Category: Market Action

American real estate agents are going hungry:

Purchases of U.S. new homes fell in May to the lowest level on record after a tax credit expired, showing the market remains dependent on government support.

Sales collapsed an unprecedented 33 percent from April to an annual pace of 300,000, less than the median estimate of economists surveyed by Bloomberg News and the fewest in data going back to 1963, figures from the Commerce Department showed today in Washington. Demand in prior months was revised down.

Like the Fed says:

Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months.
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The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

But fear not! Fannie Mae is tightening standards:

Borrowers who have the means to make mortgage payments and don’t work with lenders to restructure loans will be banned from obtaining new mortgages backed by Fannie Mae for seven years from the date of foreclosure, the company said today in a statement.
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Homeowners walking away from mortgages they can afford accounted for about 12 percent of U.S. mortgage defaults in February, New York-based Morgan Stanley said in an April report.

It would be much more to the point if non-recourse mortgages carried a penalty rate; but that would be too logical.

Argentina is showing Greece how it’s done:

The results of Argentina’s debt swap offer exceeded the government’s expectations and will help close a chapter on the country’s record $95 billion default in 2001, Economy Minister Amado Boudou said.

Creditors holding about $12.1 billion of $18.3 billion in defaulted debt tendered their securities in the restructuring, which Boudou said was the result of “hard” negotiating on the part of Argentina. Combined with the results of a 2005 restructuring, a total of 92.4 percent of the defaulted debt has been swapped for a mix of new bonds, he said.
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The government has no fiscal need to issue debt and can wait until it is able to sell bonds that yield less than 10 percent, Boudou said.

Yields on the country’s benchmark dollar bonds due in 2015 rose 11 basis points, or 0.11 percentage point, to 12.86 percent at 10:59 a.m. New York time.

The question is … will a serial defaulter ever be able to issue bonds at less than 10%?

All the money that’s being dropped on the G-20 is having an effect.

PerpetualDiscounts kept the streak alive in the Canadian preferred share market, gaining 11bp, while FixedResets were down 11bp. Volume was moderate.

PerpetualDiscounts now yield 6.02%, equivalent to 8.43% interest at the standard equivalency factor of 1.4x. Long Corporates are now at about 5.55% so the pre-tax interest equivalent spread (also called the Seniority Spread) is now about 290bp, a significant widening from the +270bp reported on June 16 due to the sharp decline in long yields.

Click for big

Nothing happened today.

The Canadian preferred share market was fairly well-behaved today, with PerpetualDiscounts up 7bp to keep the streak alive (only six more trading days until month-end!) and FixedResets down 6bp. Volume was slighly above average, but there is only one entry in the performance highlights.

Good article in The Atlantic about algorithmic and high-frequency trading, titled Monsters in the Market. I was a little disappointed by the precious tone of their comments:

At least a few high-frequency traders have learned to make a killing by detecting the more simplistic algo strategies deployed by basic pension funds and mutual funds, buying the next stock the funds plan to buy, and then selling it to them at a higher price. This may not be illegal, but it’s almost certainly unfair to the funds’ investors. “It is increasingly clear that there are quite a number of high-frequency bandits in the high- frequency-trading community who pump up volume statistics, front-run investor orders, increase transaction costs, and hurt real liquidity,” David Weild, an adviser at Grant Thornton and a former vice chairman of Nasdaq, told me. *

I would have been much more interested in an expose of just why basic pension funds and mutual funds are using the “more simplistic algo stretegies”. My guess is that they can’t be bothered; the money is much better spent on marketting.

It should also be noted that David Weild’s use of the term “front-run” is moronic. There is no misappropriation of client information in these strategies. One wonders what Mr. Weild’s performance track record is like! Vice Chairman of NASDAQ? Big deal, Madoff was chairman.

The UK will probably be getting a bank tax:

U.K. Chancellor of the Exchequer George Osborne is pushing ahead with plans to tax banks in his first budget, according to three people with knowledge of the plans, an announcement to go along with spending cuts that may prompt forecasters to lower economic-growth estimates.

The tax, which may be imposed on assets or liabilities, could raise at least 2 billion pounds ($3 billion), one of the people said. Osborne has said the June 22 budget statement would set the stage for the deepest spending reductions since the 1980s.

