Category: Market Action

The housing bubble blame game continues:

The FOMC in June heard presentations from staff economists, with some raising alarms about housing markets, the transcript shows. Those warnings didn’t translate into a more aggressive policy. The committee raised the benchmark lending rate a quarter-point at that meeting and said “policy accommodation can be removed at a pace that is likely to be measured.”

“An estimated 4 percent of borrowers are highly leveraged and could lose all of their home equity if house prices were to fall 10 percent,” Andreas Lehnert, now the deputy director of the Office of Financial Stability Policy and Research at the Board, told the committee. “One might wonder if financial institutions and investors have, in the face of the continuing housing boom, dropped their defenses against the mortgage losses that would accompany a house-price bust.”

New York Fed researcher Richard Peach dismissed press reports describing a bubble in housing markets.

“Hardly a day goes by without another anecdote-laden article in the press claiming that the U.S. is experiencing a housing bubble that will soon burst, with disastrous consequences for the economy,” Peach told the committee.

“Housing-market activity has been quite robust for some time now, with starts and sales of single-family homes reaching all-time highs in recent months and home prices rising rapidly, particularly along the East and West coasts of the country,” he said. “But such activity could be the result of solid fundamentals.”

Greenspan followed the presentation with questions about the effect of underlying land prices in housing indexes, and the quality of data on whether home purchases were for investment or residences.

This question has been discussed extensively on PrefBlog and will be discussed extensively world-wide for the next hundred-odd years. Two posts of interest are Subprime! Problems forseeable in 2005? and FRBB: Bubbles Happen.

Manulife is redeeming some sub-debt at an operating subsidiary:

The Manufacturers Life Insurance Company (“Manulife”) today announced it has exercised its right to redeem, on February 16, 2011, all of the outstanding $550,000,000 principal amount of 6.24% Subordinated Debentures due February 16, 2016 (CUSIP No. 564835AB2) at par plus accrued and unpaid interest to the date fixed for redemption. Formal notice of redemption has been delivered to the registered holder of the Subordinated Debentures in accordance with the terms of the trust indenture made as of February 16, 2001.

Another day, another loss of freedom. Your family doctor is a paid informer:

“Alcohol dependence” is one of 16 specific medical conditions – including certain heart conditions, unstable mental illness and uncontrolled diabetes – that must be reported in most Canadian provinces if, in a doctor’s opinion, it “may make it dangerous for the person to operate a motor vehicle.”

Only Alberta, Nova Scotia and Quebec leave such reporting to physicians’ discretion.
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The province’s mandatory reporting requirement under the Highway Traffic Act appears to date back to 1990, but the number of doctors actually doing it began to “steadily increase” only after the province’s health ministry began paying physicians to do it in 2006, Bob Nichols, senior media officer for the transport ministry, told The Globe in an e-mail.

The province pays doctors, who are protected by statute for what otherwise would be a breach of patient confidentiality, $36.25 for each report.

The older I get, the less surprised I am when I learn that many people in a position of trust are for sale. I do, however, sometimes get surprised at how cheap they are.

It was another day of startlingly good returns on the Canadian preferred share market, probably due to expectations that everything will get redeemed – which doesn’t explain why FixedResets did well, but since when has this market been either consistent or logical? PerpetualDiscounts gained 61bp (with a continued increase in implied volatility, as discussed yesterday) and FixedResets were up 21bp. Volume was high.

There’s a fundamental disagreement about the Citigroup bail-out:

“While there was consensus that Citigroup was too systemically significant to be allowed to fail, that consensus appeared to be based as much on gut instinct and fear of the unknown as on objective criteria,” according to a report today from Neil Barofsky, special inspector general for the Troubled Asset Relief Program. “The conclusion of the various government actors that Citigroup had to be saved was strikingly ad hoc.”
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“It may have been ad hoc, but it worked,” said Michael Goldstein, professor of finance at Babson College in Massachusetts. “Fear of the unknown is a perfectly good reason to try to buy some time and not take the chance of the U.S. economy going into another Great Depression.”

Well, I’m no big fan of the regulators, but expecting a standard bureaucratic binder with plans regarding ‘What to do if the world melts down’ seems a bit much. Once they started concentrating on their jobs – the concentration being assisted by the prospect of hanging in the morning – they did all right. Like the man said, more or less, no plan survives contact with the enemy.

