Category: Market Action

The week ended with another thumping for US Equities and Canadian stocks went along for the ride, notably

BCE Inc., target of the largest buyout, retreated after Citi Investment Research cut its recommendation, citing growing risks to its financing.

One analyst puts the odds of a Telus bid at 25% or less, but the long term track record of this analyst was not disclosed.

Some say that a turning point in capital markets has definitely been reached but there is some doubt that Wall Street’s problems will reach Main Street. The US economy has, apparently, been growing at a fair clip but the nattering nabobs of negativism have their own interpretation of the underlying trends. All the uncertainty meant that Treasuries did superbly, while Canadas followed … mostly. Even New York City, almost bankrupt in 1975, was able to get in on the action and scoop up some financing that ain’t going into corporates no more.  

And … I must apologize … the tables and commentary that have something of direct relevance to actual preferred shares will have to wait. HIMIPref™ has been updated, but I have dinner scheduled with a dear friend, whom I intend to regale with stories about how I don’t own any junk bonds.

I will update everything tomorrow!

Update, 2007-07-29: OK, maybe it wasn’t the very next day. But it was a most enjoyable dinner! In the meantime, the National Post has reported that:

“We have our financing,” Claude Lamoureax, president and CEO of Teachers’ said yesterday. “Clearly right now, the spreads have widened but that’s why you pay the bank huge fees to take the risks.”
…
As Mr. Lamoureax said, in leveraged buyouts the banks “take the risks” and right now the investment banks are temporarily swallowing the billions of dollars worth of debt deals for Chrysler and Alliance.

As for whether Teachers’ bankers should be worried, Mr. Lamoureux said there are no worries with its bankers or anyone else.

“Right now, we have our financing in place. No trouble,” he said.

Either he refused to say just exactly how the financing was in place, or the reporter didn’t ask. The story doesn’t go any further than the above bland assurance.

I’ve thought the issue in the context of what a massive break-fee-loss would mean to Teachers, and come to the conclusion that I don’t know enough about the issue. It would seem to me reasonable that there might be provisions regarding financing in the consortium agreement, to the effect that, if the deal fails on financing, the loss would be borne by Teachers financial partners, Providence Equity Partners Inc. and Madison Dearborn Partners, LLC. After all, they’re the financial muscle for the deal! It may be that such a provision is why Mr. Lamoureux is so sanguine … but we will just have to sit back and wait and see! In the meantime, I highly doubt that I’ll be throwing chips down on that table!

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

The day ended, at long last, with not just a sound thumping for US Equities, but just about everybody else as well, including Canada.

Liquidity in the US Corporate markets was terrible (worse than yesterday), with marked spread-widening after yet another blown-up hedge fund, but there is some steepening developing with expectations the Fed will cut rates this year. The housing numbers are getting blamed for this in some quarters. Me, I’m not sure. There’s never just one reason. Weak (non-housing) economic news and Junk Bond Fatigue have also been blamed.

Still, at least Treasuries and Canadas had a good day, although the CAD got whacked.

More mundanely, the quarterly results from Loblaws seem to argue against any imminent reversal of the Weston downgrade. And I couldn’t resist checking the definitive BCE / Teachers’ Agreement:

6.4(9): The Purchaser acknowledges and agrees that its obtaining financing is not a condition to any of its obligations hereunder, regardless of the reasons why financing is not obtained or whether such reasons are within or beyond the control of the Purchaser. For the avoidance of doubt, if any financing referred to in this Section 6.4 is not obtained, the Purchaser will continue to be obligated to consummate the Arrangement, subject to and on the terms contemplated by this Agreement.

The PerpetualDiscount index had a nine-day winning streak snapped – but not by much, as the preferred market displayed its customary insouciance towards silly old market news. BCE issues, particularly, did quite well. The Ratchet Rate Index, comprised entirely of Bell Ratchets, kept its streak alive with ten-straight. The volume certainly wasn’t heavy today, but it wasn’t too much on the light side.

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

The day ended with not much happening in government markets, either in Canada or the US. New Zealand tightened to 8.25%. Now, there’s a central bank that’s drop dead serious about inflation!

The KKR/Boots and Chrysler financings both appear to have failed, which probably has Teachers’ feeling pretty nervous about financing the BCE takeover. BCE preferreds seem to be taking all this in stride, however, perhaps due to Desjardins’ calming words.

Of interest today was action with EPP.PR.A, which – judging by the TSX – was a fizzle. There was some pretty good volume today anyway, highlighted by Nesbitt and a series of internal crosses of issues from the GWO / PWF / IGM / POW group … is somebody placing a bet on the August 1 quarterly results announcement?

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

Equities got thumped today, both in the US and Canada on profit warnings of various kinds and weak resources.

Of greater importance to the Canadian bond markets was the retail sales number, which was amazingly strong. The expectation that this will lead the Bank of Canada to increase rates boosted the dollar and, presumably, would have whacked bonds had they not benefited from the flight from equities. As it was, bonds were flat-to-downish, underperforming Treasuries substantially, as Treasuries enjoyed the pain in the equity and junk bond market without such countervailing economic data. Higher grade debt is still thought to be insulated from the sub-prime debacle.

