August 22, 2007

Well, the press is certainly champing at the bit to announce a return to normalcy!

In the best news of the day HSBC Canada issued a press release that included the paragraph:

HSBC Investment Funds (Canada) Inc., manager of the HSBC Mutual Funds, and HSBC Investments (Canada) Limited, manager of the HSBC Pooled Funds, confirm that there is no exposure to third party asset backed commercial paper within any of these Funds.

Finally! Some explicit recognition in all this mess that there is a difference between the corporation’s interest and the subsidiaries fiduciary function. It isn’t much and it isn’t any kind of proof that all is well with separation of function at HSBC Canada (any more than the press releases that aroused my ire in the past two days are any kind of proof that there’s anything wrong at National Bank and Industrial Alliance) … but the more that such a distinction is mentioned in public, the more willing I am to believe that the distinction is part of corporate culture.

All this Independent Review Committee stuff has to be good for something, right?

In Canadian ABCP news, NAV Canada (beloved of all those who pay for airline tickets) announced that it:

holds approximately $368 million of non-bank R-1 (high) rated ABCP allocated among its reserve funds and accounts required by its debt indentures.  The Company has approximately $130 million of cash and cash equivalents not affected by the problems in the non-bank ABCP market.

It is, of course, cheap and easy to point out investment mistakes in hindsight, so I’ll try to show a little restraint … but that means about three-quarters of their cash is held in non-bank Canadian ABCP. They may wish to review their diversification policies.

Amidst fears that liquidity infusions are being hoarded by the top-tier banks four major banks were jawboned by the Fed into using the discount window and letting the credit trickle down. Bernanke is using a more targetted approach than Greenspan used for the 1998 LTCM crisis … we shall see how it all turns out! If he can get away with it, there will be less bleeding of easy credit into the real economy and less chance of a renewed asset bubble. At present, the Fed appears to be defending a 5% Fed Funds rate but Bernanke’s got lots of time to decide whether or not to make the de facto easing de jure. The futures traders appear to believe in a three month ease, then back to the anti-inflation grind.

There is still a lot of stress in the global system despite a pause for breath in US markets. Investors should remember the Fed doesn’t really care about them. We can only hope that the politicians do not succeed in getting the Fed to bail out mortgagors, but it is election time in the US, after all, so there’s bound to be a lot of showboating.

Meanwhile, the default statistics on securitized loans mentioned yesterday are being confirmed by statistics on mortgages held directly. Lenders are reacting ruthlessly to the changed climate, with three lenders firing 3,700 employees. Remember “creative destruction”? This is the nasty second part, and we’ve only just begun:

two European mortgage-securities funds had their credit ratings slashed to junk from AAA by Standard & Poor’s because debt market turmoil curbed access to short-term financing.

Even more seriously, Wall Street bonuses are threatened. On the other hand, in late-breaking news it was announced that Bank of America’s putting $2-billion into Countrywide. So things are – very slowly and jerkily – working as they should.

At least one hedge fund is experiencing knock-on effects of the credit crunch. Stratus has 25% of its assets in Sentinel, which suspended client redemptions on August 14 – which may, in fact, have more to do with fraud than liquidity.

The Chinese have bought up a huge amount of high-quality housing debt over the past few years.

Here’s a good question to ask your friendly neighborhood US Equity Quant: “how do you distinguish between the various levels of financial instrument valuation“? Without having to gain access to the quantitative code and other trade secrets, you should be able to come to a reasonable judgement of skill level by the answer to that question!

US Equities had a very good day as traders decided the world might still exist at the time today’s trades settle. Canadian equity roared upwards, but is still down a bit more than 7% from the July peak. We shall see what happens if Tom Graff’s musings on the potential for re-pricing of as-yet unsettled private equity takeovers should prove to be prophetic with respect to the Teachers’ / BCE deal.

Treasuries fell, with the 2-10 spread flattening 6bp. Some investment grade issuers raised funds, reducing reliance on short term credit, for instance:

XTO Energy Inc. reopened a bond sale yesterday, raising $1 billion to pay down commercial paper, according to a regulatory filing. Fort Worth, Texas-based XTO yesterday sold five-year, 10- year and 30-year bonds.

After all … look at the alternative:

Asset-backed commercial paper yields rose to the highest in almost seven years after H&R Block Inc., the biggest U.S. tax preparer, said a unit tapped $850 million in credit lines because it couldn’t sell the short-term debt.

Canadas fell, with the 2-10 spread flattening by 7.4bp, in what was hailed as an indication that the market has been pricing in too catastrophic a disaster.

It was a quiet and calm, but none-the-less positive day for Canadian preferreds. There was good volume and a confluence of prices with BAM.PR.M / BAM.PR.N, so it may be that those issues are normalizing after recent wild oscillations … subject to “normalizing” being a meaningful word, that is!

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 4.75% 4.79% 24,084 15.93 1 +0.6173% 1,045.9
Fixed-Floater 4.99% 4.85% 116,723 15.80 8 +0.1363% 1,019.8
Floater 4.96% 2.14% 75,681 7.91 4 +0.0615% 1,031.5
Op. Retract 4.84% 4.05% 80,939 3.12 16 -0.0498% 1,021.9
Split-Share 5.10% 5.07% 97,447 4.21 15 +0.0755% 1,038.0
Interest Bearing 6.25% 6.78% 67,043 4.58 3 -0.9957% 1,031.7
Perpetual-Premium 5.54% 5.19% 96,479 6.92 24 +0.0654% 1,022.8
Perpetual-Discount 5.13% 5.17% 281,437 15.23 39 +0.0303% 968.3
Major Price Changes
Issue Index Change Notes
BSD.PR.A InterestBearing -3.1546% Ouch! Asset coverage is now about 1.75:1, according to Brookfield Funds – down from 2:1 in late May. Now with a pre-tax bid-YTW of 7.64% (mostly as interest) based on a bid of 9.21 and a hardMaturity 2015-03-31 at 10.00.
IAG.PR.A PerpetualDiscount +1.0989% Now with a pre-tax bid-YTW of 5.07% based on a bid of 23.00 and a limitMaturity.
BNA.PR.C SplitShare +1.1161% Now with a pre-tax bid-YTW of 5.48% based on a bid of 22.65 and a hardMaturity 2019-1-10 at 25.00.
Volume Highlights
Issue Index Volume Notes
BAM.PR.M PerpetualDiscount 59,880 Closed at 20.10-15, 1×10, compared to BAM.PR.N at 20.00-06, 20×1. Finally, comparability! And heavy volume! Now with a pre-tax bid-YTW of 6.01% based on a bid of 20.10 and a limitMaturity.
GWO.PR.H PerpetualDiscount 53,680 Nesbitt crossed 50,000 at 23.85. Now with a pre-tax bid-YTW of 5.17% based on a bid of 23.79 and a limitMaturity.
BAM.PR.N PerpetualDiscount 33,300 See BAM.PR.M, above. Now with a pre-tax bid-YTW of 6.04% based on a bid of 20.00 and a limitMaturity.
CM.PR.A OpRet 22,485 TD crossed 15,000 at 26.00. Now with a pre-tax bid-YTW of 2.75% based on a bid of 26.01 and a call 2007-11-30 at 25.75. Worst than T-Bills, even after tax, that is. Perhaps people can’t believe the first call is at 25.75.
SLF.PR.D PerpetualDiscount 16,840 Now with a pre-tax bid-YTW of 5.02% based on a bid of 22.15 and a limitMaturity.

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

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