However, the US is eating its seed corn:

Now, as governments in China and India boost funding for expansion of their universities, Governor Jerry Brown’s proposed 16 percent cut in the higher-education budget jeopardizes the flow of talent that powers Google Inc., Apple Inc. and the rest of California’s knowledge-based economy. The elite University of California system may no longer be able to guarantee admission to the top 12.5 percent of the state’s high-school seniors. Annual tuition for residents, which was less than $4,500 a decade ago, is scheduled to rise to at least $11,124 in the next school year.

… but the current pace of innovation remains satisfactory:

Vivus Inc.’s experimental impotence drug Avanafil helped 80 percent of men achieve erections and two-thirds to have intercourse, Chief Executive Officer Leland Wilson said.
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Because Avanafil is metabolized fairly rapidly, men may be able to use it safely twice a day, at the beginning and end of the day, Tam said.

News of the breakthrough got the Canadian preferred share market all excited today, with PerpetualDiscounts up 65bp while FixedResets gained 4bp on heavy volume.

It was the deep-discount issues that did particularly well, as will be seen on the Performance table, but let’s look at some specific:

Analysis of the data using the Straight Perpetual Implied Volatility Calculator produces the following table:

Plots are:

2011-01-12

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2011-01-13

Click for Big

All this does not appear to be bond-related, by the way: long corporates did nothing all day, NUTHIN’.

Mark White of OSFI gave a speech titled Basel III: Balancing of Risk and Regulation, in which he said nothing at all.

There’s one one big problem with simple stock screens:

Claymore’s Canadian Dividend exchange-traded fund (CDZ-T …) is designed to track the S&P/TSX Canadian Dividend Aristocrats Index, which is composed of companies that have paid higher dividends for at least five consecutive calendar years.

It’s a great concept. Trouble is, the financial crisis prompted a lot of companies to conserve cash by cutting dividends or holding them steady, and that’s caused the index to shrink dramatically.
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However, unlike the iShares ETF, the Claymore fund no longer has any Canadian banks or insurers.

Some are cheering the results of Portugal’s 10-year auction:

The markets heaved a hefty sigh of release today as Portugal pulled off a widely-watched auction of 10-year bonds, €599-million worth at a lower-than-expected yield of 6.716 per cent, below the key level of 7 per cent. It also sold four-year bonds, bringing the todal to €1.25-billion.
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Together, Portugal, Ireland and Spain have needs this year of about €300-billion, a combination of maturing debt and additional funding needed to cover deficits, [Scotia economist] Mr. [Derek] Holt calculated.

It’s not apparent just how much yield the recent ECB purchases are worth:

The weekly amount compares with 164 million euros spent the previous week although the figures may not give the full picture as the ECB’s purchases take 2-3 days to be finalised.
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The ECB threw Portugal a temporary lifeline on Monday by buying up its bonds, traders said, as market and peer pressure mounted for Lisbon to seek an international bailout soon.

Official disrespect for due process is reaching epidemic proportions:

Ten municipalities in the Lower Mainland have safety inspection programs that send inspectors armed with B.C. Hydro statistics on abnormal energy consumption into homes.
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Critics say the safety inspections are a substitute for police raids of suspected grow-ops. Police cannot enter a home without reasonable grounds for believing that they will find illegal activity. However, safety inspectors can just go in and look around. If they find a grow-op, they call police, who are usually waiting at the curb.

And why? Here’s one potential answer:

Municipalities could end up reaping millions of dollars if given 50 per cent of assets seized under proceeds-of-crime legislation, Kevin Falcon said Tuesday.

“I think it’s a great opportunity to involve municipalities in a partnership way going after illegal criminal activity,” Mr. Falcon told reporters.

Mr. Falcon’s commitment is part of a 12-point crime platform released by the former health minister, who is seeking the leadership of the B.C. Liberals in a party vote Feb. 26 that will choose the province’s next premier.

It was a mixed day on above average volume for the Canadian preferred share market, with PerpetualDiscounts gaining 16bp and FixedResets losing 2bp. There was quite a bit of block trading done and not much volatility, with again only one entry in the Performance Highlights Table.

Block trading was dominated by Desjardins, which wrote some very nice-sized tickets. Note that this does not necessarily mean they earned good money on the crosses – some of them could have been internal crosses (with a single manager shuffling issues around his portfolios; not something that should cost a lot of money).

