BOCA RATON, FLA. - Predictions for 2006 ABS volume were all over the map at the ABS East conference last week, as evidenced by the panel entitled "What Lurks Around The Corner?" moderated by Fitch Ratings Managing Director Kevin Duignan. The panelists, many of whom were talking heads from previous years, discussed the general outlook for next year and tried to project the impact of such issues as interest rates, increasing fuel prices, home price appreciation and the wide-ranging effects of Hurricane Katrina on the market.
There was clearly no consensus on where ABS volume is headed in 2006. In a survey conducted by Duignan prior to the panel, the panelists said next year's volume could range anywhere from a 10% decrease, to a 25% increase over this year. One panelist, John Arnholtz, a partner with Mckee Nelson, even predicted a 100% increase in volume for next year, though it was assumed to be a joke. Duignan also dredged up last year's predictions, made by a similar panel, which included a forecast that 2005 ABS volume would be down 10% from the year before, when it is actually up 25% to 30% so far.
Richard D'Albert, managing director and co-head of the structured products group at Deutsche Bank Securities, was one of the more pessimistic panelists, predicting a 10% decrease in volume. D'Albert ascribed that possible decline to a slowdown in Alt-A mortgage origination and a wearing out of the refinancing cycle. "As you go through the refi cycle umpteen times, refis slow and rates go up," he said.
"It think three dollar gas in this country is [causing people to] pause, and that's going to show in the fourth quarter," said Craig Platt, senior vice president with KeyBanc Capital Markets. However, Platt did predict a 25% increase in ABS volume for next year, and said he believes there will be a housing boom in the Gulf Coast area, as the region reinvigorates after Hurricane Katrina.
The panelists each identified a number of different areas of concern, but the consensus was that interest rates present the biggest threat. William Sidford, senior vice president with Alliance Capital Management, said employment, consumer income and economic expansion are the overall drivers of performance and if those start going south, the performance of ABS deals will follow. Sidford also put the spotlight on gas and home heating fuel prices as key determinants of where the market is headed.
For the most part, the panelists predicted interest rates would reach 4.25% by the end of the year, with Greg Medcraft, managing director with SG Corporate & Investment Banking, low-balling his prediction at 4%. He said at 4%, the Federal funds rate would be at the right level to dampen growth and allow the Federal Reserve to pursue a more neutral strategy. Bill Haley, managing director at ABN AMRO, believes as long as the yield curve is as flat as it is, the Fed will continue to justify raising interest rates, and may even get to 5.25% by the end of 2006.
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