Friday, April 9, 2010

ABS, CMBS prices continue to rise

The top chart shows the price of an index of home equity-backed securities, while the bottom chart shows the price of an index of commercial mortgage-backed securities. Both show strong price gains, and I would note that prices have been rising since last summer. It's particularly interesting to see these price gains come at a time when the whole world is anticipating a new wave of home foreclosures and widespread distress in the commercial real estate market. These charts are saying the reality is not likely to be nearly as bad as the hype.

This also provides more confirmation that the real estate market has bottomed and may even be improving. A year ago the prices of asset-backed securities such as these were priced to Armageddon—to the expectation of truly massive defaults nationwide. Now they are priced to merely difficult conditions, but that represents a huge improvement.

These charts also suggest that asset backed securities such as the ones represented in these indices, which were marked down severely last year by many institutions because they were considered "impaired," will at some point be marked up, resulting in very welcome additions to corporate profits.


John said...

I would think that one of the largest beneficiaries of these real estate 'mark ups' when they occur will be the banking industry. In fact, I believe the markets are already beginning to anticipate it. The stocks of both regional and money center banks have recently moved above a trading range they have been in for several months. They have increased in price despite poor earnings prospects. What may be moving them is peaking credit losses and the possibility of mark ups in the not too distant future. It also means declining additions to loss reserve accounts. So even though significant bank earnings may still be a few quarters away, bank stock investors are seeing better times ahead.

Those who disagree may feel free to sell the banks short whenever they wish.

John said...

You know, I don't even bother going over to SA anymore unless I really don't have anything to do. But today just for grins I looked at SA's site and pulled up this article just to have a look at the comments. Wow. They wanted to take Scott out and string him up. The vitrol was was as bitter as I've seen in awhile.

CNBC interviewed Muriel Siebert today in one of their segments. I have a lot of respect for Ms. Seibert. She was the first woman to own a NYSE seat back in 1967 abd for a long time has owned her own discount brokerage firm. She is a real pro in my book. Well, she was waxing disappointment over the fact that the individual investor is still hunkered down in MM funds and bank deposits. I know EXACTLY where she's coming from. I dealt with the public for 23 years in the securities industry and in the quarters after bad bear markets I could't blast most of my clients out of their deposit accounts with dynamite. Wasn't happening. One thing ALWAYS worked though: higher prices. Worked every time. The ever climbing market eventually brought 'em in. The typical retail investor is not gonna get in the water 'till its nice and warm - and higher. To me Ms. Siebert and the bozos over at SA are telling me there's still time to accumulate good quality equities for the long bull market ahead.

Buy, Mortimer.

Scott Grannis said...

John: I hardly ever visit the SA site but did so just now. Amazing how bearish people are there! That makes me feel better about being optimistic.

septizoniom said...

there's a v in your mutual self regard

brodero said...

We are about 65 to 70% of the way
through all the chargeoffs in this
great financial meltdown ( and moving about a pace of 5% a quarter)....stocks
are merely anticipating this eventuality......

John said...


You need to trot on over to SA. You'd be right at home.

John said...


I don't know where you're getting your numbers but that's OK. Tell me how I take advantage of your opinion. Buy, sell, sell short, cash in tin can buried in back yard, stored food in the cellar along with AK-47s, what??

Benjamin Cole said...

Everybody seems to know what is SA, except for me. What is SA?

Scott Grannis said...

狂猪 said...

I've just read some of the comment on SA. There really is a lot of anger and frustration toward this wonderful recovery! The market has been telling, actually yelling at these people their outlook is wrong for a year now and they still don't hear it.

Investment opportunities are always made from the inefficiencies of man! The more the merrier!

John said...


I am sorry. I should have been more specific. I have used the acronym for so long it just seemed normal. I should not be so critical of the site. Its where I discovered this one!

Unknown said...

Sorry for off topic, but here in Poland we lost the top patriots: Mr.President prof. Lech Kaczyński and his wife Maria, the top polish army commanders, polish army bishop, NBP chief, National Memory Institue chief and many others top people. Among them Ms.Anna Walentynowicz - the legendary Solidarity woman. Thanks to her heroic attitude the main strike in 1980 did not ended to early. This fragile woman has stopped a few thousand shipyard workers when they have been leaving the factory.

Requiescant In Pace

Benjamin Cole said...

John : thanks for the tip-off on SA.

Also a little OT: According to the cover of the LA Times business section today, the CRB index of 19 commodities is down 3.5 percent for the first quarter.

Now, I do not think commodities are as important as 30 years ago, for two reasons; They are less of our overall outlays, and because of that demand is relatively inelastic. That is to say, if the price of a commodity goes up, it is such a small portion of my outlays that I do not react. Eventually competition will bring the price back down. This holds true for the broader economy as well.

That being said, if commodities go down in price in the last quarter, how does that harbinger inflation? Along with cascading real estate values, dead wages, and soft property rents?

Really, I think a better case can be made we are still dancing along the edge of deflation. Hopefully property values have bottomed (I think they have) and wages too. But we are several years away from inflation, if that.

