Market Action

December 27, 2007

Sorry, folks! What with month-end, year-end and a chess tournament, I am just plain out of time!

There was good performance in the market today, but volumes were markedly lower now that tax-loss-selling season is over. On a cheery note, the S&P/TSX Preferred Share Indexas proxied by CPD, is now in the black for the month!

I should be able to update tomorrow.

Update, 2007-12-28:

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.17% 5.15% 78,669 15.22 2 +0.2029% 1,059.2
Fixed-Floater 4.89% 5.11% 90,093 15.37 8 +0.3170% 1,026.6
Floater 5.88% 5.90% 145,103 14.05 2 1.6810% 820.7
Op. Retract 4.85% 2.58% 85,811 3.30 16 +0.0076% 1,042.5
Split-Share 5.34% 5.54% 112,024 4.30 15 -0.0050% 1,024.5
Interest Bearing 6.37% 6.61% 64,594 3.66 4 +0.6749% 1,057.9
Perpetual-Premium 5.83% 5.50% 83,206 4.27 11 +0.2301% 1,015.3
Perpetual-Discount 5.60% 5.64% 391,664 14.12 55 +0.4324% 910.9
Market Action

December 24, 2007

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.14% 5.14% 81,927 15.19 2 -0.0406% 1,057.0
Fixed-Floater 4.88% 5.11% 92,385 15.32 8 +0.2075% 1,023.4
Floater 5.98% 6.00% 149,486 13.91 2 +0.9228% 807.2
Op. Retract 4.85% 2.58% 87,876 3.16 16 +0.3915% 1,042.4
Split-Share 5.32% 5.49% 113,820 4.12 15 -0.0847% 1,024.6
Interest Bearing 6.36% 6.93% 65,312 3.65 4 +0.2061% 1,050.8
Perpetual-Premium 5.83% 5.51% 85,534 6.07 11 +0.3074% 1,013.0
Perpetual-Discount 5.62% 5.67% 400,998 14.17 55 +0.2879% 907.0
Major Price Changes
Issue Index Change Notes
IAG.PR.A PerpetualDiscount -2.0720% Now with a pre-tax bid-YTW of 5.83% based on a bid of 19.85 and a limitMaturity.
BNA.PR.C SplitShare -1.7604% Asset coverage of 3.7+:1 as of November 30 according to the company. Now with a pre-tax bid-YTW of 8.85% based on a bid of 17.30 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (6.08% to 2010-9-30) and BNA.PR.B (7.51% to 2016-3-25).
CIU.PR.A PerpetualDiscount -1.5686% Now with a pre-tax bid-YTW of 5.79% based on a bid of 20.08 and a limitMaturity.
GWO.PR.I PerpetualDiscount -1.5144% Now with a pre-tax bid-YTW of 5.61% based on a bid of 20.16 and a limitMaturity.
SLF.PR.B PerpetualDiscount -1.3819% Now with a pre-tax bid-YTW of 5.64% based on a bid of 21.41 and a limitMaturity.
CM.PR.D PerpetualDiscount -1.3707% Now with a pre-tax bid-YTW of 5.94% based on a bid of 24.15 and a limitMaturity.
POW.PR.D PerpetualDiscount -1.3502% Now with a pre-tax bid-YTW of 5.53% based on a bid of 22.65 and a limitMaturity.
FTU.PR.A SplitShare -1.2834% Asset coverage of 1.7+:1 as of December 14 according to the company. Now with a pre-tax bid-YTW of 7.26% based on a bid of 9.23 and a hardMaturity 2012-12-1 at 10.00.
SLF.PR.A PerpetualDiscount -1.2031% Now with a pre-tax bid-YTW of 5.59% based on a bid of 21.35 and a limitMaturity.
CM.PR.I PerpetualDiscount -1.1753% Now with a pre-tax bid-YTW of 6.28% based on a bid of 18.73 and a limitMaturity.
BAM.PR.N PerpetualDiscount -1.0857% Now with a pre-tax bid-YTW of 6.91% based on a bid of 17.31 and a limitMaturity.
RY.PR.E PerpetualDiscount +1.0643% Now with a pre-tax bid-YTW of 5.45% based on a bid of 20.89 and a limitMaturity.
W.PR.H PerpetualDiscount +1.0782% Now with a pre-tax bid-YTW of 6.22% based on a bid of 22.50 and a limitMaturity.
WFS.PR.A SplitShare +1.2146% Asset coverage of 1.9+:1 as of December 19, according to Mulvihill. Now with a pre-tax bid-YTW of 5.25% based on a bid of 10.00 and a hardMaturity 2011-6-30 at 10.00.
PWF.PR.K PerpetualDiscount +1.3508% Now with a pre-tax bid-YTW of 5.40% based on a bid of 23.26 and a limitMaturity.
ELF.PR.G PerpetualDiscount +1.4063% Now with a pre-tax bid-YTW of 6.23% based on a bid of 19.47 and a limitMaturity.
RY.PR.G PerpetualDiscount +1.4139% Now with a pre-tax bid-YTW of 5.48% based on a bid of 20.80 and a limitMaturity.
CM.PR.E PerpetualDiscount +1.4462% Now with a pre-tax bid-YTW of 5.95% based on a bid of 23.50 and a limitMaturity.
BAM.PR.M PerpetualDiscount +1.4577% Now with a pre-tax bid-YTW of 6.87% based on a bid of 17.40 and a limitMaturity.
BAM.PR.K Floater +1.4857%  
FBS.PR.B SplitShare +1.5152% Asset coverage of just under 1.7:1 as of December 20, according to TD. Now with a pre-tax bid-YTW of 4.41% based on a bid of 10.05 and a call 2009-1-14 at 10.00.
SLF.PR.E PerpetualDiscount +1.5233% Now with a pre-tax bid-YTW of 5.48% based on a bid of 20.66 and a limitMaturity.
RY.PR.C PerpetualDiscount +1.5955% Now with a pre-tax bid-YTW of 5.36% based on a bid of 21.65 and a limitMaturity.
GWO.PR.H PerpetualDiscount +1.6348% Now with a pre-tax bid-YTW of 5.58% based on a bid of 21.76 and a limitMaturity.
BNS.PR.K PerpetualDiscount +1.9669% Now with a pre-tax bid-YTW of 5.34% based on a bid of 22.81 and a limitMaturity.
CU.PR.B PerpetualPremium +2.5237% Now with a pre-tax bid-YTW of 5.13% based on a bid of 26.00 and a call 2012-7-1 at 25.00
HSB.PR.D PerpetualDiscount +4.5414% Now with a pre-tax bid-YTW of 5.40% based on a bid of 23.25 and a limitMaturity.
BAM.PR.G FixFloat +4.9972%  
BAM.PR.J OpRet +5.5064% Now with a pre-tax bid-YTW of 4.80% based on a bid of 26.25 and a softMaturity 2018-3-30 at 25.00.
Volume Highlights
Issue Index Volume Notes
CM.PR.A OpRet 481,700 Global crossed 240,300 for cash at 26.57, then the same number for regular at 26.23. Went ex-dividend today for $0.33125. Now with a pre-tax bid-YTW of 4.69% based on a bid of 25.40 and a softMaturity 2011-7-30 at 25.00.
BMO.PR.K PerpetualDiscount 83,200 Scotia processed an Internal Cross for 81,200 at 24.80. Now with a pre-tax bid-YTW of 5.42% based on a bid of 24.65 and a limitMaturity.
CM.PR.I PerpetualDiscount 59,425 Now with a pre-tax bid-YTW of 6.28% based on a bid of 18.73 and a limitMaturity.
CM.PR.H PerpetualDiscount 47,114 Now with a pre-tax bid-YTW of 6.22% based on a bid of 19.31 and a limitMaturity.
BMO.PR.J PerpetualDiscount 39,580 Now with a pre-tax bid-YTW of 5.65% based on a bid of 20.17 and a limitMaturity.

