December 16, 2008

Next step, quantitative easing! The FOMC announced:

The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.

As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses.

In a related action, the Board of Governors unanimously approved a 75-basis-point decrease in the discount rate to 1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Cleveland, Richmond, Atlanta, Minneapolis, and San Francisco. The Board also established interest rates on required and excess reserve balances of 1/4 percent.

The Fed also announced:

The federal banking and thrift regulatory agencies today approved a final rule that would permit a banking organization to reduce the amount of goodwill it must deduct from tier 1 capital by any associated deferred tax liability.
Under the final rule, the regulatory capital deduction for goodwill would be equal to the maximum capital reduction that could occur as a result of a complete write-off of the goodwill under generally accepted accounting principles (GAAP). The final rule is in substance the same as the proposal issued in September. The final rule will be effective 30 days after publication in the Federal Register. However, banking organizations may adopt its provisions for purposes of regulatory capital reporting for the period ending December 31, 2008.

The final rule was approved by the Federal Reserve Board, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, and Office of Thrift Supervision. The draft Federal Register notice is attached.

The uninformed reporting of this rule change was discussed by PrefBlog when the rule was proposed.

In a sign of the times, redemptions on a real-estate seg fund have been suspended:

The Great-West Life Assurance Company today announced a temporary moratorium on redemptions from its Canadian Real Estate Investment Fund No. 1 effective close of business (4:00 p.m. EST) December 15, 2008.

The Great-West Life Real Estate Fund is a Segregated Fund which holds a diversified portfolio of high-quality income producing properties. Given the current economic environment, redemption requests have recently increased. Real estate assets are generally less liquid than other major asset classes and cannot be rapidly liquidated. Therefore, in accordance with the terms of
the Information Folder governing the Fund, it has been determined that a temporary moratorium on redemptions is necessary to ensure equitable treatment for all investors in the Fund.

I have a good illustration of why preferreds in general and BAM in particular are down so much this year. It’s in a post on Financial Webring Forum:

I am continuously amazed at the prices for BAM retractables. Forgetting the dividend for a moment, the O series are priced to return a 52% capital gain by August 2013 (assuming a $25 payout). That’s 9.4% annualized, and that’s just the capital gain. The YTW which James calculated yesterday is 16.65% based on a price of $16.

That’s ifBrookfield Assets Management can pay up in 2013, right ? And if Brookfield is still in business in 2013.

I hate to sound like the voice of doom, but these days anything can happen, and often does.

Voice of doom? Voice of ignorance is more like it. Look at that post: ZERO discussion, ZERO analysis, ZERO accountability. The quoted poster has a bright future ahead of him in the financial services industry, because he’s got the sales pitch down pat.

If somebody does an analysis of BAM and doesn’t like it, that’s fine. Maybe they’ve got too much exposure to real estate. Maybe they’ve got too much debt. Maybe … you name it, we can think about it and discuss it.

On the other hand, maybe somebody does an analysis of BAM, takes a view on what yield it should have, compares it to the yields available elsewhere with similar risk profile, and says Holy Smokes! Buy! Maybe the exposure to real-estate isn’t the totality of the company. Maybe the real-estate assets can be jettisoned (BAM has, effectively, a put on BPO. BPO has a put on the individual properties) with damage done, to be sure, but not life-threatening. Maybe since all that debt is secured by individual properties with no recourse and with well staggered maturities, it’s not as scary as it looks at first. Maybe … you name it, we can discuss it.

And if you like it, you can plunk a little money down (not too much because you might be wrong) and if you’ve done your homework properly you’ll make a good return – not necessarily on every investment, but on the totality of your portfolio.

Because, contrary to the ravings of efficient market zealots, the market is not efficient. The market is not comprised solely of highly intelligent people who work hard. The market is comprised of guys like the Mr. Voice of Doom quoted above – and poor performance does not weed them out. They just come back with a new line of patter and a new client list. Markets are moved by salesmen, not analysts.

Another down day on very heavy volume – but PerpetualDiscounts are still a little ahead on the month-to-date. SplitShares seem to be hesitantly recovering, and BNA activity appears to be dominated by retractors.

