PrefBlog

Today’s word is confidence. Sadly, it’s only a word:

Consumer confidence slumped to the lowest level in almost two years and home sales weakened, threatening U.S. household spending and bolstering the case for the Federal Reserve to keep cutting interest rates.

The Conference Board’s index of consumer confidence fell more than forecast in September, to 99.8 from 105.6.

The consequences of extreme lack of confidence are currently illustrated by the continuing Northern Rock saga, in which some possible bidders are thought to think it’s worth more dead than alive:

Former Goldman banker Chris Flowers may join the Cerberus Capital Management LP and Citadel Investment Group LLC hedge funds in splitting up Northern Rock, the Sunday Telegraph reported Sept. 23, citing an unidentified person familiar with the proposal.

A Northern Rock bail-out might cause some embarrassment with UK regulators :

The U.K.’s Financial Services Compensation Scheme has 4.4 million pounds to protect deposits, compared with $49 billion at a similar fund in the U.S., the London-based Independent reported today, without saying where it got the information.

Even that, though, is a huge bankroll compared to what we have in Canada: $1.4-billion as of 2006-3-31. The 2006 report is the one relevant to the 2007 Annual Public Meeting. Call the papers! I want to revise my confidence number!

The WSJ republished the IMF’s risk diagram, which is cool enough to be worth posting:

The further from the centre, the riskier the axis.

The S&P/Case-Shiller US Housing Price Indices were released today and flesh out the anecdotal descriptions of how bad the US market is:

10-City Composite was down 4.5% versus July of 2006, while the 20-City Composite was down 3.9% over the same time period.

This is the first significant yoy decline in these indices since the recession of Bush the Elder; the worst three cities for housing in the past year have been Detroit (-9.7%); Tampa (-8.8%); and San Diego (-7.8%). It’s Detroit that looks really ugly: the index level, set to a base of 100 in January 2000, is only 111.3 in July 2007, implying an annualized rate of return of less than 1.5%. So much for housing as a long term investment, in Detroit, anyway! For those who look at the detailed data and want a comparison, US Inflation data is available from the Bureau of Labour Labor Statistics: The Jan 2000 “All items less food and energy” index (US City Average, Not Seasonally Adjusted) was 100.3; July 2007 is 115.1, implying the average Case-Shiller index should be about 114.7 to stay even.

Since the 10-city composite is actually 215.9 and the 20-city composite is 198.4, there are two ways of looking at it: (i) What are those greedy Americans complaining about?, or (ii) Wow, they’ve got a lot further to fall. JDH at Econbrowser discusses the matter and worries about repercussions in the financial markets. If he’s not gloomy enough for your tastes, Dear Reader, try Nouriel Roubini:

So as JP Morgan rightly put it there is “no sign of a floor for housing”. The housing recession will continue throughout 2008 and the fall in home prices will continue into 2009 before any bottom is reached.

As an aside, the WSJ has highlighted some research by the Atlanta Fed showing that home ownership in the States increased from 64% in 1994 to 69% in 2005. The rate had been static from the mid-sixties to 1994.

Speaking of the CPI, a Bloomberg columnist has produced a column pandering to the ‘CPI Lie’ crowd. It’s certainly a pleasant change to see some actual meat on the bones of the slogan! He states, for instance:

Medical expenses are given short shrift as well. It wasn’t that long ago when employers could cover almost all of an employee’s health-care bills.

Now workers are shelling out an average of $3,281 from their paychecks for family medical coverage, according to the Kaiser Family Foundation, a non-profit organization based in Menlo Park, California. The average premium for a family policy is more than $12,000 annually.

So why is this a measure of inflation? It looks more like a cut in salary (via reduction in benefits) to me … which may come to the same thing to somebody attempting to maintain a standard of living with the same work, but should not be mis-labelled.

Willem Buiter took a break from writing for VoxEU to post to his own blog, criticizing Trichet for rising to Sarkozy’s bait. Buiter is quite right; Trichet should retain his dignity and leave the criticism of Sarkozy to me!

