Category: Market Action

Pop quiz! What do the securities and airline industries have in common?:

If these customers can’t use laptops or wi-fi and have to waste half their day going through security, they may abandon airlines at a faster rate than they are already, turning instead to modern business tools such as the web and teleconferencing, Kokonis said. Over the past year, he added, international premium flights were down 30 to 35 per cent.

What makes this even worse, [Robert] Mann [president of R.W. Mann & Company Inc., a consultancy in Port Washington, N.Y.] said, is that most in the industry realize new security measures are essentially political moves aimed at assuaging the public.

“It’s security theatre,” Mann said, noting that “there are a lot of us in the business that roll our eyes when these things happen.”

CIBC has issued covered bonds:

Series CB3 (CHF 375 million) covered bonds have a coupon rate of 1.75% and a maturity date of January 30, 2015. Series CB4 (CHF 300 million) covered bonds have a coupon rate of three-month CHF LIBOR plus 0.1% and a maturity date of December 30, 2011.

Swiss Government 5-years (there must be a cool name for them!) are now yielding 0.16%. Three month CHF LIBOR is 0.25%.

The last Canadian 5-Year NHA MBS auction was on October 16 with an average yield of 3.268%, as part of the Insured Mortgage Purchase Plan. Five year Canadas averaged 2.71% in October.

Preferred shares got on the up escalator today, although volume remained seasonably light. PerpetualDiscounts were up 31bp, while FixedResets gained 22bp, taking yields down to … 3.59%!

PerpetualDiscounts now yield 5.86%, equivalent to 8.20% interest at the standard equivalency factor of 1.4x. Long Corporates are now a hair over 6.0%, with a total return of -1.63% on the month-to-date, so the pre-tax interest-equivalent spread is now about 220bp, slightly tighter than the 225bp reported on December 16, but still wider than “Credit Crunch Normal” of 200bp and far above the long-term range of 100-150bp.

The boo-hoo-hoo crowd was in full cry December 24, with Dealbook exposing the revelation that Goldman Sachs occasionally trades as principal:

Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.

Goldman’s own clients who bought them, however, were less fortunate, Gretchen Morgenson and Louise Story write in The New York Times.

Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.
…
While the investigations are in the early phases, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them, people briefed on the matter say.
…
Michael DuVally, a Goldman Sachs spokesman, declined to make Mr. Egol available for comment. But Mr. DuVally said many of the C.D.O.’s created by Wall Street were made to satisfy client demand for such products, which the clients thought would produce profits because they had an optimistic view of the housing market. In addition, he said that clients knew Goldman might be betting against mortgages linked to the securities, and that the buyers of synthetic mortgage C.D.O.’s were large, sophisticated investors, he said.

The last paragraph says it all, really, and Goldman’s response was not necessary. Who are the investors? Were they prudent? Did they do due diligence? Did they merely have the misfortune to have A SMALL PART OF THEIR PORTFOLIO caught up in the train wreck? The ever-so-diligent reporter at the New York Times doesn’t bother even to ask such questions. It’s simply boo-hoo-hoo, a client bought something and it went down, it must be the seller’s fault.

The biggest danger the capital markets now face is over-regulation (as alluded to in a speech by John Taylor). Until performance becomes a serious consideration when placing assets for management (with risk firmly in mind at all times) and Portfolio Managers as a group start taking responsibility for their performance (which they certainly don’t want to do), we will keep seeing this friction … which basically means, until human nature changes.

There are some complaints that the Financial Crisis Inquiry Commission is making it stretch. I have no doubt but that there will be a star-studded roll of witnesses and some first-rate data collected … just how objectively that data is turned into recommendations will be another thing entirely! I think it entirely likely that regulation will become so stifling that a huge wave of hedge funds forms to compete with the banks at the margins, taking the old-style merchant-banking partnerships and trading houses as their models.

There is, surprisingly, some difference of opinion on the future course of 10-Year Treasury yields:

Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York.
…
Ten-year notes will end 2010 at 3.97 percent, according to the average of 60 estimates in a Bloomberg News survey that gives greater weight to the most-recent forecasts.

Edward McKelvey, senior economist in New York at Goldman Sachs Group Inc., the top-ranked U.S. economic forecasters in 2009, according to data compiled by Bloomberg, expects yields to drop to 3.25 percent.

Forecasting is a mug’s game.

