Category: Market Action

With all this rate-cutting, here’s a little bit of history for you: Four-Week US T-Bills were auctioned off at 0% today. A big fat zero, to three decimal places.

Preferred share volume remained heavy today (well … heavy for the preferred market, I mean!) while prices eased off after yesterday’s gains.

There were seventy-four index-included $25-pv-equivalent issues trading over 10,000 shares today

American pension funds begged for relief from having to top up their accounts:

Pension funds at Pfizer Inc., International Business Machines Corp., United Parcel Service Inc. and dozens of other companies have joined the parade of businesses seeking relief from Congress amid this year’s economic meltdown.

Instead of money, they want legislation to suspend a federal law that would make them pump billions of dollars into retirement plans to offset stock-market losses as many struggle to find enough cash just to stay in business. They’re pressing Congress to consider the issue this week before this year’s session adjourns.

It’s another difficult question of mark-to-market vs. whatever-other accounting! Frankly, I think the entire defined-benefit paradigm is dead – or if not dead, should be.

In a rather chilling development, specific bank credit decisions are being politicized:

Illinois Governor Rod Blagojevich said today the state would suspend its business with Bank of America Corp. until the lender restores credit to the shuttered Republic Windows & Doors company in Chicago where workers are staging a sit-in.

Blagojevich commented at a news conference after meeting with employees who have stayed at the factory since Dec. 5, when it closed after the bank canceled its line of credit. Illinois does “hundreds of millions of dollars” in business with the bank, he said.

Three-month US T-Bills are now trading at less than a beep:

The Treasury sold $27 billion in three-month bills at the lowest rate since it starting auctioning the securities in 1929 amid record demand for the safety of U.S. debt during the worst financial crisis since the Great Depression.

The bills were sold at a high discount rate of 0.005 percent, the Treasury said today in Washington. At last week’s auction, the bills drew a rate of 0.05 percent. The government received bids for the bills totaling more than triple the amount sold.

There is a report of another chapter in the BCE saga:

BCE Inc. told would-be acquirers that it received an auditor’s opinion showing the company would be solvent after the C$52 billion purchase by Ontario Teachers’ Pension Plan and a group of U.S. private-equity firms, according to two people briefed on the matter.

The opinion, delivered by PricewaterhouseCoopers LLP, is contrary to an analysis by rival accounting firm KPMG LLC.

Hmm … I wonder if the same deal can go the Supreme Court twice!

Sorry, folks! I’m just plain out of time, so there is no volume or price-change table today. I will point out though, that the SplitShare sector was on fire today, with strength pretty much across the board.

BCE gyrations continue:

Citigroup Inc. and Deutsche Bank AG, lead lenders on the C$52 billion ($42 billion) acquisition of BCE Inc., have indicated they are unwilling to fund an alternative proposal that would keep the phone company publicly traded, according to two people familiar with the matter.

Private-equity firms had proposed investing C$8 billion to C$10 billion in preferred securities in lieu of the original leveraged buyout. The alternative transaction hinged on financing from the banks backing the LBO, which are opposed, according to the people, who asked not to be named because the discussions are private.

Golly, there’s a surprise, eh? It may be that the entire proposal was simply lawsuit-avoidance grandstanding … but who knows? BCE denies the rumours:

issuing a statement in response to certain rumours reported in the media regarding a possible minority investment in the company by some or all of theinvestor group led by Teachers’ Private Capital, the private investment arm ofthe Ontario Teachers’ Pension Plan, and affiliates of Providence EquityPartners Inc., Madison Dearborn Partners, LLC, and Merrill Lynch GlobalPrivate Equity.

While it is BCE’s policy not to comment on rumours or speculation, in theinterest of its shareholders, BCE is today confirming that no such offer has been made to the company.

The company continues to work with KPMG and the Purchaser to seek tosatisfy all closing conditions under the June 29, 2007 Definitive Agreement,as amended.

The press release has “legal advice” written all over it. It is not clear to me just what the precise, legally justifiable, meaning of “no such offer has been made” really means. To my untrained eye, it could mean ‘They haven’t actually signed anything yet’.

