.

2. A sub-prime home owner with a few years of steady mortgage payments will no longer be sub-prime. Credit scores do improve quite rapidly from the bottom for people with a good mortgage payment history.

3. The other big factor in any debt crisis is time. With time wages and income creep up, improving the home owners ability to pay their mortgage. Time will also heal balance sheets, especially when the mark downs in banks have been extremely aggressive.

Housing, Credit, Economy: At an Inflection Point

Basic Finance:

Yes indeed. We are going to see more bad news.

However the equity market is a future discounting mechanism. They will be priced based on what people see 6 to 9 months ahead. The underlying causes of this cycle's slowdown are gradually healing.

That is why I feel that the low we will see in equities after this quarter's earnings would be very likely the low for this bear market.

Housing, Credit, Economy: At an Inflection Point

Rhett:
My article clearly states that home prices will continue to fall at least till the end of this year and then form the bottom U over the next two years.

jayz:
The article you linked to does not take into account interest rates. Just because a mortgage resets, does not mean that the rate will go up. With LIBOR around 2.60%, the rate will go down after resets. This was different than much of 2006-2007 when LIBOR was 2-3% higher.

Further, the ABS market has already priced in the 2006 and 2007 vintage which will reset in the future with a big discount.
www.markit.com/informa...

The AA tranche of 2007 vintages are trading at around 21c/dollar. That means that market expects a huge amount of principal loss on these mortgages.

Housing, Credit, Economy: At an Inflection Point

As Arts pointed out, and I expanded upon in my comment, an inflection point is not the bottom. It marks a change in the rate (second derivative). That is exactly what I have written: that things will become worse before they get better and I expect the graph to look somewhat like the graph of x^3.

upload.wikimedia.org/w...

en.wikipedia.org/wiki/...

Earnings are going to be bad this quarter and the outlook cautious. House prices will fall further as more sellers capitulate.

However, the fundamental factors which caused these slides in the first place are showing signs of bottoming (sub-prime, credit crunch, lower wages etc.). It will take some time for the effects of these to go through.

It is the gap between these two events, the potential washout after the earnings, and the recovery, which will be the best time to go long US equities.

User169490: Though NAR has its own agenda, it is still worthwhile to compare the numbers, especially a derived number like affordability index which is based on publically available data. You can not dispute that home prices are coming down, the interest rates are much lower than an year ago, and nominal wages (not discounted for inflation) are up. The same NAR affordability index was flashing signs of distress during the peak of the boom.

Housing, Credit, Economy: At an Inflection Point

Arts:

Thanks for your comments.

en.wikipedia.org/wiki/...

Things are going to become worse before they get better.

I fully expect this quarter's earnings to be hurt by the credit crisis and expect some sort of capitulation in the equity markets (a big down day/a test of the lows).

Similarly home prices are going to go down further, and faster as sellers start lowering prices after holding on for a long time and foreclosures dominate sales.

However, both these actions are cathartic and will result in something similar to this curve:
en.wikipedia.org/wiki/...

Subprime Write-Downs More Than 50% Done? Write-Ups Coming Next?

www.aleablog.com/dont-.../\
Dont Mark to Markit


seekingalpha.com/artic...

10) Be careful using the ABX indices. They are too easy to short, and do not represent the values that are likely to be realized in the cash markets. The same is true of the CMBX indices. This would lead me to be a bull, selectively, in AAA CMBS, after careful analysis of the underlying collateral. (CMBS was a specialty of mine when I was a mortgage bond manager.)

Subprime Write-Downs More Than 50% Done? Write-Ups Coming Next?

mtclm:

I think what he meant was that all the short positions which MS has will expire worthless; i.e. the loss and severity will not be as bad and MS will not earn anything on these after accounting for the maintenance cost. The write-downs, as noted by the Lehman analyst and specificially probed by the City analyst factor in the worst case scenario on BOTH sides of the trade!



www.risk.net/public/sh...

"Chief financial officer Colm Kelleher said that the the mortgage desk had decided to short the subprime market by taking a $2 billion short position in low-rated subprime mortgage-backed securities (MBS). In order to meet the cost of the negative carry of the short position, the desk also went long $14 billion of AAA-rated super-senior [tranches] of BBB subprime securities, which we refer to as mezzanine," he said. The investment in the top tranches of collateralised debt obligations (CDOs) of MBS was assumed to be safe enough to provide a reliable source of funding to meet the cost of the short position, even if the underlying market declined"

As it is clear, their short positions are in much worse tranches since they needed $14B of long mezannine debt to balance out the negative carry spread on $2B of the short sub-prime.

Their long positions are going to be worth a lot more before the short positions start losing money. And the principal of the short positions which earns interest will detoriate much faster than the long position, decreasing the cost of carry.

Again, do the math.

Subprime Write-Downs More Than 50% Done? Write-Ups Coming Next?

Thanks for all the messages folks. Some observations.

The bond market has already priced most sub-prime based bonds at very low valuations. Mark to Market rules ensure that the banks have to take the write-downs as they occur. Bonds originally rated as AAA are trading in the 50s, reflecting extreme risk even though there is real tangible collateral backing them.

1. ABX sub-prime indices
markit.com/information...

Index Series Version Coupon RED ID Price High Low

ABX-HE-AAA 06-1 6 1 18 0A08AHAA1 86.19 100.38 84.17
ABX-HE-AAA 06-2 6 2 11 0A08AHAB8 70.06 100.12 66.1
ABX-HE-AAA 07-1 7 1 9 0A08AHAC6 55.94 100.09 53.46
ABX-HE-AAA 07-2 7 2 76 0A08AHAD4 52.92 99.33 52.47


2. The TABX index tracking the BBB sub-prime mezannine debt which fund many CDOs is trading as almost worthless; even the 40-100 tranche which start taking losses after 40% of the principal is exhausted are trading in the teens

markit.com/information...

3. Salvage Value: The salvage value for loans on homes in foreclosure varies between 50-80% of the home's market value depending on the size of the loan and the market condition. And not all these loans were no-down payment loans; in many cases they homeowners had some kind of equity in the deal (downpayment).

Homes have a tangible value and use; in nominal dollar terms there are unlikely to fall significantly below the replacement costs.

4. Creative solutions for Tough Times:
The Fed has shown that they are willing to reveal weapons most people do not even know exist.

Similarly it is also likely that the stakeholders affected by the high amount of foreclosures will band together to find a solution.

For example, subprime related foreclosures are concentrated in specific pockets of the country. The geographical concentration means that it is easy to form entities to manage them as rentals. If the homes are transferred at 60-70cents to the dollar to new entities, a bulk of these homes are going to be cash flow positive rentals from day #1; Californa, Nevada and Florida continue to be very attractive places to live in. The original note-holders can continue to have an equity stake in the entities.

Time, inflation, and the devalued USD will fix things. The wash-out is occuring as we speak.

Subprime Write-Downs More Than 50% Done? Write-Ups Coming Next?

As I wrote in the article, MS took the $9B write-down assuming 100% default and 100% severity. Houses are tangible assets and not going to be worthless in nominal dollar terms. You do the math.