PrefBlog

The Sino-Forest plot thickens:

Muddy Waters Research, the firm founded by short seller Carson Block, “pre-marketed” its June 2 report on Sino-Forest Corp. (TRE) to hedge funds for the past five weeks, said an analyst at Dundee Securities Ltd.
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“Muddy Waters pre-marketed this smoking-gun report on Sino-Forest to hedge funds over the last five weeks,” said Richard Kelertas, a Montreal-based analyst at Dundee, which helped sell shares in Sino-Forest as recently as December 2009.
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Kelertas said that the Muddy Waters report was inaccurate and there’s nothing fraudulent about Sino-Forest “to the best of our knowledge.” He recommended buying Sino-Forest shares from September 2007 until June 3, when he put his rating on the company under review.

Dundee was among institutions that helped Sino-Forest sell shares in December 2009 and also in May 2009.

Short selling, or selling borrowed shares with the hope of profiting when they fall, more than doubled to a record 35 percent of Sino-Forest’s outstanding stock as of June 3, up from 17 percent at the beginning of May and 13 percent at the end of 2010, according to Data Explorers, a New York-based research firm. Sino-Forest was the most-shorted stock in the Standard & Poor’s TSX Composite Index, which has an average short interest of 4.8 percent.
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Offering a report to hedge funds before making it public is not illegal, said James Fanto, who teaches classes on international financial regulation and securities laws at Brooklyn Law School in New York.

“Muddy Waters can profit from this information itself, or allow others to profit from their insights as well,” Fanto said in an e-mail message. “The only problems emerge when research is in fact based on insider tips. But that doesn’t seem to be the case here.”

I haven’t heard such an impassioned defense of company from a dealer since Bre-X! I hope everybody has popcorn at hand to watch the rest of this show.

Speaking of companies getting trashed, there was another outbreak of yellow fever today:

It was another muted day for the Canadian preferred share market, with PerpetualDiscounts gaining 6bp, FixedResets basically flat and DeemedRetractibles up 3bp. Volume was low.

This is old, but Laurie Carver wrote a good piece on Credit Rating Agencies titled Losing Credit:

Brooks says the NAIC decided to move to the new methodology because of rating agencies’ failure to accurately capture the risk of severity of loss in structured credit (and consequently its flipside – recovery). “Under the old regime, ratings were a kind of blunt tool for determining the risk-based capital, whereas now we’re doing a more detailed analysis of each security held by the insurer.”

He sees the old rating-based RBC charges as creating ‘cliff risk’, because their focus on the first dollar of loss in the whole structure caused sudden downgrades to be assigned to tranches that were actually likely to recoup or profit. For instance, under the old regime, AAA securities would carry a capital charge of just 0.4%, compared to 23% for a CCC security. “This very sharp change in the RBC charge can happen without a material effect on the actual return on the insurer’s investment,” says Brooks.

“The rating agencies’ methodology is binary – they take account of the probability of default but not the severity of loss to the insurer’s specific position. Just because there’s a default, doesn’t mean that the security held by the insurer is going to experience 100% loss.”

Trichet has figured out that maybe the EU should have paid attention when Greece announced it was cooking its books:

The economic crisis in Europe is not a crisis of the euro currency or of the monetary union, says the president of the European Central Bank.

“The current crisis stems rather from insufficient monitoring of economic policies in a number of member states,” Jean-Claude Trichet said in a speech at the Conference of Montreal. “Today, it’s not the monetary pillar of economic and monetary union that is at stake but the economic pillar,” he said.

Gee, and I thought it was all Goldman Sachs’ fault, as mocked 2010-4-19.

I’m tired of YLO – bor-ring! I wish Sino-Forest had preferred shares.

A mildly depressing day on the Canadian preferred share market, with PerpetualDiscounts down 8bp, FixedResets off 4bp and DeemedRetractibles losing 9bp. Volatility was muted. Volume was dead. D-E-D. Dead.

Greece may be getting some money:

European Union and International Monetary Fund officials agreed to pay the next installment to Greece under last year’s 110 billion-euro ($161 billion) bailout, paving the way for an upgraded aid package that includes a “voluntary” role for investors.

“I expect the eurogroup to agree to additional financing to be provided to Greece under strict conditionality,” Luxembourg Prime Minister Jean-Claude Juncker said after meeting with Greek Prime Minister George Papandreou in Luxembourg today. “This conditionality will include private sector involvement on a voluntary basis.”

It should be remembered, however, that Jean-Claude Juncker is a liar, unworthy of respect or position.

The Bank of Canada has released a working paper by Alexandre Lazarow titled Lessons from International Central Counterparties: Benchmarking and Analysis:

Since the financial crisis, attention has focused on central counterparties (CCPs) as a solution to systemic risk for a variety of financial markets, ranging from repurchase agreements and options to swaps. However, internationally accepted standards and the academic literature have left unanswered many practical questions related to the design of CCPs. The author analyzes the inherent trade‐offs and resulting international benchmarks for a certain set of issues. Four CCPs – FINet, CME Clearing, Eurex Clearing and LCH.Clearnet – are considered in terms of risk management, CCP links, governance and operational risk.

