Archive for October, 2007

October 31, 2007

Wednesday, October 31st, 2007

American GDP grew at an annualized rate of 3.9% in the third quarter, but economists were not impressed. On a positive note, ADP Employment data was stronger than expected, which implies that next Friday’s jobs number shouldn’t be disastrous, at any event.

In other words: we’re confused! So what else is new?

The Fed cut to 4.50% today, as expected. When the market is unanimous, the Fed usually listens. Accrued Interest looks to the future and sees the potential for future cuts measured in terms of bank rescue rather than broader inflation/economic concerns.

The more things change … in 1993, the US had the steepest yield curve since the Civil War, as the Fed was busy bailing out the banks’ profitability (this was in the aftermath to the S&L crisis, remember). Then, in 1994, the music suddenly stopped and Orange County, among others, couldn’t find a chair. It will be most interesting to see how this cycle unfolds!

Well, thank heavens that month’s over! There have been a huge variation of the returns in the HIMIPref™ indices over the past month and the fund was unfortunate enough to have identified a broad pricing discrepency just as the panic got started. Returns this month are not a complete disaster, I hasten to add, but will have underperformed the index.

Mind you, the yield on the fund’s holdings is now well above the index and credit quality is great … so the faster that things normalize, the happier I’ll be! Results should be published on Saturday November 3, or Sunday at the latest.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.96% 4.91% 404,090 15.52 1 0.0000% 1,049.2
Fixed-Floater 4.91% 4.82% 98,002 15.84 7 -0.0519% 1,041.1
Floater 4.52% 4.54% 65,688 16.27 3 -0.1234% 1,039.4
Op. Retract 4.87% 3.82% 79,227 3.44 15 +0.0956% 1,026.6
Split-Share 5.17% 4.99% 86,527 4.10 15 +0.3344% 1,043.3
Interest Bearing 6.23% 6.22% 61,028 3.59 4 -0.1501% 1,062.0
Perpetual-Premium 5.71% 5.60% 104,069 8.73 17 +0.2043% 1,006.9
Perpetual-Discount 5.58% 5.62% 321,198 14.48 47 +0.2649% 905.0
Major Price Changes
Issue Index Change Notes
ELF.PR.G PerpetualDiscount -1.5492% Now with a pre-tax bid-YTW of 6.09% based on a bid of 19.70 and a limitMaturity.
GWO.PR.H PerpetualDiscount -1.0363% Now with a pre-tax bid-YTW of 5.85% based on a bid of 21.01 and a limitMaturity.
W.PR.J PerpetualDiscount +1.0482% Now with a pre-tax bid-YTW of 5.85% based on a bid of 24.10 and a limitMaturity.
POW.PR.D PerpetualDiscount +1.0502% Now with a pre-tax bid-YTW of 5.70% based on a bid of 22.13 and a limitMaturity.
BMO.PR.H PerpetualPremium (for now!) +1.0850% Ex-Dividend today. Now with a pre-tax bid-YTW of 5.22% based on a bid of 24.94 and a limitMaturity.
CM.PR.H PerpetualDiscount +1.1759% Now with a pre-tax bid-YTW of 5.62% based on a bid of 21.51 and a limitMaturity.
FTU.PR.A SplitShare +1.1964% Asset coverage of just under 2.0:1 according to the Company. Now with a pre-tax bid-YTW of 4.93% based on a bid of 10.15 and a hardMaturity 2012-12-1 at 10.00.
SLF.PR.E PerpetualDiscount +1.4602% Now with a pre-tax bid-YTW of 5.66% based on a bid of 20.15 and a limitMaturity.
BNA.PR.C SplitShare +1.6900% Now with a pre-tax bid-YTW of 6.47% based on a bid of 21.06 and a hardMaturity 2019-1-10 at 25.00.
NA.PR.K PerpetualPremium +1.7066% Now with a pre-tax bid-YTW of 5.80% based on a bid of 25.03 and a call 2012-6-14 at 25.00.
Volume Highlights
Issue Index Volume Notes
GWO.PR.X OpRet 100,629 Desjardins crossed 30,000 at 26.61, then another 70,000 at 26.65. Now with a pre-tax bid-YTW of 3.76% based on a bid of 26.50 and a softMaturity 2013-9-29 at 25.00.
GWO.PR.I PerpetualDiscount 95,846 Now with a pre-tax bid-YTW of 5.71% based on a bid of 19.95 and a limitMaturity.
ELF.PR.G PerpetualDiscount 85,590 Desjardins crossed 25,000 at 20.00, then Scotia crossed 50,000 at the same price. Now with a pre-tax bid-YTW of 6.09% based on a bid of 19.70 and a limitMaturity.
CM.PR.J PerpetualDiscount 82,000 Now with a pre-tax bid-YTW of 5.57% based on a bid of 20.36 and a limitMaturity.
BMO.PR.J PerpetualDiscount 70,040 Now with a pre-tax bid-YTW of 5.41% based on a bid of 20.85 and a limitMaturity.

There were thirty other index-included $25.00-equivalent issues trading over 10,000 shares today.

A Bear Checks In

Wednesday, October 31st, 2007

After having given so much attention to the neighborhood bull, it seems only fair to allow some comments from the bears!

Hi James:

Here is the result of a little calculation I did with Royal Bank bond yields and pref yields.  It looks similar (today at least) for other banks, but I don’t have lots of historical bond data.

Comparing RY Bonds and Prefs
  11-May-07 26-Oct-07
Bond Yield (Dur = 5) 4.21% 5.14%
Discount Pref Yield 4.50% 5.49%
Disc Pref Duration 22.1 18.6
Spread 0.29% 0.35%
Yield Ratio 1.069 1.068

Although we seem to be comparing bond apples (duration 5) to pref oranges (duration 18-22), the arithmetic spread, and especially the yield ratio (which I like better for many things and many reasons) is basically the same today as it was 5 months ago.  I happen to have some data from May 11 for two RY bonds, but have no older data.

Perhaps you have access to more historical bond and pref data to investigate this further, but one conclusion I would draw is that pref yields are not currently out of line with bond yields.  Furthermore, a 5.14% bond yield is consistent with (perhaps slightly below) US bond yields.  If the corporate yields hold, then discount prefs will NOT recover, so investors today should only expect the yield component, and give up hoping for capital gains — and could suffer more losses if corporate yields increase.  I wish I knew more about this apparent relationship over the past couple of years of Pref purchasing!

I also note that the bond equivalent yield ratio (at least at this wildly different duration) is 1.07 in the market, rather than 1.40 for taxable investors.  No reason they should be the same because the buyers and sellers of prefs and bonds are quite different. You are welcome to use this with attribution, if you like. ******************************************

[Later] One minor glitch on this, the 1.07 Yield ratio is the inverse of the 1.40 bond equivalent yield, so for direct comparison should be more like 0.93.  Thus there is a 50% (1.40/0.93) after-tax yield advantage to pref shares compared with Duration = 5 bonds.

