Category: Market Action

OSFI has announced:

the results of its latest solvency testing of federally regulated private pension plans.

As part of its regular monitoring activities, OSFI tracks the ratio of plan assets to plan liabilities for the 400 defined benefit plans it regulates. The results show that the average estimated solvency ratio of federally regulated defined benefit private pension plans at December 31, 2008 was 0.85, a decrease from 0.98 as reported in June 2008.

One of my favourite examples of boneheaded compensation schemes has always been the Soviet system for evaluating tractor factories’ meeting of goals set in five year plans. They weren’t evaluated on quality of tractors. They weren’t evaluated on quantity of tractors. They were evaluated on weight of tractors. Guess which world economy had the heaviest tractors?

But maybe now I have a new favourite: the SEC system for evaluation of case officers:

The SEC and Finra receive thousands of complaints each year. SEC enforcement offices were evaluated on the number of cases, or “stats,” they brought in, rather than on the seriousness or difficulty of action, said Walter Ricciardi, the agency’s deputy chief of enforcement from 2005 through 2008, in a speech April 1 in New York.

“So if you brought an Enron, that’s one,” Ricciardi said. “If you brought a WorldCom, that’s two.” Delisting 135 defunct companies in a week for failing to file annual reports gave an enforcer 135 cases to count, he said.

But there’s some good news in the bond world, anyway:

JPMorgan Chase & Co., the second- largest U.S. bank by assets, plans to sell dollar-denominated debt without the backing of the U.S. government for the first time since August, according to a person familiar with the transaction.

The New York-based bank plans to sell 10-year notes in a benchmark offering, said the person, who declined to be identified because terms aren’t set. Benchmark typically means at least $500 million.

There are rumours about that the objective of this issue is not so much as to get the money as to establish a market clearing price.

But naturally, recessions mean there are some losers: General Growth and Abitibi have filed for creditor protection.

Yet another solidly positive day for preferred shares on continued relatively heavy volume. PerpetualDiscounts outperformed – as might be expected, given that their duration is now officially well in excess of the FixedResets.

Amidst all the shock and horror about American lending practices, the Boston Fed has published an examination of credit availability to recent bankrupts by Ethan Cohen-Cole, Burcu Duygan-Bump, and Judit Montoriol-Garriga: Forgive and Forget: Who Gets Credit after Bankruptcy and Why?:

Conventional wisdom about individuals who have gone bankrupt is that they find it very difficult to get credit for at least some time after their bankruptcy. However, there is very little non-survey based empirical evidence on the availability of credit post-bankruptcy. This paper makes two contributions using data from one of the largest credit bureaus in the US. First, we show that individuals who file for bankruptcy can indeed get credit very quickly after they file. Indeed, 90% of individuals have access to some sort of credit within the 18 months after filing for bankruptcy, and 66% have unsecured credit. Second, we show that those individuals who are effectively the least punished and can get the easiest access to credit after bankruptcy tend to be the ones who have shown the least ability and propensity to repay their debt prior to declaring bankruptcy. In fact, a significant fraction of individuals at the bottom of the credit quality spectrum seem to receive more credit after filing than before. We interpret the widespread credit access and the difference in credit provision across borrower types as evidence that lenders target at-risk borrowers. By means of a simple stylized model we show that this observation is consistent with a profit maximizing lender whose optimal strategy involves segmenting borrowers by observable credit quality and bankruptcy status and that offers credit contracts to each group. This interpretation is also in line with survey evidence that shows that lenders repeatedly solicit debtors to borrow after bankruptcy, with unsecured credit card being the easiest one to obtain.

Holy smokes, the preferred share market is on fire! Up strongly again today, continuing the two week rally highlighted yesterday, with volume still above normal levels.

PerpetualDiscounts now yield 6.87%, equivalent to 9.62% interest at the standard equivalency factor of 1.4x, compared to Long Corporates which continue mired in their range of 7.50% … this time, maybe a hair below, but no more than a hair. The pre-tax interest-equivalent spread has thus narrowed to about 212bp, which is starting to look normal … normal, at least, by Credit Crunch standards, still well above the un-stressedl range of 100-150bp.

It is noteworthy that the Median Duration (YTW) of the HIMIPref™ Fixed-Reset index is now a mere 4.59 Years.

The Globe & Mail reports that new rules for retail bond desks are coming:

Many investors would for the first time find out exactly how much commission they are paying to buy and sell bonds. Industry convention is to hide the commission in the purchase or sale price of the bond, but the new rules would force it to be broken out.

The rules would also require better disclosure of the bond’s yield – the real interest rate based on the price.

Perhaps most importantly, and contentiously, IIROC plans a “fair pricing rule” to enable regulators to punish dealers who trade bonds at prices far from the true market price.

Thoroughly precious and idiotic. There are some fine alternatives available for retail investors who don’t know what they’re doing: funds. I have no idea what this “yield disclosure” thingy might mean; perhaps it simply means that dealers will be required to print the yield on their confirms, as they are for Money Market instruments.

