Category: Market Action

Worry over the fate of the USD continues to be a theme in the markets, and Menzie Chinn of Econbrowser has posted a review of the issues. I will admit, this post is notable mainly for its links to definitions and prior reviews of the issue, but these are good links. The 2005 post includes a link to a paper showing the futility of forecasting: it’s always gratifying to get some agreement with one’s prejudices! The examination of the interest-rate parity predictions are interesting, if only because I have seen it claimed – by a sophisticated retail investor – that carry trades are intrinsically unsound because interest-rate parity is guaranteed. Well … not in this world!

Accrued Interest reviewed the jobs numbers on the weekend, with a view to discussing the investment difference between “lawyers” and “detectives” – the former seeking evidence to support a particular view; the latter (greatly favoured) seeking to examine evidence to form a view.

What’s a good name for those, such as myself, who feel that the process is pointless because natural chaos will destroy any prediction as soon as it’s made? Weatherman, perhaps? I’m not going to predict a hurricane, but I will say that if there is a hurricane, you should have a good solid house; but if it’s sunny and pleasant, you’ll want nice windows; so build your house with the objective of surviving hurricanes with not too much damage while being able to enjoy the sunny times.

Perhaps this is stretching a metaphor too far! The markets can be outperformed, but you have to get your hands dirty and examine a wide variety of scenarios. And – assuming you are a rational investor and avoid the One Big Bet school of thought – you’re not going to double your money while everyone else goes broke, either! Ideally, you’ll outperform by a constant, small-but-worthwhile amount, irregardless of economic conditions.

The Northern Rock Saga continues:

Northern Rock, based in Newcastle, England, said in a statement today that money deposited after Sept. 19 will now be covered by the Bank of England, the U.K. Treasury and Financial Services Authority. The authorities previously only protected deposits made before then.

“This may make Northern Rock easier to sell,” said Philip Shaw, chief European economist at Investec Bank in London.
…
The case has been “damaging” for the reputation of the U.K., Financial Services Authority Chairman Callum McCarthy told the Treasury Select Committee of lawmakers today. Still, it was “impossible” to predict closure of the markets both for securitization and for short-term repurchase agreements, he said.

“We didn’t identify the probability of that happening,” McCarthy said. “No regulator anywhere around the world succeeded in predicting that.”

Sion Simon, a Labour Party member of the committee, said he had heard that relations between the FSA and the Bank of England were “poisonous” and compared McCarthy to a boxer.

“You are the Sugar Ray Leonard of the financial-services sector. You are a world-class ducker and diver.” Simon told McCarthy. “There was a run on the bank, the nation was a global laughing stock, and you say the provisions worked?”

Instead of saying ‘We didn’t predict it and neither did anybody else’, McCarthy should have blamed the credit rating agencies. That technique is working beautifully in North America!

Speaking of credit rating agencies, I see in the Globe today that State Street (among other Money-Market-Fund sponsors) is seeing a big uptick in business:

Executives at many small to mid-sized companies across Canada woke up in mid-August to find a portion of their supposedly liquid cash holdings were frozen, as a $30-billion segment of the asset-backed commercial paper market (ABCP) collapsed. Airline Transat A.T. Inc., for example, has $154-million of its $340-million in cash reserves stuck in a holding pattern.

“Corporate treasurers suddenly became aware that they face risks in their cash holdings, and they’re rushing to deal with these risks,” said Gregory Chrispin, president of State Street’s Canadian arm and former treasurer of Export Development Canada.

It is nice to see that some companies are taking my advice to stick to what they’re good at and pay for portfolio management. Whether or not there will be a surge of CFO replacements to accompany the sudden discovery that treasury departments have been speculating with shareholder assets remains to be seen! 

Treasuries drifted downwards, attributed to a ‘no-recession’ indication by the Fed, though today’s retail sales number provided no indication of a huge economic boom. Canadas fell, as a strong housing number decreased chances for a rate cut. US equities rose (no recession!) while Canadian equities were pretty quiet.