Well! The first problem I see is with the data. I looked up the issue Royal Bank 4.53% May 7, 2012. This is a deposit note, the most senior bank debt issued (and thus, in terms of credit quality, as far as you can get from a preferred while remaining with the same issuer). It’s basically a liquid institutional GIC and there is $950-million outstanding. According to Bloomberg, the yield on 5/11 was 4.53%.

This is quite the discrepency! If we go to Canadian Bond Indices, we can look at a graph of short-term yields – for both corporates and Canadas. The quoted figure, 4.21%, looks more like a plausible yield for a Canada 5-year, while 4.53% looks like an entirely reasonable value for a 5-year Royal Bank DN.

I suggest it’s better to compare long indices with the PerpetualDiscount index; this reduces the duration mis-match and diversifies away the asystemic risk introduced by using a single corporate for a comparison. Using data from the Bank of Canada we see that the Scotia / PC-Bond / Dex long-term all-corporate index was yielding 5.42% on May 9; going back to Canadian Bond Indices, we can say it’s about 5.8% now; and construct the following table:

Comparing Corporate Bonds and Prefs
  27-Dec-2006 9-May-07 30-Oct-07
Bond Yield 5.18% 5.42% ~5.80%
Bond Duration ~11.7 ~11.6 ~11.3
Discount Pref Yield 4.51% 4.65% 5.64%
Disc Pref Duration 11.73 16.12 14.45
Disc Pref
Interest
Equivalent
6.31% 6.51% 7.90%
Interest-
Equivalent
Yield Ratio
(Prefs : Bonds)
1.22:1 1.20:1  1.36:1
Interest-
Equivalent
Yield Spread
(Prefs – Bonds)
113bp 109bp 210bp 

So, pending further discussion, it does not appear to me that a bearish argument based on yield spreads in the current year is very convincing!

Update: My correspondent was the commentator prefhound. The delay in attribution was due to my wanting to check how he wanted the attribution made.

October 30, 2007

Tuesday, October 30th, 2007

US Consumer confidence was reported to be way down today, while housing prices declined at an accellerating rate. Geez, this is sounding a lot like my September 25 post! Perhaps I should just keep a template full of gloomy news and copy-paste!

There was some very interesting news regarding the overall credit crunch today: it seems that Federal Home Loan Banks in the states are making massive loans to the marketplace, financing them by issuing their own paper:

Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest.

FHLBanks are kind of interesting. They are regulated not by the Fed, but by the Federal Housing Finance Board,

an independent agency within the executive branch of the federal government.

The Finance Board consists of a five-director board—one of whom is the Secretary of Housing & Urban Development (HUD) or the Secretary’s designee. The other four directors are appointed by the President and subject to Senate confirmation. 

In other words, it’s all political. They trumpet their 4.41% Capital to Asset ratio, but there is no indication that I can find – even in the Annual Report for FHLB Atlanta – of how this may be expressed in standard Basel Agreement terms, like “Tier 1 Capital Ratio”. I don’t know. I don’t know very much about this aspect of the US Financial system … and I’m willing to listen carefully to those who do … but this seems to me to be another grossly under-capitalized source of moral hazard, in addition to the GSEs.

A summary article in Voxeu led me to a CEPR Policy Insight which in turn was based on a lecture given 2007-10-1. Recycling of all kinds is very fashionable nowadays! At any rate, Axel Leijonhufvud has joined the debate regarding whether the Fed (and central banks in general) should target inflation alone, or should also pay attention to (potential / perceived) asset bubbles. He argues that the absence of US inflation in the early part of this decade was due not so much to the availability of cheap Chinese labour as it was to the willingness of the Chinese (and others) to accumulate dollar reserves.

So the trouble with inflation targeting in present circumstances is that a constant inflation rate gives you absolutely no information about whether your monetary policy is right.

It is a simple observation that the experience of Japan shows that inflation targeting will not by itself protect you against financial instability. The present criticism goes a step further. Inflation targeting might mislead you into pursuing a policy that is actively damaging to financial stability.

He criticizes SIVs, but I find his arguments a little facile. He does not distinguish between liquidity risk and credit risk (he’s not alone there!) and claims that they circumvent the Basel rules. The well-informed readers of this blog will know that while they used to circumvent Basel in the States, liquidity guarantees are now charged against capital. There is, of course, continuing controversy over whether the liquidity guarantees are expensive enough; I suspect that they’re not; and I have good reason to believe that the issue is currently under intense scrutiny by regulators world-wide. But he doesn’t actually say this.

He also claims that the “SIVs were, like hedge funds, highly-leveraged” … I don’t know exactly what he means by this; he may be considering only the very bottom tranche as equity and ignoring the tranching effects of mezzanine notes; it’s not clear. He speaks very highly of NN Taleb and the Black Swan phenomenon, feeling that the concept is not adequately reflected in risk management at large financial institutions. His final conclusion is that the fact that no big exogenous shock caused the current crunch shows that the world financial system is not well understood … which is comforting indeed to those of us employed by it!

In Canada, the most economically illiterate government since Trudeau elected to cut the GST to 5% and reduce the national debt by a mere $22-billion over the next five years while reducing other taxes as well. Perhaps the boomers will all die off without having ever paid for their government services! Interest on public debt is forecast to remain in excess of $30-billion annually; it’s currently 14% of federal revenue.

I have not yet seen any indication on whether there are any implications for interest-equivalency of dividends in the tax changes. Probably not, since it hasn’t been trumpetted.

It was a good day for preferreds today – good volume and the PerpetualDiscount index was actually up 0.1759% on the day, its third up day this month. Before breaking out the champagne, note that today’s gain is less than yesterday’s loss, so the index is still down on the week.