The second item I noted was that on the cover of Parade magazine (must reading) this week is Co. Allen Jamerson, 48, Co. U.S. Air Force, Tinker AFB, Oklahoma, whose salary is listed as $130,200.

I do not know how that sum was calculated, or if that includes the lifetime pension after 20 years of service. He is entitled to one-half his last grade, so this guy will be pulling down $65k in annual pensions for as long as he lives, plus VA benefits.

I just wonder if the USA will ever be able to balance the federal budget, if pay and pensions like this for federal employees are the norm.

Scott Grannis said...

Family Man: that is a terrible loss for the world and for Poland. My sincere condolences.

Scott Grannis said...

Benjamin: the CRB index you cite has some deficiencies that you should be aware of. For one, it is heavily influenced by energy prices (natural gas, heating oil, and crude). Also, it only has a few commodities from each major group, so just one (e.g., sugar) can have an outsized influence. I note that sugar and natural gas have dropped considerably in the past year.

There are other CRB indices which are more broadly based that I routinely feature (CRB Raw Industrials, CRB Spot Commodities) that are not overwhelmed by energy and tend not to be subject to much speculative investment. I also think the Journal of Commerce indices are worth following.

All of the major commodity indices, with the exception of the CRB index you cite, are up in the first quarter.

Scott Grannis said...

Re: deflation. Finding one group of commodities that are declining in price, or citing the decline in real estate prices is far from sufficient to reach a conclusion that we are on the verge of deflation. On the contrary, I think it much more likely that you are simply seeing a change in relative prices caused by unwanted inventories of housing, for example, or a shift from a very weak global economy to a growing global economy. Relative price shifts happen all the time.

Christian S. Herzeca, Esq. said...

a propos of the recovery in banks, and where we are in the process, i was listening to dick bove on bloomberg radio say that last year the banks had some 200B in writeoffs/reserves that hit earnings, and that he thought normal was 40-50B. hence his claim that if the banks just maintain their operating earnings going forward, as reserves approach normal, the banks stocks can pop 300-400%.

disclosure: long, overweight and leveraged financials.

Benjamin Cole said...


Certainly, any method of measuring prices has shortcomings.

Well, time will tell on inflation, I guess.

BTW, while I am dubious abut inflation anytime in the next three years, in fact I am property-heavy and commodity heavy in my portfolio. The wife.

I suspect that, like many husbands, how I invest and how I want to invest are tripped up by familial obligations.

However, I enjoy these Calafia Beach exchanges immensely, if only on intellectual grounds.

Good luck to all investors.

Unknown said...

Thanks Scott,

Re, real estates stabilization, NAH survey show that altough asking rents are still heading lower, effective rents are in bottoming phase. Rents are a crucial factor in a process of regaing pricing power by the companies.

Benjamin Cole said...


I turned on the "Dodger station" 790 in Los Angeles, and some guy had purchased a block of time to hype his gold investment company. I listened for 15 minutes, and it was pretty dreadful.

This does remind me of the last fluff-bubble in gold in 1986, when the yellow metal topped $900. The more you see gold websites, TV shows, cover of any magazine, then you know more it is time to get out.

Gold is only worth what the next guy will pay for it.

Hard to call tops these days, as capital keeps flowing into favorite sectors well past all reason--momentum is tremendous. See real estate 2000-2008.

I used to say invest on the fundamentals and wait. Now, I wonder if "get in front of the herd" is better advice.

But gold looks like a house of cards with a pending windstorm, to me. The last gold bubble actually followed most of the inflation,. This gold bubble is fear-driven. When the fears recedes? When people get a good 15 percent up year in equities? When real estate rebounds? Then who wants gold?

Benjamin Cole said...

Above 11,000 ont he DJI!

Yes, I know it is just a number, not even a milestone number like 10,000.

Yet, I think this one is big. Each 1,000 milestaone further signals recovery, and more and more investors will put their toes into the stock market water.

You may wish to re-value any gold positions, If equities rally, the steam will leave the gold sector.

John said...

Hi Benj,

My commodity - inflation relationship question was really a hypothetical one. It goes something like, GIVEN an accelerating inflation rate, would not generally rising commodity prices be a necessary occurance? If the answer is 'yes' then would not the fact of generally rising commodity prices be a signal of POTENTIAL inflation?

John said...

Family Man,

I have a good tennis friend whose wife is Polish. She had a distant cousin on the plane. What a wretched tragedy! My family's prayers go to you and your country.

While the pain is great, Poland will survive this disaster. I believe Poland is destined for great things on the world stage. This will not stop you. In fact, in some ways it could accelerate Poland's ascent.

God Bless Poland and all her people.

John said...

