September 17, 2007

Panic, thy name is retail:

Despite the credit-market uproar, redemptions from money market funds were described as lower than expected at $915.5 million. Bond funds had $368.1 million in net redemptions excluding reinvested distributions, and Canadian equity funds had net redemptions of $578.4 million.

The only positive major category was balanced funds, offering conservative managed combination of stocks and fixed-income holdings. Canadian balanced funds endured $271.5 million in net redemptions, but the global balanced segment showed net sales of $670.5 million.

I’m sure that somebody, somewhere, has studied mutual fund cash flows vs. 12-month future returns. If anybody knows where I can find such a thing, let me know and I’ll post the link.

The Northern Rock crisis continues in Britain, with the stock dropping, customers crowding the withdrawal window and the Bank of England’s actions being questioned. The part I don’t understand is:

Northern Rock credit-default swaps increased 15 basis points to 170 basis points, according to JPMorgan Chase & Co. The cost of the credit-default swaps, which traded as high as 210 basis points on Sept. 14, rises as creditworthiness deteriorates.

Only 170bp? You don’t have to look very hard to find higher prices than that in the North American markets … Countrywide & CIT Group are quoted in the mid-200s, for instance, and with all their problems they’re not actually suffering a run and getting publicly announced support from the Fed. Bear Stearns & Lehman are in the low-100s. Still – I haven’t actually looked at NR’s financials, so I’ll just pass on the tidbit without further comment.

But! After the UK markets closed, the following announcement was made:

The British government is to guarantee all existing deposits at troubled bank Northern Rock, Treasury Chief Alistair Darling said Monday.

People can continue to take their money out of the Northern Rock, but if they choose to leave their money in the bank it will be guaranteed safe and secure,” Darling said at a Downing Street press conference.

Now, that is a bail-out. I don’t know what to make of it … but my gut reaction is unfavourable.

Meanwhile, in LBO news … Blackstone might be getting a black eye:

PHH Corp., the mortgage lender and vehicle-fleet manager that agreed to be bought by General Electric Co. and Blackstone Group LP, said the sale may unravel after Blackstone failed to get $750 million in loans.

And Credit Suisse is taking a hit on First Data:

Credit Suisse, the lead arranger of financing for First Data Corp.’s LBO, last week agreed to lower the amount of loans that banks initially will sell to $5 billion from $14 billion, and cut the price to 96 cents on the dollar, said three people with knowledge of the talks. The discount alone could cost about $200 million.

Deutsche Bank AG, Germany’s biggest bank, and JPMorgan, the No. 3 U.S. bank, found buyers last week for the highest-yielding loans financing KKR’s purchase of U.K. pharmacist Alliance Boots. The banks had abandoned selling 6 billion pounds ($12 billion) of mostly senior loans in August because buyers weren’t interested.

Investors agreed to buy the loans at 95 cents on the dollar, according to bankers.

That concession followed the sale of loans to back the purchase of Allison Transmission, the Indianapolis-based auto- parts supplier, by Carlyle Group and Onex Corp. Banks led by Citigroup, the biggest U.S. bank, sold $1 billion of loans for the Allison purchase for 96 cents on the dollar.

The fact that these loans are moving at all, albeit at a hefty discount, will be welcome news for holders of BCE Prefs. BCE common was down a tad today, but well within the boundaries of random jiggle-jaggles.

Oil prices set a new record today, which might have long term implications for the Gulf states:

It should go without saying that the strong oil/ weak dollar mix creates real problems for all the Gulf countries that insist (still) on pegging to the dollar.   They are effectively importing a weak currency and low nominal interest rates when there economies are booming.   The result: massive inflation and very negative real rates that are adding to the boom now, but risk creating problems later.

Three income trusts have celebrated oil’s rise by cutting their distributions:

Income-trust distribution malaise spread through the oilpatch Monday as Enterra Energy Trust (TSX: ENT-UN.TO) suspended its payout while Wellco Energy Services Trust (TSX: WLL-UN.TO) cut its distribution in half.

Those moves followed a 10 per cent distribution reduction Friday by Pengrowth Energy Trust (TSX: PGF-UN.TO) and extended a wave of payout disappointments for investors, particularly in energy services trusts.