The spread between BAM.PR.M and BAM.PR.N widened some more, on good volume.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.95% 4.89% 420,804 15.55 1 0.0000% 1,049.2
Fixed-Floater 4.91% 4.81% 98,670 15.85 7 +0.2466% 1,041.6
Floater 4.51% 3.87% 67,223 10.68 3 -0.0547% 1,040.7
Op. Retract 4.88% 3.74% 78,975 3.55 15 +0.0060% 1,025.6
Split-Share 5.19% 5.06% 85,959 3.86 15 +0.1884% 1,039.8
Interest Bearing 6.22% 4.96% 61,424 2.17 4 +0.5346% 1,063.6
Perpetual-Premium 5.72% 5.61% 103,634 9.30 17 +0.3911% 1,004.8
Perpetual-Discount 5.59% 5.64% 321,035 14.45 47 +0.1759% 902.58
Major Price Changes
Issue Index Change Notes
W.PR.J PerpetualDiscount -2.2941% Now with a pre-tax bid-YTW of 5.91% based on a bid of 23.85 and a limitMaturity.
FTU.PR.A SplitShare -1.2795% Asset coverage of just under 2.0:1 as of October 15 according to the company. Now with a pre-tax bid-YTW of 5.20% based on a bid of 10.03 and a hardMaturity 2012-12-1 at 10.00.
BAM.PR.M PerpetualDiscount +1.0960% Now with a pre-tax bid-YTW of 6.22% based on a bid of 19.37 and a limitMaturity. Closed at 19.37-48, 1×5 on volume of 37,230, while its pair, BAM.PR.N, was down on the day, closing at 18.18-29, 1×1, on volume of 50,670. Such silliness.
BCE.PR.A FixFloat +1.1712%  
CM.PR.I PerpetualDiscount +1.2048% Now with a pre-tax bid-YTW of 5.63% based on a bid of 21.00 and a limitMaturity.
BMO.PR.J PerpetualDiscount +1.2048% Now with a pre-tax bid-YTW of 5.46% based on a bid of 21.00 and a limitMaturity.
DFN.PR.A SplitShare +1.2859% Asset coverage of just over 2.7:1 according to Quadravest. Now with a pre-tax bid-YTW of 4.87% based on a bid of 10.24 and a hardMaturity 2014-12-1 at 10.00.
CM.PR.D PerpetualPremium +1.4056% Now with a pre-tax bid-YTW of 5.54% based on a bid of 25.25 and a call 2012-5-30 at 25.00.
RY.PR.G PerpetualDiscount +1.4286% Now with a pre-tax bid-YTW of 5.48% based on a bid of 20.59 and a limitMaturity.
FIG.PR.A InterestBearing +1.6113% Asset coverage of 2.3+:1 according to Faircourt. Now with a pre-tax bid-YTW of 1.33% (mostly as interest) based on a bid of 10.09 and a call 2007-11-29 at 10.00.
BNS.PR.J PerpetualPremium (for now!) +1.9389% Now with a pre-tax bid-YTW of 5.25% based on a bid of 24.71 and a limitMaturity.
GWO.PR.G PerpetualDiscount +2.2065% Now with a pre-tax bid-YTW of 5.68% based on a bid of 23.16 and a limitMaturity.
GWO.PR.I PerpetualDiscount +2.4653% Now with a pre-tax bid-YTW of 5.71% based on a bid of 19.95 (still distressed!) and a limitMaturity.
ELF.PR.G PerpetualDiscount +2.8792% Now with a pre-tax bid-YTW of 5.99% based on a bid of 20.01 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
CM.PR.J PerpetualDiscount 75,800 Now with a pre-tax bid-YTW of 5.56% based on a bid of 20.37 and a limitMaturity.
SLF.PR.D PerpetualDiscount 75,404 Now with a pre-tax bid-YTW of 5.47% based on a bid of 20.60 and a limitMaturity.
BNS.PR.L PerpetualDiscount 71,450 Now with a pre-tax bid-YTW of 5.42% based on a bid of 20.88 and a limitMaturity.
RY.PR.G PerpetualDiscount 64,747 Now with a pre-tax bid-YTW of 5.48% based on a bid of 20.59 and a limitMaturity.
BNS.PR.J PerpetualPremium (for now!) 54,000 Now with a pre-tax bid-YTW of 5.25% based on a bid of 24.71 and a limitMaturity.

There were thirty-two other index-included $25.00-equivalent issues trading over 10,000 shares today.

 

HIMIPref™ Indices : October 2002

Tuesday, October 30th, 2007

All indices were assigned a value of 1000.0 as of December 31, 1993.

HIMI Index Values 2002-10-31
Index Closing Value (Total Return) Issues Mean Credit Quality Median YTW Median DTW Median Daily Trading Mean Current Yield
Ratchet 1,345.0 3 2.00 4.55% 16.4 171M 4.97%
FixedFloater 1,937.2 8 2.00 4.29% 16.0 141M 5.75%
Floater 1,497.8 5 1.80 4.12% 17.1 30M 4.23%
OpRet 1,579.2 30 1.23 3.73% 2.0 75M 5.64%
SplitShare 1,541.7 8 1.62 4.87% 4.9 65M 5.57%
Interest-Bearing 1,871.0 11 2.00 6.91% 2.0 132M 7.85%
Perpetual-Premium 1,196.3 12 1.50 5.61% 6.4 148M 5.79%
Perpetual-Discount 1,370.0 11 1.53 5.65% 14.3 182M 5.78%

Index Constitution, 2002-10-31, Pre-rebalancing

Index Constitution, 2002-10-31, Post-rebalancing

October 29, 2007

Monday, October 29th, 2007

Well! There I was, all set to attend David Berry’s contested hearing with RS, having spent all weekend choosing overly ripe tomatoes to hurl at any disingenuous Scotia executives with the effrontery to show up … and now I find that it’s been postponed! I have no idea what’s going on. Maybe RS has gotten a little embarrassed about being used as a pawn in a contract negotiation. Maybe somebody’s realized that if Jesus Christ Himself was subjected to the same level of scrutiny as Scotia has inflicted on Berry, then there’d be equal cause for firing, mudslinging and character assassination. Stay tuned!

Possible Fed moves this week are being discussed all over, with the consensus calling for a 25bp cut to 4.50% (and Bill Gross of PIMCO is calling for 3.50% in the near future). There is more than one report that the Fed is unhappy with such certainty, but I’m not convinced that this is the case. The Fed is adept at manipulating opinion; if they were truly unhappy with the forecasters, they would send a few hawks out to make speeches about the dangers of hyper-inflation. Poole has been given a lot of attention in the past few months; the WSJ has grilled him about his high profile.

The Super-Conduit debate continues, with a report that:

the banks will earn 1% on structured investment vehicles of less than $5bn, and 1.5% for SIVs over $15bn

The prospectus also details what SIVs will receive for selling their assets to M-LEC. Qualifying SIV holders will be eligible for up to 94% of the value of the assets they sell in cash, or 89% cash and 5% in senior capital notes, in the form of medium- term notes, that will participate in part of the upside when the assets mature.

I have not yet seen this report confirmed by more usual sources – but I’m looking! I guess my reaction is dependent upon the interpretation of the word “value” in the above paragraph. If we can presume that “value” means “recent trading prices in small lots”, then I believe I have every right to refer to Super-Conduit as Vulture Fund … but if “value” means something else, then we’re back to uncertainty. We shall see!

Well … PerpetualDiscounts were whacked again today – and the Question Regarding BAM.PR.N I received today makes me wonder if we have reached the point of self-feeding gloom-and-doom, otherwise known as capitulation. Long Term corporate bonds yield about 5.8%, according to Canadian Bond Indices … at 5.65% Dividend, the perpetual discounts have an interest equivalent of 7.91%.