Sir Christian,

How refreshing to hear from someone who sees the opportunity in the financial stocks. Everywhere I go (especially over on SA) it seems all anyone sees is 'more foreclosures' or 'commercial RE is going to h---)' or 'the coming tsunami of second mortgage defaults' etc, etc, etc. To me, these problems have long been seen by the market and have been discounted. The market is NOW just beginning to focus on the restored capital levels via the new equity offerings, very high loan loss reserves, peaking credit losses, low cost of funds (note what the rates are for CDs these days), high rates of return on credit cards & overdrafts, increasing real estate transactions, wide spreads between loan and deposit rates, coming real estate mark ups, etc.

The worm has turned. It is getting better, not worse, and best of all, THE FED IS ON THE BANKS SIDE. As Chairman Bernanke said in a speech last week, a normal economy is requires a healthy banking system. Rates will stay low until unemployment is in a clear and sustained downtrend. By then, the banks balance sheets and profitability will also be much stronger. IMO there is no way the stock prices fail to reflect it.

As I said before, those who think I'm a polyanna can sell the banks short. If they are right they will profit handsomely. If they are wrong, they will feel the pain.

Disclosure: long wfc,jpm,xlf and others, and if I'm wrong, I will DEFINATELY feel the pain.

randy said...


My problem with the banks and financial sector in general is one of clarity. I haven't put the time you have into looking closely at them, but how can one trust earnings and balance sheet when they have "substantial discretion" in valuing assets (rather than mark to market). Sounds like Enron to me. On top of that, the meddling federal government - who can guess what they will do? Could be good, could be bad, problem is who knows. Will they strengthen loan loss recognition requirements? Issue new leverage restrictions (I hope)? Force consolidation? Or breaking apart? Broaden subsidized mortgage restructuring? Or suspend it? Banks future "earnings" are too dependent on political whims for me.

You have a stronger stomach than me. Or better information. You may well be right and I hope it is so.


Benjamin Cole said...

BTW, I checked out mainland China monetary growth--up about 22 percent in last year, compared to slight negative growth in the USA (using St. Louis Fed MZM).

Okay, the Yuan is pegged to the dollar.

So, if commodity prices rise due to Chinese demand and monetary growth, then global commodity prices will go up even in dollar terms--the two currencies are tied together. Something that costs more in yuam has to cost more in dollars too.

Thus, I see a strained connection between commodity prices and the Fed. And given that China has become a huge importer of commodities, any change in commodity prices is probably related to China more than the USA.

So, then, I see a much-weakened connection between US future inflation rates and global commodity prices.

John said...


I understand your concerns. You have massive amounts of company. I'll try to address your points.

Clarity: If there was a time to worry about clarity it was in 2008. The regulators have been through the banks' balance sheets with vaccume cleaners. Every (and I do mean EVERY) asset has been 'stress tested' repeatedly and if the slightest weakness shows up, marked down in value. This, in my opinion, is a rear view worry. Remember. The markets are anticipatory and forward looking.

'Substantial discretion': This is an outgrowth of the 'mark to market' rule when there temporarily WAS no market, due to the paralyzing fear generated when Lehman sank. Regulators allowed banks to place a reasonable value on an asset it had no intention of selling anyway. Again, yesterday's news.

Meddling government: As most of the guys (and maybe gals, too!) know around here I leave the political discussions to Scott and the others. However I will say that the market has long known more financial regulation is coming. Just as the health care stocks were not crushed by the health care reform bill, neither will the financial stocks be crushed by their new regulation. And some say they will be helped, in that capital requirements will increase, oversight will increase, and the unmistakable message that next time, there will be no government lifeline for the stupid, and there will be jail for the negligent. Banking is about confidence. Advanced economies cannot function without a healthy banking system. There will be no return to full employment without a healty, profitable, and confident banking system. It cannot happen.

Returns on capital in excess of normal market returns require the assumption of some degree of risk. This is basic economics. Those who prefer not to take the risk avoid the pain of loss, but also fail to earn above market returns on their money. Everyone's risk tolerance is different, and I certainly can't suggest a course of action for you. All I can say is that in my opinion what concerns you are issues long known in the marketplace. And like my old mentor told me long ago when I was starting out in the securities business as a green spud, "Sonny, always remember. Its never the snake you see that bites you."

I never forgot it.

Benjamin Cole said...


Great write-up.

John said...


I see your point on commodity prices being more directly tied to global demand than US monetary policy. However, keep in mind that during the crisis the entire world's monetary authorities conducted coordinated and sustained stimulative policies. It was not just China. That stimulus is continuing, again, by all the world's major central banks. Commodity prices in my view are not up just because China is buying. They have to have somewhere to send their production, and that is almost exclusively here. So I think it still comes back to that 800 lb gorilla in Washington called the Federal Reserve. China would not be buying the commodities if they didn't have a market to sell into.

N'est pas?

John said...

Guys, this is it for me for awhile. My Dad's gone into the hospital and I gotta go. I don't think its critical but at 89 you never know.

Nite, ya'll

randy said...


Best wishes for your family.


Unknown said...

Hi Scott,

Do you know of any free databases that show pricing information for CMBS(including different tranche prices)?


Jon Sandlund

Scott Grannis said...

Veneratio: Sorry, I don't.