Category: Market Action

Whoosh!

Just when you thought you were safe …

I was most impressed today by the DG.UN suspension of redemptions, a made-in-Canada $1.4-billion whoopsee, when in comes news of S&P’s downgrade of Cheyne, a $6-billion oopsy-daisy. According to S&P’s actual release (emphasis added):

Cheyne Finance is a SIV structure managed by Cheyne Capital Management Ltd. who has responsibility for purchasing assets, managing the portfolio, and overseeing the issuance of CP and medium-term notes.
 
Current pressure on market prices and the associated recent deterioration in the net asset value (NAV) of this vehicle have reached a level where the ratings have come under pressure.
…
The portfolio is predominantly invested in real estate securitizations, and we note that the portfolio has not suffered any downgrades to these underlying assets.
 
We have been notified today that the vehicle breached its major capital loss
test and so an enforcement event has occurred. In accordance with the program documents, the portfolio manager upon consultation with the security trustee may begin an orderly liquidation of assets and by Aug. 30 it will estimate the expected proceeds from future liquidations.

Both the “Issuer Credit Rating” and the rating on the Senior Notes has been downgraded from AAA to A-[Watch Negative]. Those of you who are in furious disagreement with my defense of the ratings agencies and eager to see me with egg all over my face (which I know is practically all of you, you’re not fooling anybody) will be most pleased!

What makes this event notable is the bolded disclosure above that this event results from a decline in market prices of the underlying security, not simply an inability to roll the paper at sensible prices. I eagerly await more information regarding Euromoney’s Best CDO Manager of 2006.

The good part about these events with Cheyne is that some actual liquidation of the underlying portfolio will take place. This will lead to at least some delevering of the financial system – this calling on bank lines stuff merely transfers debt. Some equity guys will be wiped out, but that’s what equity guys are for.

There’s more ghoulish news about liquidity exposures, this time from the Times:

State Street, the American bank, has been identified as having $22 billion (£10.9 billion) of exposure to asset-backed commercial paper conduits, the off-balance sheet vehicles that have caused severe problems for rivals in recent weeks amid turmoil in credit markets.

According to regulatory filings, the Boston-based bank has credit lines to at least six conduits, which account for 17 per cent of its total assets. That proportion makes State Street the most highly exposed bank to conduits among its European and American peers.

17% of assets is a very lot. On a positive note, their most recent 10-Q filing discloses that the bank had a Tier 1 Capital ratio of 12%, which is quite good, equal to TD Bank’s ratio as of last year-end, which was the best of the big 5. Even if we divide their 12% by 1.17 to get a ballpark idea of capital adequacy in the event all their lines get called on, we’re still in excess of 10%, which is still quite reasonable. But holy smokes, that’s a lot of lines!

Meanwhile, credit card delinquencies are rising while housing prices are falling, not a great combination.

The Fed’s trying to help! More banks got an exemption allowing them to lend discount money to their broker subsidiaries and I think we can count on this sort of thing being earnestly debated at this weekend’s Jackson Hole conference.

However, I can now provide links to another panic: the Panic of ’07 (not this ’07, the last one), brought to my attention by the WSJ Economics blog, which has some interesting-sounding links to papers I haven’t yet read. If I do read them and they’re good, I’ll post again. Panics, panics panics! Collect them all at PrefBlog!

In other news, some brave Australians are putting together a $1.9-billion LBO, Brad Setser discusses a claim that sub-prime was dumped on the Chinese, jumbo mortgages have become much less available, which is hitting Californial real-estate where the average house needs a jumbo loan and European politicians are planning to do some credit-crunch grandstanding.

Given the gloomy tone of today’s post, nobody will be surprised that US Equities got hammered, mainly financials. Canadian equities got pasted as well, but here it was mainly commodity-related stocks. Treasuries steepened on a banner day with more of the same for Canadas.

Preferreds had quite a good day, ignoring the stock market and the credit concerns. But it’s always the way! No sooner do I point out what a lousy month the splitShares are having than they have a great day and make up half the difference between their returns and OpRet’s. It’s nice to see, but maybe I should just keep my mouth shut from now on.