US equities were flat, with a few high-profile drops due to earnings-forecast revisions being greatly overemphasized by the media. Canadian equities were very slightly up, with a few advances desperately siezed on by reporters in dire need of something to report.

Treasuries had a good day, with predictions of further Fed cuts bringing some more highly-desirable term spread into the curve:

The difference in yield, or spread, between 10- and two-year yields was 63 basis points today, the widest since April 2005.

Canadas did nothing much.

It was an exciting day in the preferred share market today, almost certainly due to the BNS 5.25% Perp New Issue, which seems to have had the effect of repricing the entire spectrum of perpetuals. In other words, the universe has adjusted itself to the new issue, rather than the other way ’round.

Perpetuals dropped quite significantly, as perpetualDiscounts, yesterday priced to yield 5.09% suddenly dropped in price to yield 8bp more – exactly half of the distance between the universe and new issue yield, deciding 5.17% was a much better level.  The perpetualPremium index, formerly 5.13%, is now 5.29%. This figure is not only more than the new issue yield, but is more than the perpetualDiscount yield … I would normally expect discounts to yield more than premiums, to compensate for the greater – and more immediate – interest rate risk. Markets, however, sometimes don’t listen to me as well as they should.

The Claymore Preferred share ETF had a $0.35 drop in NAV today after a distribution of $0.2185. The fund offered by my firm, MAPF, did not have its most pleasant day ever recorded, but is now well ahead of CPD on the month to date. We’ll see what the last three trading days bring!

There were seventeen other $25-equivalent index-included issues trading over 10,000 shares today.

The WSJ has reported on an interview of Greenspan by a German newspaper, in which the question of Credit Rating Agency regulation arose. The information given is too interesting to be simply reported here and too small to deserve its own post: I have updated a recent post with the new opinion.

Former Treasury Secretary Larry Summers has written a short op-ed piece on moral hazard, pooh-poohing those who feel it should be a major consideration when central banks take action.

Charles Goodhart of the LSE has written a summary of his recent research into the ever-popular topic of downward-sloping yield curves and recessions. He suggests that:

historically, the additional predictive power of the spread for future output growth –over and above that already encoded in other macroeconomic variables – often appeared during periods of uncertainty about the underlying monetary regime.
…
On the other hand, when the monetary regime becomes (at least partly) uncertain, an increased risk premium will have to be added to expectations of future short rates. According to this view, part of the cause of the subsequent output decline is not that the yield curve is negatively sloping, but that it is insufficiently so, i.e. long rates are above those consistent with the subsequent resolution of the uncertainty, thereby imparting additional downwards pressure on output.

He has found a counter-example in the Anglo-Saxon bloc of the early 2000’s, but suggests that there might be some other factor at work. It’s an interesting idea …

Brad Setser has a guest blogger with an interesting thesis:

It is a basic assumption on my part that globalization cycles, of which by my count there have been six in the past two hundred years, are driven largely by new developments or structural changes in the financial system that cause a significant increase in global liquidity and a concomitant increase in risk appetite. Because of rising risk appetite this newly-abundant capital flows into a variety of risky countries or ventures – financing canals in the 1820s, railroads in the 1860, long-distance communication media in the 1920, the internet in the 1990s – and sets off the growth in international trade, capital flows, technological development (and, for some reason, the rebirth of liberal economic theory) that we associate with globalization.

His first ‘real post’ provides some background on China’s Sovereign Wealth Fund. Such funds, usually abbreviated SWF to make me feel like I’m reading a personals ad, have attracted some controversy in recent times, with quite a few calls for their regulation. There will probably be some kerfuffle in the papers tomorrow about PrimeWest’s Abu Dhabi honeymoon*:

Abu Dhabi National Energy Co., the state-controlled power generator and oil producer, agreed to buy Canada’s PrimeWest Energy Trust for about C$4 billion ($4 billion) in the biggest-ever North American takeover by a United Arab Emirates company.