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.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 7.96% 8.34% 123,030 12.24 7 +0.7086% 661.3
Floater 9.34% 9.41% 81,910 10.10 2 +0.9429% 346.6
Op. Retract 5.51% 6.53% 155,761 3.95 15 -0.1060% 985.6
Split-Share 6.72% 12.51% 89,541 3.94 15 +1.6721% 916.6
Interest Bearing 9.76% 20.56% 55,265 2.76 3 +2.1727% 757.8
Perpetual-Premium N/A N/A N/A N/A N/A N/A N/A
Perpetual-Discount 7.98% 8.11% 225,316 11.30 71 -0.5672% 695.0
Fixed-Reset 6.01% 5.36% 1,188,072 13.87 18 +0.1118% 1,004.9
Major Price Changes
Issue Index Change Notes
NA.PR.K PerpetualDiscount -9.0186% Now with a pre-tax bid-YTW of 8.69% based on a bid of 17.15 and a limitMaturity. Closing quote 17.15-18.22 (!), 3×1. Day’s range of 17.56-18.99.
BAM.PR.J OpRet -5.8908% Now with a pre-tax bid-YTW of 15.19% based on a bid of 13.10 and a softMaturity 2018-3-30 at 15.19%. Closing quote of 13.10-73, 1×6. Day’s range of 12.75-97.
POW.PR.C PerpetualDiscount -4.4275% Now with a pre-tax bid-YTW of 7.91% based on a bid of 18.78 and a limitMaturity. Closing quote 17.15-18.22 (!), 3×1. Day’s range of 17.56-18.99.
SLF.PR.C PerpetualDiscount -4.1825% Now with a pre-tax bid-YTW of 8.89% based on a bid of 12.60 and a limitMaturity. Closing quote 12.60-70, 14×29. Day’s range of 12.55-39.
BAM.PR.N PerpetualDiscount -4.1801% Now with a pre-tax bid-YTW of 13.44% based on a bid of 8.94 and a limitMaturity. Closing quote 8.93-00, 3×1. Day’s range of 8.74-60.
BAM.PR.M PerpetualDiscount -4.1667% Now with a pre-tax bid-YTW of 13.39% based on a bid of 8.97 and a limitMaturity. Closing quote 8.97-24, 3×5. Day’s range of 8.95-41.
SLF.PR.E PerpetualDiscount -4.1198% Now with a pre-tax bid-YTW of 8.85% based on a bid of 12.80 and a limitMaturity. Closing quote 12.80-00, 6×4. Day’s range of 12.66-26.
SLF.PR.D PerpetualDiscount -3.9786% Now with a pre-tax bid-YTW of 8.93% based on a bid of 12.55 and a limitMaturity. Closing quote 12.55-97, 5×5. Day’s range of 12.55-30.
BCE.PR.F FixFloat -3.4483% Huh. I add it to the database and this is the thanks I get.
ELF.PR.F PerpetualDiscount -3.4483% Now with a pre-tax bid-YTW of 9.74% based on a bid of 14.00 and a limitMaturity. Closing quote 14.00-30, 51×5. Day’s range of 14.00-44.
BNA.PR.C SplitShare -3.0573% Asset coverage of 1.7+:1, based on BAM.A at 17.94 and 2.4 BAM.A per preferred. Now with a pre-tax bid-YTW of 21.84% based on a bid of 7.61 and a hardMaturity 2019-01-10 at 25.00. Closing quote of 7.61-79, 4×1. Day’s range of 7.31-10.
BCE.PR.A FixFloat +3.1507%  
BSD.PR.A InterestBearing +3.7647% Asset coverage of 0.8-:1 as of December 12, according to Brookfield Funds. Now with a (currently dubious) yield of 23.74% based on a bid of 4.41 and a hardMaturity 2015-3-31 at (a currently dubious value of) 10.00. Closing quote of 4.41-66, 3×3. Day’s range of 4.27-50.
BAM.PR.K Floater +3.8519%  
MFC.PR.C PerpetualDiscount +4.7312% Now with a pre-tax bid-YTW of 7.71% based on a bid of 14.61 and a limitMaturity. Closing quote 14.61-00, 10×3. Day’s range of 13.97-80.
PPL.PR.A SplitShare +4.9936% Added to database today. Asset coverage of 1.6+:1 as of November 28 according to the company. Now with a pre-tax bid-YTW of 10.78% based on a bid of 8.20 and a hardMaturity 2012-12-1 at 10.00. Closing quote of 8.20-39, 20×1. Day’s range of 7.66-24.
FFN.PR.A SplitShare +5.4896% Asset coverage of 1.3+:1 as of November 28 according to the company. Now with a pre-tax bid-YTW of 12.41% based on a bid of 7.11 and a hardMaturity 2014-12-1 at 10.00. Closing quote of 7.11-49, 45×3. Day’s range of 6.87-25.
HSB.PR.D PerpetualDiscount +5.8901% Now with a pre-tax bid-YTW of 7.86% based on a bid of 16.00 and a limitMaturity. Closing quote 16.00-49, 21×21. Day’s range of 15.10-49.
DF.PR.A SplitShare +7.5817% Asset coverage of 1.4+:1 as of November 28 according to the company. Now with a pre-tax bid-YTW of 9.31% based on a bid of 8.23 and a hardMaturity 2014-12-1 at 10.00. Closing quote of 8.23-74, 1×23. Day’s range of 7.91-75.
BCE.PR.G FixFloat +7.6923%  
Volume Highlights
Issue Index Volume Notes
MFC.PR.C PerpetualDiscount 178,223 Now with a pre-tax bid-YTW of 7.77% based on a bid of 14.61 and a limitMaturity.
BNA.PR.A SplitShare 129,071 Now with a pre-tax bid-YTW of 23.77% based on a bid of 19.01 and a hardMaturity 2010-9-30 at 25.00
MFC.PR.B PerpetualDiscount 383,419 Now with a pre-tax bid-YTW of 7.57% based on a bid of 15.50 and a limitMaturity.
GWO.PR.I PerpetualDiscount 74,220 Now with a pre-tax bid-YTW of 8.31% based on a bid of 13.63 and a limitMaturity.
BNS.PR.I PerpetualDiscount 73,012 Now with a pre-tax bid-YTW of 7.78% based on a bid of 14.75 and a limitMaturity.

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

4 Responses to “December 16, 2008”

  1. mpisni says:

    Hi James, Regarding BAM comments. I agree with you James that what everyone needs is thoughtfull anaysis versus rash extremes. As someone who cannot do as thorough an analysis as you I really appreciate the detail you provide, allthough I admit getting lost sometimes, a reread will generally drive the point home.

    As someone who holds Pref’s for retirement income I would like to thank you for your site.

  2. jiHymas says:

    One would think I would be inured by now to the sort of meaningless babble that got me so annoyed last night … but not that time!

  3. tobyone says:

    Barry Critchley opines on soft retractable prefs as the next type of Tier 1 capital in Dec. 17 Financial Post.

  4. tobyone says:

    TD Newcrest initiates coverage on BAM-N as a BUY Dec. 16 with a $US18 target, current $US13.67.

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