CMBX Spreads Spike as Moody's Reviews $300bln CMBS. Threatens to Downgrade $85bln Below Senior AAA Tranche.

Commercial mortgage backed securities rated below the senior AAA-tranche are expected to be cut by Moody's due to falling commercial property values and rising delinquencies.


"Some $302.6bn in CMBS, or half of this type of asset rated by Moody's, are under review. Moody's said ratings of top tranches of triple A-rated securities, or 72 per cent of the debt under review, should not be affected. That leaves about $85bn subject to potential downgrades, including triple-A rated securities that rank below the senior securities, which could drop four to five notches on average.

The Markit CMBX-AJ, A, BBB, BBB- indices broke through resistance levels today. They are measured in spread (risk premium) not price. Charts below are sourced from Historical Markit CMBS Graphs priced on Feb 6, 2009.

If you have no idea what I'm talking about here's a description of the CMBX Indices.
"The Markit CMBX is a synthetic family of indices based on U.S. commercial mortgage-backed securities (CMBS) which provides investors with liquid, transparent exposure to CMBS of a unique vintage. Each CMBX index references a basket of 25 of the most recently issued CMBS deals.

The seven index tranches reference bonds rated AAA, AJ, AA, A, BBB, BBB- and BB respectively. Ratings are required from at least two of the following rating agencies: Fitch, Moody's and Standard & Poor's. A new series of CMBX is issued every six months." Markit via Bobsguide"

Moody’s to Review $302.6 Billion in Commercial Debt (Bloomberg)

Chesapeake Energy (CHK) Breaking Resistance Levels.. Natural Gas Trending Higher.

Chesapeake Energy ($CHK) is breaking some major levels here. The market is catching a bid so everything is moving. Today CHK broke above $18, it's currently at $18.07 at 10:55est. I did some technical analysis on CHK yesterday and found that it broke above trend resistance with 50 day moving average support. On the weekly it's also breaking some levels to the upside. UNG looks like it could test 50 day moving average resistance. Both CHK and UNG (natural gas etf) have seen some tradable rallies recently with no sustained breaks since natural gas kept printing lower lows. It looks like there's been some bullish inventory readings by the DOE recently and analysts believe the stimulus package could boost demand for natural gas. We'll see what happens here.

Weekly Natural Gas Storage Report (1/30/09,

"Working gas in storage was 2,179 Bcf as of Friday, January 30, 2009, according to EIA estimates. This represents a net decline of 195 Bcf from the previous week. Stocks were 60 Bcf higher than last year at this time and 17 Bcf above the 5-year average of 2,162 Bcf. In the East Region, stocks were 118 Bcf below the 5-year average following net withdrawals of 125 Bcf. Stocks in the Producing Region were 80 Bcf above the 5-year average of 678 Bcf after a net withdrawal of 50 Bcf. Stocks in the West Region were 54 Bcf above the 5-year average after a net drawdown of 20 Bcf. At 2,179 Bcf, total working gas is within the 5-year historical range."

"“The stimulus package is a big deal,” said Chris Jarvis, president of Caprock Risk Management LLC in Hampton Falls, New Hampshire. “Every global market is trying to re-inflate and eventually that money is going to find its way into commodities.”
“The supply and demand fundamentals are actually bullish for gas,” said Jarvis. “I know people are concerned about the industrial demand, but we’ll likely lose production faster.”" (Bloomberg)

More Links:
U.S. Natural Gas Inventories Fall, Remain in Surplus
Natural Gas E&P Stocks Should Rebound Quickly

Baltic Dry Index is on Fire! China Increases Iron Ore Imports to Re-stock Inventory.

Look at this chart of the Baltic Dry Index. Over the past 3 months it has doubled in price. China's iron ore imports rose by 1.03% in December on the year as China's steel mills "replenished" stocks. This compares with a -8% November reading on the year. It could be related to a confidence boost in the inter-bank lending market or China's $586 billion stimulus plan. The shipping industry relies on letters of credit to move product between parties. So whatever is driving this... It's a start.

There are many analysts that believe there will still be pain ahead for the shippers even though China's iron ore stockpiles declined 22% since Sept. It looks like there could be vessel supply/dry bulk demand issues that could ruin the BDI party. So it could just be a temporary squeeze.

"Cantor Fitzgerald analyst Natasha Boyden is more bearish. She tells Bloomberg the market shows little sign of recovering in the near term because of the large fleet supply growth on the horizon. Even with the rise in cancellations, the supply of vessels will outpace demand. "We believe recent output cuts by major iron ore miners along with indications that Chinese industrial activity continues to weaken could make 2009 a difficult year for dry bulk rates." (Seatradeasia)
And a more positive near term view by Goldman Sachs.

