Trader’s Narrative

The subprime crisis which came to a head when Bear Stearns’ (BSC) funds imploded has now officially spilled over into the rest of the bond market. Take a look at the BBB rated bonds in the mortgage markets:

What looked benign just less than a month ago, has now filtered through the market such that the BBB paper is priced at less than 40 cents on the dollar. As I noted back then the chart for Bear Stearns (BSC) looked ominous but the credit default swaps were showing no real panic in the market.

How much difference a few weeks makes. The credit default swap rate spread has spiked higher than May 2006, when the market last found its most significant bottom.

The poster child for this mess is American Home Mortgage Investment Corp. (AHM) which dropped 90% today to close at penny stock prices.

Here’s another chart (from Jim Stack’s InvesTech) which shows the devastation being wrought in this sector:

Notice how the critical support line (dotted) coincides with the consolidation in the BBB market around 65-70. That is one brutal chart. The only positive thought I can muster is that it looks like most of the damage is over.