There is continued muttering that Bernanke’s Big Mistake was Lehman:

The more than half a million U.S. jobs lost in November were the latest in a drumbeat of dire economic data that may have been triggered by the Federal Reserve’s decision in mid-September to allow Lehman Brothers Holdings Inc. to fail, economists and bankers said.

“It’s the collapse heard around the world,” said Ellen Zentner, a senior economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “It’s probably one of the worst decisions the Fed ever made — to save everybody else but Lehman.”

Bernanke has said he won’t do it again. Assiduous Readers will remember my earlier remark:

The only mistake so far, I think, is allowing Lehman to fail … but neither I, nor any responsible commentator I know of, dreamed at the time that the bankruptcy would have such enormous systemic effects.

Across the Curve passes on some HSBC commentary on the jobs number. HSBC expects FOMC to cut to zero December 16.

Accrued Interest heaps scorn on the NY Port Authority for setting themselves up for a failed bond issue.

PerpetualDiscounts gained slightly as volume continued high. The weighted-average pre-tax bid-YTW of the PerpetualDiscount Index is now 8.01%, equivalent to 11.21% at the standard equivalency factor of 1.4x. This may be compared to long Corporates at 7.50%, implying a still-astonishing Pre-Tax Interest-Equivalent spread of 371bp.

There were sixty-eight index-included $25-pv-equivalent issues trading over 10,000 shares today

Assiduous Readers will know that I am not averse to a little bit of stimulus in this lousy economy. Deficits are fine, provided they’re backed up with credible research showing a good healthy surplus through a business cycle – many of our current problems are the result of What-Debt? and Spend-Every-Penny goosing an already over-stimulated economy with not just tax cuts, but moronic tax cuts – like cutting the GST.

Infrastructure would be a marvellous place to start. It has a very high economic multiplier and is the type of thing that has a very logical end-point, making it possible to turn off the tap without too much controversy – once you’ve built your subway or repaired your bridge … it’s built! There is only so much you can do (take it too far, for instance, and we end up with 1000% over-capacity in the cement industry and a lot of really shoddy construction that has to be torn down), but in Canada and the Western world generally, there is a huge list of neglected infrastructure that would be a Very Good Thing to chip away at.

However, from Japan comes a cautionary tale about idiotic infrastructure spending:

Japan’s $268 million Ibaraki Airport is on schedule to open for business in March 2010. The hard part will be persuading an airline to fly there.

The government and Ibaraki prefecture, home to 3 million people, are paying for the airport north of Tokyo, which won’t have train services and is a half-hour drive from Ibaraki’s capital, Mito. Japan Airlines Corp. and All Nippon Airways Co., which operate 90 percent of flights in the country, don’t plan to use it.

We don’t have to worry about such boondoggles in Canada, though! What-Debt? has reacted forcefully and decisively to the global economic crisis by forcefully and decisively running away from Parliament for eight weeks. See ya!

The Amazing Takeover Bid That Will Never End continued its gyrations today, with Bloomberg reporting:

The private-equity firms that agreed to buy BCE Inc. for C$52 billion ($42 billion) may instead seek to acquire a minority stake in the Canadian phone company, according to two people with knowledge of the plan.
…
The alternative proposal involves the buyers investing C$8 billion to C$10 billion in preferred securities for about 20 percent of BCE. It also calls for a cash dividend of C$8 to C$10 a share to paid to BCE shareholders.

Citigroup Inc., based in New York, and Frankfurt-based Deutsche Bank AG are leading a group of lenders that also includes Toronto-Dominion Bank and Royal Bank of Scotland Group Plc. The banks would need to approve the new transaction. The debt required to finance the minority stake would be around C$7 billion or C$8 billion, compared with the C$34 billion the banks would fund if the buyout went ahead.

Bloomberg also has a piece on Municipal credit rating upgrades, implying skullduggery by S&P. All the data is cherry-picked, of course, so whether there’s an actual trend or not remains to be see. But I bring this up because of the most interesting quote:

Recent default studies suggesting municipalities’ enhanced creditworthiness don’t account for what happened to issuers during the Great Depression, according to Richard Ciccarone, chief research officer of McDonnell Investment Management LLC. The Oak Brook, Illinois-based firm has $12 billion under management, including municipal bonds.

