PrefBlog

Another nervous day

Continuing the recent pattern, Yvon Charest, Industrial Alliance’s President and Chief Executive Officer, gave his portfolio managers a kick in the teeth by usurping their responsibilities. They’re just plain flat out buying the ABCP in their mutual funds – there is no indication as to whether the portfolio managers want to sell (and look, I know that’s a pretty good bet, OK? That’s not the point). Mr. Charest’s track record as a portfolio manager was not disclosed; we can expect unit-holders not to care until conflicts of interest are resolved in a way they don’t like and a newspaper headline tells them to care.

If Mr. Charest wants to play at “Portfolio Managers”, there is nothing to prevent him from issuing index-linked PPNs, and doing it all on his own balance sheet. But if there’s to be a separate balance sheet there has to be independence.

There is no indication as yet that anybody besides me thinks this is important; analyst independence is just so 2002.

On the sub-prime front, large bets are being made agains ResCap’s survival – and ResCap is a big player:

At the end of June, ResCap had tapped those [ABCP] markets for about $5.5 billion in financing, according to regulatory filings.

ResCap has about $18.5 billion in committed financing, CreditSights analyst David Hendler wrote in an Aug. 7 note.

Mortgage companies without any sub-prime on their books, such as Ottimo Funding LLC, are experiencing financing difficulties.

The default reports for July have been released and Fitch has placed $92.1-billion under review. Last month they reviewed $118-billion and downgraded $13-billion of it. There are more calls coming out for a review of the ratings agencies, as the politicians seem to have agreed on a convenient scapegoat. There are more calls for increased regulation of banks, as well.

Yves Smith has published a balanced review of the various critiques of Central Bank actions. Put me in the third camp: Realist (although I would prefer “Pragmatist”). The market is faced with a situation in which nobody will even look at riskier or more complicated debt. The central banks must first ensure that the commercial banks can, in fact, make investment decisions with reasonably assured financing. Then they must increase the spread between government and commercial paper to the point where real investors (as opposed to mere dealers) will at least be interested enough to look at it. Finally, once the normal routine of examining credit and making an actual decision between safe-but-low-yielding and riskier-but-higher-yielding securities has been re-established, we can get back to fighting inflation. And don’t worry, once people start looking at risk/reward with a more jaundiced eye, there will be plenty of losers. But if the credit markets lock up and everybody in the world has to dump assets on the market at give-away prices in order to de-lever, we’re talking deflation. And deflation is bad.

Tom Graff seems to be in so-far-so-good camp as well, while James Hamilton applauds the Fed’s methodology thus far.

There is some speculation that the liquidity crisis is over and we can all go home; fortunately there are cooler heads at the Fed:

“Financial market volatility, in and of itself, doesn’t require a change in the target federal funds rate,” [Richmond Fed President] Lacker said at a luncheon of the Risk Management Association of Charlotte. “Policy needs to be guided by the outlook for real spending and inflation.”

And, in boring news about the real economy, the Cleveland Fed reminds us that inflation, while still worrisome, is showing signs of responding favourably to the Fed’s policies of moderate restraint. 

True to form, however, US equities were up on takeover speculation, so it would seem that some are hopeful the whole episode was just a bad dream. Canadian equities followed.

Canadian banks re-affirmed their committment to providing credit support to their own Asset Backed Commercial Paper (ABCP) products. I can only imagine they’re having difficulty rolling the paper and are attempting to (i) reduce their conduit’s cost of borrowing, and (ii) keep the assets & liabilities off their own balance sheets. Given that their cost of funding, as measured by the September BAX on the Montreal Exchange has risen to about 4.6% (and I’ve seen them much higher), I’m sure they’re about ready to try anything. Note that the Canadian 3-month WI T-Bills are at 4.00% … that’s an amazing spread – according to RBC, the spread was 30bp on August 10, 62bp on August 17.

US 3-month T-Bills finally increased in yield but the 2-10 curve steepened anyway – so let’s not say it’s over just yet! The Canadian 2-10 spread steepened again and is now at 30.5bp. Hank Cunningham provides some historical context.

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

This entry was posted on Tuesday, August 21st, 2007 at 10:41 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.