There is some reporting of the dissent regarding the ECB’s bond-buying:

On May 10, just hours after the European Central Bank stepped into government bond markets for the first time, Axel Weber broke ranks with most of his colleagues on the ECB’s Governing Council — including his boss, President Jean-Claude Trichet.

“The purchase of government bonds poses significant stability risks, and that’s why I’m critical of this part of the ECB council’s decision,” said Weber, president of Germany’s Bundesbank.
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“Weber’s public opposition to a policy move by the ECB that the politicians are presumably very keen on could make his appointment a bit difficult,” says David Mackie, chief European economist at JPMorgan Chase & Co. in London. “They might feel: ‘Do we really want this guy to be in charge?’”

Weber was nonetheless right to warn about the danger of buying bonds, Mackie says. By taking the helm of the world’s second-most-important central bank, Weber would face “huge” challenges, says Nouriel Roubini, the New York University economist who predicted the financial crisis.

Quite right. The sovereign debt problem (crisis?) is not one that can be solved with liquidity injections, like the banks’ crisis. The banks, to a large extent, simply needed time for the markets to reflect values and for their short-term assets to run off the books … in such a case, Bagehot’s principle of supplying liquidity to an illiquid, but solvent, bank is the correct prescription. For the sovereigns, however, the problem is of spending and structural deficits and while bond-buying may buy time, it does not even begin to address the underlying problem.

Those puzzled by the SEC’s handling of the Goldman lawsuit can rest assured that yes, sometimes the SEC does manage to make allegations of genuine wrongdoing:

ICP kept some bonds in one of AIG’s CDOs after the New York-based insurer rejected them in October 2007, the SEC said. “In late 2008, after AIG complained about unauthorized trades, ICP was compelled to stop nearly all reinvestments by the Triaxx CDOs,” the complaint said.
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[ICP founder and CEO Thomas] Priore also backdated trades of mortgage-backed bonds in 2008, using prices from a year earlier, causing one of the Triaxx vehicles to overpay by about $3.5 million, the SEC said.

The Canadian preferred share market rally just kept on going today, the PerpetualDiscounts up 15bp and FixedResets up 10bp, with a slight uptick in volume. The performance highlights table is sparsely populated and the volume highlights are dominated by PerpetualDiscounts.

Carney talked tough on inflation:

Given the scale of the fiscal challenge, it is perhaps not surprising that some eminent economists are looking for an “easier” way out. This form of denial is to allow temporarily higher inflation in order to inflate away public debt.

To the Bank, this is a siren call.

Those most in need of fiscal consolidation are often those with debt portfolios of the shortest duration. The “surprise” would have to be very sudden and very large to have a material impact. Of course, if temporary inflation becomes built into expectations, real rates may well increase, rather than fall, thereby exacerbating debt dynamics. Moreover, in the past, it has proven devilishly hard to keep inflation high temporarily. Would it be credible to have a one-off increase in the inflation target?

Central banks have worked for decades to get inflation down to levels consistent with price stability. We should not risk these hard-won gains.

A reasonable day in the Canadian preferred share market with PerpetualDiscounts gaining 8bp and FixedResets losing 22bp. The question is rapidly becoming one of not so much ‘How long will the PD streak last?’ but ‘Can PD’s manage to make it through the entire calendar month without a down-day?’ Volume was moderate and volatility virtually non-existent.

Another very good day for the Canadian preferred share market on moderate volume as PerpetualDiscounts gained 30bp and FixedResets lost 14bp.

There were new issue announcements from PWF and TRP while the announcement that PWF.PR.D will be redeemed turns that issue into a very attractive money market alternative.

Revolving-door regulation is at least getting a little scrutiny:

A Senate panel asked the Securities and Exchange Commission’s inspector general to review the agency’s “revolving door,” which shuttles many SEC staffers into jobs with the companies they once regulated.

In a letter sent Monday, Sen. Charles Grassley (R., Iowa), the ranking minority member on the Senate Finance Committee, asked David Kotz, the inspector general, to review the recent departure of a top official in the SEC’s Division of Trading and Markets who took a job with a prominent high-frequency trading firm.

Nice to see that the HFT guys have figured out how the game is played, anyway!

