as most analysts on the street say or is this an indication of more bad times to come? Interested to hear more views…
Its a fair indicator. If people were feeling good they would be selling protection. Of course it doesn’t perfectly reflect reality but it certainly reflects the opinions of the Wall Street traders.
i personally think it might be oversold, i.e. the cost of debt may not have risen as much as the index implies. There seems to be this disconnect between the commercial RE market and what the market thinks is going on in RE.
“as most analysts on the street say” Most analysts on the street feel that a supply and demand driven index of the market from the people who know the market best is crap? You might want to take another look at whatever research piece someone forwarded you.
Skillionaire, it’s not always the people who know CMBS best who are using the index. Some people are just betting that CMBS is the next subprime, and there are many differences between CMBS and subprime. Others are actually using CMBX to hedge non-CMBS positions, and are not basing their positions on the underlying CMBS fundamentals, but rather just betting that the overall structured finance markets continue to widen. Which may happen, but the fact that people are doing that without thinking about the CMBS sector specifically is frightening.
Thinking about the CMBS sector is tough, but I don’t understand what it means for a tradable index to be “a bunch of crap”. It seems to me that underlying all of it are loans for the nail salon in Burbank and the shoe store in Kalamazoo. That’s America so we then package them, chop them up, tranche them, redistribute them, combine them all back together in an index and we have financial engineering allowing us to invest in a nail salon in Burbank and a shoe store in Kalamazoo. Of course, everyone along the way took their piece of golden cake, which might be why it’s a piece of crap…
May be saying it bunch of crap is bit harsh:), but it’s the slang way of putting it when irritated analysts, and more importantly the clients (am in sell side research), vehemently disagree on interpreting/inferring widening of the the spreads on the CMBX as a future predictor of losses. cfa2grunt has a point when he says people dont understand the index completely. I too am confused when inferring the default rate on the CMBX. Once source of outcry was evidenced in an a recent article in the WSJ where a few analysts said probablity of CMBS looses for 2008 was around 2%, but the CMBX said it was 8%. I recently had a discussion with the people from Markit (who created these indices-ABX/CMBX/CDX, etc). I asked them the same question and all they said was they find it strange why people are crying out loud. They said its the people who are taking these positions (buying and selling credit default swaps on the CMBS) and making the spread look what it is today. But at the same time this is a synthetic/derivative index and understanding this is what is causing the concern. Another concern is that these indices are fairly new (CMBX had its first vintage in 2006 and CDX, being the oldest, in 2003). Thus, its difficult to observe the predictive nature of these indices. Thus, the confusion and outcry is anything but over.
So in conclusion the Markit indexes should not be used exclusively as an indicator as the people making bets on them have their own reasons that aren’t neccessarily an educated opinion on where the market will go. But if everyone is negative I sure as heck would take that to be a bad sign…if you’re long that is