In 1929, more than 98 percent of the largest U.S. cities were rated Aa or better, according to Ciccarone’s research, which cites a study of municipal bonds showing that 3,252 issues went into default at the peak of the economic contraction in 1935. Almost half the bonds in default were rated Aaa in 1929.

“We may be facing the same conditions today that we did in the 1930s, but they could be worse because of pension and other liabilities,” Ciccarone said. “We have some huge liabilities at the same time that real estate values are falling.”

Yo! Ciccarone! Get with the programme! There’s some political theatre that needs to be played out! What do you think you are, some kind of investment expert or something?

I got a little curious today about relative performances;

RY.PR.D vs. common:

CM.PR.H vs common:

Make of it what you will.

Volume continued heavy today; volume and price advances in split shares were again particularly noteworthy.

There were sixty-one index-included $25-pv-equivalent issues trading over 10,000 shares today

Econbrowser‘s James Hamilton reviews 5-Year TIPS, which have been showing some rather unusual behaviour recently:

on Monday, the TIPS yield fell 214 basis points, while the nominal yield was down only 22 basis points, leaving the TIPS yield only slightly above the nominal.

Dr. Hamilton quotes extensively from Greg Mankiw who points out:

Starting 12/01/2008, the TIPS yield curve will use on-the-run TIPS as knot points rather than all securities under 20 years

There are two kinds of TIPS – on-the-run (recent issue) and off-the-run (old issue). The older issues will have a lot of prior inflation embedded in their price; the new issues will have none. Since the minimum redemption value of a TIPS is par, this means that a deflationary environment will erode the principal of off-the-run TIPS while leaving the on-the-run issues unscathed; hence, there is now not simply a liquidity premium contributing to the difference in yields, but an embedded put as well.

Assiduous Readers will remember that continued five-year TIPS issuance is dubious. They will also be aware that the Cleveland Fed has given up trying to figure out what TIPS yields really mean!

Entirely reasonable performance today on continued high volume. Of particular interest is the spike in volume and prices of splitShare corporations.

There were sixty-seven index-included $25-pv-equivalent issues trading over 10,000 shares today

Bloomberg reports:

The U.S. Securities and Exchange Commission may act to curb conflicts of interest at credit-rating companies while delaying a mortgage-bond ranking proposal faulted by underwriters, two people familiar with the matter said.

SEC commissioners plan to bar employees who assess debt from discussing compensation with the bankers selling the bonds, said the people, who declined to be identified before a vote in Washington tomorrow. Commissioners also may limit gifts from underwriters and restrict debt analysts from offering advice on structuring securities to win top grades.

Well, it sure sounds tough doesn’t it? The whole point is to ensure that there are enough rules to ensure that everybody is guilty of something. Then when things go wrong, you have your choice of scapegoat … that’s what regulation’s all about. However, some good might come out of the process:

The SEC sought to encourage unsolicited rankings by proposing another rule in June that would have forced credit- rating companies to publish the data that goes into their assessments. As a result, competitors could have graded bonds even if they weren’t paid by debt underwriters.

New York-based Moody’s in a July 28 letter to the SEC said the proposal would trigger lawsuits and encourage banks to take their business to the credit-rating company that asked for “the least amount of information.”

SEC commissioners will seek a second round of public comment on the proposal instead of adopting it at tomorrow’s 10 a.m. Washington time meeting, the people said.

The ratings agencies’ exemption from Regulation FD must be repealed. It’s the only way … I’ve written an essay on the topic. Unfortunately, however, addressing this issue would involve the authorities admitting that the current system works pretty well and the agencies do a pretty good job … subject to all the caveats that apply in assessment of any forecasting ability.

Since the regulators’ myth-du-jour is that the credit crunch was caused by Evil Credit Agency exploitation of Innocent Portfolio Managers (rarely, if ever, criticized; presumably because they already have regulations coming out their ying-yang) it will be inconvenient to acknowledge reality. Fortunately, this bothers neither regulators nor politicians.

A good solid day for PerpetualDiscounts, up nearly 1% in a sloppy market. Another two weeks of good returns like this and we’ll make up for November!

