Wednesday, July 29, 2009

Are ABX and CMBX Pointing to Economic Stabilization?

ABX.HE, or better known simply as ABX, is a collection of asset-backed securities indices administered by Markit. Without going into too many details, these indices basically track the price of residential mortgage backed securities and thus are an excellent barometer for the housing market. Our prediction is that these indices have to at stabilize for economic recovery to be possible. Let's take a look to see where we stand.

Below are a selection of ABX charts, from ratings AAA to BBB-, which began trading on July 19, 2007 (click on images for larger views):

ABX.HE.AAA.07-2

The AAA index has turned up decisively in the preceding months.

ABX.HE.AA.07-2

The AA index looks to have stabilized, though at a remarkable 4 cents on the dollar.

ABX.HE.A.07-2

The single A index has rebounded a whopping .4 cents, so let's call it stabilization anyway.

ABX.HE.BBB.07-2

ABX.HE.BBB-.07-2

BBB and BBB- have stabilized as well, though glancing at the charts they may just not be trading at all anymore.

Like the ABX indices track residential mortgages, the CMBX indices track commercial mortgages. CMBX began trading on March 7, 2006. Below are a selection of CMBX charts, from ratings AAA to BB:

CMBX.NA.AAA.5
AAA has been trending up since March with no signs of trouble.

CMBX.NA.AA.5

CMBX.NA.A.5

Double A and single A have been less steady than the AAA variety but still the trend is decisively up.

CMBX.NA.BBB.5

BBB does not look as strong as the other indexes but is still 4 cents off of its bottom.

CMBX.NA.BB.5

Double B looks by far the weakest and while it has not made a new bottom, does not look like it has quite stabilized either.

What conclusions can we draw from examining the ABX and CMBX indices? It appears that most of the indices at the very least have stabilized. Looking at other price indicators, such as Case-Shiller, Residential housing prices look to have stabilized some while commercial prices are in free fall still. For the time being, the case can be made that the worst may be behind us as far as real estate goes. This is a far cry from a new bull market and strong economic recovery, but it is more than we had to cling to six months ago. Now what happens when monetary policy has to tighten again may be another story...
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