The news in the preferred share market today was that the TD New Issue and the closing of the BMO new issue combined to drive the PerpetualDiscount index to a new low. The prior low (since the temporary index was started, as of 2006-6-30, that is) was set on June 12, 2007. The four main indices since then have returned:

If we look at returns for CPD …

So, speculating on price movements in prefs has not been a jolly time for the past four months! Fortunately, the investments are paying the same income as they have done in the past, so income – which is the entire reason for investing in prefs, right? – is unaffected. Market timers may wish to kick themselves for getting it wrong, but an honest market timer is always kicking himself anyway, so there’s not much difference there.

It was nice to see some good volume in the pref market today, with a few good-sized crosses courtesy of Scotia.

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

Remember last month’s US jobs number? Don’t. It’s been revised upwards with an entirely solid number reported for September, which has been enthusiastically greeted by most economists, ( including JDH of Econbrowser) although Noriel Roubini sees the devil in the details. There was much the same thing in Canada. So, basically, bad news for bonds.

But in a reminder that, yes, sub-prime is really still a concern, both Merrill Lynch and Washington Mutual took big housing-related write-downs amidst reports of fire-sale liquidations and horrifying lack of quality in 2007-vintage sub-prime loans. Concern, yes; end of the world, no. For sure, $150-billion in sub-prime losses ($50-billion? $100-billion?) sounds like a very big number, but I’ll just take a moment to remind readers of Nortel’s market cap in 2000: almost $400-billion. So by all means, worry. But don’t try to tell me that this is an unprecedented disaster requiring extensive regulation. Accrued Interest has taken a look at contagion in non-RMBS asset-backed paper.

There’s entirely too much speculation that the credit crunch is over. Accrued Interest is concerned that the pendulum, having swung too far one way, will promply over-correct in the other direction. Panic, ecstasy … just another day in the markets. Those who wish to profit from panic without having access to institutional markets might wish to take a look at DG.UN, which was mentioned here on August 28 when it suspended redemptions (ABCP financing dried up). According to their September 26 Press Release:

its net asset value (“NAV”) per unit as at August 31, 2007 was $7.92 based on an indicative price received from a large international bank (the “Bank”) as of August 28, 2007.
…
The NAV on a particular date is equal to the aggregate value of the assets of the Trust, less the aggregate value of its liabilities (calculated in conformity with Generally Accepted Accounting Principles (GAAP)). The NAV does not reflect any eventual write-down resulting from the interruption of payments that MMAI is required to make to Global DIGIT under the swaps, nor does it reflect any potential impairment in the value of the assets of Global DIGIT from any eventual restructuring of MMAI debts, as it not possible at present to determine if, when and to what extent such payments to Global DIGIT under the swaps will resume or the effect of any eventual restructuring of any such MMAI debts.

So … there’s some warnings there and there could be legal problems and all sorts of things. But from what I could make out with a VERY brief look, the underlying credit was fine – it’s just liquidity that causes concern … and it’s quoted today on the TSX at 2.80-00, 8×23; so it seems to me it’s worth closer inspection by those willing to rip apart the books and make a few ‘phone calls prior to a decision.

The Economist has published a commentary on bank liquidity that echoes Dodge’s comments on the seemingly very high level of liquidity guarantees given by the banks. I suggest that one thing that be considered is a sliding scale of capital charges for liquidity guarantees: the charge is now a 10% CCF across the board; perhaps something like … “10% on the first capital-equivalent, 15% on the next, 20%…” might permit the market to operate efficiently while keeping the number of lines under control.

Brad Setser continues to worry about the USD, which has been a topic of some concern lately.

I added an ad to the recent reader inquiry; you don’t really need to do it all yourselves, you know! I’m willing to help!

The jobs numbers crushed bonds in both the US and Canada today.