There were fifty-seven index-included $25-pv-equivalent issues trading over 10,000 shares today

Total confusion in the news today about the duration of perpetual annuities, a subject dear to the hearts of preferred share investors. Bloomberg reports (hat tip: Assiduous Reader MP):

The gilts, known as perpetuals because they have no maturity date, have a coupon of 3.5 percent compared with the U.K.’s 4.5 percent inflation rate. Investors hold about 1.9 billion pounds ($2.9 billion) of the securities that still pay interest 90 years after the end of the Great War, according to the U.K.’s Debt Management Office.
…
The “Jolly Long Bond,” as Hendry calls the war loan, will be the most reactive to deflation because not having a maturity means it has long duration, said Charles Diebel, head of European interest-rate strategy at Nomura International Plc in London. A bond with a higher duration will increase more in value than one with a shorter duration for a given decline in yield.

“His philosophy behind it makes a lot of sense,” Diebel said. “If you have an extended period of time where inflation is not a problem, you get no yield at the front end of the curve and people will be forced out the yield curve. You can’t be forced out further on the yield curve than a perpetual.”

Assiduous Readers will instantly recognize this as highly suspicious, at best. The duration of a perpetual annuity is the inverse of the interest rate. Long Gilts are currently yielding about 4.5% … assuming that the Gilt Perpetuals are trading around there, the modified duration is (1 / 0.045) = 22.2 years.

Gilt Strips are well known.

The Macaulay Duration of a strip is equal to its term. The Modified Duration is equal to Macaulay Duration divided by (1+r). Assuming a 5% yield on long gilt strips, we arrive at the conclusion that any Gilt Strip with a term of 25+ years will have a higher duration than the perp.

Sometimes I despair.

Well, things settled down a little today, but I’m still cutting off the price changes table a +- 3%!

PerpetualDiscounts now yield 8.13%, equivalent to 11.38% pre-tax interest at the standard conversion factor of 1.4x. Long corporates look to have settled in at around the 7.50% mark, so the Pre-Tax Interest-Equivalent spread is now 382 … massive, massive, massive!

There were forty-two index-included $25-pv-equivalent issues trading over 10,000 shares today

Chaos and pandemonium today. Perhaps some investors are enthused about the proposed bank stake legislation?

Another piece of legislation made quaint by the financial crisis also forced Mr. Flaherty to risk raising the spectre of a public bailout of Canadian banks by acknowledging the government doesn’t currently have the power to buy shares in financial institutions – something governments in the U.S. and Europe did, to the tune of hundreds of billions this year, to keep their banks from failing.

The new Fed Balance sheet shows a slight shrinkage, with a decline in liabilities to depositors of all stripes balanced by a decline in foreign currency assets. Hmmm … Bloomberg highlights the continued increase in commercial paper holdings.

Sorry folks – no words of wisdom today. Just be grateful the month is over, that’s my advice.

There were sixty-eight index-included $25-pv-equivalent issues trading over 10,000 shares today. Sorry there’s no table!

Spend-every-penny announced today that the proper manner to fight imminent recession is to cut government spending, end the right to strike for civil servants and eliminate the pension problem by eliminating the rules.

After thirteen straight trading days of losses, eight of which were over 1%, and cumulatively a stunning crash of 19.53% … the Americans stayed home to eat turkey … and the PerpetualDiscount market went up!

There were fifty-three other index-included $25-pv-equivalent issues trading over 10,000 shares today.

Moody’s notes that its accuracy ratio has declined:

Moody’s ratings performance has deteriorated sharply from the elevated levels seen in recent years. The deterioration is primarily driven by investment grade defaults that include multiple affiliates of Lehman Brothers and Washington Mutual. The one-year horizon “accuracy ratio” (AR) was 78.7% in the third quarter relative to 94.7% a year ago. This sharp decline in performance is similar to that observed in previous downturns that were marked by a sudden surge in the aggregate default rate. The investment grade default rate at 0.12%, while above its historical average of 0.05%, is currently below the 0.5% observed at the peak of the previous downturn in
2000-2002.

Accrued Interest takes exception to Moody’s negative views on the Financial Guarantee business.

What a day! The TXPR index was down 5.94% on the BCE news.

There were sixty other index-included $25-pv-equivalent issues trading over 10,000 shares today.