NovaStar, mentioned here on September 4 is in the news again:

NovaStar Financial Inc., the subprime home lender trying to survive by conserving cash, scrapped plans to pay a dividend on 2006 profit and will forfeit its real estate investment trust tax status as a result.

The mortgage company, one of more than 110 that have halted lending or left the business since the start of 2006, said in a statement that the loss of REIT status will have a “significant adverse impact” on third-quarter results. Kansas City, Missouri- based NovaStar is reviewing its listing requirements with the New York Stock Exchange.

“Clearly, we did not anticipate the drop in market value or the level of demands on liquidity caused by the market turmoil this summer,” said Chief Executive Officer Scott Hartman in the statement. “Canceling the previously planned dividend is the only reasonable and prudent course of action.”

James Hamilton of Econbrowser thinks enormous pressure for increased regulation is inevitable – and, at least to some degree, desirable. Econbrowser’s other principal, Menzie Chinn, notes:

As social scientists, we should try to explain why the current Administration behaves in this manner. One approach is the capture and ideology perspective of Kalt and Zupan (1984). Although not directly applicable (since their study was of legislative actions), the framework is of interest. If policy is captured by economic interests, then analysis is irrelevant. If ideology is paramount, then again analysis is irrelevant.

Oh, it’s a glorious world, where evidence, argument and analysis are irrelevant!

US Equities were off a bit, having run aground on the Northern Rock (and a sudden realization that maybe the Fed doesn’t actually have to cut by 50bp tomorrow if they don’t feel like it); Canadian equities followed.

Short-term Treasuries also fell, flattening the curve; Canadian ten-years rose, flattening the curve.

Preferreds didn’t do much on low volume, although the SplitShare and InterestBearing sectors drifted up a bit.

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 4.85% 4.81% 1,411,410 15.67 1 +0.0000% 1,044.5
Fixed-Floater 4.85% 4.76% 99,562 15.82 8 +0.0257% 1,031.8
Floater 4.48% 2.98% 86,466 10.80 3 -0.0254% 1,048.4
Op. Retract 4.84% 3.91% 75,506 3.13 15 +0.0137% 1,028.9
Split-Share 5.13% 4.79% 95,847 3.87 13 +0.2558% 1,048.1
Interest Bearing 6.25% 6.74% 64,535 4.54 3 +0.1718% 1,038.4
Perpetual-Premium 5.47% 5.04% 88,998 5.24 24 -0.0918% 1,032.2
Perpetual-Discount 5.05% 5.09% 249,244 15.06 38 +0.0064% 985.2
Major Price Changes
Issue Index Change Notes
PWF.PR.L PerpetualDiscount -1.2622% Now with a pre-tax bid-YTW of 5.33% based on a bid of 24.25 and a limitMaturity.
BAM.PR.M PerpetualDiscount +1.4634% Closed at 20.80-87, 7×6. The virtually identical BAM.PR.N closed at 20.11-21, 2×1. There are things in life that I don’t understand. BAM.PR.M now has a pre-tax bid-YTW of 5.74% based on a bid of 20.80 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
FTN.PR.A SplitShare 66,700 Asset coverage of about 2.5:1 as of August 31 according to the company. Now with a pre-tax bid-YTW of 4.69% based on a bid of 10.08 and a hardMaturity 2008-12-01 at 10.00.
ACO.PR.A OpRet 23,725 Scotia crossed 18,400 at 26.65. Now with a pre-tax bid-YTW of 4.33% based on a bid of 26.30 and a call 2009-12-31 at 25.50.
NA.PR.L PerpetualDiscount 21,700 Now with a pre-tax bid-YTW of 5.30% based on a bid of 23.13 and a limitMaturity.
CM.PR.R OpRet 15,120 Scotia dominated the action, buying 14,820 of the shares and selling 14,800. Now with a pre-tax bid-YTW of 4.29% based on a bid of 26.01 and a call 2009-5-30 at 25.60.
WFS.PR.A SplitShare 37,915 Asset coverage of just under 2.1:1 as of September 6 according to Mulvihill. Now with a pre-tax bid-YTW of 4.80% based on a bid of 10.15 and a hardMaturity 2011-6-30 at 10.00.

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

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