BAM.PR.N had very high volume today, courtesy of two large blocks crossed by Scotia. I have no idea whether that’s cleaned out their inventory or not, but it’s about time we saw some big-time crosses! Volume in general picked up, which is good to see … equity refugees?

BMO.PR.G has been removed from the OpRet index because it no longer exists. It’s the end of an era … the world was different at the time of its first month-end in the index, February, 1998.

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

Another reasonably normal day, bearing in mind that we’re talking about financial markets here and the word “normal” needs to be taken with a grain of salt.

Of great interest to me (I dare not say, “Of prime interest”, for fear of being misunderstood) was the Bank of Canada’s cash management bill, $2.5-billion of one-month bills to be auctioned tomorrow morning. They had to do something! The spread between 1-month bills and one-month CP as of the 24th had widened to 137bp (out 40bp just on the week) which I find just incredible … I mentioned on the 21st that I thought a 60bp three-month Bill/BA spread was amazing.”Cash Management Bill” is simply what they’re calling it – I’m not even sure if they can call it anything else, given that it’s not part of the regular auction routine.

I suspect that all the actual cash will be pushed right back into the money supply as loans against ABCP (maybe indirectly, e.g., National finances all the ABCP it suddenly owns by repo-ing more of its Canada holdings) … but I’m sure only a few people know that for sure at this point.

Bank of Canada deputy governor Pierre Duguay stated:

“Specifically, we are asking ourselves two questions: First, how much greater is the risk to the Canadian economy now posed by developments in the U.S. economy? And second, to what extent would the re-pricing of credit risk lead to a sustained tightening of credit conditions in Canada?”

In other words, they may have to ease considerably just to keep the commercial paper market (and the rest of the corporate curve) where they want it to be. We’ll see! The money-market quality spread has, maybe, stabilized in the US.

Speaking of the US, Brad Setser continues his probing of the current account deficit, Menzie Chinn highlights risks to the US deficit projections and Stephen Cecchetti reviews the Fed reaction to the crisis. He also includes the sentence

The sub-prime crisis made it clear that the rating agencies were doing a poor job of evaluating risks in securities that were backed by sub-prime mortgages.

but does not substantiate the charge that they’re doing a poor job. But that’s another post … and doubtless many more, as actual data start to come in to replace all this guessing.

I hope nobody thinks I’m totally indifferent to the situation, or that I’m carrying a torch for the ratings agencies. It’s just that … I’m not the oldest guy in the business, not by a long shot, but I’ve been around the block. If I had a nickel for every time I’ve been told the world’s about to end (and a dime for each time it was the result of a conspiracy or massive negligence by big institutions) … I’d be too busy with my troupe of dancing girls to bother writing this blog.

A lot of hedgies are going to get wiped out and the sooner the better; a few pension funds are going to play blame the manager; credit squeezes and the sudden conversion of Money Market instruments to term debt a la Coventree may give a recessionary cast to the economy; the US may well enter a recession, since a lot of their deficit-fuelled growth in the past few years has been housing-related and there ain’t gonna be much more of that; a few real companies will probably get weak enough that they get taken over at prices that don’t make long-term shareholders very happy (like just happened to Sachsen, mentioned here on August 20); and we might even see a spectacular flame-out if a big institution’s risk-controls are found wanting  … but I’m not so sure that the solidly investment-grade tranches of sub-prime debt are as bad as they’re made out to be.

What I am sure of, is that if I was a hedgie myself, I’d be bidding … low. And telling the newspapers how awful everything is.

US Equities fell a bit, as did those in Canada. There is concern that the de facto easing will be bad for Treasuries; the Fed Fund Futures are pricing in an immediate ease to 5.00% (the current de facto rate) and another ease to the 4.75% area – and beyond – by November. Canadas had a good day, with a basically parallel shift.

Another quiet, directionless day in pref land. Split shares are getting hit this month … people appear to want direct investments in companies with recognizable names!

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

Another normal day! At this rate, I’m going to have to make notes when preparing remarks about ‘What happened in August’!

