Category: Market Action

There’s a real dearth of news and informed commentary today!

The US had a bad jobs number today, but that’s about it.

Otherwise, the only thing I saw today of even passing interest was Springfield, Massachusetts, getting angry at Merrill because some sub-prime linked CDOs that they bought have gone down in price. According to Steven Syre of the Boston Globe:

City officials say Merrill Lynch, an active player in the municipal finance business, sold them securities that cities in Massachusetts aren’t legally allowed to own for reasons of safety and liquidity. What the broker actually disclosed about the nature of those investments at the time of the sale remains murky.

“We take very seriously the financial cost and the breach of public interest,” said Chris Gabrielli, the chairman of Springfield’s Finance Control Board and former gubernatorial candidate. “Our view is that Merrill Lynch has responsibility here and is accountable. We shouldn’t have to settle for less than getting the money back.”

A Merrill spokesman said Springfield officials had sought AAA-rated securities offering higher returns than they had been getting. “These investments met both those criteria, and each was reviewed, approved, and authorized by Springfield officials.”

Who knows? It is possible, I suppose, that Merrill misrepresented the investment. I consider it far more likely that a few snivel-servants with Springfield were just thrilled to pieces about being big-shot hard-nosed investment geniuses, until they got to the “taking responsibility” part. We’ll see!

An excruciatingly slow day on the preferred share market, but performance continued to be good.

There were three other index-included $25.00-equivalent issues trading over 10,000 shares today.

Here’s a switch! US ABCP outstanding actually increased last week, from USD 747.6-billion to USD 773.8-billion. It has been suggested that the market is stabilizing … but I’ll wait for a little more data, not taken at year-end in the midst of an enormous liquidity injection, before celebrating.

An article on the collapse of the Bear Stearns hedge funds provides some food for thought:

Some 90 percent of the face value of the CDOs was loaned to Bear by Merrill, as is normal in such transactions. When the prices of the funds’ CDO holdings started to fall in June, Merrill demanded that the firm increase collateral in what’s known in the debt markets as a margin call.

Bear Stearns executives pleaded for time, arguing that the forced sale of their assets would push down all CDO prices. Merrill Lynch officials brushed off the entreaty, according to people involved in the discussions.

In June, the hedge funds, run by Ralph Cioffi, sold $3.8 billion of CDOs to meet margin calls by Merrill and other lenders that were following its lead. The fire sale led to a further drop in CDO prices.

Whenever this sort of thing has happened in the past, regulators have responded by tightening margin requirements. Perhaps derivative debt should be eligible for only 15% margin; perhaps 20%. I suspect we will be hearing a lot more about this over the next while. There will be definitional problems, to be sure!

In what may well turn out to be a sign of the times, there was a US junk bond default today:

Buffets, a closely held company based in Eagan, Minnesota, failed to make the coupon payment yesterday on its 12.5 percent notes maturing in 2014, according to Matthew Lee, a customer service representative at U.S. Bank National Association in St. Paul, Minnesota, the trustee for the debt.

Buffets is at least the second company to miss an interest payment in the past week as the worst home sales market since 1981 stokes concern about a slowing economy. Tousa Inc., the Florida homebuilder that lost 99 percent of its market value in the past year, also missed interest payments on $485 million in debt, the company said in a regulatory filing yesterday.
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The 12 month dollar-weighted high-yield default rate will rise to 2.25 percent by the end of this year from 0.34 percent in December, JPMorgan Chase & Co. high-yield strategist Peter Acciavatti in New York predicted in a report dated yesterday. The rate will climb to 4 percent by year-end 2009, he forecast.

And finally, Accrued Interest reminds us of what “crisis” really means:

In my mind, a marriage in crisis is one where divorce is an imminent possibility. Not one where the couple just had a big ugly fight.
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So back to the “crisis” question. It is these speculators who are insolvent. So what we have are people who speculated in houses and lost. We have are banks who lent to the afore mentioned speculators and have lost too. Bear in mind, these banks are the ones who agreed to limited documentation of income (perhaps so the speculator could claim this would be his/her primary residence?) or minimal down payments.
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All this isn’t a crisis. Its how the credit cycle works. When credit becomes too easy, bad loans get made. People get hurt. But that’s the way of the world. You move on.

Where a crisis could develop is when the innocent are hurt just because capital becomes tight. Where a good borrower can’t get a mortgage loan. Where a solid commercial real estate project can’t roll over its bridge loan because banks are short on capital. That’s where the real crisis can get going. Foreclosures happen that didn’t need to happen, driving the price of assets lower. Lenders start taking losses on good loans, and suddenly are unwilling to lend to anyone. Investors struggle to value assets, not because of unknown losses, but because of unknown liquidity. Bids dissappear.

That’s a crisis.

Meanwhile, President Bush is contemplating fiscal stimulus. Some might say there is far too much fiscal stimulus already.

Another day of light volume and strong returns for preferreds. It should be most interesting to see whether the returns stand up next week when I assume volume will return … particularly with stocks looking sick in Japan and the US.

There were five other index-included $25.00-equivalent issues trading over 10,000 shares today.

Accrued Interest leads off with a very informative discussion of American Municipal Bond Insurance, something that is in the news lately, what with credit problems and Berkshire Hathaway’s entry to the field.

A very light day on the preferred share market, but performance was good.

There were five other index-included $25.00-equivalent issues trading over 10,000 shares today.

Hurrah! 2007 is finally over!

Strong performance from the PerpetualDiscounts again, but all this is on relatively light volume. Santa brought me exactly what I asked for.

Happy New Year! Best Wishes for 2008!

There were five other index-included $25.00-equivalent issues trading over 10,000 shares today.

Well, the same things that caused me to drastically foreshorten yesterday’s report are causing me to chop today’s report to the bone!

