Spreads Don’t Lie

On Tuesday JPMorgan said it had racked up $1.5 billion of losses so far this quarter on mortgage-linked assets, reflecting deepening turmoil in credit markets.

As of June 30, JPMorgan held $19.5 billion of prime and Alt-A mortgage exposure, $1.9 billion of subprime mortgage exposure, and $11.6 billion of commercial mortgage-backed securities (CMBS) exposure, a filing showed.

"These mortgage exposures could be adversely affected by worsening market conditions, further deterioration in the housing market and market activity reflecting distressed sellers," JPMorgan said. Loss estimates exclude hedging, it said.

But there’s more. The Fast Money traders have discovered an odd correlation between the financials and CMBS. The financials are rallying despite the fact that CMBS spreads are growing wider.

I think there has been a disconnect between what’s happening in the bank stocks and the assets that are underlying the balance sheets, explains Karen Finerman.

We are getting very close to levels we haven't seen since things were at their worst, she says. I expect further deterioration.


The bottom line: Karen Finerman recommends shorting the financials. Also, keep an eye on interest rates and spread. The cost of the money is now at levels not seen since the collapse of Bear Sterns.

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Trader disclosure: On Aug 12, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (WMT), (COST), (MSFT), (UUP), Macke Is Short (TM); Adami Owns (AGU), (C), (BTU), (GS), (INTC), (NUE), (MSFT); Pete Najarian Owns (AAPL), (NVDA), (TSO), (AMLN), (HD); Pete Najarian Owns (CSCO) Calls; Finerman Owns (GS); Finerman's Firm Owns (GLNG), (JCP), (MSFT), (SUN), (TSO), (VLO); Finerman's Firm Is Short (WB), (XLF), (BBT), (COF), (IYR), (MDY), (SPY), (IWM), (IJR); Finerman's Firm Is Short British Pound; Finerman's Firm And Finerman Own (PDE); Finerman's Firm And Finerman Own (C) Leaps