"What hasn't shared in the rally at all is mortgage credit, which has been in kind of a quiet crash for the past 6-months to a year. In the sub-prime world, the ABX Index has dropped by over 35% in the past year. And now in the past week even, the PrimeX market, which nobody really knows much about, it was rally designed to be the prime sibling of the ABX sub-prime index, it's been persistently weak."
"The prices have been a little bit weak since the later part of September on the mortgage assets because of some large selling. There were some large blocks that were selling out of some hedge funds. The PrimeX index has been persistently overvalued. It really trades about 10-12 points higher in price than where real cash bonds trade in the market. Basically, there are two reasons for that. The first is the PrimeX has a higher interest coupon that it pays and that's worth about a handful of few points right there, and then people can leverage it. Leverage is very hard to get in the cash bond market because people still have a hangover effect from the 2008 disaster in financing. So, you can leverage up these synthetic indices, and for that reason... It's kind of weird isn't it? People pay more because they can leverage it, so they're overpaying for something and leveraging it. I always feel like leveraging an overvalued asset seems like a uniquely bad idea.
|PrimeX Index courtesy of Markit (see prices and charts)|
|ABX Index courtesy of Markit (see prices and charts)|
Now, PrimeX is tiny, the float is only $11 billion. Back in late 2008, the subprime index was more than 10x that size. So it's very susceptible to technicals. So when the selling came in late September out of the hedge funds, it started to hit the PrimeX market..."
"So it's probably something of a weak spell here as there is this technical problem, and let's face it, the fundamentals in housing just aren't that good. You have..."
Btw, the interview was interrupted with footage of Raj Rajaratnam walking out of a courthouse after his sentencing.
Related article: Jeffrey Gundlach: ‘We’re in a Recession Right Now (presentation at New York Yacht Club, 9/28/2011) - WSJ DealJournal