It was an interesting day for prefs! The yield on PerpetualPremiums is finally back below PerpetualDiscounts, which is only sensible given the greater interest rate risk on the latter. Operating Retractibles and SplitShares have been virtually immune to the recent declines in perpetuals … this makes sense up to a point, but only up to that point.

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

There was a report today of another sub-prime winner:

Harbinger Capital Partners, the hedge fund firm run by former Barclays Capital trader Philip Falcone, generated returns of more than 65 percent this year, helped by bets against subprime-mortgage bonds and gains on commodities.Harbinger’s $2.5 billion Special Situations fund increased 9.9 percent last month and more than 100 percent in 2007, said two of the firm’s investors. The $11 billion Harbinger Capital Partners fund rose 5.4 percent last month and 65 percent this year.

Lucky or smart? Does it matter?

The Fed released Commercial Paper Outstandings today; it would appear the situation is normalizing rapidly. ABCP outstanding was down about $6-billion on the week, a nice chunk of change but relatively small in the context of the $906-billion total outstanding. Quality spreads, while still high compared to the last six years, are in decline.

The following posts were either written or updated today:

• Whoosh! Market Adjustment Affects Fair Value of New Issues
• Early Commentary on Canadian ABCP
• Fed Regulation of US ABCP Liquidity Guarantees
• Query from a Reader: Time to Buy?

… which should go a long way towards explaining the brevity of today’s round-up!

There are some very thoughtful essays regarding the Northern Rock bail-out in the WSG Economics Blog and the Economist. There’s another link to an Economist article about the funding gap in British banking … there is an increased reliance on commercial paper, as opposed to deposits, to fund bank loans:

 

Meanwhile, the preferred share market showed a little stability today. There were some rather violent individual moves, but most of these were reversals of previous silliness.

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

The latest passion on the Street is telling everybody how lousy everything is! PIMCO & TIAA-CREF hate the market, Greenspan hates the market, Credit Suisse hates the market … there’s no shortage. But it takes two to make a market! James Hamilton at Econbrowser takes a look at recent indicators and points out that – so far, anyway – the problems in the US housing market haven’t spread to other areas of the US economy. So take your choice!

The BIS Quarterly Review has a good review of the credit crunch.

I’ve updated the post about the Globe’s reporting of Dickson’s speech with a link and extract from the National Post’s article, which is much more reflective of what was actually said. You almost wonder if the reporters are reporting the same speech!

Fitch Ratings has announced that it completed its review of 2006-vintage sub-prime issues:

For first- and second-lien transactions combined, Fitch has affirmed 2,228 classes with a par balance of $155.1 billion and downgraded 1,003 classes with a par balance of $18.4 billion. While Fitch’s reviewed all rating categories, downgrades were most heavily concentrated among classes originally rated ‘BBB+’ or lower. Fitch believes that those classes that have been downgraded to below-investment grade have substantial risk of principal loss. However those bonds remaining investment grade still exhibit the ability to withstand the higher projected collateral default and loss expectations without principal loss. Those classes affirmed at ‘AAA’ are able to withstand a substantial multiple of expected collateral performance without experiencing loss.

This action was gleefully reported by Bloomberg and commented upon by Joseph Mason, an associate professor at Drexel University. Mr. Mason has testified to the Subcommittee on  Capital Markets, Insurance, and Government … woo-hoo! I haven’t read his testimony thoroughly yet, but a quick skim suggests that he doesn’t like the Credit Rating Agencies very much! I’d better get cracking on my reading, because his faculty web-page pointed me to a paper on the value of recourse which has implications for bank-sponsored ABCP. Briefly, it would appear – the authors claim – that the market is implicitly assuming that there will be support for conduits even when there doesn’t need to be; this is very similar to the US mortgage GSEs and implicit ‘off-balance-sheet’ Treasury backing.

