Well, I wanted to do a little attribution analysis for my own purposes and now find that I have the same viewpoint as a publish-or-perish academic: publish everything! If you have a good laundry list, publish that!
The worst performers of May (of the issues included in the HIMIPref™ Universe) were:
| Ticker | Sector | Return | Probable Cause |
| AR.PR.B | Scraps | -29.08% | Who cares? |
| WN.PR.E | PerpetualDiscount (begin) Scraps (end) |
-7.70% | Credit |
| BCE.PR.I | FixFloat | -7.69% | Credit |
| BCE.PR.R | FixFloat | -7.50% | Credit |
| CM.PR.J | PerpetualDiscount | -6.96% | Rationalization |
| GWO.PR.I | PerpetualDiscount | -6.63% | Rationalization |
As of May 31, CM.PR.J was quoted at 22.85-90 with a curvePrice of 23.06; GWO.PR.I was quoted at 22.83-85, curvePrice 22.86. These issues are very similar, having the same annual coupon and the same credit rating. It is because these issues now appear reasonably fairly priced that I have characterized the probable cause as “Rationalization”. However, I could just as easily – and perhaps better – characterized the probable cause as simply “Vanishing Liquidity Premium”.
Let’s have a closer look at those curve Prices:
| CM.PR.J Monthly Curve Price Comparison | |||
| Component | May 31 | April 30 | Change |
| Price due to base-rate | 22.03 | 22.36 | -0.33 |
| Price due to short-term | -0.49 | -0.21 | -0.28 |
| Price due to long-term | 1.78 | 1.32 | +0.46 |
| Price due to Interest Income | 0.00 | 0.00 | 0.00 |
| Price to to Cumulative Dividends | 0.00 | 0.00 | 0.00 |
| Price due to SplitShareCorp | 0.00 | 0.00 | 0.00 |
| Price due to Retractibility | 0.00 | 0.00 | 0.00 |
| Price due to Credit Spread (2) | 0.00 | 0.00 | 0.00 |
| Price due to Liquidity | 0.39 | 1.47 | -1.08 |
| Price due to Floating Rate | 0.00 | 0.00 | 0.00 |
| Price due to Credit Spread (3) | 0.00 | 0.00 | 0.00 |
| Price due to error | 0.08 | 0.02 | +0.06 |
| Price due to Credit Spread (High) | 0.00 | 0.00 | 0.00 |
| Price due to Credit Spread (Low) | -0.74 | -0.61 | -0.13 |
| Curve Price | 23.06 | 24.35 | -1.29 |
| Quote | 22.85-90 | 24.56-71 | -1.71 – -1.81 |
…and…
| GWO.PR.I Monthly Curve Price Comparison | |||
| Component | May 31 | April 30 | Change |
| Price due to base-rate | 21.83 | 22.34 | -0.51 |
| Price due to short-term | -0.49 | -0.21 | -0.28 |
| Price due to long-term | 1.78 | 1.32 | +0.46 |
| Price due to Interest Income | 0.00 | 0.00 | 0.00 |
| Price to to Cumulative Dividends | 0.00 | 0.00 | 0.00 |
| Price due to SplitShareCorp | 0.00 | 0.00 | 0.00 |
| Price due to Retractibility | 0.00 | 0.00 | 0.00 |
| Price due to Credit Spread (2) | 0.00 | 0.00 | 0.00 |
| Price due to Liquidity | 0.39 | 1.48 | -1.09 |
| Price due to Floating Rate | 0.00 | 0.00 | 0.00 |
| Price due to Credit Spread (3) | 0.00 | 0.00 | 0.00 |
| Price due to error | 0.08 | 0.02 | +0.06 |
| Price due to Credit Spread (High) | 0.00 | 0.00 | 0.00 |
| Price due to Credit Spread (Low) | -0.74 | -0.62 | -0.12 |
| Curve Price | 22.86 | 24.34 | -1.48 |
| Quote | 22.83-85 | 24.75-79 | -1.92 – -1.94 |
I discussed the yield curve and the collapse of the liquidity premium in the post HIMI Index Performance, May 2007:
One very interesting thing that happened this month is that a lot of the yieldCurvePremiumLiquidity disappeared, as shown in this graph. I interpret the change in the premium as reflecting a desire by some holders, at least, to get out of the sector in size and quickly; such holders might simply sell their most liquid holdings to adjust portfolio exposures; this will affect the prices of these issues; hence, liquidity will become a lot less expensive. The PerpetualDiscount index is the most liquid of all the sub-indices – it’s dominated by recent issues, apart from anything else – and thus a portion of the decline in this index might be attributed to this factor rather than the intrinsic characteristics of the investment.
Such a hypothesis gains some support from examination of the changes in the yield curve, which I found a little surprising. The long-end hasn’t moved by nearly as much as one might have expected. Note that this graph is of the TAXABLE curve and refers to SPOT YIELDS … therefore, the x-axis shows the yield one might expect on a “stripped dividend”, after tax.
Hopefully, the tables above will make my meaning a bit more clear. However, I should advise explicitly that the huge importance of liquidity in the above tables is probably over-stated. It comes out of the math, all right, and I have no problems with the mechanical correctness of the math … but as I’ve re-stated above, liquidity is not distributed homogeneously across the HIMIPref™ universe – it is highly concentrated in the PerpetualDiscount segment and this can lead to a confounding of the analysis.
[…] So, I suspect the underwriters still have most of this on their books. This issue wasn’t priced too horribly to begin with, but arrived when the market was in a downturn. It may even have contributed to the downturn, if the underwriters were frantically shorting tradable shares to hedge their position (which would tie in with the observation that more liquid issues got hurt most in May), but that’s merely speculation. […]