Monday, February 26, 2007
Has the day of reckoning arrived? Macro Man’s email box and Bloomberg message cache is chock full of missives on the subprime market and the serious deterioration in the price of the lowest-rated credits in the sector. And indeed, it does look grim...the ABX BBB- chart reminds Macro Man of the price action in GKOs in the summer of 1998.
Not really. While Macro Man concedes that the subprime market does indeed look fugly, he retains his belief that contagion is probably unlikely. Overall mortgage delinquency rates in Q3 were just 1.72%, according to the Fed; while this is admittedly off its lows of a couple of years ago, it remains well, well below the average of the past 15 years.
Macro Man therefore covers his TYH7 short at 107-27.
If this theme ever gains broad currency (pardon the pun), then equities are going to be a screaming buy.
In the meantime, however, Macro Man continues to worry, but is pleased that the subprime story is at last playing out. It’s much better to take the risky-asset hit now when everyone’s worrying already...