Merry Chritmas everyone. Colleen and I now have a turkey roasting and I am enjoying a cup of coffee and perusing the latest postings on Agri-ville. While I mostly enjoy the perspectives of others, I feel compelled to offer my 2 cents worth regarding the sub-prime issue.
Kodiak has it figured out, although I would suggest the "market" doesn't wait for dividends. An example would be CIBC shares down over 30% since early summer, and there dividends have increased. Seems illogical, however, the trading of shares is now dominated by "funds". These tend to be pension funds, union funds, mutual funds, hedge funds , private equity funds, etc. The managers of these funds are very mercenary, and they quckly move large plays to the most attractive returns in the short term. Three months, one quarter of a fiscal year, is long term to these players. I think they all use the same "program" as well! Guidance and disclosure becomes very important in volatile markets, but that is a topic for another day.
The sub-prime situation is also interesting(positive spin!), in that the market has probably grossly overstated the situation. Mortgages are sourced and priced according to factors such as eguity, credit ratings, location, security, relationship, etc. Pricings, spreads from base rates, are established with costs rising disproportionally to the probability of default.Therefore a triple A rating, with an extremely low probability of loss, will be priced close to prime. A triple C rating , with a probability of default of (i'm guessing) 5%, would be priced perhaps prime plus 7%. There is normally more profitability in the lower ratings. Many Mortgage Co's. source the deals, collect some fees, and then package these deals together and sell them to funds. Funds buy them to diversify there portfolios, or to back trading instruments(Asset Backed Commercial Paper!), with the intention of making a little money, and spreading risk.
When the US economy slowed down, motgages that were highly levered started defaulting, and the markets trading the paper were too illiquid, hence values "dicovered" that are up to 80% discounted. Accounting regulations require marketable securities to be marked to market at the close or each reporting period. The effect of these write downs can destroy balance sheets, i.e. insurers,etc. Therefore, if your business is counterparty to a business that is technically insolvent, you inherit the responsibility. Accounting regulations still apply and the write downs become a part of your balance sheet.
Note, write downs are not write offs, they are provisions to cover loss of value. I would be astonished if 80% of mortgages default (talk about a depression!), although the market would suggest it is likely. Therefore, I would surmise that when this market anxiety subsides, balance sheets will vastly improve.
Sorry for such a long winded post,and again, Merry Christmas....Bill
Kodiak has it figured out, although I would suggest the "market" doesn't wait for dividends. An example would be CIBC shares down over 30% since early summer, and there dividends have increased. Seems illogical, however, the trading of shares is now dominated by "funds". These tend to be pension funds, union funds, mutual funds, hedge funds , private equity funds, etc. The managers of these funds are very mercenary, and they quckly move large plays to the most attractive returns in the short term. Three months, one quarter of a fiscal year, is long term to these players. I think they all use the same "program" as well! Guidance and disclosure becomes very important in volatile markets, but that is a topic for another day.
The sub-prime situation is also interesting(positive spin!), in that the market has probably grossly overstated the situation. Mortgages are sourced and priced according to factors such as eguity, credit ratings, location, security, relationship, etc. Pricings, spreads from base rates, are established with costs rising disproportionally to the probability of default.Therefore a triple A rating, with an extremely low probability of loss, will be priced close to prime. A triple C rating , with a probability of default of (i'm guessing) 5%, would be priced perhaps prime plus 7%. There is normally more profitability in the lower ratings. Many Mortgage Co's. source the deals, collect some fees, and then package these deals together and sell them to funds. Funds buy them to diversify there portfolios, or to back trading instruments(Asset Backed Commercial Paper!), with the intention of making a little money, and spreading risk.
When the US economy slowed down, motgages that were highly levered started defaulting, and the markets trading the paper were too illiquid, hence values "dicovered" that are up to 80% discounted. Accounting regulations require marketable securities to be marked to market at the close or each reporting period. The effect of these write downs can destroy balance sheets, i.e. insurers,etc. Therefore, if your business is counterparty to a business that is technically insolvent, you inherit the responsibility. Accounting regulations still apply and the write downs become a part of your balance sheet.
Note, write downs are not write offs, they are provisions to cover loss of value. I would be astonished if 80% of mortgages default (talk about a depression!), although the market would suggest it is likely. Therefore, I would surmise that when this market anxiety subsides, balance sheets will vastly improve.
Sorry for such a long winded post,and again, Merry Christmas....Bill
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