Well, since I've first started watching this thing, it's dropped every single day. I caught Jeff Gundlach on CNBC last week (Strategy Session) who talked about this index and claimed that Hedge Funds were selling out of their leveraged positions in this and that was a likely cause of the drop in the index. He claimed there was room for 5 more points of drop (this was on Thursday morning, 10/13/2011). However, because banks didn't need to mark this index to market, you wouldn't see any changes in bank balance sheet values. Also, he said this CDS market only represented about $11B in float, so it isn't the huge $100B subprime market we had in 2008.
| ||||||
| Index | Series | Coupon | RED ID | Price | Factor | |
|---|---|---|---|---|---|---|
| PRIMEX.ARM.1 | 1 | 0.0442 | 7B579YAA3 | 95.042 [-4.770] | 0.408221747 | |
| PRIMEX.ARM.2 | 2 | 0.0458 | 7B579YAB1 | 82.458 [-6.584] | 0.436699618 | |
| PRIMEX.FRM.1 | 1 | 0.0442 | 7B57AKAA1 | 99.958 [-3.875] | 0.468172369 | |
| PRIMEX.FRM.2 | 2 | 0.0458 | 7B57AKAB9 | 87.875 [-6.000] | 0.488982221 | |
So, explain something to me. How do banks avoid the need to mark assets to market prices? Right now, any (European) bank that owns PrimeX CDS and is using these assets as leverage just had the value of this asset fall 4-6% in seven days. However, if this really represents selling pressure only (double whammy of Hedge Funds and EU Banks divesting), then those on the buying end believe that the Prime RMBS market is great and they're getting a steal. If, on the other hand, Prime RMBS market is crap (or the loans underlying this index a crap, those are two different things), then the Hedge Funds and the EU Banks are getting out just in time and someone else will be left holding the bag.
Wish I had a crystal ball.
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