August 13, 2007

Link heaven today, since everybody’s talking about interesting stuff! You know things are getting weird when the words “Ruble” and “Safe Haven” are mentioned in the same sentence.

Things were going well until Coventree announced it wasn’t able to roll its commercial paper and was therefore extending the term of their extendible notes. As they explain in a very good promotional essay, written in 2002 and still on their website, Extendible Notes provide liquidity protection for issuers similar to that of having stand-by lines with major banks, while being much less costly to support. Whether or not anybody will be willing to buy these things after seeing all the damage an extension can do in practice, is something we will just have to wait and see.

After Coventree’s announcement, American and Canadian equities tanked, ruining what had been a pretty good day ’till that point. Equities had, until then, been able to laugh off a Goldman Sachs bail-out of one of their funds, to the tune of $3-billion.

The Global Equity fund has about $3.50 in borrowed money, or leverage, for each $1 of client money, down from $6 before the capital infusion announced today, Viniar said. The fund plans to keep leverage at the current level.

When you are levered 7:1, there isn’t much room for zig-zags in market prices! This, I think, is one of those occasions where patient money that isn’t marked to market every single day can find some good bargains. High-quality spread product has been suggested.

There was more central bank intervention on the day and some fast-money is betting that this will turn into rate cuts. I don’t buy that myself … but I can’t deny that the market is expecting cuts. Jim Hamilton wrote a great essay defining a liquidity event and attached a graph of Fed-Intervention-Sizes I can’t help reproducing here:

Wow! The WSJ posted a primer on the mechanics of this. My own homely example of a liquidity crunch is … say you have to sell me your house … maybe you’re moving or something. It’s worth $400,000 – we both agree on that. But I can’t get financing! All the bank is willing to lend me is $300,000! At that point, you might have to swallow hard and sell it to me for the latter figure … and I’ll have to keep my nose clean for the next while so the bank doesn’t foreclose on me.

The central banks are desperately afraid of this type of thing happening … it’s what happened in Japan in the late eighties, and we’ve seen how that story plays out. So they are lending the top-tier banks as much money as they want at the overnight rates, simply to ensure that these banks can then make business decisions based on expected returns relative to the overnight without having to worry about their own financing. With luck, this liquidity will trickle into the marketplace and – since everybody agrees your house is really worth $400,000 – I’ll be able to get financing for the original figure. I’ll have to, since if I don’t somebody else will. But a prolonged liquidity squeeze can lead to deflation – and fighting deflation is like trying to push a rope uphill.

There is money around, so we needn’t all panic just yet. J&J just came out with a massive bond issue that was sharply increased in size once they realized how much demand there was for triple-A product. There are warnings that the same reception won’t be found by lesser credits, however.

As one might imagine, government bonds had an entirely reasonably good day, with Treasuries up a tad and Canadas up a tad more.

In continuing stories, there is argument that sub-prime is NOT Greenspan’s fault and, having made their point, China backed off the financial Armageddon thing.

The preferred share market was quiet, drifting slightly downward on not much 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 4.74% 4.78% 27,263 15.97 1 -0.0820% 1,042.9
Fixed-Floater 5.03% 5.00% 125,521 15.60 8 -0.1064% 1,013.2
Floater 4.89% 0.08% 72,118 8.13 4 +0.0026% 1,046.1
Op. Retract 4.82% 4.06% 81,126 2.93 16 +0.1121% 1,024.5
Split-Share 5.07% 4.75% 100,383 3.72 15 -0.0314% 1,041.6
Interest Bearing 6.21% 6.62% 63,728 4.63 3 +0.2757% 1,039.3
Perpetual-Premium 5.54% 5.24% 100,421 5.80 24 -0.0592% 1,022.2
Perpetual-Discount 5.08% 5.12% 300,620 15.30 39 -0.0814% 976.1
Major Price Changes
Issue Index Change Notes
BCE.PR.Z FixFloat -1.1638%  
PIC.PR.A SplitShare -1.0918% Now with a pre-tax bid-YTW of 4.94% based on a bid of 15.40 and a hardMaturity 2010-11-1 at 15.00.
CU.PR.A PerpetualPremium -1.0626% Now with a pre-tax bid-YTW of 5.63% based on a bid of 25.14 and a call 2012-3-31 at $25.00.
BSD.PR.A InterestBearing +1.0638% I don’t know about anybody else, but I’m getting awfully tired of seeing this issue in the “Major Price Move” list every single day! Can’t it just find a level? Asset coverage on August 10 was 1.84:1 according to Brookfield. Now with a pre-tax bid-YTW of 7.08% (as interest, mostly) based on a bid of 9.50 and hardMaturity. 2015-3-31 at 10.00.
CM.PR.R OpRet +1.4041% Now with a pre-tax bid-YTW of 3.85% based on a bid of 26.00 and a call 2008-5-30 at 25.75.
Volume Highlights
Issue Index Volume Notes
DFN.PR.A SplitShare 70,568 Desjardins bought 29,700 from “Anonymous” at 10.30 just before the close – a total of 57,800 traded in the last ten minutes of the day, and another 300 in after-hours. Now with a pre-tax bid-YTW of 4.81% based on a bid of 10.30 and a hardMaturity 2014-12-1 at 10.00.
RY.PR.W PerpetualDiscount 14,900 Now with a pre-tax bid-YTW of 5.00% based on a bid of 24.56 and a limitMaturity.
SLF.PR.B PerpetualDiscount 13,500 Now with a pre-tax bid-YTW of 5.01% based on a bid of 24.21 and a limitMaturity.
RY.PR.B PerpetualDiscount 12,545 RBC crossed 10,000 at 23.70. Now with a pre-tax bid-YTW of 4.98% based on a bid of 23.65 and a limitMaturity.
ALB.PR.A SplitShare 11,800 Now with a pre-tax bid-YTW of 4.25% based on a bid of 24.95 and a call 2008-3-29 at 25.00.

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


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