PerpetualDiscounts now yield 5.43%, equivalent to 7.60% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.5% (maybe a bit less) so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 210bp, with everything unchanged from the figures reported January 5.

It had to come. Credit Suisse is starting a new Exchange targetting clients who are little girls:

The venue, Light Pool, will be the first U.S. electronic communications network to be started in five years. The ECN is aimed at institutional investors such as mutual funds, hedge funds, pensions and endowments. Unlike existing exchanges, Light Pool will employ a system to classify users by how they trade as a way to set prices and keep out unwanted speculators.
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Development of Light Pool began a year ago as a hedge against potential regulatory restrictions on dark pools. The chief executive officers of exchange operators such as New York- based NYSE Euronext and Nasdaq OMX Group Inc. have urged the SEC to impose more requirements on dark pools, which grew to more than 12 percent of equities trading in November, from less than 9 percent two years earlier, data from Rosenblatt show.

As its regulatory concerns diminished in 2010, Credit Suisse switched its focus to creating a public displayed market for institutional investors worried they weren’t getting optimal executions on exchanges that cater to high-frequency firms.
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The broker’s clients and firms accessing Light Pool directly will be automatically classified based on an initial period of trading behavior and placed in one of three categories: contributors, neutral users and opportunistic traders. The criteria for defining a firm will be automated and objective, “with no human intermediation,” as is required for public markets, Galinov said. The aim is to determine whether firms are systematically profiting from their trading activity in ways that could hurt institutional clients, he said.

Opportunistic firms, which Galinov says include some high- frequency trading companies, will be kicked off the platform and prevented from providing orders or executing against bids and offers directly through Light Pool. They’ll instead have to go through the Jersey City, New Jersey-based National Stock Exchange, where Light Pool will also publish its quotes.

Meanwhile, the UK is showing the world how to compete:

Chancellor of the Exchequer George Osborne said he’ll push Britain’s biggest banks to follow state- controlled Royal Bank of Scotland Group Plc in awarding lower bonuses in 2011 and left open the possibility of further action.
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Prime Minister David Cameron’s coalition faces the same problem as the previous Labour administration after its 2008 rescue of the banks. The government needs lenders it has stakes in — such as RBS — to succeed, which means paying competitive salaries, while it can’t directly control the compensation paid by other banks — such as Barclays.

If you can’t beat ’em – legislate ’em!

Volume picked up to above average on a good day for the Canadian preferred share market. PerpetualDiscounts were up 18bp, while FixedResets gained 8bp. There was, again, only a lone entry in the Performance Table – and that’s the same issue as yesterday, reversing itself.

The situation in Europe is slowly getting worse:

The cost of insuring against default on European sovereign debt climbed to records and European stocks fell amid concern Portugal is next in line for a bailout. Portuguese securities reversed declines after three traders with knowledge of the deals said the ECB purchased the government’s bonds.

With European governments including Portugal and Spain due to borrow at least $43 billion this week, attention is shifting to whether Europe is doing enough to stem the crisis. Chancellor Angela Merkel was today forced to deny that Germany was pushing Portugal to seek a bailout to alleviate the market pressure.
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The cost of insuring Portuguese bonds against default rose to a record today, while Belgian and Spanish bonds declined on funding concerns. The benchmark Stoxx Europe 600 Index lost 0.9 percent to 278.48 at the 4:30 p.m. close in London, the biggest drop since Dec. 30.

For the first time, investors view western European government bonds as riskier than emerging-market debt, the Markit iTraxx SovX Western Europe Index of credit-default swaps showed last week.

Mr Patrick Honohan, Governor of the Central Bank of Ireland, gave a speech:

The current impact of the banking losses on the economy is not so much via the net long-term taxpayer cost, but comes mainly as a result of the accumulation of debt. The jump in debt associated with these losses is of the same order of magnitude as the rest of the borrowing 2009–10 (Fig. 4). Either of these components would have been unproblematic, together they make the markets and the rating agencies nervous. The fiscal adjustment could possibly have been delayed by a year or two had it not been for the banking losses; now it cannot wait.

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Sell-side analysis has been worse than usual lately:

Companies in the Standard & Poor’s 500 Index that analysts loved the most rose 73 percent on average since the benchmark for U.S. equity started to recover in March 2009, while those with the fewest “buy” recommendations gained 165 percent, according to data compiled by Bloomberg. Now, banks’ favorites include retailers and restaurant chains, the industry that did best in last year’s rally and that are more expensive than the S&P 500 compared with their estimated 2011 profits.