With any luck, 2008 will be a bit more consistent in terms of post lengths.

The S&P/TSX Preferred Share Index gained again today and, barring a catastrophic end to the trading year, will be up on the month. PerpetualDiscounts performed superbly, but remain below the recent peak level of 930.2 reached on December 11.

Sorry, folks! What with month-end, year-end and a chess tournament, I am just plain out of time!

There was good performance in the market today, but volumes were markedly lower now that tax-loss-selling season is over. On a cheery note, the S&P/TSX Preferred Share Index,  as proxied by CPD, is now in the black for the month!

I should be able to update tomorrow.

Update, 2007-12-28:

There were thirty-six other index-included $25.00-equivalent issues trading over 10,000 shares today.

Today’s report will be somewhat delayed, I’m afraid … it might even have to wait until Monday.

Update

I’m sorry. I had witty & trenchant analysis planned, the secrets of the universe unveiled and was even going to tell you what the price of oil will be exactly one year hence … but now I’ve run out of time. So all you’re going to get is the links:

Yet More Trouble for Bear?

Lacker: Fed Auction’s Effect Unclear

CEPR Policy Insight #18 (there will be a separate post devoted to this one … tomorrow?)

MBIA Tumbles on $8.1 Billion of CDOs, Fitch Warning

So How Did Morgan Stanley Lose That $9.4  Billion

Lessons from the North Atlantic Financial Crisis

SunTrust Injects $1.4 Billion to Protect Money Funds

Merrill’s Writedowns to Top $8 Billion, Analysts Say

The alliance between China’s (nominally) communist government and Wall Street deepens …

A Proposal for Reviving the Credit Markets

Experts Weigh in on Merits of Fiscal Stimulus

Whoosh! There’s a day and a half, for anybody keeping track! Preferreds were down again on the day, on heavy volume. The CIBC issues were extremely badly hurt, presumably on news of their subprime/ACA problems discussed yesterday, which may have been exacerbated by tax loss selling.

There’s some interesting timing issues with the CIBC issues … the last day for tax-loss selling is December 24, and that is their ex-date for the current dividend … tomorrow, December 21, is their last cum-date. So … if you have such an issue you really want to sell, when do you sell it? Decisions, decisions …

Remember the discussion of Weston yield spreads that included a note that the CM.PR.? issues were trading with a yield spread of 11bp? That’s way, way, way out of date now. Looking solely at the bid-YTW of their PerpetualDiscount issues, I make the high yield 6.30% (CM.PR.I) and the low yield 5.91% (CM.PR.D)

There were fifty-two other index-included $25.00-equivalent issues trading over 10,000 shares today.

Today’s big news was the downgrade of ACA Financial by S&P, the subject of speculation on December 13. According to the S&P Press release:

The rating actions were prompted by worsening expectations for the performance of insured nonprime residential mortgage backed securities and CDOs of asset backed securities. Based upon current stress test analysis, the details of which are being published simultaneously with this release, the affected companies may experience claims and/or capital consumptive negative rating transitions such that their capital resources may no longer be sufficient at their respective rating levels. Another consideration in the analysis, if there is a capital shortfall, is the magnitude of the shortfall and the extent to which the company has raised or is planning to raise new capital, and the viability of that capital plan.
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Standard & Poor’s will host a teleconference today at 3 p.m. EST.
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Replay Numbers:
US/Canada: 1-866-455-0459
All Others: 1-203-369-1259
Replay will expire on Jan. 16, 2008

CIBC had this to say:

Following Standard and Poor’s announcement today that it had reduced the credit rating of ACA Financial Guaranty Corp. from “A” to “CCC”, CIBC confirmed that ACA is a hedge counterparty to CIBC in respect
of approximately U.S. $3.5 billion of its U.S. subprime real estate exposure.

    It is not known whether ACA will continue as a viable counterparty to CIBC. Although CIBC believes it is premature to predict the outcome, CIBC believes there is a reasonably high probability that it will incur a large charge in its financial results for the First Quarter ending January 31, 2008.

    As CIBC disclosed on page 52 of its Investor Presentation dated December 6, 2007, the mark of the hedge protection from the “A-rated” counterparty (ACA) as at October 31, 2007 was U.S. $1.71 billion. As at November 30, 2007, this mark was US$2.0 billion. If the charge in the First Quarter were to be U.S. $2.0 billion (US$1.3 billion after tax) CIBC currently projects its Tier 1 capital ratio to remain in excess of 9% as at January 31, 2008.

Exciting times for CIBC! I have previously examined their capitalization and later compared it to the other Canadian banks.

Morgan Stanley had another example of sub-prime related write-offs:

Morgan Stanley wrote down its subprime-infected mortgage holdings by a greater-than-expected $9.4 billion and received a $5 billion cash infusion from state- controlled China Investment Corp.

To put those numbers into perspective, have a look at the actual quarterly report:

Total capital as of November 30, 2007 was $193.7 billion, including $36.1 billion of common shareholders’ equity, preferred equity and junior subordinated debt issued to capital trusts. Book value per common share was $28.56, based on 1.1 billion shares outstanding.

The $36.1-billion figure is what would usually be referred to a “equity capital”, the rest is simply long-term subordinated debt.

I mentioned Bloomberg’s story about the antics at a Californian sub-prime origination office yesterday. They continue the series today with the story of Hayman Capital Partners that bet against them and made a fortune. Fascinating stuff!

Funny day today. Trading continued fast and furious – next Monday, Dec. 24, is the last day for tax loss selling – and there were some very strange moves. The market was down again – with the suddenly dubious Canadian Imperial Bank of Commerce greatly over-represented in the losers’ list.

There were forty-seven other index-included $25.00-equivalent issues trading over 10,000 shares today.