Category: Market Action

Tireless researchers in PrefBlog’s Department of Things That Don’t Really Make a Whole Lot of Sense have been looking at the various Commerce issues lately…

So not only do we have the slope of the yields being in the wrong direction (see my articles on Convexity and Perpetual Hockey Sticks) but … doesn’t the spread seem a little … er … extreme to anybody? It’s almost as much as the spread on Westons that attracted comment last year!

The best performance of the day came from HPF.PR.B, which closed at 10.50-74, 12×23 … up 4.79% bid/bid. All 8,800 shares traded were bought by Nesbitt … could this be related to the Annual Retraction?

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

James Hamilton of Econbrowser provides an interesting piece on how big a contribution could oil speculation be making? … his conclusion:

We were only able to buy 19.9 mb/d in the first quarter when we offered a price near $100. So why would it have been possible to secure the 21 mb/d that consumers would likely have wanted at a price of $72?

Given these data, I think it is impossible to argue that the volume of futures market purchases alone could be the reason why oil prices went up this year. A key and necessary element of any speculation-based interpretation must be some explanation for the factors governing the physical quantity of oil being supplied to the market.

We’re hearing from a number of experts asserting that there’s no reason why the oil price should have gone up. I wish one of them would tell me where an extra million barrels per day in supply is supposed to come from.

Accrued Interest looks at the question of oil prices and their relationship to general inflation:

So over a period of three decades, it was rare that a move in Core CPI would not be mirrored in headline CPI. If one was elevated, the other was elevated. If one was tame, the other was tame.

However, the 21st century hasn’t followed the same pattern. From 2000-2008, the correlation between total CPI and Core CPI has broken down: only 7.6% measured monthly and 21.4% measured annually. This despite the energy portion of CPI rising at a 1970’s style 9.5% annualized. During the current decade, there has been no particular relationship between total inflation and core inflation.

What does this mean? The data is telling you that rising energy and food prices have been due to supply and demand conditions in those markets. Not classic inflation, which is a monetary phenomenon. In other words, rising oil is indeed due to strong demand from emerging markets and a lack of new supply. Not the weak dollar or loose monetary policy.

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

An interesting bit of NRSRO news today … the Treasury is jumping on the bandwagon, albeit with an afterthought that makes sense:

There must be changes in credit-rating companies’ practices, as well as in the way corporations use those ratings, he said

“The users of their services must rely less on, and appreciate more, the limitations of ratings products,” he said.

Bloomberg’s afraid to admit that the full speech has been posted by the Treasury department … I wish the media would quit these coy little games! He went on to say:

To aid in accomplishing this goal, a second private-sector group is outlining further steps that issuers, underwriters, and credit rating agencies can take to ensure the integrity and transparency of ratings, and to foster the appropriate use of ratings in risk assessment. The Asset Managers’ Group at SIFMA is leading this effort. They are exploring issues including: use and quality of ratings; business models; and credit rating agency independence. We expect their work to be completed by the end of July.

Once identified and assessed, risks must be better managed. During the past year, many financial institutions, money managers, and investors simply failed to appreciate the magnitude and nature of risks on their books. This inability to aggregate risk and transparently address public concerns led to even further uncertainty, volatility, and dislocations. We need improved risk management practices by investors and financial institutions.

Great. Better Living Through More Rules. More box-ticking to do and (inevitably) an increasingly vicious regulatory response towards asset managers unlucky enough to be invested in the cause celebre of the day.

Also on the credit ratings front, Naked Capitalism takes a dim view of the latest (rumoured) rules to decrease blind reliance on ratings in regulation of Money Market Funds.

Bloomberg has picked up on the story.

It’s all craziness. The Portfolio Manager is responsible for Everything. He may, or may not, wish to rely on Credit Rating Agency advice … although, as I have argued, it would be really nice if the Friendly Regulators did not ensure that Credit Rating Agencies have better access to information than us ordinary mortals.

The root of the trouble is this: performance doesn’t matter. Salesmen have taken over the industry and all they need is something to package and sell … whether the package is any good or not is something that really doesn’t enter into the question. If the regulators wish to avoid blow-ups and improve the quality of investment advice, then they must track performance. Anybody with a license to trade with discretion, or who is part of a team of advisors helping the PM to trade with discretion, should be reporting performance versus a benchmark. And that performance should become part of the regulatory record that is published by the regulators forever. No more burying of unsuccessful funds; no more coyness regarding long term results.

The Credit Rating Agencies, for instance, publish their track records going back 20 years. When was the last time any Assiduous Reader saw a stockbroker’s 20-year track record? Or saw a brokerage provide half the self-analysis that the NRSRO’s routinely produce?