The brokerage houses are great for data and a good source of ideas. Actionable investment recommendations… not so much.

In another example of “gotcha regulation”, the SEC has commenced proceedings to enforce Rule 105 of Regulation M:

Rule 105 of Regulation M of the Exchange Act provides, in pertinent part:
In connection with an offering of equity securities for cash pursuant to a registration statement. . . filed under the Securities Act of 1933 (“offered securities”), it shall be unlawful for any person to sell short . . . the security that is the subject of the offering and purchase the offered securities from an underwriter or broker or dealer participating in the offering if such short sale was effected during the period (“Rule 105 restricted period”) that is the shorter of the period: (1) Beginning five business days before the pricing of the offered securities; or (2) Beginning with the initial filing of such registration statement . . . and ending with the pricing. … Rule 105 of Regulation M is designed to protect the independent pricing mechanism of the securities market shortly before follow-on or secondary offerings.

For the life of me, I can’t make out why this rule exists, or what useful purpose it might serve.

Bernanke scolded Congress:

However, an important part of the federal budget deficit appears to be structural rather than cyclical; that is, the deficit is expected to remain unsustainably elevated even after economic conditions have returned to normal. For example, under the Congressional Budget Office’s (CBO) so-called alternative fiscal scenario, which assumes that most of the tax cuts enacted in 2001 and 2003 are made permanent and that discretionary spending rises at the same rate as the gross domestic product (GDP), the deficit is projected to fall from its current level of about 9 percent of GDP to 5 percent of GDP by 2015, but then to rise to about 6–1/2 percent of GDP by the end of the decade. In subsequent years, the budget outlook is projected to deteriorate even more rapidly, as the aging of the population and continued growth in health spending boost federal outlays on entitlement programs. Under this scenario, federal debt held by the public is projected to reach 185 percent of the GDP by 2035, up from about 60 percent at the end of fiscal year 2010.

The CBO projections, by design, ignore the adverse effects that such high debt and deficits would likely have on our economy. But if government debt and deficits were actually to grow at the pace envisioned in this scenario, the economic and financial effects would be severe. Diminishing confidence on the part of investors that deficits will be brought under control would likely lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil. Moreover, high rates of government borrowing would both drain funds away from private capital formation and increase our foreign indebtedness, with adverse long-run effects on U.S. output, incomes, and standards of living.

It is widely understood that the federal government is on an unsustainable fiscal path. Yet, as a nation, we have done little to address this critical threat to our economy. Doing nothing will not be an option indefinitely; the longer we wait to act, the greater the risks and the more wrenching the inevitable changes to the budget will be. By contrast, the prompt adoption of a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence. Plans recently put forward by the President’s National Commission on Fiscal Responsibility and Reform and other prominent groups provide useful starting points for a much-needed national conversation about our medium- and long-term fiscal situation. Although these various proposals differ on many details, each gives a sobering perspective on the size of the problem and offers some potential solutions.

The Fed’s reintermediation made a good profit:

The U.S. Federal Reserve System, which includes the Board of Governors in Washington and 12 regional banks based in cities such as New York and San Francisco, returned a record $78.4-billion (U.S.) to the Treasury in 2010 – a remarkable 65-per-cent increase from 2009.

Toronto Mayor Rob Ford is making the right noises:

Toronto Mayor Rob Ford has issued a clear warning to any managers or staff who defy his cost-cutting edicts: Rein in spending or find a new job.

“If they are unable to manage effectively in the best interest of the taxpayers, then we will have to find new managers that can,” Mr. Ford said Monday.

Mr. Ford singled out Toronto police for its proposed 3-per-cent budget increase and summoned Chief Bill Blair to his office at 2 p.m. Monday.

The mayor toned down his rhetoric by the time he and Chief Blair emerged from their hour-and-a-half-long meeting. “I have the utmost confidence in the chief continuing to do the job. We had a very, very constructive meeting and I support the chief 100 per cent,” Mr. Ford said.