The Fed made it clear that it will accept ABCP at the discount window. This will aid in delevering the financial system since it makes it easier for the banks to buy, or to lend against, the ABCP that has been issued in an attempt to avoid the banks. The latter process is referred to as disintermediation; I’m not sure what to call the process of reversal.

In related news, two Canadian sub-prime lenders have tightened their standards, citing inability to fund the loans at a decent price.

There was good economic news in the US (especially durable goods orders) … but that was for July! Considerable uncertainty remains over how the recent events will affect the real economy.

Brad Setser speculates, based on foreign official reserves held in custody at the Fed, that private investment in emerging economies is being reduced – funds reducing risk, funds meeting margin calls.

On the other hand … US equities capped a fine week with a good gain and Canadian equities did even better. So who knows? Markets will do what markets want to do when they want to do it.

But in signs that many, anyway, are calming down after the panic the US bond curve flattened and

Benchmark 10-year notes rose as traders said corporate bond sales created demand for long-term products sold earlier as hedges.

So in general, it would appear that term is being extended (even if merely via intermediaries), which is a Good Thing. Canadas flattened a lot with the 2-10 spread moving to 12.1bp from 19.1bp.

A quiet, directionless day in pref land.

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

At last, a normal, quiet day in the summer! I had almost forgotten what those were like!

The big news, as far as I’m concerned, is the release of Fed statistics that illustrate the continued delevering of the financial system; the amount of outstanding US ABCP down over 4% on the week:

More than half of the $1.1 trillion in outstanding asset- backed paper comes due in the next 90 days, according to the Federal Reserve. Unless they find new buyers, hundreds of hedge funds and home-loan companies will be forced to sell $75 billion of debt, according to Zurich-based UBS AG, Europe’s largest bank.  

Those sales would drive down prices in a market where investors have already lost $57 billion, based on Merrill Lynch & Co.’s broadest index of floating-rate securities backed by home- equity loans. That may hurt the 38.4 million individual and institutional investors in money market funds, the biggest owners of commercial paper. Top-rated commercial paper is one of the world’s safest assets.

In Europe, the asset-backed commercial paper market is almost closed, Reynold Leegerstee, team managing director for Moody’s Investors Service, said on a conference call today.

My guess is that we’re going to see some more blow-ups, perhaps even large and exciting blow-ups. Paribas is re-opening the redemption window for the famous three funds that accellerated the panic; but there will be redemptions on the order books now for many funds and more to come when investors get their statements.

The lock-up in the ABCP markets is going to lead to exciting times (and bargains!) as financing intermediaries are forced to dump their holdings on the market for whatever they can get; such are the perils of leverage and term mismatching and the Fed’s pushing of the discount window (and other techniques, such as a lifting of the cap on Citigroup’s loans to customers via Citigroup Global Markets) is intended only to ensure that there is a market; they don’t care whether or not it’s a good and friendly market.

But so far, I’d say, so good. The damage has largely been confined not just to the financial system, as opposed to the real economy, but to hedge funds – and it is their function to absorb risk and trade it for return. It’s far too early to celebrate – assuming that the worst is over, effects won’t show up until Christmas – but right now we’re hearing of hedge fund redemptions being stopped and large financial institutions taking write-downs; we’re not learning of huge corporations bouncing their payroll cheques. But we’ll see! Things can always get worse and there’s still a lot of tension in the corporate bond market.

TD Bank released its results today and claimed that its underwriting of the BCE / Teachers deal is a really good piece of business. Well gee, if the salesman says it’s good, maybe we should all rush out and buy some, eh? There’s another one that we’ll just have wait and see about … at today’s close of 39.67, BCE common is still 7.2% below deal price, so those who are confident the deal will get done as described still have lots of chance to make some good money … at a higher yield than ABCP paper!

In other news we have another argument that it’s all Greenspan’s fault; an explanation of Countrywide’s financing requirements; and a discussion of Treasury’s problems with the IMF.

US equities were quiet, as were their Canadian counterparts. Treasuries barely moved and Canadas were boring, although some flattening was seen, reversing some recent trends. A quiet summer day, in fact.