Ah well. Remember why you bought them! In the absence of default – which, for the the companies in the indices, seems no more likely than ever – I’m willing to cash the dividend cheques for quite some time.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.93% 4.88% 438,210 15.58 1 +0.4905% 1,049.2
Fixed-Floater 4.88% 4.82% 99,789 15.74 7 +0.0588% 1,039.1
Floater 4.51% 3.86% 68,880 10.69 3 +0.2241% 1,041.3
Op. Retract 4.88% 3.76% 78,864 3.40 15 -0.0742% 1,025.5
Split-Share 5.20% 5.14% 86,251 4.10 15 -0.0448% 1,037.8
Interest Bearing 6.25% 6.33% 62,221 3.59 4 -0.1004% 1,057.9
Perpetual-Premium 5.74% 5.66% 102,241 10.48 17 +0.0390% 1,000.9
Perpetual-Discount 5.60% 5.65% 320,818 14.44 47 -0.2680% 901.0
Major Price Changes
Issue Index Change Notes
BAM.PR.M PerpetualDiscount -3.2812% Now with a pre-tax bid-YTW of 6.29% based on a bid of 19.16 and a limitMaturity. Closed at 19.16-35, 3×5, much higher than its pair, BAM.PR.N, which closed at 18.35-40, 40×1.
GWO.PR.I PerpetualDiscount -2.1608% Now with a pre-tax bid-YTW of 5.86% based on a bid of 19.47 and a limitMaturity.
BNA.PR.C SplitShare -1.7217% Now with a pre-tax bid-YTW of 6.76% based on a bid of 20.55 and a hardMaturity 2019-1-10 at 25.00.
CL.PR.B PerpetualPremium -1.7154% Now with a pre-tax bid-YTW of 6.19% based on a bid of 25.21 and a call 2011-1-30 at 25.00. OK, so now we’ve got a Pfd-1(low) (DBRS) / P-1(low) (S&P) issue, a PerpetualPremium, yielding 6.19%, which is 8.67% interest equivalent. Go figure. I just don’t know what to say. Remember when I couldn’t understand why they hadn’t been called?
ENB.PR.A PerpetualDiscount -1.6667% Now with a pre-tax bid-YTW of 5.77% based on a bid of 24.19 and a limitMaturity.
BAM.PR.N PerpetualDiscount -1.6086% Now with a pre-tax bid-YTW of 6.57% based on a bid of 18.35 and a limitMaturity. 9.20% interest-equivalent. Is this capitulation selling? See BAM.PR.M, above.
BMO.PR.J PerpetualDiscount -1.2375% Now with a pre-tax bid-YTW of 5.52% based on a bid of 20.75 and a limitMaturity.
RY.PR.F PerpetualDiscount -1.2285% Now with a pre-tax bid-YTW of 5.55% based on a bid of 20.10 and a limitMaturity.
SLF.PR.D PerpetualDiscount -1.1990% Now with a pre-tax bid-YTW of 5.47% based on a bid of 20.60 and a limitMaturity.
BAM.PR.K Floater +1.0656%  
PWF.PR.L PerpetualDiscount +1.1364% Now with a pre-tax bid-YTW of 5.76% based on a bid of 22.25 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
RY.PR.A PerpetualDiscount 95,000 Scotia crossed 60,000 at 20.25. Now with a pre-tax bid-YTW of 5.52% based on a bid of 20.20 and a limitMaturity.
RY.PR.G PerpetualDiscount 88,800 Now with a pre-tax bid-YTW of 5.55% based on a bid of 20.30 and a limitMaturity.
MFC.PR.B PerpetualDiscount 84,850 Now with a pre-tax bid-YTW of 5.43% based on a bid of 21.65 and a limitMaturity.
GWO.PR.G PerpetualDiscount 70,570 Now with a pre-tax bid-YTW of 5.80% based on a bid of 22.66 and a limitMaturity.
PWF.PR.L PerpetualDiscount 61,150 Now with a pre-tax bid-YTW of 5.76% based on a bid of 22.25 and a limitMaturity.

There were twenty-eight other index-included $25.00-equivalent issues trading over 10,000 shares today.

HIMIPref™ Preferred Indices : September 2002

Monday, October 29th, 2007

All indices were assigned a value of 1000.0 as of December 31, 1993.

HIMI Index Values 2002-9-30
Index Closing Value (Total Return) Issues Mean Credit Quality Median YTW Median DTW Median Daily Trading Mean Current Yield
Ratchet 1,299.5 4 2.00 4.46% 16.6 108M 4.64%
FixedFloater 1,895.9 8 2.00 4.21% 16.0 135M 5.83%
Floater 1,513.2 2 1.55 -0.16% 0.1 120M 4.15%
OpRet 1,583.8 28 1.25 3.65% 2.0 84M 5.50%
SplitShare 1,534.0 9 1.66 4.68% 5.0 59M 5.74%
Interest-Bearing 1,882.4 11 2.00 6.65% 2.0 132M 7.81%
Perpetual-Premium 1,207.0 14 1.43 5.36% 6.6 177M 5.60%
Perpetual-Discount 1,365.1 8 1.74 5.58% 14.2 113M 5.94%

Index Constitution, 2002-09-30, Pre-rebalancing

Index Constitution, 2002-09-30, Post-rebalancing

Question Regarding BAM.PR.N

Monday, October 29th, 2007

I recently received the following communication from an Assiduous Reader:

Hello James

I have recently discovered your website and your excellent coverage of preferreds.  As an investor I am always, it seems, at loss for research and information sources on the subject so your website is a welcome surprise.

Like many I am the (not so) proud owner of a handful of perpetuals including the infamous BAM.PR.N.  As you have mentioned in your blog it is difficult for many investors to understand and make sense of the brutal price drop of this and other similar issues.

I understand the nature of perpetuals and their strong sensitivity to interest rate movements (or even the hint) so I am not surprised by the drop.  The way I look at it the yield is a leveraged function of the share price.  If current dividends are now 20% higher than new issues in the summer then it makes sense that share prices are 20% lower too.

Alternatively if interest rates drop in the future it should result in a return to higher valuations.

It’s never easy to live with drastic downward fluctuations in price and especially so with preferreds as we tend to buy them for their stability and preferential tax treatment.  I can live more easily with significant price drops from issuers like major Canadian banks and insurance companies because I am confident that the drop is a reaction to interest rates or, in the current environment, the asset backed commercial paper issue rather than some fundamental problem.  The situation with BAM.PR.N is perplexing though.  The price drop has gone beyond annoying into the realm of worrisome.

