[stansd]

Cashman,

Please post your current rent along with the purchase price of a comparable house. Then take that purchase price * 8% to get approximate annual mortgage payment. We’ll assume your interest savings and equity paydown roughly pay for property tax, mello Roos or HOA, incremental insurance, repairs, and upkeep, and that the market will be flat for the next couple of years.

My Rent is 1,895/Mo or 23K/Year. The house I live in is worth 500K, so I’m saving somewhere around 17K/year by renting.

My bet is that your math is similar.

Stan

[stansd]

This is the best one I’ve seen…only bad news is that you have to register with the New York Times if you haven’t already.

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?ex=1185336000&en=92a35496df194374&ei=5070

Stan

[stansd]

This is the best one I’ve seen…only bad news is that you have to register with the New York Times if you haven’t already.

http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?ex=1185336000&en=92a35496df194374&ei=5070

Stan

[stansd]

Data I’m looking at in my previous post:

Index Series Version Coupon RED ID Price High Low
ABX-HE-AAA 07-1 7 1 9 0A08AHAC6 95.23 100.09 95.23
ABX-HE-AA 07-1 7 1 15 0A08AGAC8 88.11 100.09 88.11
ABX-HE-A 07-1 7 1 64 0A08AFAC0 68.50 100.01 68.50
ABX-HE-BBB 07-1 7 1 224 0A08AIAC4 47.09 98.35 47.09
ABX-HE-BBB- 07-1 7 1 389 0A08AOAC1 45.02 97.47 45.02

Stan

[stansd]

Data I’m looking at in my previous post:

Index Series Version Coupon RED ID Price High Low
ABX-HE-AAA 07-1 7 1 9 0A08AHAC6 95.23 100.09 95.23
ABX-HE-AA 07-1 7 1 15 0A08AGAC8 88.11 100.09 88.11
ABX-HE-A 07-1 7 1 64 0A08AFAC0 68.50 100.01 68.50
ABX-HE-BBB 07-1 7 1 224 0A08AIAC4 47.09 98.35 47.09
ABX-HE-BBB- 07-1 7 1 389 0A08AOAC1 45.02 97.47 45.02

Stan

[stansd]

I’ve been confused by this same thing: Just to make sure I’ve got it: When the popular press quotes the ABX index, they are quoting the BBB- rated portion of it, correct? If so, that means that the default rates are creeping way past the equity tranche.

With that said, the AAA tranche is still selling for 95 or so, meaning that that’s still quite safe.

I will confess, though…looking at all the different traches, I’m surprised by how much risk the market is pricing in (5 ppts on an AAA rated bond seems like quite a lot).

I haven’t done the math, but it seems like at these prices, and given the ratings downgrades, this market truly is in the process of evaporating, while the spreads skyrocket.

Am I reading this all correctly?

Stan

[stansd]

I’ve been confused by this same thing: Just to make sure I’ve got it: When the popular press quotes the ABX index, they are quoting the BBB- rated portion of it, correct? If so, that means that the default rates are creeping way past the equity tranche.

With that said, the AAA tranche is still selling for 95 or so, meaning that that’s still quite safe.

I will confess, though…looking at all the different traches, I’m surprised by how much risk the market is pricing in (5 ppts on an AAA rated bond seems like quite a lot).

I haven’t done the math, but it seems like at these prices, and given the ratings downgrades, this market truly is in the process of evaporating, while the spreads skyrocket.

Am I reading this all correctly?

Stan

[stansd]

You are correct. I am referring to bootstrapping. The only point I was making is that the implied yield in the outer years is higher than the 1.5%…you obviously understand the process. If the 6 month yield rises to 2% at the end of the 5 year term, you probably would have been better off with the 1.5% over the horizon.

On the Taleb item-I wouldn’t put my own money in that type of fund…it’s true that market irrationality often lasts longer than your own liquidity…my recollection is that even the LTCM bets actually turned out to be right…they were just levered to the point where they couldn’t wait that long.

Back to the irrational housing market.

Stan

[stansd]

You are correct. I am referring to bootstrapping. The only point I was making is that the implied yield in the outer years is higher than the 1.5%…you obviously understand the process. If the 6 month yield rises to 2% at the end of the 5 year term, you probably would have been better off with the 1.5% over the horizon.

On the Taleb item-I wouldn’t put my own money in that type of fund…it’s true that market irrationality often lasts longer than your own liquidity…my recollection is that even the LTCM bets actually turned out to be right…they were just levered to the point where they couldn’t wait that long.

Back to the irrational housing market.

Stan

[stansd]

Davelj,

I was trying to respond to some of the other posters who possibly haven’t thought about this as much as you have. I may have hit reply to yours.

Lets keep the posts constructive…argue substance all you want, but there’s no need to be condescending.

On your point about the shape of the yield curve: Typically, I’d agree, you wouldn’t want to buy the longer duration maturities without a bigger spread. That said, I’m sure you’ll recall from finance 101 that the yield of a longer term bond is a function of the the shorter term yields. If the short term bond is 0.76%, then the implicit assumption is that the 3-5 year yield is probably 2.5% or 3% if the 5 year is yielding 1.5%, which, though still low and possibly not sufficient for the risk undertaken still may make sense.