Things were just as quiet in the preferred share market at it drifted up in lazy trading. Just how much up and how lazy is, however, something you’re going to have to wait for, since I’ve run out of time and will have to update the tables tomorrow.

Update, 2007-08-24

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

Well, the press is certainly champing at the bit to announce a return to normalcy!

In the best news of the day HSBC Canada issued a press release that included the paragraph:

HSBC Investment Funds (Canada) Inc., manager of the HSBC Mutual Funds, and HSBC Investments (Canada) Limited, manager of the HSBC Pooled Funds, confirm that there is no exposure to third party asset backed commercial paper within any of these Funds.

Finally! Some explicit recognition in all this mess that there is a difference between the corporation’s interest and the subsidiaries fiduciary function. It isn’t much and it isn’t any kind of proof that all is well with separation of function at HSBC Canada (any more than the press releases that aroused my ire in the past two days are any kind of proof that there’s anything wrong at National Bank and Industrial Alliance) … but the more that such a distinction is mentioned in public, the more willing I am to believe that the distinction is part of corporate culture.

All this Independent Review Committee stuff has to be good for something, right?

In Canadian ABCP news, NAV Canada (beloved of all those who pay for airline tickets) announced that it:

holds approximately $368 million of non-bank R-1 (high) rated ABCP allocated among its reserve funds and accounts required by its debt indentures.  The Company has approximately $130 million of cash and cash equivalents not affected by the problems in the non-bank ABCP market.

It is, of course, cheap and easy to point out investment mistakes in hindsight, so I’ll try to show a little restraint … but that means about three-quarters of their cash is held in non-bank Canadian ABCP. They may wish to review their diversification policies.

Amidst fears that liquidity infusions are being hoarded by the top-tier banks four major banks were jawboned by the Fed into using the discount window and letting the credit trickle down. Bernanke is using a more targetted approach than Greenspan used for the 1998 LTCM crisis … we shall see how it all turns out! If he can get away with it, there will be less bleeding of easy credit into the real economy and less chance of a renewed asset bubble. At present, the Fed appears to be defending a 5% Fed Funds rate but Bernanke’s got lots of time to decide whether or not to make the de facto easing de jure. The futures traders appear to believe in a three month ease, then back to the anti-inflation grind.

There is still a lot of stress in the global system despite a pause for breath in US markets. Investors should remember the Fed doesn’t really care about them. We can only hope that the politicians do not succeed in getting the Fed to bail out mortgagors, but it is election time in the US, after all, so there’s bound to be a lot of showboating.

Meanwhile, the default statistics on securitized loans mentioned yesterday are being confirmed by statistics on mortgages held directly. Lenders are reacting ruthlessly to the changed climate, with three lenders firing 3,700 employees. Remember “creative destruction”? This is the nasty second part, and we’ve only just begun:

two European mortgage-securities funds had their credit ratings slashed to junk from AAA by Standard & Poor’s because debt market turmoil curbed access to short-term financing.

Even more seriously, Wall Street bonuses are threatened. On the other hand, in late-breaking news it was announced that Bank of America’s putting $2-billion into Countrywide. So things are – very slowly and jerkily – working as they should.

At least one hedge fund is experiencing knock-on effects of the credit crunch. Stratus has 25% of its assets in Sentinel, which suspended client redemptions on August 14 – which may, in fact, have more to do with fraud than liquidity.

The Chinese have bought up a huge amount of high-quality housing debt over the past few years.

Here’s a good question to ask your friendly neighborhood US Equity Quant: “how do you distinguish between the various levels of financial instrument valuation“? Without having to gain access to the quantitative code and other trade secrets, you should be able to come to a reasonable judgement of skill level by the answer to that question!

US Equities had a very good day as traders decided the world might still exist at the time today’s trades settle. Canadian equity roared upwards, but is still down a bit more than 7% from the July peak. We shall see what happens if Tom Graff’s musings on the potential for re-pricing of as-yet unsettled private equity takeovers should prove to be prophetic with respect to the Teachers’ / BCE deal.

