Professor Elam

WE are discussing derivatives in Intermediate II Accounting. Please read this article on Commercial Real Estate and Commercial Mortgage Backed Securities. CMBS is a derivative. It gets value from the mortgages that it owns. If the mortgages become delinquent, the value of the CMBS will plummet. And the assets, so called, of the banks holding those CMBS will fall as will the bank stock prices. This is what worries James Stewart. THat is the same James Stewart that wrote Den of Theives about the Milken junk bond fiasco. 

Here is a picture of what Stewart is writing about. KRE is an index or composite of several regional bank stocks. That composite hit its high last May, it hit it again in August and has declined since. The purple lines are now forming a triangle. The move out of that triangle is likely to be decisive regarding the new trend in price. This is why Stewart is selling, a pullback could well be on the horizon.