BP cancelled its dividend:

BP Plc canceled three quarterly payments of its $10 billion-a-year dividend after President Barack Obama demanded it put up cash for victims of the Gulf of Mexico spill. BP said it will reduce expenditures and sell more assets than planned to free up cash.
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Svanberg and Chief Executive Officer Tony Hayward agreed to set aside $20 billion over several years to compensate victims of the spill after Obama in an Oval Office address yesterday called for the creation of a fund.

… and its perceived credit risk is rising …

Credit investors are pricing in a 36 percent chance BP Plc will default within five years as it tangles with the Obama administration over cleanup costs and claims for the biggest oil spill in U.S. history.

The default risk implied by credit-default swaps is up from 7 percent a month ago, according to CMA DataVision prices using a standard model used to value the derivatives. BP swaps climbed 70.5 basis points to 576.5. BP debt due next year traded today at distressed levels, with investors demanding as much as 1,251 basis points in yield more than Treasuries.

… but PIMCO thinks it’s an overreaction:

Bill Gross, co-chief investment officer at Pacific Investment Management Co., recently bought $100 million of shorter maturity BP Plc bonds and some Anadarko Petroleum Corp. debt, spokesman Mark Porterfield wrote today in an e-mail.

BP’s 5.25 percent notes due in 2013 rose 2.5 cents to 93.5 cents on the dollar as of 4:20 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. BP is based in London.

Congratulations to Sarah Hymas on the launch of her debut poetry book, Host.

PerpetualDiscounts managed to squeak out a gain of 2bp on the day to keep the streak alive, while FixedResets roared ahead, up 21bp. Volume as moderate.

PerpetualDiscounts now yield 6.03%, equivalent to 8.44% interest at the standard equivalency factor of 1.4x. Long corporates now yield about 5.75% (maybe a little under?) so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 270bp, a significant tightening from the 285bp reported on June 9.

Continuing trouble in Europe:

Bank bond sales slowed in May to the lowest since Lehman Brothers Holdings Inc.’s failure in 2008 as the extra yield buyers demand to hold the securities over government debt soared to the highest this year. Firms are wary of lending to each other, depositing record funds with the European Central Bank.
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The central bank is preventing a crisis by providing banks with unprecedented funding. In substituting long-term money with shorter-maturity ECB cash, policymakers are making it harder to wean banks off life support as well as the short-term financing that regulators blame for the credit crisis.
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Risk aversion is helping to spur sales of covered bonds, securities that are guaranteed by the issuer and backed by mortgages and other loans, reducing risk for investors and interest payments for the issuer. Financial firms have sold 11.5 billion euros ($13.9 billion) of the bonds this month, three times the total for May, according to van Steenis. Frankfurt- based Commerzbank raised 1 billion euros in a June 9 offering.

BP is looking greasy:

BP Plc’s credit rating was cut six levels to two above “junk” by Fitch Ratings on concern over the potential cost of cleaning up the Gulf of Mexico oil spill and meeting future liabilities.

BP’s long-term issuer default and senior unsecured ratings were lowered to BBB from AA, Fitch said in a statement today. That follows a reduction from AA+ on June 3.
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The yield premium investors demand to hold BP’s 750 million euros of 4.25 percent bonds due next year rather than similar- maturity government debt increased 143 basis points to 505 basis points, according to HSBC Holdings Plc prices on Bloomberg.

BP credit-default swaps surged 39 basis points after today’s ratings downgrade to 476.5, according to CMA DataVision.

Speaking of BP:

Exxon Mobil Corp., ConocoPhillips, Chevron Corp. and Royal Dutch Shell Plc are as ill-prepared as BP Plc to halt and clean up an offshore oil spill because they all use “carbon copy” disaster plans, lawmakers said.
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Lawmakers faulted the four executives for disaster-response plans that would halt oil leaks at the sea floor using the same techniques that failed for BP at its Macondo well.

Naturally, anybody who does something different that – for whatever reason – doesn’t work is simultaneously criticized for not using best practices.

It will be a long time before the truth is known, but my instinct is to look first at common or garden complexity. Everything’s complicated nowadays, everything is invented and serviced by small teams of specialists and everybody parrots what they say to the best of their ability. Used to be, it was common for teenagers to buy old cars and fix them up – a virtually impossible task nowadays. How many people in the world can talk about, for instance, Toyota’s fly-by-wire accelleration system and really know what they’re talking about? A dozen?