You’ll recall from the book that the author bets on events that are very unlikely. Making money in the carry trade will make you short amounts for a long time, but you’ll lose your shirt when the currency makes a big move against you…that’s the significance.

I look forward to a brilliant reply, which I’m sure will confuse my infantile mind though articulated by your superior one into the simplest possible terms.

Stan

[stansd]

Davelj,

I was trying to respond to some of the other posters who possibly haven’t thought about this as much as you have. I may have hit reply to yours.

Lets keep the posts constructive…argue substance all you want, but there’s no need to be condescending.

On your point about the shape of the yield curve: Typically, I’d agree, you wouldn’t want to buy the longer duration maturities without a bigger spread. That said, I’m sure you’ll recall from finance 101 that the yield of a longer term bond is a function of the the shorter term yields. If the short term bond is 0.76%, then the implicit assumption is that the 3-5 year yield is probably 2.5% or 3% if the 5 year is yielding 1.5%, which, though still low and possibly not sufficient for the risk undertaken still may make sense.

You’ll recall from the book that the author bets on events that are very unlikely. Making money in the carry trade will make you short amounts for a long time, but you’ll lose your shirt when the currency makes a big move against you…that’s the significance.

I look forward to a brilliant reply, which I’m sure will confuse my infantile mind though articulated by your superior one into the simplest possible terms.

Stan

[stansd]

First, most of the posts here reflect the general consensus tht the rate discprepancy makes no sense…that’s been the impetus of the “carry trade” where you borrow in Yen at a low interest rate and invest in T-Bills at a higher rate…it’s like printing money as long as the currencies don’t move against you.

In response, thought to the idea that this is insane, and at the risk of getting overly technical, investment banking models are currently viewing the yen as the most undervalued of all currencies worldwide. If you believe that to be true, you stand a big risk that the yen value that you have to repay is much higher than what you borrowed, which would mitigate your gain.

Simple example…Lets say you borrow 100 U.S. dollars in yen at a 130yen/$ exchange rate (you borrowed 13,000 yen). The interest rate on your loan is 1%. You then took that $100 and invested in T-Bills at 5%. In a years time, you have $105. Now it’s time to repay your loan. If all goes well, and the currencies don’t move, you made $4 ($5 interest made, $1 in interest paid). But, lets say the yen appreciates 10% to 117. You then have to repay 13,000/117 = $111 plus a little over a dollar in interest = $112. So, you just lost $7 ($112-$105) instead of making $4.

Don’t assume the market is being irrational just because it seems so on the surface. There are a lot of folks out there taking big, big risks, but making $100 a day for 2 years is nothing when you lose $1,000,000 in a day due to a big move in the currency (read fooled by randomness if you want to learn more).

Stan

[stansd]

First, most of the posts here reflect the general consensus tht the rate discprepancy makes no sense…that’s been the impetus of the “carry trade” where you borrow in Yen at a low interest rate and invest in T-Bills at a higher rate…it’s like printing money as long as the currencies don’t move against you.

In response, thought to the idea that this is insane, and at the risk of getting overly technical, investment banking models are currently viewing the yen as the most undervalued of all currencies worldwide. If you believe that to be true, you stand a big risk that the yen value that you have to repay is much higher than what you borrowed, which would mitigate your gain.

Simple example…Lets say you borrow 100 U.S. dollars in yen at a 130yen/$ exchange rate (you borrowed 13,000 yen). The interest rate on your loan is 1%. You then took that $100 and invested in T-Bills at 5%. In a years time, you have $105. Now it’s time to repay your loan. If all goes well, and the currencies don’t move, you made $4 ($5 interest made, $1 in interest paid). But, lets say the yen appreciates 10% to 117. You then have to repay 13,000/117 = $111 plus a little over a dollar in interest = $112. So, you just lost $7 ($112-$105) instead of making $4.

Don’t assume the market is being irrational just because it seems so on the surface. There are a lot of folks out there taking big, big risks, but making $100 a day for 2 years is nothing when you lose $1,000,000 in a day due to a big move in the currency (read fooled by randomness if you want to learn more).

Stan

[stansd]

I find it a bit interesting that the ’08 increase and the ’07 decrease are almost identical. Pretty good marketing line to say you’ll be ahead in a years time. Even the johnny come lately S&P economists are forecasting an 8% decline between ’06 & ’08.

At least David Lereah was smart…he got out before it got really ugly…we should take squares on how long until Mr Yun resigns…I’ll give him 1.5 years from today. Lereah was savvy enough in most cases to make prognostications that were devoid of facts…Yun is citing more facts to back up his ridiculous forecasts…this will come back to bite.

http://www.businessweek.com/investor/content/jul2007/pi20070710_101838_page_2.htm

Stan

[stansd]

I find it a bit interesting that the ’08 increase and the ’07 decrease are almost identical. Pretty good marketing line to say you’ll be ahead in a years time. Even the johnny come lately S&P economists are forecasting an 8% decline between ’06 & ’08.

At least David Lereah was smart…he got out before it got really ugly…we should take squares on how long until Mr Yun resigns…I’ll give him 1.5 years from today. Lereah was savvy enough in most cases to make prognostications that were devoid of facts…Yun is citing more facts to back up his ridiculous forecasts…this will come back to bite.

http://www.businessweek.com/investor/content/jul2007/pi20070710_101838_page_2.htm

Stan

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