Treasuries fell, with the 2-10 spread flattening 6bp. Some investment grade issuers raised funds, reducing reliance on short term credit, for instance:

XTO Energy Inc. reopened a bond sale yesterday, raising $1 billion to pay down commercial paper, according to a regulatory filing. Fort Worth, Texas-based XTO yesterday sold five-year, 10- year and 30-year bonds.

After all … look at the alternative:

Asset-backed commercial paper yields rose to the highest in almost seven years after H&R Block Inc., the biggest U.S. tax preparer, said a unit tapped $850 million in credit lines because it couldn’t sell the short-term debt.

Canadas fell, with the 2-10 spread flattening by 7.4bp, in what was hailed as an indication that the market has been pricing in too catastrophic a disaster.

It was a quiet and calm, but none-the-less positive day for Canadian preferreds. There was good volume and a confluence of prices with BAM.PR.M / BAM.PR.N, so it may be that those issues are normalizing after recent wild oscillations … subject to “normalizing” being a meaningful word, that is!

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

Another nervous day

Continuing the recent pattern, Yvon Charest, Industrial Alliance’s President and Chief Executive Officer, gave his portfolio managers a kick in the teeth by usurping their responsibilities. They’re just plain flat out buying the ABCP in their mutual funds – there is no indication as to whether the portfolio managers want to sell (and look, I know that’s a pretty good bet, OK? That’s not the point). Mr. Charest’s track record as a portfolio manager was not disclosed; we can expect unit-holders not to care until conflicts of interest are resolved in a way they don’t like and a newspaper headline tells them to care.

If Mr. Charest wants to play at “Portfolio Managers”, there is nothing to prevent him from issuing index-linked PPNs, and doing it all on his own balance sheet. But if there’s to be a separate balance sheet there has to be independence.

There is no indication as yet that anybody besides me thinks this is important; analyst independence is just so 2002.

On the sub-prime front, large bets are being made agains ResCap’s survival – and ResCap is a big player:

At the end of June, ResCap had tapped those [ABCP] markets for about $5.5 billion in financing, according to regulatory filings.

ResCap has about $18.5 billion in committed financing, CreditSights analyst David Hendler wrote in an Aug. 7 note.

Mortgage companies without any sub-prime on their books, such as Ottimo Funding LLC, are experiencing financing difficulties.

The default reports for July have been released and Fitch has placed $92.1-billion under review. Last month they reviewed $118-billion and downgraded $13-billion of it. There are more calls coming out for a review of the ratings agencies, as the politicians seem to have agreed on a convenient scapegoat. There are more calls for increased regulation of banks, as well.

Yves Smith has published a balanced review of the various critiques of Central Bank actions. Put me in the third camp: Realist (although I would prefer “Pragmatist”). The market is faced with a situation in which nobody will even look at riskier or more complicated debt. The central banks must first ensure that the commercial banks can, in fact, make investment decisions with reasonably assured financing. Then they must increase the spread between government and commercial paper to the point where real investors (as opposed to mere dealers) will at least be interested enough to look at it. Finally, once the normal routine of examining credit and making an actual decision between safe-but-low-yielding and riskier-but-higher-yielding securities has been re-established, we can get back to fighting inflation. And don’t worry, once people start looking at risk/reward with a more jaundiced eye, there will be plenty of losers. But if the credit markets lock up and everybody in the world has to dump assets on the market at give-away prices in order to de-lever, we’re talking deflation. And deflation is bad.

Tom Graff seems to be in so-far-so-good camp as well, while James Hamilton applauds the Fed’s methodology thus far.

There is some speculation that the liquidity crisis is over and we can all go home; fortunately there are cooler heads at the Fed:

“Financial market volatility, in and of itself, doesn’t require a change in the target federal funds rate,” [Richmond Fed President] Lacker said at a luncheon of the Risk Management Association of Charlotte. “Policy needs to be guided by the outlook for real spending and inflation.”

And, in boring news about the real economy, the Cleveland Fed reminds us that inflation, while still worrisome, is showing signs of responding favourably to the Fed’s policies of moderate restraint. 

True to form, however, US equities were up on takeover speculation, so it would seem that some are hopeful the whole episode was just a bad dream. Canadian equities followed.