By providing recourse in cases where none is explicitly required, the sponsor demonstrates the presence of de facto recourse and therefore previously unreported contingent liabilities. The present paper examines the effects of these revelations on the sponsor. On the face of it, one might expect that revealing previously unreported contingent liabilities could heighten asymmetric information about firm conditions, resulting in poor short- and long-term stock price performance, poor long-term financial performance, and reduced proceeds from subsequent loan sales. However, we find that, conditional on being in a position where honoring implicit recourse has become necessary and conditional on actually providing that recourse, the sponsors, on average, exhibit improved short- and long-term stock price performance, improved long-term financial performance, and similar proceeds from subsequent loan sales.

This is of interest in terms of assessing market discipline and credit analysis of the banks. For example, note 5 of the 2006 BMO Financials discloses that almost CAD 80-billion of liquidity guarantees had been extended, none of which found its way into risk-weighted assets (that’s none. N-U-N. none). Given the bank’s capital of CAD 16,641-billion, reported risk-weighted assets of CAD 162,794 and a CCF of 10%, this would not make a huge difference to the tier 1 capital ratio. But – given recent experience – is the CCF of 10% high enough? Eighty-billion landing suddenly on their balance sheet might give them collywobbles – and Rule #1 states that Everything Bad Happens at the Same Time.

Market discipline is something of a worry, despite the investment industry’s constant reiteration that we’re such a bunch of tough guys. However, Beloved Leader And Economic Genius for Life Stephen Harper is taking care of an oversight, and reminding investors that they are stupid:

Sources told The Canadian Press on Tuesday that Industry Minister Jim Prentice is concerned about foreign state-owned entities snapping up Canadian resource firms.

Among those currently being reviewed, sources said, is the PrimeWest acquisition, part of TAQA’s stated goal of dramatically growing its presence in Canada’s energy sector.

At a late Wednesday news conference in Ottawa, Prime Minister Stephen Harper said his government will address the lack of a national security test for foreign takeovers of Canadian companies.

It’s about time this country was protected from foreigners offering enormous bundles of cash! If such sums ever reach Canadian hands, we’ll just blow it on beer and prostitutes.

Volume picked up today, but perpetuals continued their slide. I confess that I find this continued weakness somewhat odd … but market volatility brings trading opportunities, and the passage of time brings dividends, so my curiosity is somewhat muted.

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

The private equity bid for Sallie Mae has been revised – the much lower price is attributed to cuts in the US Federal subsidy of student loans. Accrued Interest called it right! The idea that the bidders believe they’ll be able to finance a $20-billion takeover is a good sign for the credit markets. It looks as if the target company will not agree instantly to the proposed price reduction.

There’s more than one takeover in the news as cross-border shopping is taking off … TD is buying a US bank for $8.5-billion, doubling the size of their US operation. RBC has spent $2.2-billion on a Trinidadian bank. Even the Montreal Exchange is increasing its stake in the Boston Options Exchange. Despite this, the ‘Hollowing-Out Crowd’ is flexing its muscles in the apparent belief that Canadians are too stupid to charge a good price for assets and too lazy to put cash to good use once a sale closes.

Despite periodic chatter that the ‘market believes the credit crunch is over’, I’ll stick to my guns and say we haven’t seen the worst yet. Interest rate adjustments take some time to percolate through the system – and there was bad news from US housing today, with liquidity drying up a lot. However, in another sign that the market is reacting rationally to changed circumstances, there are rumours that:

Goldman Sachs Group Inc. may buy Litton Loan Servicing LP, the Houston-based servicer of U.S. subprime mortgages, said people with knowledge of the matter.
…
Goldman may be betting it can increase the value of mortgage assets by reworking loan terms to make it easier for borrowers to pay their debt, said Terry Couto, a partner at Newbold Advisors, a mortgage-consulting firm.

Buying a servicing business would allow the owners “to go out and buy distressed loan portfolios, or work out what they already own,” Couto said.

Don’t take the brevity of this post as a sign I am ignoring you! The following posts are new today:

• HIMIPref™ Index Performance, September 2007
• MAPF Portfolio Composition : September 28, 2007
• What Dickson REALLY said about DBRS / ABCP

Additionally, I added some new information to MAPF Performance : September, 2007 and the “fair price” of the two new issues. So read all that stuff instead.

