Bulls chickened out today
So did my internet connection.
Last night was cloudy in Orient, with market there worried about US subprime mortgage rout and its impact on US economic growth. The bearish tailwind carried over to US market this morning, stopped bulls from going higher than 12190, and bulls never regained its little momentum from an OK CPI number. Bulls chickened out on concern over subprime, Fed’s indecision, and impact on US economic growth. Sentiment is still negative; every news is bad, if not worst.
Now, about subprime.
#1. What is the size of subprime problem itself?
How big the subprime problem is? The streets have all kind of estimates.
The bullish one: only 5% of subprime is problematic now.
According to Forbes, S&P estimated:
“Only 1% Just 1% of the mortgage bonds securitized so far this year and rated by Moody's Investor Service have been downgraded or put on watch..”
So, if subprime is 20% of total mortgage bonds, and assuming all problematic 1% of total mortgage bonds are with subprime, then only 5% of subprime is problematic NOW.
The bearish one: 20% of subprime may fall delinquent LATER.
The following is from “ntrader”’s post
It is hard to estimate how big the loss will be from the fallout of subprime. Buit here is a rough estimate.
The Saturday WSJ reports that "More than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, comes up for interest-rate resets in 2006 and 2007, estimates Moody's Economy.com, a research firm in West Chester, Pa."
That tells that total mortgage outstanding in US is about $8 trillion. Among this, about 20%, or $1.6 trillion is subprime (a small portion according to wall street analyst). How mcuh of these will be in foreclosure?
The nonprofit Center for Responsible Lending predicted the subprime failure rate would reach 22.8 percent in Santa Ana, Anaheim and Irvine, 22 percent in Los Angeles and Long Beach, and 25.2 percent in Bakersfield.
Barrrons estimates about 20% of $1.6 trillion may fail, that is about $320 billion!
How much was the loss of Savings and Loans failure (S&L Crisis.) in 1987? $160 billion!
#2 Is subprime going to spread around?
A survey by the Wall Street Journal yesterday showed that only 19% of economists believe it is "very likely" that sub-prime mortgage problems will impact the prime market. Another 36% say it is "somewhat likely" there will be some impact, so the headline on the article naturally screams "Subprime Mortgage Woes are Likely to Spread,"
So, “right or wrong”, the market is heavily concerned with subprime and its impact on economy.
In CDS market, iTraxx Crossover 10 Y went up to 331 from 326 today, and DJCDXNI went up 3.9% to 37.7 today.