I have sent him an eMail, titled “Police Force Gravy Train”:

As you are probably aware, there are many instances of poor personnel management in the Toronto Police Service that are very costly to Toronto taxpayers.

i) Overtime for court appearances. A considerable amount of money is spent on this, with the TPS being unable or unwilling to schedule shifts to match required court appearances. Will you be seeking change in this area, if necessary by increasing the TPS complement so that officers in court can have their duties covered by another officer on straight time?

ii) Paid-Duty. Organizers of special events hire Constables and more senior officers at a high premium to officers’ regular wages, as is entirely normal in any private sector operation. However, the bulk of this premium is paid to the officers directly, instead of being retained by TPS, the contractor. Will you be seeking to arrange matters such that policing for special events is explicitly performed by the TPS, assigning officers on regular shifts as much as possible? Again, I recognize that the TPS complement may need to be increased to facilitate the mandate.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts gaining 20bp and FixedResets down 2bp. Volume was average; there is but a single entry on the Performance Highlights table.

Willem Buiter of Citibank is predicting a bail-out of Portugal:

“Now that the Irish government has reached an agreement with the EU/IMF on a financial support package and associated conditionality, the market’s attention will turn to Portugal, whose sovereign, at current levels of interest rates and growth rates, we judge to be less dramatically, but quietly insolvent,” Buiter wrote in a research note Friday.

“We consider it likely that Portugal, too, will need to access the EFSF/EFSM soon.” Buiter said.

Buiter said the current size of the liquidity facilities in place within the European Union is sufficient to deal with another speculative attack or as he puts it “even fund Spain completely for three years”

I don’t normally report brokerage analysis on considerations of quality – but I was quoting Buiter before he got the cushy job, so why not?

But Portugal’s not shut out just yet:

The Portuguese government issued 1 billion euros ($1.29 billion) of 2.5-year notes through a private placement as the nation seeks to narrow its budget gap.

Portugal sold zero-coupon debt due July 2012 in a transaction led by Deutsche Bank AG, according to data compiled by Bloomberg. The Finance Ministry confirmed the medium-term note offering in an e-mail today without providing more details.
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Portugal sold 500 million euros of six-month bills on Jan. 5, according to the country’s debt agency. The yield on the bills jumped to 3.686 percent from 2.045 percent at a sale of similar-maturity securities in September. A year ago, the country paid just 0.592 percent to borrow for six months.

The FDIC’s attempt to risk-weight deposit insurance premia, discussed in the post FDIC Addresses Systemic Risk is having some interesting knock-on effects:

Increased FDIC fees may cut into banks’ interest income and drive money market rates lower, the strategists said. The volume weighted average for overnight fed funds, the so-called effective rate, may slide by as much as 0.1 percentage point if the FDIC change is implemented, according to Wrightson ICAP LLC, a Jersey City, New Jersey research unit of ICAP Plc.
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Even lower short-term interest rates will potentially make it even harder for the $2.8 trillion money-market fund industry to retain customer assets. The FDIC changes will add to catalysts for lower money-market rates, chiefly the Fed siphoning of about $1 trillion in Treasuries from the market through its debt purchases by June, according to New-York based Brian Smedley, a strategist at Bank of America Merrill Lynch, a unit of Bank of America Corp.

“The Fed will likely achieve lower short-term rates even without lowering the 25 basis points it currently pays on banks’ excess reserve balances,” said Smedley, a former senior trader at the Federal Reserve Bank of New York. With short-term interest rates likely to decline this year, “it will make money- market mutual fund managers lives more difficult and could lead to further consolidation of the industry.”

Deborah Cunningham, chief investment officer in Pittsburgh for taxable money markets at Federated Investors Inc., which manages more than $336 billion in money-market investments, said a fall in overnight rates would at most be only about five basis points and wouldn’t be sufficient to speed any consolidation of the money-fund industry.

OSFI reports that Jean-Claude Ménard, Chief Actuary, gave a speech on mortality and the CPP:

The actuarial report on the Canada Pension Plan is based on the projection of its revenues and expenditures over a long period of time. Under a set of best-estimate assumptions, the most recent actuarial report confirms that the legislated contribution rate of 9.9% is sufficient to pay future expenditures and accumulate assets of $275 billion in 2020, or 4.7 times the expenditures. Having said that, both the length of the projection period and the number of assumptions required ensure that actual future experience will not develop precisely in accordance with the best-estimate assumptions. For the second time, in the most recent actuarial reports, many of the sensitivity tests are determined based on stochastic modeling techniques that estimate the probability distribution of the outcome for each of the main assumptions.