Overall performance in the preferred share market was mixed, enlivened somewhat by the slowing, but never-the-less continuing decline in the PerpetualDiscount index. It is now down 3.89% from its value on September 24, and not much above the recent worst level of 943.3 reached on June 12.

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

Month-end scheduling is still a problem! I’m not going to be reporting much today, but those desperate for reading material can look at my commentary on the Blinder Op-Ed, Changes in the HIMIPref™ Indices, MAPF Performance, an updated commentary on the new issues or a note on After-tax Yield Equivalency, all of which are new since last time.

And I did the tables for September 28, too!

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

The credit markets have renormalized sufficiently that third-quarter issuance was normal, as a lot of catch-up was done following the Fed easing on September 18. Of particular interest this week was a 10-year Bear Stearns issue: they paid up to get it done, 187.5bp over Treasuries, but USD 2.5-billion that won’t have to be refinanced for a while should do a lot to ease any fears their clients – they do a lot of prime brokerage for hedge funds – may have regarding liquidity.

And it looks like the banks and the vultures are close to agreement on prices:

Investment groups such as Los Angeles-based Oaktree Capital, which oversees $47 billion, and BlackRock in New York see a chance to profit because banks are stuck with loans they made before demand for below-investment-grade debt dried up in the past three months.

The mortgage market is still in pretty rough shape according to Mortgage Insurance underwriters:

The number of PrivateMI applications received in August by MICA members was 206,445 or 14.3% more than the 180,561 received in July. The dollar volume of primary insurance written on newly originated 1-to-4 family conventional mortgage loans totaled $27,257.3 million in August, a 2.6% increase from the previous month’s $26,573.1 million. Traditional primary insurance totaled $23,793.9 million and bulk primary insurance totaled $3,463.4 million in August. In that same month, primary insurance in-force totaled $757,333.3 million. MICA members reported 33,811 cures and 58,441 defaults during August.

And in late new … a US Thrift has failed!

NetBank Inc., an online bank with US$2.5 billion in assets, was shut down by the U.S. government on Friday because of an excessive level of mortgage defaults.
…
The FDIC said Friday that $1.5 billion of NetBank’s insured deposits will be assumed by ING Bank, also a major online bank that is part of Dutch financial giant ING Groep NV. ING will pay $14 million for the deposits and receive 104,000 new customers.
…
The FDIC insures bank deposits of up to $100,000.

NetBank had $109 million in deposit accounts that exceeded the FDIC limit. Those customers will become creditors in NetBank’s receivership, the FDIC said.

According to their most recent financial statements they had a Tier 1 ratio of 4.83% at Dec 31/06 and a total capital ratio of 9.07%, although these are listed as “estimated”. Shareholders’ equity at that time was $4.32/share after a 2006 loss of $1.86/share. They were attempting to jettison all activities except mortgage servicing but didn’t make it.

And that’s it for me! Sorry to leave you all in the lurch again … but such is life. I will post the daily market action … later. Let’s just say that today was not one of the market’s biggest up days and leave it at that, shall we?

Update, 2007-10-01

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

Month-end woes have commenced and there will not be much commentary today. I’ll just have to refer loyal readers to my posts about the new BMO 5.25% Perp and the HIMIPref™ Indices for September 2001, as well as Moody’s Senate Committee testimony and S&P’s testimony. And besides, I don’t feel very productive.

But I’ll just take a quick moment to point out that US ABCP Outstanding dropped by another USD 17-billion in the past week – the rate of decrease is declining, but it is quite clear that delevering (or, perhaps, transfer to bank lines) is continuing.

The preferred share market had a lousy day, but productivity here at PrefBlog is so abysmal that you’re going to have to wait – until tomorrow, soonest, maybe later – for firm numbers. I note that the Claymore ETF is down a nickel on the day, or about 27bp.