Canadian banks re-affirmed their committment to providing credit support to their own Asset Backed Commercial Paper (ABCP) products. I can only imagine they’re having difficulty rolling the paper and are attempting to (i) reduce their conduit’s cost of borrowing, and (ii) keep the assets & liabilities off their own balance sheets. Given that their cost of funding, as measured by the September BAX on the Montreal Exchange has risen to about 4.6% (and I’ve seen them much higher), I’m sure they’re about ready to try anything. Note that the Canadian 3-month WI T-Bills are at 4.00% … that’s an amazing spread – according to RBC, the spread was 30bp on August 10, 62bp on August 17.

US 3-month T-Bills finally increased in yield but the 2-10 curve steepened anyway – so let’s not say it’s over just yet! The Canadian 2-10 spread steepened again and is now at 30.5bp. Hank Cunningham provides some historical context.

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

A nervous day in the market today – best illustrated by the fall in US 3-month T-Bills to 3.09%, down 66bp on the day with a Treasury auction coming in at 2.85%.

A serious affront to analyst/portfolio manager independence was delivered by National Bank in the context of their purchase of Asset Backed Commercial Paper that was sold to certain client or held by National Bank branded money market funds:

As a result, our clients can be reassured that the funds will not hold any ABCP until we are convinced of the quality and liquidity of the paper, whether or not it is issued by a major bank.
…
National Bank of Canada, mindful of the best interests of the unitholders of the National Bank Mutual Funds, preferred not to have its clients bear the brunt of this uncertainty and therefore decided to initiate the transaction announced today.

Excuse me? National Bank decided? And ABCP won’t be held until “we” (under the National Bank letterhead) are happy about the credit quality?

I may be a little dense, but Morningstar lists the portfolio manager as Richard Levesque and he works for Natcan, which is registered by the OSC as “Investment Counsel/Portfolio Manager”. He is the only one entitled to make decisions regarding fund investments within the context of the fund’s mandate and the mandate is the sole province of the unitholders. National Bank, CEO Louis Vachon, and any miscellaneous bozos from marketting have no say in the matter.

As always, there’s no telling what the real story is (the press release may have been released in unseemly haste and poorly edited with an emphasis on brevity), but I trust that all unitholders, regulators and trade associations will do what they can to ensure they know just who is running the fund, whose interests are held paramount at all times and how much influence National Bank management has over portfolio management decisions.

Some readers will not consider this a major issue. Some readers are encouraged not to come running to me when the interests of mutual funds and their corporate sponsors  become intertwined in a manner they don’t like.

In less important news, a lot of children are being thrown off sleds to the sub-prime wolves. Capital One is taking a big charge to close its Alt-A mortgage unit, KKR Financial is seeking equity after selling a big chunk of sub-primes, and Thornburg sold a whack of mortgage-backeds in a frantic attempt to delever. Solent Capital may be forced to join them, after investors wouldn’t buy their ABCP. In short, the market is working as it should, although fear continues to rule greed: money market funds are piling into those famous 3% Treasury Bills, and SachsenLB needed emergency liquidity of 17.3-billion Euros.

The blame game continues, with calls for more regulation in Europe and America. Blaming the Fed is always popular. I haven’t seen calls for more regulation in Canada yet, possibly because they’re still trying to find something that isn’t regulated.

The WSJ reminds us that all this has happened before. Brad Setser reports on current Fed thinking on how this will all resolve – which doesn’t appear to involve more regulation, thank heavens – while Jim Hamilton looks at low-investment-grade spreads and wonders where all the risk is being priced. My guess is simply that contagion from lower-quality sub-prime, while knocking hell out of higher-rated sub-prime and affecting investment-grade corporates to some degree … simply has run out of steam.

US Equities experienced a few swings, but closed up on the day, followed by their Canadian counterparts.

Treasury news was dominated by the plunge in short-end yields, while Canada continued steepening. I like steepening.

A quiet day for preferreds, although Nesbitt was able to accomplish some crossing in size. The perpetualPremium sector did well, led by BMO.PR.H and CL.PR.B.

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

All indices were assigned a value of 1000.0 as of December 31, 1993.