I guess I am asking your opinion on this issue in particular as it seems to have been singled out for brutal punishment.  From what I have read in your blog this price drop is way overdone.  Does that mean that we should stand firm and tough it out?  If this dramatic price drop is strictly a result of the asset backed commercial paper debacle then it makes sense to weather the storm until the problem runs it’s course.  If, on the other hand there are fundamental problems with BAM then does it make sense to cut and run?

I don’t mind waiting out the storm if it’s going to end up sunny.

Thanks for listening.

Frankly, I hate getting this kind of communication. The reader is not a client, I know nothing about his financial situation, I know nothing about his portfolio, I’m not making any money attempting to answer his question and there’s no good answer to his question anyway!

However, pretending to answer the question about the prospects for BAM.PR.N gives me a vehicle to reiterate my favourite themes … so here goes!

I wish I knew! If I knew for sure that BAM.PR.N was going to pay every single one of its projected dividends until Doomsday, I’d give up on this boring diversification routine I keep harping on and just lever up on the damn things 30:1 (assuming I could!).

If I knew for sure that BAM.PR.N was going to go bankrupt in two years, then I’d be shorting it 30:1. Why not?

Unfortunately, I don’t know anything for sure and, what’s more, I won’t claim that I do.

Life would be so much easier if I was stockbroker! If I was a stockbroker, all I’d have to do is ask a few questions to determine what the inquirer wants to hear and tell it to him!

Was this issue recommended by the inquirer’s current stockbroker and the inquirer is now alarmed and upset that it’s down so much? “Well, Mr. Blank, I consider this issue to be extremely risky. The yield is high, but it’s high for very good reasons! Why don’t you move your account over to me and I’ll keep a good eye on your investments?”

Or does the client like the investment, and is just looking for reassurance? “Well, Mr. Blank, I think you’ve made a very astute purchase … it’s just too bad that your timing was off. I was able to determine through my contacts that a period of turbulence was on its way and delayed my recommendation.”

Unfortunately, I’m an asset manager and my historical results are an open book. I’ve discussed the BAM issues before and I’ll probably be discussing them many times in the future. For those who are interested, I’ve uploaded a graph of prices and graph of YTW differences for BAM.PR.N and RY.PR.G for the period since the former’s issue on May 9. Note that by “price” in the graph, I mean “flatBidPrice“. I’ve also updated the same information (price and YTW difference) for BAM.PR.M and RY.PR.G for the period since the latter’s issue on April 26. Note that BAM.PR.N and BAM.PR.M are a Preferred Pair of the weak variety.

Credit quality? Brookfield was last reviewed by DBRS on June 11, 2007, and confirmed at Pfd-2(low). S&P rates the preferreds at P-2. Moody’s does not rate the preferreds, but upgraded the bonds a notch on February 27 to Baa2. Fitch has the bonds at BBB+. Brookfield has a lot of debt on its books, but the vast majority of it is secured by specific properties – or issued by a subsidiary – and is non-recourse to BAM. BAM could certainly lose their equity in each specific property if there were problems, but the non-recourse provision does give some comfort that problems in one area will not become so large that they drag down the whole company. I see nothing in the financials that lead me to suspect that the credit ratings agencies are being wildly optomistic.

Keep your eye on the news. Not the chatter; the news. Yahoo has a perfectly good clipping service available for free. Whatever BAM’s problems are at the moment, it doesn’t appear that headline risk is a factor.

As always, diversification is the answer. The world would be quite complicated enough if it was static, but it doesn’t even make us that concession; it changes in a dynamic and chaotic manner. It’s perfectly normal to be concerned about an investment that loses value for mysterious reasons; but if you go beyond concern to the point of worry, you own too much. Cut your holdings to the point where you’re merely interested.

Don’t make just a few big bets. The risks of such a strategy are legion. Make lots of small bets.

And for what I consider to be an excellent source of recommendations for buy-and-hold retail investors … subscribe to PrefLetter! Qualified investors who want me to do ALL the work may invest in Malachite Aggressive Preferred Fund.

Research : Preferred Pairs

Saturday, October 27th, 2007

Preferred shares are often issued with terms that are virtually identical with another issue from the same issuer; in some other cases, the terms of two series may be different, but the series may be convertible into each other at specified times. Investors should look for this kind of pairing, because the market sometimes does not price these issues as similarly as one might expect.

Look for the research link!

Regular readers will know that I am currently enraged by the persistent difference in price between BAM.PR.M and BAM.PR.N!

Update, 2015-5-12: Note that I have also provided a link to the calculator.

Research : Modified Duration

Saturday, October 27th, 2007

Well, I talk about it often enough! This one leans a little too far to the “mathematical” to be considered mainstream fare, but I had to provide it in order that the keeners would have a rough idea of what I say*. Look for the research link!

*Assuming, of course, that the keeners care about understanding what I say!

Update and Bump, 2007-10-27: I have received a rather patronizing communication from a correspondent who claims that the formula given in the article for modified duration is incorrect.

modDurFormula.gif

 

He claims that the variable “f” should always be equal to one and attaches two pages of calculus (including patronizing commentary) that proves it.

Alas, my correspondent has forgotten to ask himself the questions that any investment manager should ask himself – particularly if holding himself out to be a quant:

  • What assumptions are made, explicitly and implicitly, in the course of this calculation?
  • Have I thoroughly checked these assumptions (insofar as it is possible to check assumptions!) ?
  • What if I’m wrong?

In this particular case, my correspondent has slipped up by assuming that “yield-to-maturity” (the “y” in the equation) is equal to the internal rate of return.

It ain’t. Yield-to-Maturity is, by street convention, equal to N times the coupon-period return, where N is the number of coupons per year. This point comes up over and over again – on this blog, for instance, there is a very similar discussion on Research : Yield from On-Line Calculator. It’s a tricky point and, in this degenerate age where one can find internal rate of return on Excel more easily than by explicit trial-and-error approximations, one that is easily forgotten.

Ah, for the good old days! When men were men, when you had to understand a calculation before you could perform it, and no back-of-an-envelope was too humble to serve as a scratch pad!

I have uploaded an MS-Excel Spreadsheet in which two sets of calculations are made – the way in which my correspondent does calculations, and the way in which we do it on Planet Earth. I believe that my computer – and my Excel programme – are bug-free, so there will be no virus transmission; I believe that all reasonable precautions are made with my site and my hosting provider so that the spreadsheet will not be hacked after upload; and I believe that even if a macro-virus should reach my readers’ computers, their anti-virus software will prevent harm.

But what if I’m wrong? I have also uploaded PDF file that reflects the spreadsheet, for use by those who don’t want to take the chance.

In cells a1:d22, I have input the cash flows reflecting the November 1, 2007, purchase of a par bond that pays $5 every six months commencing May 1, 2008, and repays its principal on November 1, 2017. Since all calculations will be performed as of November 1, 2007, I feel perfectly justified in referring to this bond as a ten-year, 10% bond.