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

A dull day for Canadas and Treasuries, so I suppose the “Flight to Quality” theme is no longer operable. We will find out soon what the next three-day-wonder will be! The brokerage houses are claiming that there is no crisis, that everybody should stay calm and, mainly, buy whatever it is they’re selling, much to the astonishment of pundits everywhere.

Also a fairly quiet day for preferreds but, as the volume table shows, there were a fair number of decent-sized crosses. The perpetual EPP.PR.A, issued on May 25 at $25.00 and rated Pfd-3(high), hit a new low of 22.00 and closed at 21.60-00, 2×21. Ouch!

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

A good day for both Canadas and Treasuries in a day that had not so much news as the continued unfolding of the sub-prime saga.

Junk bonds continued to get hammered today, with a certain amount of leakage into investment grade bonds via financial corporations. Dramatically, credit spreads on the Tribune Co. buyout are now at +770bp [to get an idea of what that means, see the primers].

And – this should not really be a surprise – the finger-pointing has begun. The CEO of KBHome blames the Fed (or, the rapid rise in short rates controlled by the Fed, anyway), while the Fed blames sloppy investors.

I mentioned on July 18 that it would be most interesting to buy foreclosed residential properties in the US on the cheap, and this is exactly what Miami’s developers are hoping for.

The preferred market had a good day, with good volume. A noticable chunk of this volume was in selected split share issues, perhaps due to next week’s index rebalancing.

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

A very quiet day for both Treasuries and Canadas today, as commentators parsed Bernanke’s Congressional testimony and decided it was ‘steady as she goes’.

China is projected to tighten, while Brad Setser worries that the world is taking too long to adjust. China has been stimulated by exports to the US for too long!

Chrysler makes the daily summary again, this time because its finance unit is having to pay up for loans. S&P bit the bullet with another mass downgrade of sub-prime CDOs, while JPMorgan warned that worse is to come in the primary market, but the bad news has been reflected in the ABX Derivatives market.

Mulvihill announced  exchange ratios for Premium Income II today … given that the setting of these ratios was delayed, I suspect that the offering is not doing very well. We shall see, however … and if they sell enough, I’ll add it to the HIMIPref™ universe, since I like the terms of the preferreds.

BCE Prefs had another strong day today, perhaps reflecting Desjardins’ drum-pounding. The preferred share market continued to rise – slowly & haltingly, perhaps, but it is rising!

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

Both Treasuries and Canadas edged up today, as Canadian inflation wasn’t as bad as feared and US inflation didn’t scare anybody. Not Bernanke and not macroblog, anyway!

JPMorgan noted that junk is getting harder to sell and Freddy Mac agreed. Moody’s is claiming their tough-mindedness on sub-prime cost them business, which wouldn’t surprise me. How many Portfolio Managers, though, are going to lose their jobs for buying stuff not rated by Moody’s? That’s what counts.

DBRS has released a report titled “Analysis of Subprime Loan Concentration by Major Metropolitan Area and Corresponding Economic and HPA Trends”, available by emailing them. You know? If I was a smooth-talking salesman type, I’d be trying to put together a REIT at the moment, buying entire residential neighborhoods at half of last year’s prices. I’ve seen anecdotal reports of massive write-downs … and I recall, from somewhere, it is utter confusion over the recovery rate that is holding up ratings revisions of sub-prime CDO’s. Mind you, I also recall seeing … somewhere … some report in which it was claimed that banks et al. are hanging on to useless properties (in Cleveland?) for a long time, because they don’t have to book the loss until they sell the property. One way or another, though, there will be some people making good money from this mess.

BCE prefs had a good day today. It would appear that John Nagel swings a big stick! Volume was good, despite a lack of notable crosses. BMT.PR.A finally declared their dividend.

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

Treasuries outperformed Canada bonds in what is being touted as a continued flight to safety in the US market. Or maybe it was the PPI release. Who knows? Ask a priest.

Mind you, a little safety could be just what the doctor ordered down south! Bear Stearns has warned that the smaller of its two famous hedge funds is a total write-off, and the other one isn’t much better. Take this lesson to heart: just because a firm is good at selling investments doesn’t mean that they’re necessarily good at running investments.

In other sub-prime news, Moody’s is expanding its review and, presumably, hopes to have the barn door locked within three months of the horse being stolen. Chrysler is being forced to pay up for loans (about time), while a couple of brand-name brokerages have been left holding the baby as demand for junk declines.

Interesting times! Particularly if you don’t actually have an investment in the sector yourself! It should be noted that credit spreads in the Canadian preferred market are widening markedly, with Pfd-3 issues getting progressively weaker — but I’m not holding any of those, either, thank heavens. A graph of the After-Tax Pfd-3 Yield Spread for the past three-and-a-half months has been uploaded.

Volume picked up a little today, with a few good size blocks being traded.

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

Treasuries had a good day, possibly due to a projected drop in supply, but more likely a flight to quality amid sub-prime worries, or, even more likely, they just felt like going up.

Hey, if you want somebody with a bright smile to explain to you why everything that happened, happened because it had to happen, go read some other blog.

KKR cancelled a $1.4-billion European issue and Rosneft is rumoured to be doing the same. This is significant … and if this should happen to be a real, no-fooling turning point, then financing the Teachers / BCE deal could be interesting!

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