"According to Goldman Sachs JBWere analyst Paul Gray, Chinese imports of iron ore in January and February could be higher than expected. He notes Brazilian exports jumped 27 per cent in January, with China the likely recipient. Spot prices for Indian ore shipped to China are about 25 per cent higher than their October lows. Dry bulk rates have picked up, as have ex-Australia freight bookings. And there's more: Chinese domestic steel prices are on the rise at a time when northern Chinese ore supply has been constrained for seasonal reasons. In any event, they're convenient stats for the miners to bandy around as they get to the pointy end of price negotiations for the coming year. Gray suggests a 30 per cent fall in the benchmark price, which compares with the expected 40 per cent-plus." (Australian Business)

Baltic Dry Index (

Looking at the chart the move looks parabolic. The BDI last saw this kind of move in 1985. I'm not an expert on BDI momentum but it looks like it needs a healthy correction. There's decent support under 1,000 and at the 50 day moving average which will hopefully lead it higher during the next leg higher. Next trend resistance is under 3,000. Check out the charts of BHP Billiton and Cia. Vale do Rio Doce. The main point is the dry bulk shipping market could be building a solid base for a sustained breakout which would be analogous to the global economic recovery.

Cia. Vale Do Rio Dolce (
BHP Billiton (

More Info:
Iron Ore Market May Have Bottomed, Fortescue Predicts (Bloomberg)
China's iron ore surplus disappears, prices up-BHP (Reuters UK)
Nanjing Iron, Chinese Steelmakers Gain on Demand (Bloomberg)
Recession: glimmers of hope? (
Baltic Dry jumps another 14%, bulk becomes hot stock again (Seatrade)
Shipping cos set sail on Chinese booster (EconomicTimes)
Ship freight rates sail out of doldrums (Business Standard)
ABN AMRO Bank bullish on China, Hong Kong (MoneyControl)
Dry bulk share prices rally on firmer rates (Lloyds List)
Goldman Sees Brazil Jan Iron Ore Exports Revival (DowJones)
China’s Route Forward (
China Knows (
BHP- 2nd-half iron-ore sales expectations.. (Miningweekly)
Is China Bottoming out? Probably Not, And Yet. (Time)
Too Much Euphoria About Recovery in China Demand? (Whitten)
Sign's Of Recovery in Global Basic Materials Trade? (Whitten)
Brazil stocks rise on commodities, real firms (Reuters)
Vale Gains on Speculation Chinese Demand Recovering (Bloomberg)

**See my previous post on the BDI, EXM and DRYS from December.

Bank of America Breaks Lows, Implied Volatility Shows Pending Event. How Will This Story End?

Here we go again... I charted out BAC a few weeks ago when it got dumped to $5.10 on 500 million shares. It just broke below those lows with implied volatility spiking 11% to 194 not far from the 214 high. Options are being bid up anticipating an event and we all know that Bank of America will stay solvent to avoid another Lehman catastrophe however nationalization terms could wipe out existing equity. BofA acquired Merrill Lynch in September 2008 during the financial massacre and recently reported a $15 Billion loss at Merrill which forced BAC to ask for a hand out.

Bank of America reported its first quarterly loss in 17 years earlier this month. The bank also said losses at Merrill Lynch & Co Inc, which it acquired on Jan. 1, were so much worse than expected that Chief Executive Kenneth Lewis was forced to seek government help in order to go ahead with the deal. The government, which had already given Bank of America $25 billion in October under the Troubled Asset Relief Program (TARP), agreed to a rescue package in which it shares losses on a $118 billion package of residential and commercial mortgages, derivatives and corporate debt." (Reuters)

Also I read in the WSJ that the Fed was in charge of the transaction even when Ken Lewis had doubts. Our banking system is pretty messed up.

It will be interesting to see what happens here. Today BAC closed down 11.36% on 3.5x avg 3 month volume. The IV is close to its highs and today 412k option contracts exchanged hands which was more than double the average volume of 194k on the ISE exchange. Calls and puts were also very active and it's interesting that the ISEE (ISE Sentiment Index) call/put ratio stood at 289 up 180% from 186 (33.17k/11.48k). Also Ken Lewis the CEO of Bank of America bought 200,000 shares of BAC a couple weeks ago so anything can happen at this point so watch the technicals for a big short squeeze or a nationalization dump, or just scalp this son of a b*!

BAC (2 Month Chart)

BAC Options & Volatility (Source:, 2/5/09)

On another note, the Baltic Dry Index has seen a parabolic move to the upside recently. It looks like China is stocking up on dry bulk commodities, blog post pending.