The crucial point of the analysis is found in cell B24 – the XIRR function provided by Microsoft. It indicates that the internal rate of this bond is not 10%, as one might expect, but 10.2425%. This is easy enough to understand – for each year, we’re getting half of our quoted 10% six months early and can earn interest on this – but it is often forgotten. And this bond will not be quoted – anywhere – as yielding 10.24%. As an exercise, I suggest that interested readers sell such a bond to their brokerage house “at a price to yield 10.24%” and then invoice them for $100. Let me know what they tell you.

In cells E1:E22, I have discounted each cash flow by time in years at the yearly rate of 10.25% indicated in cell E24. Cell E23 shows the sum of the present values thus calculated, 99.99945, so we may conclude that we understand how the XIRR functions works.

In cells F1:F22, I have discounted each cash flow by period at the period rate of return of 5% indicated in cell F24. Cell F23 shows the sum of the present values thus calculated, 99.99945258, which I’m willing to conclude is a rounding error (particularly since I was lazy, and determined the period number by doubling the time in years, which will be off due to day-count and leap-year approximations. It’s OK for a quant to be lazy, as long as he knows he’s being lazy!). Anyway, this calculation confirms we know how to calculate returns by period.

Cells H1:H26 calculate the Macaulay Duration of the bond according to the “time” cash flows; cells I1:I26 perform this calculation using the “period” cash flows; the results are as equal as we can expect anything in this wicked world to be.

The next four cells to be examined, H28:I29, are a little more complex. The Modified Duration is calculated by the disputed Equation 2 for each calculation method using the indicated value of “y” and setting “f” to either “1” (as my correspondent insists is always the case) or “2” (which is dependent upon the number of coupon periods per year, as explained in the article. We obtain the following results:

Modified Duration by Four Methodologies
  “Time” “Period”
f=1 5.934 5.948
f=2 6.223 6.231

That’s quite the range of differences! It should be clear from the calculations that the “correct” answer is given by “f=1” for the “Time” method and by “f=2” for the “Period” method … but what if I’m wrong?

Cells E31:E53 calculate the present value of the bond according to the “time” method when the Internal rate of return is increased by 1 basis point. Cells F31:F53 calculate the present value when the “Yield to Maturity” (= twice period return) is increased by 1 basis point. The change in price effected by these changes is calculated as PVBP (Price Value of a Basis Point) in cells H53 and I53, respectively.

We find that the Effective Modified Duration (we will refer to the results of this calculation as “Effective” modified duration because the change of 1bp in yield, while small, is not infinitesimal) is 5.93 for the “Time” method, which is equal to the answer calculated in cell H28 using f=1; it is 6.23 for the “Period” method, equal to the answer calculated in cell I29 using f=2.

Thus, we find that Equation (2) of the article is absolutely correct – given the universally accepted definition of yield-to-maturity as being (periods per year) * (period-rate-of-return).

So, we can summarize our characterization of this bond as:

Characterization of Bond
Method Yield Modified
Duration
IRR 10.24% 5.93
Street Convention 10.00% 6.23

Which method is right? Who knows? Who cares? What is truth? The street convention is simply that: a convention adopted in order to communicate.

Immediately after posting this update, I will reply to my correspondent and ask for permission to publish his correspondence.

Update, 2007-10-29 The idea “YTM = (coupon period return) * (coupons per year)” is usually expressed formulaicly as “coupon period return = 1 + (YTM / coupons per year)” or “coupon period discounting factor = 1 / [1 + (YTM / coupons per year)]”. See, for example BANK OF ENGLAND FORMULAE FOR CALCULATING GILT PRICES FROM YIELDS

Updated versions of this publication are available from the UK Debt Management Office.

Update, 2007-10-31 I have uploaded a note from the Bank of Canada on calculation conventions; there is also a Department of Finance Web-Page available with the same information.

Update, 2009-2-15: Note that the Modified Duration of a PerpetualDiscount is dependent solely upon its yield.

October 26, 2007

Friday, October 26th, 2007

CDOs (Collaterallized Debt Obligations) were in the news today, as Bloomberg reported that Moody’s cut a batch of ratings. The Bloomberg story doesn’t mention some important context, presumably since that would make the story less interesting. According to the unexpurgated press release:

it has downgraded $33.4 billion of securities issued in 2006 backed by subprime first lien mortgages, representing 7.8% of the original dollar volume of such securities rated by Moody’s. Of the $33.4 billion downgraded securities, $3.8 billion remain on review for further downgrade. Moody’s also affirmed the ratings on $258.6 billion of Aaa-rated securities and $21.3 billion of Aa-rated securities, representing 74.7% and 52.0% of the original dollar volume of such securities rated in 2006, respectively.

The Aaa- and Aa-rated securities that have been placed on review for possible downgrade are generally not expected to move by more than three notches. The most heavily impacted securities were originally rated Ba, Baa, or A. Rating migrations have been much more severe for the more deeply subordinated tranches of 2006 subprime deals.

Accrued Interest, which has an excellent primer on CDOs, has made a rather breathtaking suggestion:

the ratings agencies simply shouldn’t rate CDOs at all.

Furthermore, the ratings agencies could still model CDO deals in their Monte Carlo simulators for a fee. Investors could then run the Monte Carlo themselves, inputting default and recovery rates, default patterns, and correlation as they see fit. Rather than getting one or two perspectives on what the default/recovery/correlation patterns should be, investors could impose their own stresses.

I’ve discussed the results of such simulations in the post Loan Default Correlation.

Sadly, Accrued Interest’s suggestion doesn’t have a chance of working. As I keep reiterating here, investors (as a group, with lots of exceptions) do not want to do any analysis. And they don’t want to spend any money on useless, profitless credit analysis, or any time understanding what it is they’re doing. They want to buy something that goes up because it’s good.

There are no possible regulations that will enforce this. Adding more rules will not make this a better world. All market regulators should have a form letter: “Yeah, you’re #$%^! bankrupt because you’re #$%^! stupid.” to be sent by the busload to complainers. They should also be much more willing to pull investment management licenses on the basis of incompetence.

This last thing is hard to do. If my investment theme is that demographics are going to cause a boom in granola, I tell all my clients this, they give me money and I promptly blow it all levering up granola futures 100:1: this doesn’t necessarily make me incompetent. Wrong, yes, but being wrong is simply part of the investment management game (which is why my other theme in this blog is the chaotic nature of financial markets). If, however, they inspect my records and find that my carefully estimated granola consumption growth rate was a little off because I used “15” as a factor rather than as a percentage … well, then I’m incompetent and should be civilly liable and should lose my license.