A massive financial industry investment in the UK may be reconsidered:

Jamie Dimon, chief executive, made the coded warning to Alistair Darling in an angry phone call after the Government revealed its 50pc super-tax on bonuses in the pre-Budget report. Although Mr Dimon did not explicitly threaten to can the 1.9m square foot Docklands development, he pointedly used it to demonstrate the bank’s commitment to London.

When JP Morgan bought the land for £237m in November last year, it wrote into its contract with Songbird Estates, the owner of Canary Wharf, an option to pull out. A decision has to be made before the option expires by the end of 2010.
…
Bankers say regulatory pressure and the shifting tax regime have made Britain a far less attractive place to do business. International banks, which assess where to place their capital at the end of every financial year, now plan to scale back investment in the UK. Even Paris, which has introduced a watered-down version of the super-tax on cash bonuses alone, is stealing a march over its traditionally superior rival, London.

It was a quiet day for preferreds, with not much volume or price volatility. PerpetualDiscounts gained 7bp, while FixedResets gained just under 5bp.

California’s in trouble:

The state also has struggled to implement cost-cutting measures that were part of the $85 billion spending plan approved in July. Courts blocked part of the budget that cut funding for home care for the disabled and another part that borrowed $800 million from an account that sets aside money for local transportation agencies.

An accounting error means the state has to spend almost $1 billion more on schools than budgeted. Officials also underestimated the cost of health care for the poor by $900 million, and lawmakers failed to pass legislation to realize $1 billion less in anticipated prison spending.

Combined, the state faces a $6.3 billion gap in the current year and another $14.4 billion in the next.
…
Democrats, who control both chambers of the Legislature, are expected to oppose wholesale cuts to health and welfare programs. Such resistance, along with Republican opposition to tax increases, will be exacerbated as election-year politics heightens the partisan divide. Half of the state’s 120 Assembly and Senate seats go before voters in November.

The basic problem is gerrymandering:

I’d place California’s ridiculous two-thirds majority vote requirement for budget passage higher on the list of culprits that create gridlock. But I wouldn’t argue with Schwarzenegger’s thesis: Gerrymandering tends to reward extremism in both parties and punish compromise, locking lawmakers into ideological corners.

Districts were shaped to be “safe” for either a Democrat or a Republican. As a result, the real election battles have been waged in the party primaries. And since low-turnout primaries normally are dominated by party purists, the contests usually have been won by candidates who run the furthest to the left or the right.

Republicans pledge not to raise taxes. Democrats promise a laundry list of social programs the state can’t afford.

Then they come to Sacramento and can’t compromise.

Without wishing to be overly dramatic, it is this sort of legislative impasse that has enabled many dictators in the past to come to power – most famously, Julius Caesar.

The markets closed early today, in order that members of the most highly paid profession on the planet will have additional opportunity to bark at counter-clerks and restaurant personnel who have to work. Me, I’m just going to put my feet up and sneer at the unemployed.

In the spirit of Christmas, the TSX has not yet made closing data available, despite the fact that the market closed three hours ago. I will update the indices … later.

…later: A quiet day, with PerpetualDiscounts basically flat at FixedResets losing (yes, losing!) 4bp.

Volume held up today, as PerpetualDiscounts slipped 14bp but FixedResets continued to defy gravity, gaining 3bp to take yields down to 3.66%.

So much for the Christmas lull! Trading was heavy today and PerpetualDiscounts were down 14bp, while FixedResets were up 13bp as investors realized that a lot of the product available was not the YPG.PR.D new issue.

Goldman is burnishing its credentials as the toughest dealer on the Street:

Goldman Sachs has threatened the UK Treasury with plans to move up to 20 per cent of its London-based staff to Spain in a standoff over tax and bonuses.

It’s believed that the Wall Street investment bank, which paid more than £2bn to the Exchequer’s ailing coffers in corporation tax alone last year, has fired a warning shot across the Government’s bows in response to the tax measures unveiled in the pre-Budget report earlier this month.

Goldman Sachs International was the biggest contributor from the financial services sector to Britain’s purse last year. Previous reports suggest that in some years the firm’s staff have contributed more than £1bn in personal income tax to public coffers.

PerpetualDiscounts were off today, losing 8bp, but FixedResets just kept on keeping on, gaining 6bp on good volume. How Low Can They Go?