When discussing the teleportation of US Municipal ratings to the global scale in Be Careful What You Wish For!, I suggested one flaw in the analysis was the assumption that all newly-indistinguishable credits would trade as if they were top-quality; Accrued Interest points out that there is hazard on the issuer side too:

The high ratings standards for municipals encourages some measure of fiscal conservatism. This is especially true for Aaa-rated credits, where loss of the rating would be politically embarrassing. Of course, municipalities are downgraded all the time, but clearly local politicians would rather maintain their rating than not. If the overwhelming majority of general obligation issuers are going to be rated Aaa anyway, that incentive is greatly reduced. In other words, a state like Georgia (rated Aaa) is currently incented to maintain its austerity. But if they could slide all the way down to California’s level (currently A1) and still be rated Aaa, they’ll probably do it.

But the rating hysteria is regulator/politician driven – neither group is notable for thinking things through.

The recently issued L.PR.A traded 24,250 shares today in a range of 23.00-24.40, closing at 24.00-15, 2×5. Nice range, eh? It does not reflect well on either the market maker or the underwriters. Those who sold today at 23.00 should be writing letters of complaint to the TSX regarding the day’s thoroughly appalling market-making.

Let’s see if these overpaid jokers can get it right tomorrow, when, I suspect, the excitement will be regarding BAM Flambé.

Another good day today, although not exceptional. Very good crossing volume in some of the near-term Operating Retractibles.

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

In one of the year’s easier calls, BCE issues skyrocketted today … now, if only I’d known that while Friday’s market was still trading! As suspected, the broader market followed. Volume was OK, but nothing special … my suspicion is that the Swoon in June was largely retail window dressing (based on the the strange price behaviour and relatively low volume) and that institutional players – such as they are – are looking at all this kerfuffle with an air of bemusement.

But what do I know?

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

Stop presses! Sit down! Have some smelling salts! The PerpetualDiscount index was actually up today (up almost 42bp, in fact), ending a string of twelve consecutive losses from June 4 to June 19, inclusive. Those twelve consecutive losses took the PerpetualDiscount index down 5.80%.

Average pre-tax bid-YTW for PerpetualDiscounts is now 6.07%, interest-equivalent 8.50%, long corporates .. oh, call it 6.17% and 30-year Canadas at 4.15%.

Work out the spreads and update the graphs yourselves, ya bums! What am I, your maid?

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

Accrued Interest has posted a good piece about CDS clearing and exposures; I have added the link to my discussion of his prior post on the issue.

OSFI has, essentially, banned “Global Market Disruption” lines of credit, which have been much discussed since non-bank ABCP sponsors found out just how little liquidity they actually provided. Banned? Well, not in so many words. But the credit conversion factor is now the same as a guaranteed line; therefore, the cost to the bank (in terms of capital when the line’s undrawn) will be the same; therefore it seems highly unlikely that anybody will ever want one. It’s an interesting issue and OSFI has included a fair bit of discussion with the advisory. I’ll try to review the rule change … soon!

Practically a return to good times today … PerpetualDiscounts were down only 40bp! Their pre-tax bid-YTW now averages 6.09%; at the standard factor of 1.4x, this is equivalent to 8.53% interest. Those feverishly updating their historical yield spread graphs will note that 30-year Canadas are now at 4.18% and long Corporates at a little over 6.10% … so call Canadas/Corporates at 195bp and preferreds/corporates at 240. This is a thoroughly bizarre market.

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

Another thoroughly appalling day for the preferred share market. The dividend yield on PerpetualDiscounts is now 6.07%, equivalent to interest of 8.50%. Long Corporates are now at about 6.15%, so the PerpetualDiscount Interest Equivalent spread to long corporates is now at a stunning 235bp, while the 30-year Canada is now at 4.15%. See Party Like It’s 1999! for an illustration of why the PDIE spread is “stunning”.

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

Again, busy!

I did come up with another rationale for the current … drop, shall we say? … and have updated the Negative Convexity? Negative Schmonvexity! post.

Today was a horrible, horrible day for preferreds, with the market down sharply (as noted by Assiduous Reader lystgl in the comments to “New Trough for Preferreds?”) on sharply increased volume.

For those keeping track, today wasn’t even the worst day this year for the PerpetualDiscount sector … that honour belongs to January 17. Hmmm … 17th both times, eh? I wonder what a technical analyst would make of that?

This drop is preferred-specific: the yield on the PerpetualDiscount index today was 6.00%, equivalent to 8.40% interest using a 1.4x conversion factor. Long Corporates continue to yield a shade under 6.2%; the 220bp spread is out of the 190-210bp range that has been recently established.

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

The OSFI/ABCP post has been updated with news of remarks by Supt. Dixon to the Commons Finance Committee.

Another very – very – poor day in the market. Volume, though, was relatively light. Now, this is getting a whole lot closer to Technical Analysis than I like, but this does lend some credence to my speculation that this downdraft is retail-driven. Whether or not that actually means anything in terms of future performance is, of course, another matter. entirely.

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

No time! Those whose days are incomplete without PrefBlog’s commentary are urged to send me Deep Thoughts that I can pass off as my own.

Yet another crummy day in the preferred share market and yet again the SunLife issues got hammered.

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