Index Constitution, 1999-11-30, Pre-rebalancing

Index Constitution, 1999-11-30, Post-rebalancing

Well, that’s the end of another week-and-a-half! I said the same thing August 10 … I’m gonna start putting in for overtime.

The big news of the day was the Fed cut the discount rate. As the WSJ admirably explains the discount rate is the rate at which financial institutions can borrow directly from the Fed:

Banks were reluctant to access the window because it was associated with a stigma usually reserved for distressed banks. A few years ago the Fed overhauled the discount window to try and alleviate that stigma; the rate was then set one percentage point above the funds rate and subject to far fewer conditions. In spite of that, discount window borrowing has remained paltry.

Discount lending averaged just $11 million in the week ended Aug. 15. Although that was up from $1 million in the prior week it was puny compared to the billions of dollars the Fed has regularly injected into the financial system through open market operations.

There has been some jeering that this is a mere gesture; but some cheering for such a public (and cheap!) jawboning that certainly had an effect on the markets today. The Fed even actively encouraged eligible institutions to take advantage of the cut.

The discount cut sent a message that the Fed will consider Fed Funds Target cuts, which was received loud and clear, although the Fed Funds Futures market seemed a little disappointed that the gesture was only symbolic (what a bunch of cowboys those guys are!). While data for today is not yet posted, the Fed maintained a rate of about 5% in the actual Fed Funds market yesterday, and the low yesterday was 2%, much more reasonable than the recent 0% nonsense. Goldman Sachs changed its prediction again:

Goldman Sachs Group Inc. said the Federal Reserve will cut the overnight target interest rate to 4.5 percent from 5.25 percent this year
…
Until June, Goldman had expected the Fed to cut rates 75 basis points this year. They changed the forecast in June saying the Fed would hold rates at 5.25 percent through year-end

The analyst’s track record was not disclosed, possibly due to confusion regarding just exactly which track record.

At any rate, this signal was considered to be a sign that the world was not about to come to an end and both American and Canadian equities soared, led by financials.

Not surprisingly, government bonds had a super day, with Treasury two-years dropping 6bp in yield and ten-years 2bp, to bring the term premium to 50bp. Canada followed:

The two-year bond added 12 Canadian cents to C$99.25 to yield 4.188 percent, while the 10-year bond gained 23 Canadian cents to C$96.76 to yield 4.411 percent.

The yield spread between the two-year and 10-year bond moved to 22.3 basis points from 17.2 at the previous close.

The 30-year bond fell 28 Canadian cents to C$109.05 to yield 4.448 percent.

Readers might not fully empathize with my joy at seeing a real-live actual term spread again, after all this time … but believe me, it’s there.

A major – and worrisome – fly in the ointment is that the market for asset-backed paper has dried up and now:

The gap between similarly rated asset-backed and direct- issued paper is 79 basis points, the most since Bloomberg began keeping the indexes in 1999.

Brad Setser explains some of characteristics of ABCP and its relevance to the current kerfuffle. Connoisseurs of the preferred share market will recognize some degree of similarity between the two basic types of commercial paper and the preferred share types of “Operating Retractible” and “Split Share”.

Retail ABCP aversion is very pronounced to the point where not having any is a competitive advantage for Canadian money-market funds.

Sadly, I must leave devotees of the preferred share market in suspense. I have a dinner engagement and prices were not available from the source until about 7:30pm. I’ll update tomorrow … but fear not! Today, while volatile, was actually a pretty good day.

Update, 2007-08-17

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

Well, let’s all be happy that day’s done, shall we?

Canadian equities are now down on the year, notwithstanding a monster rally that took it up almost 400 points from the lows.

A record 708.1 million shares changed hands in trading on Toronto today, surpassing the previous record of 499.8 million set on July 12, according to an e-mailed statement. The number of trades was 996,311, exceeding the 707,853 made Aug. 10.

Similarly:

NYSE Euronext (NYSE Euronext: NYX), the world’s largest and most liquid exchange group, today reported record transaction volume in its U.S. cash equities trading operations on NYSE Group exchanges with 5.73 billion shares traded, based on preliminary results.  Additionally, the NYSE also achieved new records in orders, trades and quotes.