I’ll do the volume table, but that’s it!

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

Update 2007-09-28:

Whoosh! The perpetualDiscount index is now at its lowest level since the trough of mid-June and has re-priced itself so that it is now even-yield with the recent new issues!

Manor & Mendelson, co-founders of Portus Alternative Asset Management Inc., are being charged:

with 12 counts of fraud, money laundering, and possession of property obtained by crime on Wednesday, the result of a lengthy international investigation.

It has been quite some time since I saw Boaz – I look forward to seeing him in the dock. Regardless of guilt or innocence of these particular charges, he ran away from 26,000 customers, 100 employees, and me. That’s not cricket.

Inquiries into the Credit Rating Agencies has begun:

The SEC wants to know whether issuers pushed credit raters to “diverge from their stated methodologies and procedures,” Cox said in testimony prepared for the Senate Banking Committee today. In particular, the commission is “examining” whether firms were “unduly influenced by issuers and underwriters,” he said.

I have posted further detail of the hearings and will continue to plough through the testimony. Alex Cukierman has written an essay on VoxEU regarding central bank independence, which may possibly be a move in the Trichet / Sarkozy game. And this game is just simply a part of the markets / politicians tournament, just like the credit ratings agency investigations. I am attempting to form a troupe of attractive Swedish cheerleaders to encourage the Markets faction … if you qualify, drop me a line!

In somewhat related news, Larry Summers has (quite correctly) warned against giving the Feds too many hats to wear.

“I think it’s clear that when you vest regulation for consumer protection with agencies like the Federal Reserve whose primary mandate is the health of the financial system or the health of the lenders, you are going to get insufficient vigilance with respect to consumer protection,” he said during a panel discussion for the Brookings Institution’s Hamilton Project.

The next US jobs number, due a week Friday, will be closely watched – especially as there are some concerns that the last one might have been distorted:

Many economists suspect the drop in August payrolls was exaggerated by a fluky fall in local government payrolls, and new data from the Bureau of Labor Statistics supports that.

On Tuesday the BLS released state payroll data for August. If you sum up the changes across the 50 states and the District of Columbia, the total rose 159,000, compared to the decline of 4,000 in the national data.

With all the worries in the High-Yield market and concerns over the stability of the banking system,  yesterday’s news release regarding large loans syndicated in the US was a good sign.

The volume of Shared National Credits (SNC) rose by 21% in 2006, the fastest pace since 1998, reflecting, in part, significant merger and acquisition lending, according to the SNC² review results released today by federal bank and thrift regulators.
…
Criticized commitments rose to $114 billion, but still remain less than half of their peak dollar level in 2002. Criticized credits represent a modest 5.0 percent of total commitments, about the same rate experienced over the past three SNC reviews.

Which is not to say, of course, that everything is unfolding as one might have thought six months ago. It looks like the Sallie Mae takeover will not proceed as originally planned, if at all:

SLM Corp. said a group led by J.C. Flowers & Co. won’t complete the $25.3 billion purchase of the largest U.S. student loan company. The group said it’s open to negotiation.

The group doesn’t expect to complete the $60-a-share acquisition, Reston, Virginia-based SLM, known as Sallie Mae, said today in a statement. Under an agreement announced in April, SLM was to be sold for $60 a share to an entity 50.2 percent- owned by Flowers, with JPMorgan Chase & Co. and Bank of America Corp. each holding 24.9 percent.

Shake-ups in the Very Big Brokerage segment are coming! The Chinese brokerage, Citic, is now number eight globally, although that’s with rankings by market capitalization and:

The S&P 500’s measure of seven U.S. securities firms is valued at 8.8 times estimated profit, about a quarter of the 38 times for their four listed Chinese peers. Citic trades at 34 times estimated earnings, compared with 10 times profit for Bear Stearns, 7.9 times for Morgan Stanley, and Lehman’s 8 times. Haitong Securities trades at 52 times estimated profit, Hong Yuan is at 39 times, while Northeast Securities is at 28 times profit.

