Watch for New Front Page Headlines This Week – Leveraged Loans, Commercial Real Estate…. The Next Shoes to Drop.
A must read - “Credit Jitters Hit Leverage Loan Market” (WSJ FEB 9/10) – This is a page 5 item that is going to work it’s way to the front page shortly. The significance of Friday is that packages of loans are now being put out to bid, in size. It is not clear whether the packages for sale by Wachovia and UBS on Friday were sold, but from what I heard the indications of what it would take to sell them sent shock waves through the markets.
Many have been asking what Next after Sub-Prime, and the answer it – take your pick????
- Commercial Mortgage Backed? – YES – See the headline from Friday’s WSJ “Chapter II – A Commercial Real Estate Bust” or Goldman’s recent report called “The Next SubPrime? Quantifying expected losses from CRE, Alt-A, HELOCs and Option Arms. Goldman says the size of the CMBS market is $3.3 trillion with about 33% or $1.1 trillion securitized and the balance held directly. They are calling for losses of about $183 BB with a whole lot of assumptions. I am not sure the number, but it is big.
- Credit Card Debt” – YES – Credit Card Debt reached a high of $943.5 BB in Dec. according to Fed Reserve. ( up 9.3% in last quarter) Delinquencies are still low at around 4%. ( WSJ Feb. 9) but are reportedly on the upswing.
- Other Exotic Residential Mortgage Product? – YES as mentioned in the Goldman piece.
- Auto Loans? – One would think, but I have not seen numbers.
- Leveraged Loans? – YES ( and what exactly they are is described in the article mentioned above)
- Credit Derivatives? – YES . Bill Gross’s January commentary talks in detail about the shadow banking system and the size of the credit default swap market. Hold on to your seatbelts, as he says the size is $42 trillion, which “according to the Bank for International Settlement (BIS) is more than half the size of the entire asset base of the global banking system. Size of the total derivative market you ask? “$500 trillion according to Bill.” Now a reasonable person would ask how is that possible? The simple answer is leverage combined with very creative financial engineering.
On the Equity side the markets had a horrible week, after a horrible January. Signs of life for equities thanks to an aggressive FED and a $168 BB spending package that seems to be moving swiftly along have quickly become overshadowed by worries around the credit markets and disappointing economic news. What is going to change this week? I think the equities market will continue to focus on the economic data which is light this week – retail sales on Wednesday and I believe Industrial Production Friday. Might well be another very volatile week.
Market Performance for the Week
DJ Indus -561 -4.40% ytd -8.16%
S & P -64.13 -4.60% ytd -9.33%
Nasdaq -108.5 -4.50% ytd -13 %
FTSE Europe -5.97%