PrefBlog

A few stories continued today …

MBIA announced its deeply subordinated bond issue (noted on January 9 will carry a yield of 14%:

MBIA’s yield is equivalent to 956 basis points higher than U.S. Treasuries of a similar maturity. The extra yield, or spread, on investment-grade bonds is 217 basis points, according to Merrill Lynch index data. The premium to own high-yield, or junk-rated, debt is 663 basis points. A basis point is 0.01 percentage point.

“That would be close to distressed levels,” said Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York. Distressed bonds trade at 1,000 basis points over Treasuries of similar maturity.

The trouble with that quote, of course, is that these so-called bonds are not bonds at all. They’re equity. That’s the whole point.

And the January 10 speculation that BofA would buy Countrywide have proven accurate … which was greeted in the marketplace with a distinct lack of enthusiasm with respect to the acquirer:

Credit-default swaps tied to the bonds of Charlotte, North Carolina-based Bank of America increased 9 basis points to 89 basis points, according to broker Phoenix Partners Group in New York, suggesting deteriorating perceptions of credit quality.
…
Moody’s Investors Service today said it may cut Bank of America’s A financial strength rating. Countrywide’s “volatile mortgage asset valuations” and pending litigation may weigh on the company’s already-strained capital position. The ratings company said it may raise Countrywide Home Loans’ Baa3 ranking.

Naked Capitalism points out that a lot of the rationale for the deal is tax benefits, as BofA will be able to utilize Countrywide’s tax loss carry-forwards, a state of affairs considered evil by some. However, Accrued Interest points out that that this demonstration that acquirers do exist was very good for the beleaguered Washington Mutual:

Today WaMu stock opened up about 7%, and their bonds rallied significantly. J.P. Morgan is rumored as the acquisitor, and there is probably only a couple other banks which would even be possibilities. I heard Wells Fargo’s name mentioned, and they’d have the capital, but it would be a strange marriage for such a conservative bank. You could also imagine some Mid-West or East Coast bank having interest in WaMu’s geographical footprint, but I’m not sure any such banks have the spare capital to absorb WaMu’s problem assets. US Bank? Fifth Third? PNC? I doubt it. If I’m Jamie Dimon, even if I’d really like to own WaMu, I wouldn’t let BofA’s move force my hand. JPM may be the only actual bidder, and WaMu is probably only going to get more desperate.

Another step was taken in the Great Credit Crunch Unwinding 0f 2007-??, when Northern Rock sold off some assets:

Northern Rock Plc, the U.K. bank bailed out by the Bank of England, agreed to sell mortgages valued at 2.2 billion pounds ($4.3 billion) to JPMorgan Chase & Co. to help repay loans from the central bank.
…
“This really does look like a desperate measure,” Simon Maughan, an analyst at MF Global Securities in London, said in an interview today. “Shareholders would seriously start to object if the balance sheet was sold piecemeal out from underneath them.” He has a “neutral” recommendation on the shares.

I haven’t been shy about telling people via this blog what I think the investment business is really about (hint: not performance) and a perfect illustration has come my way via Financial Webring Forum. The guy running Ivy Canadian has never made any bones about his investment style:

The issue with Ivy Canadian is a lack of exposure to the energy and mining stocks that have largely been responsible for the doubling of the S&P/TSX composite index in the past five years. Mr. Javasky prefers to buy and hold the shares of top businesses rather than speculating in stocks dependent on commodity prices.

OK, now to me, all this sounds reasonable enough. He wants blue-chip businesses, not rocks and trees. If you want the same thing, he’ll be on your list. If you don’t, he won’t. This seems simple enough. I have no idea whether Mr. Javasky is any good at what he wants to do … that’s a question I would have to analyze further and I really can’t be bothered.

So … what does a trenchant critique of Mr. Javasky’s abilities look like, down in the trenches of real-world selling, as opposed to the rarefied academic air of PrefBlog? Here ya go …

“I applaud Jerry for sticking to his convictions, but common sense seems to have escaped him,” wrote Brandon Moore, a financial planner with TD Waterhouse Financial Planning in Penticton, B.C. “His inability to capitalize on market change isn’t what people who are paying for his services want to hear.”

There you have it in a nutshell. Tell people what they want to hear, you’ll be fine. I eagerly await a flood of eMails criticizing my worth as a human being because preferred shares haven’t outperformed the Belorussian Head-Squeezer Manufacturer’s sub-index in eight of the past ten years. But who knows? Maybe I’ll change specialties. It would only be common sense.

Another winning day for prefs in general and PerpetualDiscounts in particular. Volume moderated, but was fine.

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

This entry was posted on Friday, January 11th, 2008 at 11:55 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.