PrefBlog

The Kansas City Fed has published the Spring 2010 edition of TEN Magazine with articles on:

• A PIVOTAL INDUSTRY: Energy’s ups and downs drive economies
• A COMMUNITY AFFAIR: Kansas City Fed programs take policymakers to the front lines
• CONFERENCE ROOM TO CLASSROOM: Financial education in the workplace benefits employees, employers
• FINANCIAL STABILITY REPORTS: How useful during a financial crisis?
• REGIONAL CONNECTIONS TO NATIONAL POLICY: The directors of the Federal Reserve Bank of Kansas City

Corporate bond sales are slow:

There were no corporate bond sales in the U.S. today, compared with $2.2 billion on the corresponding day following the holiday weekend in 2009, according to data compiled by Bloomberg. In Europe, 1.35 billion euros ($1.66 billion) was raised from two sales of covered bonds, versus 6.5 billion euros of bond issuance a year earlier, Bloomberg data show.

The global new issue market failed to revive after declining to $70 billion last month, less than half of April’s tally and the least since August 2003, Bloomberg data show. The Frankfurt-based European Central Bank forecast that banks will have to write off 195 billion euros of bad debts by 2011, according to a biannual report published May 31.

I just read John Mortimer’s Rumpole Misbehaves, an entertaining if rather lightweight romp, in which the UK’s Anti-Social Behaviour Orders figure in the plot. I’m surprised they haven’t been discussed much here, as they unite many elements of current fashion: the ability to denounce your neighbors to the police and the ability of bureaucrats to invent new crimes and punish transgressors. Anyway, in the course of poking around to see what ASBOs are all about, I found this story which may – but probably won’t – give pause to those who self-righteously exercise their right to draw pictures of Mohammed, since apparently 1,000 years of trespassing precedents aren’t enough to protect property right:

Harry Taylor, 59, of Salford, left images of religious figures in sexual poses on three occasions in 2008.

Jurors found him guilty of causing religiously aggravated intentional harassment, alarm or distress in March.

He was also given a five-year Anti-social Behaviour Order (Asbo) at Liverpool Crown Court.

Among the posters, one image showed a smiling crucified Christ next to an advert for a brand of “no nails” glue.

In another, Islamic suicide bombers at the gates of paradise were told: “Stop, stop, we’ve run out of virgins.”
…
The chaplain at the airport was “severely distressed” by the discoveries, the court heard.

Well, well! We can’t have chaplains being “severely distressed”, now, can we? Let’s put somebody in jail instead.

The first day of the Dreaded Rise in Interest Rates didn’t interupt the recent rally in the Canadian preferred share market, with PerpetualDiscounts up 47bp on the day and FixedResets up 14 bp. Volume returned to average-to-elevated levels.

There’s a scuffle brewing over FASB’s proposal that bank loans be marked-to-market:

A U.S. accounting board’s proposal that would require banks to report the fair value of loans on their books will lead to reduced lending, a former chairman of the Federal Deposit Insurance Corp. said.

“This is a terribly destructive idea to even propose,” William Isaac said in a telephone interview today. Just by making the proposal, the Financial Accounting Standards Board will lead banks to quit making loans without an easily discernable market value, and keep the ones they do make to shorter maturities, Isaac said.
…
The proposal comes “in the face of worldwide condemnation,” Isaac said. It conflicts with the recommendations of the Group of 20 nations, the Basel Committee on Banking Supervision and the International Accounting Standards Board, according to the American Bankers Association, which also opposes the plan.

David Larsen, who serves on FASB’s Valuation Resource Group, said the volatility created by markets and fair value “is there whether or not it is measured.”

“It comes down to the question, is greater transparency of help to users of financial statements?” said Larsen, a managing director at New York-based Duff & Phelps Corp.

Mark-to-market accounting destroyed $500 billion of bank capital as traders marked down all assets during the crisis by a total of 27 percent, and many of those values have now returned to near par, Isaac said. “Now FASB is going to spread this disease throughout the system,” he said.

The trouble with mark-to-market is that it assumes an infinitely liquid market. Sometimes, this embedded assumption gets a little frayed around the edges.