Investment managers should be held strictly accountable for adhering to the Prudent Man Rule. But you know something? I think a lot of investment funds are run in the same way as Greek pension plans:

Board members of Greek pension funds are appointed by the government, labor unions and employers, often on a part-time basis, without specific professional or educational qualifications. The country has about 200 pension funds with assets of more than $44 billion, according to finance ministry estimates.

Quis custodiet ipsos custodes? While specific professional or educational qualifications are nice to have, I’m not as impressed by them as the reporter seems to be … but they are, at least, an indicator. With respect to the particular Greek Tragedy reported, I agree with:

C. Kerry Fields, a professor of business law at the University of Southern California’s Marshall School of Business in Los Angeles, said JPMorgan appears to have acted lawfully in its handling of the sale to North Asset Management and bears no responsibility for what happened later.

“The foolish people are the buyers because they paid so much,” Fields said.

What’s needed on pension boards are people with the guts to ask questions, the intelligence to Think Useful Thoughts about the answers and the ruthlessness to fire those who don’t measure up. Those are the qualifications I like.

On another front, Naked Capitalism reviews the political pressure for a Fannie Mae / Freddie Mac bail-out. We can only hope that this pressure is successfully resisted – as has been argued by James Hamilton of Econbrowser:

it is equally clear to me that the correct instrument with which to achieve this goal is not the manipulation of short-term interest rates, but instead stronger regulatory supervision of the type sought by OFHEO Director James Lockhart, specifically, controlling the rate of growth of the GSEs’ assets and liabilities, and making sure the net equity is sufficient to ensure that it’s the owners, and not the rest of us, who are absorbing any risks.

Fannie Mae & Freddie Mac (the “GSEs” – Government Sponsored Enterprises) walk like banks and talk like banks … but they are not regulated like banks because grandstanding politicians such as Charles Schumer want to have all the fun of providing services to constituents without having to bother with trivial little details like paying for them (which in this case means, one way or the other, ensuring that the GSEs are capitalized like banks).

We have seen in recent months how a problem that’s relatively small (US Sub-prime mortgages) in the grand scheme of things (the world financial system) can act as a flashpoint for a major paradigm shift (if that metaphor makes any sense). Let’s not increase the potential for a major bankruptcy by allowing the GSEs to lever up even further beyond the bounds of prudence.

On a somewhat related note, I was amused to see the tone Bloomberg adopted when reporting the continued decline of American home ownership:

Homeownership in the U.S. dropped for a fourth consecutive quarter, the longest decline since at least 1981, suggesting more Americans will miss their best chance of building wealth.

“Owning a home in this country has been a principal source of wealth creation for low- and moderate-income people,” said Nicolas Retsinas, director of Harvard University’s Joint Center for Housing Studies in Cambridge, Massachusetts. “In the absence of home equity, families will inevitably spend less.”

Homeowners accumulate wealth faster than renters, with median net wealth for owners at $184,400 in 2004, compared with only $4,000 for renters, according to Federal Reserve figures.

Given the glee with which they regularly point out that everybody (except gullible investment managers) knew all along that housing was a bubble created by the Evil Credit Rating Agencies, the emphasis on these data is surprising! But they redeem themselves with an interesting factoid towards the end of the article:

Out of 297 townhouses in Springfield, Virginia, for sale last week, almost 80 were in the process of foreclosure or offered at a price lower than the mortgage balance, so-called short sales, said [Re-Max real estate agent Steve] Hawkins.

Two years ago there would have been about 50 such units offered in the same Washington suburb, with none in foreclosure, he said.

The long-term trend is clearly in homeowners’ favour – but, as the the WSJ reports, houses haven’t been doing too well lately:

 

On September 24 I noted that the US was testing pandemic preparedness, stressing the system with a simulated 49% absentee rate. The results are in and analysis is under way:

When asked “based on the lessons learned from the exercise, how effective are your organization’s business continuity plans for a pandemic,” 56% answered “moderately,” the next highest group was “minimally,” at 28%. Only 12% said their business continuity planning was very effective.

I have previously noted the various controversies about inflation measurement – but look at Argentina’s measurement problems:

Argentina’s benchmark inflation-linked bonds have tumbled 24 percent this year, making the country’s debt market the worst performer in the world, according to data compiled by JPMorgan Chase & Co. and Bloomberg.

Merrill Lynch & Co., the world’s biggest brokerage, estimates prices may be rising at a 17 percent annual pace, double the official rate.

Daniel Fazio, head of the employee union, said in February that a Kirchner political appointee had statisticians eliminate some details from the index and violate secrecy laws that prohibit the release of information during the data-gathering process. The union said federal prosecutor Carlos Stornelli is investigating the allegations. The prosecutor’s office has declined to comment.

I continued to work through the BoE Financial Stability report, but was sidetracked by a desire to investigate their “Box 2” further. What a great report that is! Crammed with information and references, but well written with a bias towards explaining the implications of important ideas from a policy perspective.

There’s a fascinating report that the credit rating agencies are being investigated for corrupt practices:

[Connecticut Attorney General Richard] Blumenthal’s office is investigating complaints that the ratings companies rank debt against issuers’ wishes, then demand payment, he said today. The state also is probing whether the companies threaten to downgrade debt unless they win a contract to rate all the issuer’s securities, as well as the practice of offering ratings discounts in return for exclusive contracts.

Quite the laundry list of charges! ‘Ranking debt against the issuers’ wishes’ is hardly a problem; ‘Demanding payment’ is not a problem [hint: say ‘No’]; ‘offering ratings discounts in return for exclusive contracts’ is not a problem; the only allegation that, if proven, is actually a Bad Thing is the threat to downgrade if they don’t get a contract for the entire issued portfolio.

I find the idea a little hard to swallow, frankly. Transition matrices are holy and I don’t think the agencies would put them at risk in order to make an extra nickel or two. It might possibly be a deliberate mis-interpretation (either by the rating agency salesman or the issuer) of a threat to downgrade unless more information is made available to the agency … but we will see. It’s worthwhile to note the recent General Electric / DBRS kerfuffle, reported on the DBRS site as:

Given the level of investor interest, DBRS believes it is important to provide clarity as to its decision to withdraw the ratings on General Electric Company (GE), GE Capital Canada Funding Company (GE Capital Canada), Heller Financial Canada and Heller Financial, Inc.

DBRS had recently been in discussions with GE to ensure that DBRS would continue to receive adequate resources, including time and attention, from GE to support DBRS’s ratings and that there would be no issue with DBRS assigning ratings to GE Capital Corporation (GECC), the guarantor of GE Capital Canada.

Ultimately, GE decided that it was not fully supportive of adding a third rating agency for GECC, and GE formally requested that DBRS withdraw all ratings related to GE.

It’s easy to see how a bad relationship could quickly get worse given worst-case interpretations of such negotiations. But we’ll see!

