ABX Chart
I have been thinking hard about the Canadian ABS trust that I mentioned in my prior post. I'm one of these people who likes to think a lot and I hope this isn't a case of thinking too much for my own good. It just looks like the ABS market is such an attractive proposition right now. It' scary and very risky but it also looks like a unique opportunity.
The main thesis for investing in these beaten-down ABS securities is the expectation of a rebound in the ABS prices. Check out the price declines of various home equity (HE) ABS indices (Thanks to MattWright at the Morningstar.com forum for providing a link to markit's ABS charts):
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The price has been dropping since default rates started increasing back in July. The real question is how much further these things will drop.
Even without knowing anything about the details of the underlying ABS instruments, I personally think that the prices have dropped too much. I can see assets rated BBB or lower dropping, but it just doesn't seem right that AA and A have dropped so much. Yes, the rating agencies are downgrading some of those higher rated debt but we are talking huge drops in prices here.
My plan now is to read the prospectus of the securities I mentioned yesterday (TSX: DG.UN; TSX: GII.UN) and figure out if I'm comfortable with these assets. Initially I felt that DG.UN was a better buy for sure since its stock price is about half its NAV, but now I'm thinking that GII.UN may be worth looking at even though its price is slightly above the NAV. I changed my mind because I have this feeling that, since the market for ABS assets has dried up, some of the NAV price estimates are likely misleading. If there is an illiquid market, the prices can be ridiculously low during crises (think trying to buy PinkSheet stocks during a market correction).
Anyway all of this is just an idea at this point. All of this is very complicated and no one, including professionals at the top investment banks, have no idea what is going on...
The main thesis for investing in these beaten-down ABS securities is the expectation of a rebound in the ABS prices. Check out the price declines of various home equity (HE) ABS indices (Thanks to MattWright at the Morningstar.com forum for providing a link to markit's ABS charts):
.jpg)
(source: markit.com)
The price has been dropping since default rates started increasing back in July. The real question is how much further these things will drop.
Even without knowing anything about the details of the underlying ABS instruments, I personally think that the prices have dropped too much. I can see assets rated BBB or lower dropping, but it just doesn't seem right that AA and A have dropped so much. Yes, the rating agencies are downgrading some of those higher rated debt but we are talking huge drops in prices here.
My plan now is to read the prospectus of the securities I mentioned yesterday (TSX: DG.UN; TSX: GII.UN) and figure out if I'm comfortable with these assets. Initially I felt that DG.UN was a better buy for sure since its stock price is about half its NAV, but now I'm thinking that GII.UN may be worth looking at even though its price is slightly above the NAV. I changed my mind because I have this feeling that, since the market for ABS assets has dried up, some of the NAV price estimates are likely misleading. If there is an illiquid market, the prices can be ridiculously low during crises (think trying to buy PinkSheet stocks during a market correction).
Anyway all of this is just an idea at this point. All of this is very complicated and no one, including professionals at the top investment banks, have no idea what is going on...
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