Still, it’s not too long since no such qualification would have been necessary. And it looks like Warren Buffet, saviour of Salomon, is sniffing around Bear Stearns:

Bank of America Corp., Wachovia Corp., and two Chinese companies, Citic Group and China Construction Bank Corp., also are among the potential bidders, the New York Times reported, citing unidentified sources.

I can just imagine the consternation if a Chinese firm takes over an iconic trader like the Bear – particularly given concern about the Chinese government’s commitment to the free flow of information. But then, the big brokerages have had a few problems recently:

Merrill Lynch & Co., the third biggest U.S. securities firm, may record losses of as much as $4 billion on fixed-income assets, resulting in the lowest quarterly earnings in almost six years, Goldman Sachs Group Inc. analyst William Tanona said.

And, in late news, it was announced that Canada’s getting into the act:

Australian investment bank Macquarie Bank Ltd will buy Canadian investment and brokerage firm Orion Financial Ltd for about C$147 million ($146 million) in cash and stock.

Menzie Chinn of Econbrowser notes that the latest dust-up in American politics is over a relatively picayune $5-billion for children’s health; suggesting there are other exposures that have been recklessly undertaken in the past five years. It is clear that some hard measures will need to be taken if the dollar is to retain value, a matter that Accrued Interest notes is of increasing concern. I’m just happy that the GAO is now referring to the decline of the Roman Empire as opposed to the fall of the Roman Republic as a metaphor. If we’re going to decline and fall all over the place, let’s at least get the metaphors right!

US Equities had a good day, with financials leading the way – attributed to the idea that Warren Buffett might possibly like the sector.

If it turns out that the sector does poorly, will there be a Senate Inquiry?

Tech stocks led Canadian equities up a bit.

Treasuries did almost nothing, but did it while attracting lots of bids to the quarterly refunding (it was the two-year today). One has to feel sorry for a reporter so abjectly desperate to make things sound interesting that she writes:

The benchmark 10-year note’s yield rose almost 1 basis point to 4.63

The only thing worse is having to quote such a report! Canadas were weak, but nothing out of the ordinary.

The preferred share market normalized a bit after yesterday’s repricing, but the PerpetualDiscount sector continued to fall. Volume returned to the light-but-still-reasonable levels that have been in effect all month.

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

Today’s word is confidence. Sadly, it’s only a word:

Consumer confidence slumped to the lowest level in almost two years and home sales weakened, threatening U.S. household spending and bolstering the case for the Federal Reserve to keep cutting interest rates.

The Conference Board’s index of consumer confidence fell more than forecast in September, to 99.8 from 105.6.

The consequences of extreme lack of confidence are currently illustrated by the continuing Northern Rock saga, in which some possible bidders are thought to think it’s worth more dead than alive:

Former Goldman banker Chris Flowers may join the Cerberus Capital Management LP and Citadel Investment Group LLC hedge funds in splitting up Northern Rock, the Sunday Telegraph reported Sept. 23, citing an unidentified person familiar with the proposal.

A Northern Rock bail-out might cause some embarrassment with UK regulators :

The U.K.’s Financial Services Compensation Scheme has 4.4 million pounds to protect deposits, compared with $49 billion at a similar fund in the U.S., the London-based Independent reported today, without saying where it got the information.

Even that, though, is a huge bankroll compared to what we have in Canada: $1.4-billion as of 2006-3-31. The 2006 report is the one relevant to the 2007 Annual Public Meeting. Call the papers! I want to revise my confidence number!

The WSJ republished the IMF’s risk diagram, which is cool enough to be worth posting:

The further from the centre, the riskier the axis.

The S&P/Case-Shiller US Housing Price Indices were released today and flesh out the anecdotal descriptions of how bad the US market is:

10-City Composite was down 4.5% versus July of 2006, while the 20-City Composite was down 3.9% over the same time period.