Deutsche Bank is marching to a different drummer – worrying about competition, of all things!:

Deutsche Bank AG, Germany’s biggest bank, plans to spread the costs of the U.K. bonus tax to all employees worldwide, risking a backlash from bankers outside of London.

Chief Executive Officer Josef Ackermann, in an interview with the Financial Times, said the bank wouldn’t restrict the cost of the tax to the U.K. bonus pool.

“We will clearly globalize it,” Ackermann said. “If parts are paid out of the bonus pool, we would seek to globalize it. It would be unfair to treat the U.K. bankers differently.”
…
Ackermann told the Financial Times today that governments shouldn’t interfere in setting pay, saying bonuses should be the result of “supply and demand for skilled people.”

The Federal Reserve Bank of Cleveland has published the December edition of Economic Trends. The article on “Supply and Demand Shocks in Residential Mortgages” was interesting, although not noteworthy enough to merit a dedicated post.

A solid, though hardly spectacular, day for preferreds today, with PerpetualDiscounts up 9bp and FixedResets gaining 3bp. This is the eighth consecutive day of gains for FixedResets and they’re up about 78bp on the month-to-date. Volume was good; it should slow down next week, but the pending settlement of the YPG new FixedReset should give the traders something to do.

PerpetualDiscounts took a hit today, losing 15bp, but FixedResets just kept on keeping on, up 8bp to close with a weighted-median-average YTW of 3.68%. How Low Can They Go? Volume was moderately good.

Holy smokes, it’s been ten years!

The November 27, 2007 commentary on the Abu Dhabi – Citigroup deal is now looking a little dated:

Citigroup Inc. said the Abu Dhabi Investment Authority is seeking to end an agreement to buy the bank’s stock, or to receive more than $4 billion in damages.

Abu Dhabi Investment, one of the world’s top two sovereign wealth funds, filed a claim alleging “fraudulent misrepresentations” tied to its agreement to buy $7.5 billion of common stock, Citigroup said today in a statement.

In front-page news, the UK said something sensible about regulation:

The U.K. pushed back on European Union and U.S. proposals to trade standardized derivatives on exchanges and clearing houses, saying that other steps can reduce risks to the financial system instead.

While the U.K. broadly supports EU and U.S. objectives, the Treasury and Financial Services Authority said in a report today that they have concerns that the proposals could concentrate risk. The U.K. has 43 percent of the over-the-counter derivatives market, the paper said.
…
The U.K. paper mandated seven steps, including greater standardization of OTC derivatives contracts, consensus on global standards for CCPs, international agreement on what contracts can be backed by a clearinghouse and the registration of “relevant” trades in a data warehouse. The paper said that if these steps were followed, putting standardized derivatives on exchanges would be unnecessary.

Regulators are, in general, anxious to establish clearinghouses for two reasons: it will deflect attention from their negligence in not requiring collateral or capital for unsecured positions in the banks they regulate; and clearinghouses will be large financial establishments )charging fees to brokerages in a non-public manner) that will require a lot of ex-regulators on staff, just to ensure that it’s all done right.

In general, the idea makes the system as a whole vulnerable to a single point failure, something the rest of the world is moving away from.

The log-jam has burst and Wells Fargo has issued a CDO:

Banks may arrange as many as 100 collateralized debt obligations backed by high-yield, high-risk loans in 2010 following Wells Fargo & Co.’s “landmark” offering yesterday, according to Guggenheim Partners LLC.

Guggenheim was the main investor in the securities of Newstar Commercial Loan Trust 2009-1, a $250 million CLO arranged by Wells Fargo, said Scott Minerd, who helps supervise more than $100 billion as Guggenheim’s chief investment officer.

A good strong day for preferreds, with PerpetualDiscounts gaining 22bp and FixedResets squeaking out another gain of 1bp to take their median-weighted-average yield down to 3.68%. How low can they go? (I’m thinking of inventing a little dance to go with the chant.) Good volume, especially for Nesbitt.

PerpetualDiscounts now yield 5.83%, equivalent to 8.16% interest at the standard conversion factor of 1.4x. Long Corporates continue to yield about 6.0%, so the pre-tax interest-equivalent spread (a.k.a. the Seniority Spread) is now 215-220bp, a slight tightening from the 225bp reported December 9.

Another day of good returns and good volume for preferreds, with PerpetualDiscounts gaining 5bp and FixedResets up 12bp, taking the median-weighted-average yield for the latter index down to yet another new low of 3.69%. How low can they go?