Equities, the VIX, and to some extent commodities have diverged massively from credit markets and the yen over the past few days (TOH Financial Times)
Here’s the CMBX 3-1 AAA roll — typical of the surge in yield (collapse of price) of the collateralized mortgage-backed securities market:
In other words, the rate of interest on a typical 3-1 AAA CMBS has exploded from approximately 7 basis points above Treasuries in July, to 50 points in August (remember “that” “credit crunch” … the one that GaveKal advised was a silly, transient panic?) to 100 basis points in November (when everyone was really freaking out, and when HF losses exceeded the August A-bomb), to… just under 225 basis points today. Similar explosions have occurred in other CMBS rolls: interest on BB debt, for example, now clocks in at just under 2000 (”two thousand”) basis points over Treasuries today.
Just looking over stock movement today, it seems like Ambac and MBIA (both -13% today) had to dump a gigantic load of toxin debt today–taking gigantic losses, and de-hedging banks’ CLO exposure, which they “hedged” by … buying insurance from MBIAmbac. So lots of garbage is headed to the balance sheets.
I have also been wondering for some time if, perhaps, an elite college endowment is hemorrhaging? I thought Harvard had bad news in store after Mohamed El-Erian abruptly stepped down from the leadership of Harvard Management Co. on Sept. 11. 2007. The endowments have been playing around in this stuff just like everybody else…
Anyway, this is an interesting divergence. Equities generally involves dumber money, and equities seemed to rally pretty blindly on the Buffett announcement, which we already covered here. But the VIX and commodities are thought of as smart money.
The moral of the story is, some big boys have been blowing up over the past couple of days. My queasy prediction is that there will be a final shakeout over the next few days. The monolines are playing hard to get, and the market will retch with the see-saw of their negotiations with Buffett.
The long term moral of the story for most investors, though, is this: every cycle, the terminology of debt vehicles will be intentionally incomprehensible. Next time around you can bet that the evil debt vehicles where the problems all start will be called ABC’s, XYZ’s, and WTF’s. The point is that banks coin these off balance sheet vehicles during boom times; they are perfectly legal according to the law; and they will be criminalized once they fail to continue printing money, leverage, and asset inflation.
Everyone assumes that Enron’s “Raptor” vehicles were obviously illegal and misleading when they died and blew open Enron’s bad debts. They certainly were after the fact. All I can say is that Citigroup, MBIA, Ambac, and other banking institutions have done the same thing this cycle, with the full knowledge and support of the SEC, Fed, and Treasury.
It’s all about whom you know. Then again, Rubin couldn’t save Enron, try as he did. At the end of the day, he won’t save Citigroup either.
Only the US taxpayer can do that.