So far this month, trading volume on NYSE Group U.S. cash equities markets in August 2007 is 110% higher than August 2006.

as US Equities plunged, then rocketted to close slightly up on the day.

Moody’s warned that a LTCM-like collapse is not entirely out of bounds, and a Wall Street type warned that Moody’s isn’t invited to his next birthday party:

“To see Moody’s make forward-looking negative statements about hedge funds, who may well be suffering in large part as a result of their reliance on Moody’s now evidently worthless ratings, is to witness the height of chutzpah.”

He’s not alone, as Sarkozy wants an investigation into Moody’s. There is, as yet, no indication as to whether Sarkozy will be investigating asset managers who underperformed their benchmarks; Sarkozy’s track record was not disclosed. I am willing to bet that Gary Jenkins will also be relieved that he will not necessarily be investigated:

“Rating agencies should be regulated and they should be paid by the investor — not by the issuer, not by the structurer,” said Gary Jenkins, a partner at London-based hedge fund Synapse Investment Management, which manages $650 million of debt assets. “It’s so obvious, so simple that it’s the one thing that probably won’t happen. They shouldn’t be paid by the people selling the bonds.”

There are others who have the maturity and personal integrity to resist the temptation to blame the rating agencies: they blame the Fed:

The result: a crisis of confidence among investors who say Bernanke must abandon his focus on inflation and prevent a deeper slide in markets that endangers economic growth.

To restore my limited faith in humanity, there is at least one other person arguing, in effect: ‘Sure, the financial markets are risky. That’s what they’re for.’

All the money the Fed has pumped in seems to be going into T-Bills, which wasn’t quite what they had in mind.

The yield on the three-month Treasury bill tumbled 0.48 percentage point today to 3.62 percent, after falling 0.54 percentage point yesterday.

The money certainly didn’t go into the Commercial Paper market, which shrank significantly. About time – have a look at the actual Fed data, particularly the “Outstandings”. It would be a mistake to draw any conclusions from data without investigating further … but boy, it sure looks as if reliance on short-term funding in the US has increased a lot over the past five years!

Amidst all the equity fear and flight to safety, Treasuries had a monster day, and the 2-10 spread widened slightly to 45bp from 44bp yesterday. Given a gappy day like today, though, a lousy beep doesn’t mean too much. Canadas were much more restrained, with more steepening, the 2-10 spread increasing from 14bp to 17bp. Actual corporate bonds are still extremely illiquid.

The Yen did well, on what is presumed to be carry-trade unwinding; outlook for the USD is still probably grim.

There was cheering in the streets early on, as banking executives from all walks of life celebrated what I think must the demise of a competitor … er, I mean, they were happy that investors aren’t being wiped out in the restructuring of the Coventry funds. The commercial paper will be converted into floating rate notes with a maturity matching that of the underlying assets; if you want to pick up a little money-market yield by investing in Asset Backed paper in the future, you are now much more likely to purchase a rock-solid security, issued by a rock-solid trust. One that’s run by, um, a bank.

Given the events of the day – corporates in general not seeing much action; stocks getting hit; retail assuming that a preferred share is simply an equity that hasn’t gone down yet – it should be no surprise that the pref market did not do very well. As has often been the case lately, the Pfd-3(high) & lower issues took a hammering [which makes more sense than the higher issues getting hurt, anyway!]: NTL.PR.G, -5.33%; DW.PR.A, -5.27%; CCS.PR.C, -4.42%; STQ.E, -4.30%; YLD.PR.B, -3.81%; WN.PR.C, -3.61%; BBD.PR.C, -3.30%; BBD.PR.B, -3.18%; WN.PR.E, -2.56%; BBD.PR.D, -2.38%; NTL.PR.F, -1.81%; CGQ.E, -1.56%; WN.PR.D, -1.53%; BPO.PR.K, -1.47%; YPG.PR.A, -1.02%.

I’m not trying to pick on the junky stuff, there are lots of investment grade issues listed below! There was one junky gainer, IQW.PR.D, +1.92%.

Lets have another look at the junky-but-not-quite-junk sampler:

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