This is the first significant yoy decline in these indices since the recession of Bush the Elder; the worst three cities for housing in the past year have been Detroit (-9.7%); Tampa (-8.8%); and San Diego (-7.8%). It’s Detroit that looks really ugly: the index level, set to a base of 100 in January 2000, is only 111.3 in July 2007, implying an annualized rate of return of less than 1.5%. So much for housing as a long term investment, in Detroit, anyway! For those who look at the detailed data and want a comparison, US Inflation data is available from the Bureau of Labour Labor Statistics: The Jan 2000 “All items less food and energy” index (US City Average, Not Seasonally Adjusted) was 100.3; July 2007 is 115.1, implying the average Case-Shiller index should be about 114.7 to stay even.

Since the 10-city composite is actually 215.9 and the 20-city composite is 198.4, there are two ways of looking at it: (i) What are those greedy Americans complaining about?, or (ii) Wow, they’ve got a lot further to fall. JDH at Econbrowser discusses the matter and worries about repercussions in the financial markets. If he’s not gloomy enough for your tastes, Dear Reader, try Nouriel Roubini:

So as JP Morgan rightly put it there is “no sign of a floor for housing”. The housing recession will continue throughout 2008 and the fall in home prices will continue into 2009 before any bottom is reached.

As an aside, the WSJ has highlighted some research by the Atlanta Fed showing that home ownership in the States increased from 64% in 1994 to 69% in 2005. The rate had been static from the mid-sixties to 1994.

Speaking of the CPI, a Bloomberg columnist has produced a column pandering to the ‘CPI Lie’ crowd. It’s certainly a pleasant change to see some actual meat on the bones of the slogan! He states, for instance:

Medical expenses are given short shrift as well. It wasn’t that long ago when employers could cover almost all of an employee’s health-care bills.

Now workers are shelling out an average of $3,281 from their paychecks for family medical coverage, according to the Kaiser Family Foundation, a non-profit organization based in Menlo Park, California. The average premium for a family policy is more than $12,000 annually.

So why is this a measure of inflation? It looks more like a cut in salary (via reduction in benefits) to me … which may come to the same thing to somebody attempting to maintain a standard of living with the same work, but should not be mis-labelled.

Willem Buiter took a break from writing for VoxEU to post to his own blog, criticizing Trichet for rising to Sarkozy’s bait. Buiter is quite right; Trichet should retain his dignity and leave the criticism of Sarkozy to me!

US equities were flat, with a few high-profile drops due to earnings-forecast revisions being greatly overemphasized by the media. Canadian equities were very slightly up, with a few advances desperately siezed on by reporters in dire need of something to report.

Treasuries had a good day, with predictions of further Fed cuts bringing some more highly-desirable term spread into the curve:

The difference in yield, or spread, between 10- and two-year yields was 63 basis points today, the widest since April 2005.

Canadas did nothing much.

It was an exciting day in the preferred share market today, almost certainly due to the BNS 5.25% Perp New Issue, which seems to have had the effect of repricing the entire spectrum of perpetuals. In other words, the universe has adjusted itself to the new issue, rather than the other way ’round.

Perpetuals dropped quite significantly, as perpetualDiscounts, yesterday priced to yield 5.09% suddenly dropped in price to yield 8bp more – exactly half of the distance between the universe and new issue yield, deciding 5.17% was a much better level.  The perpetualPremium index, formerly 5.13%, is now 5.29%. This figure is not only more than the new issue yield, but is more than the perpetualDiscount yield … I would normally expect discounts to yield more than premiums, to compensate for the greater – and more immediate – interest rate risk. Markets, however, sometimes don’t listen to me as well as they should.

The Claymore Preferred share ETF had a $0.35 drop in NAV today after a distribution of $0.2185. The fund offered by my firm, MAPF, did not have its most pleasant day ever recorded, but is now well ahead of CPD on the month to date. We’ll see what the last three trading days bring!

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