This chart shows the evolution of the asset to expenditure ratio under three scenarios: the best-estimate assumption and the two stochastically determined scenarios based on a 80% confidence interval. The result is that the minimum contribution rate required to finance the plan over a 75-year period could fall between 9.3% and 10.3%.

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It was a relatively quiet, but nevertheless profitable day on the Canadian preferred share market, with PerpetualDiscounts up 10bp and FixedResets gaining 5bp on average volume.

On December 14 I highlighted Hoenig’s dissent from the FOMC decision and speculated:

It occurs to me that Mr. Hoenig is being used – probably with his enthusiastic cooperation – as a straw man. The Fed wants to send an explicit signal that they’ve thought about this, discussed this and reached a concensus to reject this. There’s no shortage of blogs out there claiming hyperinflation is imminent! Given the increased public discussion of economic data, with various levels of competence, one wonders if more public pronouncements by governments and their agencies will set up straw men in their releases and recognize that forecasts are necessarily imprecise.

Hoenig has delivered a speech on the topic, titled Monetary policy and the role of dissent:

Based on audience questions, news coverage and pundit columns throughout the year, it has become obvious to me that the role of dissent in the FOMC is misunderstood and viewed without context. The idea that a dissenting vote is confusing, counterproductive, and generally undesirable is unhealthy. It is also historically inaccurate.

In my remaining time today, I will discuss why dissenting views at the FOMC are critical to the success of the Federal Reserve System and that public debate was the intent of its congressional founders. I will also describe how open debate and dissent are fundamental to achieving transparency of FOMC deliberations and to supporting the credibility of the committee in difficult economic times.
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As an economist, I cannot be certain that my views are correct. Certainly, a majority of my counterparts on the FOMC last year did not agree with my views. But it is important to recognize that in the face of uncertainty, arriving at the best policy decision is built on divergent opinions and vigorous debate.

Because of this, the role of open dissent is at least as critical to FOMC monetary policy decisions as it is to deliberations by the Supreme Court, the United States Congress or any other body with important public responsibilities from the local through the federal level. If you find it unusual to consider the FOMC as being similar to these other deliberative bodies, it is perhaps because many–including some former Federal Reserve officials–tend to speak of Fed policy as being done by a single actor.
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A deliberative body does not gain credibility by concealing dissent when decision making is most difficult. In fact, credibility is sacrificed as those on the outside realize that unanimity – difficult in any environment – simply may not be a reasonable expectation when the path ahead is the most confounding.
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As for me, I recognize that the committee’s majority might be correct. In fact, I hope that it is. However, I have come to my policy position based on my experience, current data and economic history. If I had failed to express my views with my vote, I would have failed in my duty to you and to the committee.

In these days of political obsession with staying “on message”, and puerile voters who want a simple story just like mommy used to tell them, Hoenig’s expression of his views is rather refreshing!

Contingent Capital as a concept has often been criticized on the basis that it might be difficult to sell – but banks have been selling this type of issue with gusto:

Barclays Plc, based in London, and UBS AG in Zurich led more than a dozen banks selling reverse convertibles, which are short-term bonds generally marketed to individuals that convert into stock if a company’s share price plummets.
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Structured note sales rose 46 percent last year to a record $49.4 billion in the U.S., Bloomberg data show. The securities fed demand from individual investors frustrated with record low rates on everything from certificates of deposit to money market funds with the Federal Reserve holding its target interest rate for overnight loans between banks in a range of zero to 0.25 percent since 2008. Banks issued $33.9 billion in 2009, according to StructuredRetailProducts.com, a database used by the industry.

Royal Bank of Scotland Group Plc sold $1.15 million in three-month notes tied to Rochester, New York-based Eastman Kodak Co. on June 10 that paid 24 percent annualized interest, a filing with the U.S. Securities and Exchange Commission shows. That’s 24 times the average rate on one-year certificates of deposit, according to data from Bankrate Inc. in North Palm Beach, Florida.

Buyers couldn’t lose money unless shares of the camera maker fell to below $3.54 from $5.06. Kodak dropped to $3.50 on Aug. 31 in New York trading. RBS converted the bonds into stock and investors lost about 18 percent even with the high interest rate.

I will admit, however, that the perpetual nature of Contingent Capital is another difficulty in flogging it.