Look for retail bond offerings at brokerages to be even more sharply reduced than they are now. When you buy your GIC, you’ll know you’re getting best execution on the price!

The market continued its rally today with heavy volume. Performance for the past two weeks has been impressive:

Strong performance today on normal volume. Not much news – government holiday!

If Dealbreaker is anything to go by – and I think it is – the latest plan to stimulate an artificial market for highly illiquid and distressed securities will go the way of all the others:

Is it not enough that we are already providing what are effectively failed institutions unbearably low cost capital while the likes of Berkshire Hathaway must wallow in high rates?

It is more than despicable that, now that the PPIP looks like it may be an abject failure even before bids have hit the screens, we should see the attempt to throw the problem onto the “dumb money” of the retail investor, while collecting fees, we might add.

Dealbreaker also brings to my attention an adulatory piece on Bernanke’s management style. Bernanke amazes me. There he was, an academic with experience on the board of the Fed, quietly doing his research on the Depression … normally he could look forward to a life of rewarding work and the the respect of a few dozen of his colleagues who knew and understood what he was talking about. Suddenly, he’s in the hotseat, doing the job he’s been training to do all his life, knowing that every decision he makes will be fodder for academia for the next hundred years … lucky man! And we’re lucky to have him.

Another strong day on the market with increasing volume, particularly among the Fixed-Resets. PerpetualDiscounts are now up 4.26% on the month, while FixedResets are up 2.40%. Average Trading Volume of the former continues its gradual decline, but I see no reason to panic as yet. Who knows, maybe some people simply gave up trading for Lent!

The SEC has announced that facts don’t matter any more:

The U.S. Securities and Exchange Commission will weigh multiple rules to dictate when traders can bet shares will fall, after lawmakers and business groups said short-sellers fueled the financial crisis by targeting banks.
…
[SEC Chairman Mary] Schapiro said the SEC isn’t aware of any “empirical evidence” that shows the elimination of the uptick rule contributed to falling U.S. stock prices. Still, “many members of the public have come to associate short-selling with that volatility and with a loss of investor confidence,” she said.

… but it might simply be some more political grandstanding:

SEC Commissioner Kathleen Casey, a Republican, questioned whether the agency was pushing forward “merely in a political exercise.” If the SEC fails to justify its actions, the agency risked having any rule challenged and shot down by a federal court, she said.

“Empirical evidence must guide regulatory decisions,” said Casey, who said she supported soliciting public comment on the proposals. “If the commission forgets this principle, the D.C. Circuit stands ready to provide a reminder.”

Another day of good solid gains for preferreds, with PerpetualDiscounts gaining 0.35%, just a hairsbreadth better than Fixed Resets. The former asset class now has pre-tax bid-YTW of 7.06%, equivalent to 9.88% interest after application of the standard 1.4x conversion factor. Long corporates remain as near as dammit to 7.5%, so the pre-tax Interest Equivalent spread is now 238bp.

Volume was good today, dominated by the recent FixedReset issues; MFC.PR.D’s volume is picking up. It’s hard to tell what to think about this issue – the issue size was bumped and the underwriters exercised their greenshoe, but the issue has been trading sub-par since its issue with less volume than one might expect from an issue of this size. Could it be that the underwriters took a basketful into inventory?

For the first time in a while, we close a day without any new Fixed-Reset issues being marketted. It is, I suspect, a rather interesting conundrum; the banks – and insurers! – could probably use some more capital with a 5-year call; but market yields now suggest that a new issue should carry a coupon of less than the recent new issues. Who wants to be the first to try selling an issue with a reduced coupon? As far as I can readily recall, it would be a first for the sector.

Again, no commentary! Pretty lazy, huh?

Another day of good solid performance, but volume was off a bit.

Bernanke gave a speech today on the Federal Reserve’s Balance Sheet (hat tip: Across the Curve). I have updated the post Fed to Open Spigots Further.

It looks like Short-Sellers will join the politically inspired list of Designated Villains for the financial crisis. The SEC is under pressure and voices of reason will – as usual, when political grandstanding becomes paramount – be ignored.

The OSC has published the first edition of OSC Investor News. Investors may obtain a subscription by eMailing the OSC.

Another day of good performance from the PerpetualDiscounts; Fixed-Resets were more mixed but were able to eke out a gain.

No commentary today! It must be quarter-end, or something!

Whoosh-a-rama! PerpetualDiscounts rocketted up today and Fixed-Resets put up a very good show. CIU.PR.B at 26.75 bid, with a 5.22% YTW? The PerpetualDiscount CIU.PR.A closed at 17.21-18.25 today, yielding 6.78%-6.33% and I can no longer say (as I said when CIU.PR.B closed) that the Fixed-Reset issue is still cheap! However, some may still be attracted by the now legitimate expectation of a five-year call.