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Thursday, October 18, 2007


abx indexes in freefall again

during the downdraft in august, i noted the crashing of the abx indexes, which began to precipitate in early june and accelerated in early july, preceding the equity market fall. on february 26, i noted a nosedive in these same indexes -- just before the market began to fall apart.

as noted by calculated risk -- here, here, here and here -- those indexes on october 11 resumed their plunge to lower lows. commercial syndicated debt is also pricing in more risk, signalling the end of the fun in the heretofore booming commerical real estate market (as oft predicted by calculated risk, it is following residential with a couple quarters lag). sophisticated money is getting short low-quality asset-backed credit, making the super-siv plan look almost a diversion. indeed, though, i think the indexes are reading the plan correctly -- it will save what hopefully can be saved by pooling it, and leave the rest to what comes. "what comes" will probably entail high-pressure selling.

if recent history is any indication, i'd expect more trouble in equities imminently, led by the financials.

lee adler also noted that what may have been a key support in the rally since august 16 -- the unwinding of commercial paper vehicles (siv's and conduits) -- has worked off what it can. players have largely withdrawn from abcp what they can, and their re-employed cash helped boost all other asset markets. now the unwind has stopped, leaving over $900bn in abcp that may or may not be redeemable at all, super-siv or no -- but the cash spigot to the markets from the unwind is largely over.

One of the few places in the world where the problems have been widely reported in the media is Canada (mostly Canadian media). A couple of months ago a number of Canada’s biggest institutions were forced to roll over commercial paper that could not be redeemed when it came to term. One of Canada’s biggest banks, National Bank, stepped in to guarantee this paper. However, my insider contact in a leading Canadian financial institution tells me the holders still have only gotten about 50% of the value due, with no end in sight. He says that the media is not reporting the whole story, that the potential losses are far larger than is being reported.

The Canadian media has also recently been reporting Bank of Canada has in recent days been furiously pumping reserves into the banking system there. This has all the earmarks of a crisis coming to a head. Is the problem confined to Canada? Not likely. We heard similar horror stories coming out of Europe in August. The ECB took action at that time to stave off an immediate crisis, but as a round of ABCP again comes due, there are pipers who must be paid.

With market interest rates again on the rise and the data showing the outflows from the ABCP market slowing, the one time boost to the financial markets, driven by the movement of cash out of the ABCP market has probably reached its zenith. The market must now come to grips with the fact that cash flowing out of that market is likely to slow to a trickle. The $917 billion in nominal value remaining in the ABCP market is a fiction. A large portion of that value is likely to never be returned to holders.

The evidence suggests that crunch time, if not here, is imminent.

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