Congrats to my nephew Sam Arfin:

TORONTO INVITATIONAL

Rowing – Champions … Boys’ – 1000 m T1x – Sam Arfin, Birchmount Park, 4:39; 1000 m T2x – Sam Arfin and Oscar Kahu, Birchmount Park, 4:15;

It was a quiet but positive day for Canadian preferred shares, with PerpetualDiscounts gaining 15bp and FixedResets up 8bp.

PerpetualDiscounts now yield 6.29%, equivalent to 8.81% interest at the standard equivalency factor of 1.4x. Long corporates now yield 5.65% (maybe a hair more?) after scoring a total return of +0.46% for the month, so the pre-tax interest-equivalent spread (also called the Seniority Spread) now stands at 315bp, a 10bp tightening from the 325bp recorded on May 26.

And that’s it for another month!

Two of the eight new BMO ETFs are of interest:

BMO Long Federal Bond Index ETF (ZFL)
BMO Real Return Bond Index ETF (ZRR)

These have management fees of 20bp and 25bp respectively.

Interesting mea culpa from Scottwood Capital, indicating that yes, there are some investors who believe that a short term credit line will solve structural deficit problems:

As the situation in Greece continued to deteriorate and spread in May, we were indeed watching closely for how that could affect our market and Scottwood’s positions. However, when the EU and IMF announced their $1Trillion rescue package, we believed that that would eliminate many of the – real and perceived – potential macro risks that had been hanging over what had been up to that time extremely healthy and vibrant US credit markets. Our belief was based on the fact that, as opposed to 2008, the Euro governments now had the entire US playbook to show exactly what programs worked (and how, and why) and what did not (and how, and why).

Scottwood does not publish performance figures.

The SEC is holding a public meeting on Market Structure:

The Commission already has proposed rules that would:

• Establish a consolidated audit trail system to help regulators keep pace with new technology and trading patterns in the markets.
• Generally require that information about an investor’s interest in buying or selling a stock be made available to the public, instead of just to a select group operating with a dark pool.
• Effectively prohibit broker-dealers from providing their customers with unfiltered access to exchanges and alternative trading systems and ensure that broker-dealers implement appropriate risk controls.
• Create a large trader reporting system to enhance the Commission’s ability to identify large market participants, collect information on their trades, and analyze their trading activity.

As an old bond buy, I am flabbergasted by point 2. That information is GOLD. I suspect that implentation of point 2 will reduce liquidity, since participants will be less willing to make such indications if it’s going to be broadcast. What’s next? Making it illegal for brokers to work a block trade?

Point 3 also has interesting implications. It would be nice to see Exchange membership opened up to large funds and chip away at the brokerage oligopoly. Unfiltered access was discussed on January 19; to it’s credit, the SEC addressed such a possibility in its request for comments:

The Commission seeks comment on any other potential costs to brokers or dealers that may result from the proposed rule. While the Commission does not anticipate that there would be significant adverse consequences to a broker or dealer’s business, activities, or financial condition as a result of the proposed rule, it seeks commenters’ views regarding the possibility of any such impact. For instance, would the proposed rule impact a broker or dealer’s ability to attract or retain its market access customers? Could a broker or dealer lose order flow, because its customer might seek other arrangements in order to access the securities markets, such as becoming a member of a particular exchange or becoming a broker or dealer? The Commission requests for commenters to quantify those costs, where possible.

I saw what I’m reasonably sure was an Eight-Spotted Forester Moth in my garden today. Apparently my neighbor’s Virginia Creeper is a larval host, which is the first use I’ve ever heard of for the disgusting stuff.

It was another zippetty-doo-dah day in the Canadian preferred share market, with PerpetualDiscounts rocketting up another 57bp, while FixedResets were up 5bp. The gain brings the PerpetualDiscount total return index to its highest level since April 20 and the yields (basically the price index) to their lowest level April 21.

PerpetualDiscounts have returned -0.35% from April 20 and +1.23% month-to-date. Figures for FixedResets are -0.02% and +1.25%, respectively. Three consecutive nice days don’t make a rally – but it’s a lot better than the steady drip-drip-drip of price declines in the sector we’ve been seing all year!

GWO PerpetualDiscounts did especially well on the day, occupying the best five places on the performance table. This was their first day of trading ex-dividend. See comments.

