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What If The Subprime Losses Are Wrong?
by Dr Joe Duarte
June 9, 2008
A Voice In The Wilderness
We don't want to come off as if we were Larry "always happy no matter what's really happening" Kudlow. But here's a thought to ponder. What if the supbrime losses to Wall Street and other big investors are a lot less than we've been told?
One little known, but important outfit seems to think so. According to The Wall Street Journal: "A key measure of estimating the value of subprime mortgage-backed securities may be overstating potential losses of triple-A securities by more than 60%, according to the Bank for International Settlements, which puts its own estimate of such losses at $73 billion."
In fact, if the BIS is correct, then somebody's got a lot of explaining to do. Wall Street, and everybody else, has been using something called the ABX to value supbrime securities. According to the Journal: " the ABX is an index that tracks the value of securities backed by subprime loans. ABX is based on credit-default swaps: actively traded instruments that insure against default on the securities."
Yet, the index may be flawed, if the BIS is correct, as "the BIS says the ABX prices may be unreliable because the indexes only cover a small percentage of the market." In other words, using the ABX may be akin to using the action in the Dow Jones Industrial average as a measure of the whole market. As anyone with any knowledge of technical analysis knows, there are times when the Dow has a terrible time and the rest of the market does fine.
So, if the BIS is correct, by using ABX as the benchmark, the market may be reacting to the whole market based on what statisticians would call a "biased sample," which makes the whole set of assumptions and conclusions based on the data flawed.
Sure, it's a farfetched idea. Yet, "The BIS, often called the central bankers' central bank, has few formal banking duties but is a hub for economic and monetary research as well as for global policy makers," and the ABX is only two years old, making it an instrument whose usefulness has not been fully tested by time.
So, here's the critical statement. According to The Journal: "The BIS also says the ABX indexes may misrepresent the structure of the securities they claim to reflect. The specific triple-A securities referenced by the index, in the case of a default, would be paid only after all other triple-A obligations had been met. Recalculating with new data for triple-A securities that would get paid faster, the BIS says the ABX overestimates triple-A losses by 62%."
Like with any set of numbers. It's how you look at them that really matters. And BIS is looking at the data from a different angle, saying that "the ABX indexes may misrepresent the structure of the securities they claim to reflect. The specific triple-A securities referenced by the index, in the case of a default, would be paid only after all other triple-A obligations had been met. Recalculating with new data for triple-A securities that would get paid faster, the BIS says the ABX overestimates triple-A losses by 62%."
The BIS data suggests that the losses from the supbrime crisis are only (hmmm) $205 billion. Pheewwwwww!! We feel better knowing that.
Conclusion
Wall Street is more about perception than fact. And the subprime crisis is no exception. But, as with any other Street phenomenon, it's all in how you look at the data.
In this case, the BIS, a quasi-think tank has come up with an alternative version of looking at the subprime mess.
And yes, it looks better than it would otherwise. More than anything else, it raises questions about the ABX, the benchmark used by the market to measure the subprime losses.
So, the big question, is who do we believe? Once again, even good news raises the same old specter, even when Wall Street is trying to do the right thing, all it can do is make investors trust the establishment even less.
Texas Roadhouse (Nasdaq: TXRH) Burns The Competition
Texas Roadhouse (Nasdaq: TXRH) is bucking all kinds of trends, yet the stock is languishing along with the casual restaurant sector.
Chart Courtesy of StockCharts.com
In the course of being a junior tennis dad, this scribe gets to travel a fair amount and happily samples life as a road warrior, sometimes seeing things from a totally different light.
This weekend, we found ourselves in College Station, TX, home of Texas A & M university, and a place that's usually dead in the summer. But, not this weekend, as hundreds of junior tennis players, basketball players, and firemen have decended upon the town for tournaments and conventions.
The result is that hotels and casual dining joints have been packed to the rafters. Sure, Chili's, On the Border, Red Lobster, and the usual other haunts have been busy. Trust us, we've had to drive from one to another just to get into one for a late bite after a hot day on the courts.
Yet, not a one of them has been as crowded and as busy as the Texas Roadhouse, where we finally got in for lunch on Sunday.
As usual, the analyst makes an appearance, so while talking to our waitress, we found that this particular roadhouse is "always" busy, both for "lunch" and "dinner," even on Sundays.
Our wait was about 20 minutes at lunch. And the place was packed. By contrast, we walked into Red Lobster for dinner without any wait on the same day.
A jaunt to the Texas Roadhouse web site, revealed that the company actually expects to grow this year, while its competition is praying just to break even, while annual growth figures are also encouraging.
So, is College Station a microcosm of casual dining heaven? Is this just a flukey weekend because of all the conventions? Or does TXRH really have something going that Brinker and Darden don't?
We're not sure, to be honest. And with a crazy market such as we saw last week, TXRH shares took a dive on Friday.
Still, this is one to keep an eye on, and one to revisit on a regular basis. Next month, Austin, where they just happen to have a few Texas Road Houses scattered about town. Who says that you can't mix business with pleasure?
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