Regular debt is selling pretty well, too!

Company bond sales in the U.S. surged to the most on record this week and relative yields on investment-grade debt shrank to the narrowest since May as investors boosted bets that economic growth is gaining momentum.

Issuance soared to $48.2 billion, eclipsing the $46.9 billion raised in the week ended May 8, 2009, as General Electric Co.’s finance unit sold $6 billion of notes in the largest sale in 11 months, according to data compiled by Bloomberg. Investment-grade bond spreads narrowed to 162 basis points, or 1.62 percentage points, the tightest since May 4, 2010, Bank of America Merrill Lynch index data show.

Investors’ appetite for company debt is growing even after annual sales topped $1 trillion for the second consecutive year as the securities outperform Treasuries.
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Offerings from foreign borrowers dominated U.S. sales this week, with transactions by companies from Sydney-based Macquarie Group Ltd. to the U.K.’s Barclays Plc accounting for 57 percent of the total, Bloomberg data show. Relative yields on U.S. corporate bonds became narrower than those on company debt worldwide last month for the first time on record, Bank of America Merrill Lynch index data show.

The Canadian preferred share market had a good day on average volume, with PerpetualDiscounts gaining 21bp and FixedResets up 10bp. Sun Life PerpetualDiscounts saw some good volume.

Manulife has announced that:

Between October 1, 2010 and December 31, 2010, the Company:

• Shorted approximately $5 billion of equity futures contracts as part of the Company’s macro hedging program.
• Modestly increased its dynamic variable annuity hedging program by adding $800 million of in-force variable annuity guaranteed value to the program.
• Sold $200 million of on-balance sheet public equities backing insurance liabilities

The WSJ has a story today titled Bondholders Are Rattled by Prepayment Covenants, republished by the Globe, but not on-line. It seems there are a lot of calls for redemption in the junk bond world, surprising many managers … I tell you, it’s a good thing so few of my competitors read prospectuses; that would make outperformance more difficult.

Assiduous Reader DW brings to my attention a working paper by Zhiwu Chen, Roger G. Ibbotson and Wendy Hu titled Liquidity as an Investment Style:

We first show that liquidity, as measured by stock turnover or trading volume, is an economically significant investment style that is distinct from traditional investment styles such as size, value/growth, and momentum. We then introduce and examine the performance of several portfolio strategies, including a Volume Weighted Strategy, an Earnings Weighted Strategy, an Earnings-Based Liquidity Strategy, and a Market Cap-Based Liquidity Strategy. Our backtest research shows that the Earnings-Based Liquidity Strategy offers the highest return and the best risk-return tradeoff, while the Volume Weighted Strategy does the worst. The superior performance of the liquidity strategies are due to equilibrium, macro, and micro reasons. In equilibrium, liquid stocks sell at a liquidity premium and illiquid stocks sell at a liquidity discount. Investing in less liquid stocks thus pays. Second, at the macro level, the growing level of financialization of assets in the world makes today’s less liquid securities increasingly more liquid over time. Finally, at the micro level, the strategy avoids, or invests less, in popular, heavily traded glamour stocks and favors out-of-favor stocks, both of which tend to revert to more normal trading volume over time.
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The negative relation between liquidity and stock returns is not always straight forward. Lee and Swaminathan (1998) show that the return spread between past winners and past losers (i.e., the momentum premium) is much higher among high-volume stocks. Trading volume serves as an indicator of demand for a stock. When a stock falls into disfavor, the number of sellers dominates buyers, leading to low prices and low volume. When a stock becomes popular or glamorous, buyers dominate sellers, resulting in higher prices and higher volume. Thus, relatively low turnover is indicative of a stock near the bottom of its expectation cycle, while a relatively high turnover is indicative of a firm close to the top of its expectation cycle.

Today’s installment in the “Incredible Bullshit Banks are Allowed To Get Away With” series features the Bank of Montreal:

Click for Big

Risk Free! Lehman should have thought of that line, they would have been able to sell a great many more of their PPNs.

A mixed day on the Canadian preferred share market, with PerpetualDiscounts gaining 10bp and FixedResets losing 16bp. Volume was on the high side of average.

PerpetualDiscounts now yield 5.43%, equivalent to 7.60% interest at the standard equivalency factor of 1.4x. Long corporates now yield about 5.5%, so the pre-tax interest-equivalent spread (also known, around here, as the Seniority Spread) is now about 210bp, a dramatic tightening from the 225bp reported on December 31.

