Flashback / 'AAA' ABX Plunge Continues

A: Forgive me for wanting to go back to Oct. 16th - Oct. 18th for a moment. In addition, most ABX Indices stay at lows as the 'AAA' index reverses course and heads down again to new lows. In short, a decline in the ABX indices signifies investor sentiment that subprime mortgage holders will suffer increased financial losses from those investments. Its a new world, follow what has been dead on people!

Flashback 6 weeks ago:

October 16th: Will The Real Hangover Please Stand Up

...I think the street is yet to adapt fully to a world of credit restrictions, solvency issues, global inflation and higher rates. The first credit blip was an 'awakening' of sorts, and for those that think it's completely over, well, stop hitting the snooze button!

Is the recent selloff in ABX markets a sign that foreclosures and defaults are a problem again? Are we going to get another round of credit worries? After all the write-downs by corporations, will we find out that MORE is yet to come as earnings are hit in future quarters? These are the questions that come to my mind when I see what is going on in the credit markets!

October 18th: Proof The Credit Squeeze is NOT Over

Just a lot going on under the surface here folks that could lead to another round of credit woes when it reaches the top; that is mass media and consumers. Let me just get right into the three reasons why the credit squeeze is not over: ABX markets plunging, Bank of America's Earnings Miss, & Cheyne Finance's PLC insolvency issue. This credit story is NOT OVER! We are also yet to see any actual evidence in US economic data that the credit squeeze is hitting the wallets of consumers. I think it's a matter of time

October 18th; later that day: Another Day, More Insolvent SIV's

Call me paranoid, but something is going on at the core of the credit mess here. Its a signal that things are NOT ok in credit land. As you all found out in early August what this means for the consumer in terms of tighter standards, fewer loan options, mandatory doc checks and higher rates, it IS IMPORTANT! It seems we are now in the beginning phase of what may eventually be called the insolvency era. So when will the time of death be? I have no clue but I do know that the core of the credit markets are undergoing serious distress right now and it's got to trigger some type of adjustment in equity markets in the near future. But hey, whats a few billion amongst friends?

Here is a chart of the DOW stock average since October 16th and the observations noted above:

DOW JONES IS DOWN 1,145 POINTS (just under 10%) since my comments 5 weeks ago of: "Call me paranoid, but something is going on at the core of the credit mess here. So when will the time of death be? I have no clue but I do know that the core of the credit markets are undergoing serious distress right now and it's got to trigger some type of adjustment in equity markets in the near future."

Lets stick with what works. Here is a chart of the ABX 'AAA" index. Notice where I circled the uptick that occurred last week; I discussed that here two weeks ago with the hopes that maybe some bids were coming in. But that didnt last and you can clearly see the selloff to new lows that took place. This is further evidence that it is not just a subprime problem anymore, and the future probably holds bad news for alt-a (near prime) and prime delinquencies & defaults. Should this occur and the ABX be right again, we will have a further seizing up of the secondary mortgage markets as investors back away from buying repackaged securities of higher quality loans. Needless to say, this is a very big deal and could make the tens of billions in write downs thus far look minuscule.

In meantime, enjoy these short covering & glimmer of hopes rallies but know that the credit crunch is in full swing, nothing can stop it (not even fed rate cuts), and the best thing we can hope for is full disclosure of holdings so we can fully understand what the problem is and solutions can be formulated. This is as much a liquidity crunch as it is a credit crunch at this time. I'll continue to report on the ABX Indices as the financials have been following moves in these markets for the past 3-4 months.

THE ABX INDEX - At a time when almost nothing about subprime securities seems certain, the ABX index is a key point of reference for investors navigating the world of risky mortgage debt.

The ABX, launched in January 2007, serves as a benchmark of the market for securities backed by home loans issued to borrowers with weak credit. The ABX tracks the performance of a basket of credit default swaps based on U.S. subprime home loans. Credit default swaps, which are like insurance contracts, allow buyers and sellers to trade risk. A decline in the ABX suggests that the securities have become more risky and that investors have lost confidence in them.

WHAT TO WATCH - The part of the ABX linked to the riskiest subprime bonds has fallen about 67 percent since the mortgage wipeout began in the summer. Now subprime fears are spreading to segments of the market once considered ultra-safe.

For example, AAA-rated mortgage-backed debt has tumbled on the ABX in the last month, reflecting concerns that even those bond holders higher up in the capital structure - those who get paid first - may also suffer losses.

Citigroup CEO Gary Crittenden referred to the decline in the AAA index when the financial services giant announced on Nov. 5 it would write down as much as $11 billion in the fourth quarter. "Now the best way to kind of get an outside perspective on this is to look at the ABX indices, which have dropped dramatically since the end of September," Crittenden said.

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