In technical news that some (wierdos) might find of interest, the NYSE is eliminating rule 80A, which was enacted as part of the volatility damping package deemed necessary after the crash of 1987:

Rule 80A (a) and (b) require that, for any component stock of the S&P 500 Stock Price IndexSM, whenever the NYSE Composite Index® (“NYA”) advances or declines by a predetermined value from its previous day’s closing value, all index arbitrage orders to buy or sell (depending on the direction of the move in the NYA) must be entered as either “buy minus” or “sell plus”.

The Exchange is making this change since it does not appear that the approach to market volatility envisioned by the use of these “collars” is as meaningful today as when the Rule was formalized in the late 1980s. Rule 80A addresses only one type of trading strategy, namely index arbitrage, whereas the number and types of strategies have increased markedly in the last 20 years and may as well contribute to the increase in or lack of volatility.

The rule has been applied 15 times on 13 days this year; the peak was 1998, with 366 occurances on 227 days.

And, holy smokes, I almost let an entire post go by without mentions SIVs! Naked Capitalism provides a round-up and some commentary; still quite convinced (perhaps correctly – who knows?) that Super-Conduit is a nefarious plot of some kind that is unlikely to attract investors.

The TD New Issue announced October 9 now has an estimated fair value of $23.76. It will not be a happy opening!

By one definition, Great-West and SunLife Financial are now distressed companies: GWO.PR.I closed at 19.90-98, 12×3 on volume of 47,085; SLF.PR.E closed at 19.92-18, 4×3, on volume of 11,750. I wonder what the Globe will have to say about this tomorrow?

Month-to-date, the PerpetualDiscount index is down 4.93% (on the week, it’s down 2.18%) and has gained on only two of nineteen trading days. On the other hand, the PerpetualPremium index has managed to grovel back over its 6/30 starting figure of 1,000.00, and is down only 1.89% on the month. On the other hand, there’s some very strange things going on in that index. What the HELL is CU.PR.B doing, being bid at 26.12 for a pre-tax bid-YTW of 5.17, when PWF.PR.I has the same coupon and a redemption schedule that differs by one month and one day, AND has a one-notch higher credit rating (DBRS) to put it into widows-and-orphans grade … and is bid at 25.31 to yield 5.71%?

However, as a participant on Financial Webring said today:

No, it’s because the market is an ass. Preferreds are retail driven with about half of the purchasers not even aware what they’re buying. We see it on this board all the time. They got lumped into the whole subprime/ABCP mess in my opinion by boneheads who think they have a connection to it. Down goes the price…………

Ah, Grasshopper, when you can take the pebble from my hand, it will be time for you to trade.

The market will normalize eventually. It always does. But DAMN, the waiting can be aggravating – and it probably wouldn’t irritate me so much if HIMIPref™ hadn’t indicated valuations were severely out of whack a little too early!

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.91% 4.88% 456,335 15.53 1 0.0408% 1,044.1
Fixed-Floater 4.89% 4.82% 100,785 15.75 7 -0.1041% 1,038.5
Floater 4.52% 3.87% 69,207 10.66 3 -0.6244% 1,038.9
Op. Retract 4.87% 3.72% 80,049 3.35 15 -0.1427% 1,026.3
Split-Share 5.19% 5.08% 86,413 4.10 15 -0.2426% 1,038.3
Interest Bearing 6.25% 6.29% 62,072 3.60 4 -0.4221% 1,059.0
Perpetual-Premium 5.75% 5.63% 102,020 9.87 17 +0.1706% 1,000.5
Perpetual-Discount 5.59% 5.63% 320,711 14.47 47 -0.3132% 903.4
Major Price Changes
Issue Index Change Notes
ELF.PR.F PerpetualDiscount -2.3928% Now with a pre-tax bid-YTW of 6.17% based on a bid of 21.62 and a limitMaturity.
ELF.PR.G PerpetualDiscount -2.0192% Now with a pre-tax bid-YTW of 6.18% based on a bid of 19.41 and a limitMaturity.
GWO.PR.G PerpetualDiscount -1.9214% Now with a pre-tax bid-YTW of 5.85% based on a bid of 22.46 and a limitMaturity.
GWO.PR.I PerpetualDiscount -1.7284% Now with a pre-tax bid-YTW of 5.72% based on a bid of 19.90 and a limitMaturity.
BAM.PR.K Floater -1.6764%  
BSD.PR.A InterestBearing -1.6649% Asset coverage of just under 1.8:1 as of October 19 according to Brookfield Funds. Now with a pre-tax bid-YTW of 7.14% (mostly as interest) based on a bid of 9.45 and a hardMaturity 2015-3-31 at 10.00.
CM.PR.I PerpetualDiscount -1.5603% Now with a pre-tax bid-YTW of 5.68% based on a bid of 20.82 and a limitMaturity.
PIC.PR.A SplitShare -1.3106% Asset coverage of 1.7:1 as of October 18, according to Mulvihill. Now with a pre-tax bid-YTW of 5.61% based on a bid of 15.06 and a hardMaturity 2010-11-01. That’s right, 5.61% (interest-equivalent of 7.85%) on a well-secured three-year note.
RY.PR.F PerpetualDiscount -1.2136% Now with a pre-tax bid-YTW of 5.48% based on a bid of 20.35 and a limitMaturity.
PWF.PR.F PerpetualDiscount -1.0841% Now with a pre-tax bid-YTW of 5.78% based on a bid of 22.81 and a limitMaturity.
IAG.PR.A PerpetualDiscount -1.1994% Now with a pre-tax bid-YTW of 5.75% based on a bid of 20.25 and a limitMaturity.
W.PR.H PerpetualDiscount +1.6066% Now with a pre-tax bid-YTW of 5.88% based on a bid of 23.40 and a limitMaturity.
PWF.PR.L PerpetualDiscount +1.8519% Now with a pre-tax bid-YTW of 5.83% based on a bid of 22.00 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
PWF.PR.F PerpetualDiscount 515,700 Now with a pre-tax bid-YTW of 5.78% based on a bid of 22.81 and a limitMaturity.
MFC.PR.C PerpetualDiscount 360,300 Now with a pre-tax bid-YTW of 5.35% based on a bid of 21.30 and a limitMaturity.
MFC.PR.B PerpetualDiscount 123,865 Now with a pre-tax bid-YTW of 5.38% based on a bid of 21.80 and a limitMaturity.
NA.PR.K PerpetualDiscount 84,976 Now with a pre-tax bid-YTW of 6.00% based on a bid of 24.41 and a limitMaturity.
SLF.PR.B PerpetualDiscount 53,100 Now with a pre-tax bid-YTW of 5.46% based on a bid of 22.20 and a limitMaturity.

There were thirty-two other index-included $25.00-equivalent issues trading over 10,000 shares today.