It’s nice to see that there are still some adults left in the business:

Despite all the bad headlines — the accusations of fraud, the talk of a big settlement, the risk, however remote, of criminal charges — there’s an inconvenient truth that’s been largely ignored: Most of Goldman’s big customers are not bolting.
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“We trust them,” Jeffrey R. Immelt, the chief executive of General Electric, told an audience at the 92nd Street Y in New York last month. “People need to tone down the rhetoric around financial services and stop the populism and be adults.”

I’ve done business with Goldman before and I’ll do business with Goldman again. Why? Not because they’re nice people. Not because they’re kind to small furry animals. But because they can source trades. If I go to Goldman and say ‘I want to take such and such a position’, they’ll come back to me with price. You know, just like, say, a broker. Or a used car salesman, for that matter.

The Canadian preferred share market just kept on keeping on today, with PerpetualDiscounts up 24bp and FixedResets gaining 14bp, on moderate volume. Again, there were no losers in the Performance Highlights table … now, if I were a real financial journalist, I’d be able to say something like “This is the first time since august 17 that there have been two successive days of no losers during months without an “R” in them” …. but I ain’t. PerpetualDiscounts dominated the volume tables, another relatively rare occurance.

I have long taken the view that if sub-debt becomes contingent capital, then so will preferred shares; otherwise, issues’ seniority could leapfrog when an institution gets into trouble and that makes no sense. So I was gratified to hear this view echoed for the first time I’ve seen:

Canada is recommending that subordinated debt and preferred shares sold by banks be convertible to common shares to bolster capital in the event of a crisis. The conversion would be triggered if the banking regulator determines a troubled bank is about to fail, or if the government is forced to purchase shares in the bank.

It’s a shame that OSFI hasn’t actually published the proposal; or, indeed, done any work at all that I can see on the proposal.

An older paper on Contingent Capital is Rethinking Capital Regulation by Kashyap, Rajan & Stein, referenced but not previously linked in HM Treasury Discusses Contingent Capital.

Korea is imposing foreign exchange position limits:

Foreign banks will be required to cut currency derivatives holdings to 250 percent of equity capital and domestic banks to 50 percent, with three months to meet the new ceiling and two years to cover existing positions. The limit on derivatives to cover corporate settlements will be cut to 100 percent of the total, from 125 percent.

“We are not limiting portfolio investment,” said Kim Yi Tae, director at the finance ministry’s foreign exchange market division. “We’re not putting regulations on trade financing, only on bank lending in foreign currencies and on forwards.”
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The new rules are to reduce systemic risks, which should serve as a safety net to avert a crisis, the government and central bank said in yesterday’s statement.

The ‘systemic risk’ rationale sounds a little thin to me. If that was the problem, they could simply impose higher risk-weights on FX positions. But prescriptive rules are always more attractive to politicians and bureaucrats than market-based solutions.

Call risk is hitting the Asian junk market:

The biggest junk bond market rally in more than a decade is increasing the risk investors in Asian high-yield debt will be roiled by early redemptions, according to Morgan Stanley and Credit Agricole CIB.

Cheaper funding alternatives such as loans make companies more likely to buy back callable notes, unsettling investors who may be forced to reinvest at lower rates or in more volatile assets. Thirty-five percent of liquid Asian junk bonds are callable — most this year — and about 20 percent are trading above or close to their call price, according to Morgan Stanley research.

Junk? Greece is junk says Moody’s:

Greece’s credit rating was cut four steps to non-investment grade, or junk, by Moody’s Investors Service, which cited the country’s economic “risks.”

The rating was lowered to Ba1 from A3, Moody’s said in a statement today from London. The outlook is stable, it said. Greece is already rated junk by Standard & Poor’s.
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S&P cut Greece’s credit rating to non-investment grade on April 27, the first time a euro member lost its investment-grade since the euro’s 1999 debut. S&P warned that bondholders could recover as little as 30 percent of their initial investment if the country restructures its debt.

Fannie & Freddie continue to demonstrate that no matter what degree of incompetence at which we assess Wall Street, it will always be out-done by the politicians:

The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.

Quick! Trump up another charge against Goldman Sachs!