Update, 2010-5-31: Revised figures for PerpetualDiscounts and FixedResets after correction of erroneous dividends (see comments):

The legislation to close the loophole on taxation of “carried interest” (discussed on May 20) has a rather peculiar feature:

Private-equity firms, trying to derail legislation that would boost taxes on their leaders’ pay, are attacking a provision that would make it more costly for executives to sell their own management firms.

The provision, which also would affect operators of hedge funds, would make executives pay ordinary income tax rates on profits from selling a stake in their own management companies. Founders of other types of businesses would remain eligible to pay lower capital-gains rates when they sell. The House is scheduled to vote on the legislation today.
…
The sales provision is intended to stop executives at buyout, venture-capital and real-estate partnerships from circumventing the higher taxes on their pay imposed by the bill, said Matthew Beck, a spokesman for the House Ways and Means Committee. Otherwise, he said, fund managers would sell their stake — and pay the lower tax rate — just before receiving income subject to higher taxes.

Well – I haven’t read the legislation and I’m not a tax lawyer anyway. But this sounds like a ridiculous punitive provision that will pass anyway because it bashes those evil Wall Street Types. I find it very difficult to believe that the income vs. Capital Gain question used as justification is applicable only to private equity firms.

Another day of elevated volume and fine returns, as PerpetualDiscounts gained 60bp to take the total return subindex for this class to its highest level since April 21. FixedResets gained 5bp and continue their record of outperforming PerpetualDiscounts from both that date and month-to-date.

Regulatory capture is getting some media attention (hat tip: Financial Webring Forum):

A CBS News analysis of the revolving door between Goldman and government reveals at least four dozen former employees, lobbyists or advisers at the highest reaches of power both in Washington and around the world.

For example, former Treasury Secretary Henry Paulson is a former Goldman CEO; Arthur Levitt, the head of the Securities and Exchange Commission is a now a Goldman adviser; and former House Majority Leader Dick Gephardt is now a paid lobbyist for the firm.

There’s more, less well written. Automatically branding every instance of revolving door regulation as “corruption” is an extreme view; conflicts of interest are everywhere and – even in the finance world! – most people are not crooks.

A lot of it has simply to do with the nature of the world: I’ve seen ads for very senior risk management officials at salaries best described as “pathetic”. Anybody smart enough and knowledgable enough and tough enough to do a good job at the post could make a lot more doing something else.

Hands up who wants, say, the head of the Ontario Securities Commission or the Superintendent of Financial Institutions to get a government salary of – say – $5-million p.a. … didn’t think so.

The influence of retail investors on markets is getting more interesting to track. During the crunch, we saw how US – MMF redemptions exacerbated the funding crisis and forced (encouraged?) the Fed to set up dollar swaps. Now junk bonds are getting the same treatment:

Yields on junk bonds rose to the highest since December relative to Treasuries, with prices declining on debt from American International Group Inc. to Harrah’s Entertainment Inc. on concern Europe’s debt strains will derail the global economic recovery.

Spreads widened 27 basis points yesterday to 724 basis points, or 7.24 percentage points, the highest since Dec. 9, according to Bank of America Merrill Lynch index data. That’s up from a low this year of 542 basis points on April 26.

High-yield debt has lost 4.6 percent in May, on pace for the first drop in 15 months, after gaining 73 percent from the market bottom in March 2009 through last month. Investors withdrew more than $3.1 billion in the past two weeks from junk funds amid growing concern that European efforts to control government deficits would interrupt the recovery, making it harder for the neediest companies to reduce and refinance their borrowings.
…
“Due to low levels of cash at mutual funds, redemptions are forcing sales,” said Brian Yelvington, head of fixed-income strategy at Knight Libertas LLC in Greenwich, Connecticut.

This looks like an unintended consequence of the electronic era – now that it is so easy to switch between funds of the same family at 3am, people are doing it. Retail is, in general, more jumpy than institutional money, so it’s interesting to speculate where all this might lead. One possibility is a greater emphasis by issuers on long term debt, paying up if they need to.

Volume picked up today to levels approaching the average of the past two months and PerpetualDiscounts caught fire, gaining 65bp. FixedResets were up 12bp.

PerpetualDiscounts now yield 6.36%, equivalent to 8.90% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.65%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 325bp, a mild (and perhaps spurious) decline from the 330bp reported on May 16.