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ABXes going nuts again


The ABX indices seem to be hitting newer and lower lows.

ABX is based on the various tranches of CDOs of subprime mortgage loans (see here for more, and thanks Calculated Risk). Simple funda: if they go down, then the people who hold them are making m2m losses every day.

In my last post in June, I’d seen the 07-2 AAA index at 52; now it’s at 43. This means someone is only willing to pay 43 cents for each dollar of a “AAA” loan. The phrase “AAA” has no meaning anymore – it’s just Another Asinine Acronym.

Credit losses are now going to mount. My Subprime Phase 3 in end-May talked about why I thought the credit crisis was rearing it’s ugly head again: now we’re right at the point where it should hit the fan.

Fannie Mae and Freddie Mac, reeling from record losses, are practically insolvent. Lehman looks really unhappy on the charts, down some 60% in the last three months. Financial stocks are hitting the bottoms, and suddenly everyone’s running for cover – and they will announce results soon.

In India I can’t imagine more carnage. Since May end, we have lost 20% on our indices – in less than 45 days. While we may be in for a bounce – even sellers need to take a break – we can’t stay isolated from world events for too long. For instance, if Citi goes down, it may want to get rid of it’s stake in public companies in India, like HDFC, where it owns a substantial interest. Lehman does too – look for shareholders named “LB Holdings” etc. on the exchange. The resulting unwinding can trigger another run for us.

How to trade this? React is better. We have already taken most of the hit that was going to impact the market, so we may not be too sensitive to bad news. Still, next time the index falls 10% in three days, there’s not much room in there for support so it will fall further. I just hope we hit lower circuit a couple days so that the pain is over in a few days. But if I look at histories of crashes, that just doesn’t happen. Slow pain, over weeks and months.

For all practical purposes our major fast pain is over. Now it’s slow poison time. Gotta go on a diet.


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