James Hamilton has commented on the monetary implications of the Fed Rate cut. He reviews the meaning of the term ‘printing money’ and the actual mechanisms involved to conclude:

This is not to insist that concerns about higher inflation are unfounded. But, if one wanted to motivate such concerns from a monetarist perspective, one could not point to money that has been printed so far. Instead, the story would have to be that, in order to achieve the path for the fed funds rate that the Fed is now likely to set for the following year, the Fed will eventually need to add more reserves that do end up as more cash in circulation. In this scenario, markets have been reacting to an anticipation of future money creation and not to something that has already happened.

There can be no more doubt regarding the motivation for Sarkozy’s hostility towards credit rating agencies and ECB President Trichet … his Prime Minister has let the cat out of the bag:

French Prime Minister Francois Fillon warned Monday that the country’s public finances were in a “critical” state and need drastic action to reduce worrying deficits.

Fillon urged France to “change its attitude” towards state spending two days before his centre-right government presents its 2008 draft budget, which is expected to show a deficit of 41.5 billion euros (58.5 billion dollars).

It was the second time in three times that he has sounded the alarm. On Friday, the prime minister said France was in a “situation of bankruptcy”.

France’s debt is over 60% of GDP, about the same as Canada’s, but their budget balance is headed in the other direction – fast. It will get faster:

But opposition Socialists said the budget had been aggravated by President Nicolas Sarkozy’s tax cuts — voted through after his May election — which is estimated to cost between 11 and 16 billion euros a year.

  It would appear that Sarkozy’s attempt to distract has the same motivation as that of an underperforming portfolio manager.

Things aren’t much better in Britain:

The U.K. had a larger budget deficit than economists forecast in August as spending jumped and revenue from profits fell, piling pressure on the government to save money as income from financial services dwindles.

The 9.1 billion-pound ($18.4 billion) shortfall was the highest for the month since records began in 1993, the Office for National Statistics said in London today. It exceeded the median 6.5 billion pounds forecast in a Bloomberg survey of 20 economists.
…
Debt stood at 36.7 percent of GDP in August.

The US Treasury is currently executing a three week test of pandemic preparedness:

One of the biggest challenges financial institutions will face is how to cope with absenteeism. In week one, the Treasury exercise directs the financial organizations to assume that 25 per cent of their work force is not coming to work, either because of illness or because of fear of being infected or because they are staying home to take care of children who can’t go to school because the schools have closed.

To decide who is absent, the Treasury directs the institutions to assume that everyone whose last name begins with certain letters, which could cover the bank president down to the local teller, cannot come to work. The 25 per cent absentee rate will jump to 49 per cent in week two.

Holy smokes! The mind boggles at the thought of 49% absenteeism across the entire financial sector … as, I guess, it’s supposed to do. Something on this level will definitely uncover a few weak links … let’s hope we never find out if they were all fixed.

Accrued Interest has posted a fascinating discourse on CDOs and I am very hopeful that the comments will help me understand what all the fuss is about. I’ve also referenced this post on my post about the IMF’s recommendation.

In one of the Harper government’s finest moments of leadership, Flaherty has announced a committee:

In his speech to a gathering of derivatives specialists, Flaherty also reiterated his call for the creation of a common securities regulator that would replace Canada’s 13 regulators.

Flaherty said he expects to name in the next two or three weeks members of an expert panel being created to advise the federal, provincial and territorial governments on how to address the issue. He would expect to hear recommendations from the panel within eight months of its creation.

I’m holding my breath, Mr. Flaherty! Please tell them to hurry!

US equities fell a bit which was blamed on the market’s astonishment that the credit crunch isn’t over yet. And it’s been going on for almost six weeks! Fortunately, the sad news did not reach the TSX.

Treasuries were quiet and Canadas were quieter.

Preferreds also had a quiet day but volume, while restrained, remained within normal boundaries.

*Senior moment alert! Does the phrase “Abu Dhabi Honeymoon” ring a bell with anybody besides me? I was convinced it was a movie title, but it’s not listed on IMDB. Maybe it was a fake movie that the Flintstones went to see, or something? Please help!

There were nine other $25-equivalent index-included issues trading over 10,000 shares today.