It was another very good day for Canadian preferred shares, with PerpetualDiscounts up 22bp and FixedResets gaining 29bp, on slightly elevated volume. There were no losers on the Performance Highlights table!

European banks are in serious trouble:

Investors have already pushed down financial stocks enough to imply the “erosion” in book value that may result from losses tied to a sovereign debt restructuring, said Dirk Hoffmann-Becking, an analyst at Sanford C. Bernstein in London. A Bloomberg index of European financial firms dropped as much as 22 percent since April 15 to the lowest level since July.
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Writedowns stemming from a Greek default would total almost $200 billion, estimates Jon Peace, an analyst at Nomura Holdings Inc. in London. Banks globally could lose as much as $900 billion in a worst-case scenario where Greece, Ireland, Italy, Portugal and Spain all have to restructure their debt, Nomura estimates.
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German financial companies including Deutsche Bank agreed in May to refinance maturing Greek debt and maintain existing credit lines to Greece and its lenders for the next three years. French banks made a similar pledge.

A majority of European banks haven’t tendered their Greek sovereign debt to the European Central Bank, according to an informal survey by Morgan Stanley analysts. One reason may be that some banks bought their Greek bonds when they were trading at 20 percent above par, meaning a sale to the ECB would prompt a loss, Morgan Stanley’s London-based analyst Huw van Steenis said in a note to clients on June 9.

Corporate eMail is not secret!

“Just between us,” it may be “stupid” to use certain words in e-mail to “discuss” the “big trouble” you might face if you’re ever investigated for financial wrongdoing or a subsequent cover-up.

Those are some of the terms that examiner Anton R. Valukas searched for in 34 million pages of Lehman Brothers Holdings Inc. e-mails and reports, to find out who knew what about the risks that drove the fourth-largest securities firm into bankruptcy, according to his 2,200-page study on the collapse.

I don’t understand why people don’t know this already. When I’m composing an eMail, I imagine an angry regulator looking over my shoulder – a regulator who feels no compunction about publishing irrelevancies for the mere joy of embarrassing me.

The Canadian preferred share market rally kept on rallying today, with PerpetualDiscounts gaining 21bp while FixedResets were up 8bp. Some might be interested in the fact that volume was rather light today, and that there is considerable volatility shown in the Performance highlights table. Of course, today was the exDate for a great many issues, so perhaps a little volatility was to have been expected anyway.

Different crimes for different times!

Sergio Natera and Anna McElaney are scheduled to be sentenced in Hartford’s federal court in August after pleading guilty to fraud. Their crime involved persuading lenders to approve the sale of homes for less than the balance owed –known as a short sale — without disclosing that there were better offers. They then flipped the houses for a profit.
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A prevalent scam involves a practice called “flopping,” [special inspector general for the Troubled Asset Relief Program Neil] Barofsky said. In that scheme, investors or home buyers hire brokers to assess a home for less than its market value and convince banks to accept a sale at that level. The buyer conceals from the lender that he has lined up a higher offer and then quickly resells the property for a profit, as in the Connecticut case.
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In the Connecticut case, Regions Bank in April 2008 agreed to a short sale of a Bridgeport house for $102,375, unaware that Natera and McElaney had a bidder willing to pay $132,500, according to the plea agreements. Eight weeks after the bank sold for a loss, the pair resold the house for a $30,125 gain.

The SEC wants to make competition illegal:

U.S. Securities and Exchange Commission Chairman Mary Schapiro said the agency may regulate the speed of stock orders in response to a surge in electronic trading and the May 6 plunge that wiped out $862 billion of market value in 20 minutes.

The SEC needs “to explore whether bids and orders should be regulated on speed so there is less incentive to engage in this microsecond arms race that might undermine long-term investors and the market’s capital-formation function,” she said at a conference in Montreal. “The markets have to serve that function for companies to raise money, create jobs and allow the economy to grow.”

The basic trouble is that old,school, comfortable, well connected, incompetent portfolio managers are having their lunch eaten by High Frequency Traders – which are often brokerage firms, hedge funds, and individuals with, say $10-million to play with. Since they can’t compete on results, they’ll compete on regulation.

The pace of the rally in the Canadian preferred share market continued at a slower pace today, with PerpetualDiscounts up 18bp and FixedResets up 12bp.