European bank regulation may become far more intrusive:

National regulators of cross-border banks may be able to require “changes to legal or operational structures” if the lender would need “extraordinary public financial support” during a crisis, according to draft proposals obtained by Bloomberg News.
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The plan also envisages measures “requiring the credit institution to limit its maximum individual and aggregate exposures” or forcing banks to “limit or cease” some activities, according to the document, dated December 2010.

Regulators should assess lenders and “satisfy themselves that critical functions could be legally and economically separated from other functions” during a crisis, according to the draft proposals.

I can’t think of a better way to reinforce structural groupthink.

Japan has interesting bond sales methods:

Japan will sell a record 144.9 trillion yen ($1.8 trillion) of debt in the fiscal year starting April 1, it said in a budget plan on Dec. 24 that also detailed the changes in its retail bonds. The Ministry of Finance tried to find new buyers for the debt last year with magazine advertisements saying, “Men who hold JGBs are popular with women!”

An investor who decided to buy floating-rate retail notes after reading the ads would have seen yields shrink to a range of 0.25 percent to 0.53 percent at the twice-yearly coupon payouts for the 10-year securities.

I mentioned the Greg Walsh kerfuffle briefly on December 30 – he’s the Peterborough hockey coach who had hysterics when one of his players was called a nasty name. The blog dahn batchelor’s opinions also posted on the topic in a post titled A foul-mouthed brat caused this problem; I left a comment on the moderated blog, but it hasn’t appeared yet, possibly due to a technical problem. So I’ll publish it here:

I am surprised that someone with such a lengthy profile would publish such a shoddy analysis.

You acknowledge that the players were in an on-ice confrontation and that they heckled each other in the penalty box. You profess dismay at the idea that the heckling included the word “nigger” and substitute “brat” as your own politically correct childish insult of choice – both in the headline and the text.

These kids are 16-17 years old – more balls than brains if my own recollections of adolescence can be trusted. Sometimes they say stupid things. Surprise! Not everybody invariably chooses their words as carefully as a retired lawyer tapping away at his keyboard in his surroundings of choice.

What should the punishment be for such a breach of public dignity in the context of a schoolyard yelling match? A three game suspension sounds harsh to me, but it’s not so harsh that I care much one way or the other.

What should the punishment be? Walsh seems to think it should involve a public apology – at best a lesson in hypocrisy, at worst a public humiliation of the kind civilized nations have eliminated from the criminal code.

Your own rather incoherent response seems to include coaches – the ones who should support their players – imposing extra-judicial punishment, benching them for the rest of the game. Unable to find any other support in today’s world for your thesis, you are forced to dredge up a case from thirty-seven years ago, and the recollections of a 54-year old man speculating on what he thinks he would have done differently.

The PMHA seems to think that penalties should include a criminal record.

In a year or two, these kids will be eligible to go to Afghanistan, where the Taliban may well call them nasty names and even – gasp! – hit them with sticks. It really is too bad that Greg Walsh, Dahn Batchelor and others are attempting to prepare them for the rigors and conflicts of adulthood by telling them that the way to deal with adversity is to run home crying to mommy.

Jackie Robinson would never even have been able to watch major league baseball with that attitude.

I hadn’t known that the PMHA had gone to the police about this. My lord, don’t they realize that when there are horrific penalties for minor transgressions, you simply get selective reporting? Or don’t they care? Or do they, in their heart of hearts, believe that this shouting match is worthy of police time and a possible criminal record? But then, we live in a world with some very strange priorities – or, at least, one in which very strange rationales are given credence by the press.

The Canadian preferred share market had a good day as volume returned to more normal levels. PerpetualDiscounts gained 15bp and FixedResets lost 3bp.

It was an extremely slow and boring day on the Canadian preferred share market to end the year, with PerpetualDiscounts up about half a beep and FixedResets losing 6bp.

PerpetualDiscounts now yield 5.48%, equivalent to 7.67% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.4%, so the pre-tax interest-equivalent spread is now about 225bp, a slight (and perhaps spurious) widening from the 220bp reported December 29

Malachite Aggressive Preferred Fund has had another good year – I’ll put a little cinnamon in my coffee tonight, to celebrate – but I’ll have the final report out on that in the near future.