This may be viewed as part of the global regulators’ desperate attempts to convince fools that single point failure and moral hazard is not a problem as long as they’re in charge, oh no.

Today, they called it mellow yellow.

A very positive day in the Canadian preferred share market, with PerpetualDiscounts up 7bp, FixedResets gaining 10bp and DeemedRetractibles winning 21bp. Volatility was muted. Volume was sub-par.

Sorry this is so late, folks! What can I say? Time flies like an arrow, but fruit flies like bananas.

The Bank of Canada has released a working paper by Ron Alquist, Lutz Kilian and Robert Vigfusson titled Forecasting the Price of Oil:

We address some of the key questions that arise in forecasting the price of crude oil. What do applied forecasters need to know about the choice of sample period and about the tradeoffs between alternative oil price series and model specifications? Are real or nominal oil prices predictable based on macroeconomic aggregates? Does this predictability translate into gains in out-of-sample forecast accuracy compared with conventional no-change forecasts? How useful are oil futures markets in forecasting the price of oil? How useful are survey forecasts? How does one evaluate the sensitivity of a baseline oil price forecast to alternative assumptions about future demand and supply conditions? How does one quantify risks associated with oil price forecasts? Can joint forecasts of the price of oil and of U.S. real GDP growth be improved upon by allowing for asymmetries?

Maybe another movie? “How Yellow was my Valley”? About a family of unfortunate preferred share investors.

It was an uneventful day for the Canadian preferred share market, with PerpetualDiscounts down 3bp, FixedResets losing 3bp, and DeemedRetractibles up 5bp. There was only minor volatility. Volume was quite low.

Plans for a Greek debt restructuring are moving along;

European officials preparing Greece’s second bailout in two years may offer bondholders incentives to roll over maturing debt without triggering a credit-rating downgrade that would roil Europe’s banking system, two people with knowledge of the talks said.

Investors may be given preferred status, higher coupon payments or collateral as inducements to buy bonds replacing Greek debt maturing between 2012 and 2014, said the people, who declined to be identified because the talks are in progress.
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“We are also examining the feasibility of voluntarily rescheduling, which would not create a credit event,” European Union Economic and Monetary Commissioner Olli Rehn said in an interview yesterday in New York. “Debt restructuring is not on the table, it’s not in the cards, it will not be part of our agenda.”

DBRS has placed some Master Asset Vehicle notes under Review-Positive. The MAV notes are repackaged, term-extended ABCP.

Wow, the Boston Fed gets its fingers into a lot of pies! A working paper by Mary A. Burke and Frank W. Heiland is titled Explaining Gender-Specific Racial Differences in Obesity Using Biased Self-Reports of Food Intake:

Policymakers have an interest in identifying the differences in behavior patterns—namely, habitual caloric intake and physical activity levels—that contribute to demographic variation in body mass index (BMI) and obesity risk. While disparities in mean BMI and obesity rates between whites (non-Hispanic) and African-Americans (non-Hispanic) are well-documented, the behavioral differences that underlie these gaps have not been carefully identified. Moreover, the female-specificity of the black-white obesity gap has received relatively little attention. In the National Health and Nutrition Examination Surveys (NHANES) data, we initially observe a very weak relationship between self-reported measures of caloric intake and physical activity and either BMI or obesity risk, and these behaviors appear to explain only a small fraction of the black-white BMI gap (or obesity gap) among women. These unadjusted estimates echo previous findings from large survey datasets such as the NHANES. Using an innovative method to mitigate the widely recognized problem of measurement error in self-reported behaviors—proxying for measurement errors using the ratio of reported caloric intake to estimated true caloric needs—we obtain much stronger relationships between behaviors and BMI (or obesity risk). Behaviors can in fact account for a significant share of the BMI gap (and the obesity gap) between black women and white women and are consistent with the presence of much smaller gaps between black men and white men. The analysis also shows that the effects smoking has on BMI and obesity risk are small-to-negligible when measurement error is properly controlled.

Jule Dickson highlighted fraud as a problem for the P&C industry in a speech to the 2011 Property and Casualty Insurance Industry Forum:

Rate increases, together with progress in curtailing fraudulent claims, are required if the industry is to continue to provide the services it offers Ontario drivers.

While recent measures to curtail fraud are encouraging, there is no short-term solution to deal with the escalating losses residing in the GTA. Individuals, institutions, the government and the police must continue to be vigilant in curtailing fraud if they want to ensure the Ontario auto line returns to profitability.

I’m thinking of producing a movie: “I am volatile – yellow”, starring a young female preferred share investor.

It was a good start to the month for the Canadian preferred share market, with PerpetualDiscounts leaping 28bp, FixedResets gaining 17bp and DeemedRetractibles up 6bp. Volatility was good. Volume was elevated.

PerpetualDiscounts now yield 5.50%, equivalent to 7.15% interest at the standard equivalency factor of 1.3x. Long Corporates now yield a little under 5.3% (!) so the pre-tax interest-equivalent spread is now about 185bp, a wee bit tighter than the 190bp reported on May 26, as the PerpetualDiscounts play catch-up.