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

Sub-Prime!

Canadian ABCP : Agreement! Before Christmas! Perfect!

Bloomberg reports:

Investors holding about C$33 billion ($33.3 billion) of short-term debt in Canada agreed to swap it for longer-term notes, ending a four-month freeze in trading of the securities.

Today’s agreement, which covers 20 of the 22 non-bank trusts, has been approved “in principle” by the investor group as well as the trust sponsors. Some lenders, including “several of the large Canadian banks,” have said they may provide credit facilities, according to the statement.

Toronto-Dominion Bank, Canada’s second-biggest lender, is “not a participant in the agreement,” bank spokesman Simon Townsend said. The Toronto-based bank had originally resisted supporting the restructuring agreement because it didn’t underwrite the debt in the first place. The C$80 billion market for commercial paper sold by lenders such as Royal Bank of Canada hasn’t been interrupted by the freeze in non-bank paper.

Crawford said that based on the advice of financial adviser JPMorgan Chase & Co., most of the restructured notes will receive a AAA rating, according to the statement.

The group didn’t say how much investors will receive on the dollar, according to spokesman Mark Boutet.

The commercial paper will be restructured differently depending on the type of asset that backs it, the statement said.

Things were looking grim after last week’s hiccup. There are no details on how the margin of the CDSs that have been written will work … the only thing that would make sense to me is that an equity tranche will be issued and paid out of what would otherwise have gone to the senior noteholders. Or, perhaps, the lines from the banks will be more richly rewarded (again, out of the senior noteholders’ hides). But I will report new developments as they are released…

Market Action

December 21, 2007

Today’s report will be somewhat delayed, I’m afraid … it might even have to wait until Monday.

Update

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.11% 5.12% 82,731 15.23 2 +0.6164% 1,057.4
Fixed-Floater 4.89% 5.10% 94,419 15.33 8 -0.2713% 1,021.2
Floater 6.03% 6.05% 140,841 13.84 2 +1.1345% 799.8
Op. Retract 4.86% 2.58% 88,547 3.29 16 +0.4138% 1,038.4
Split-Share 5.32% 5.50% 114,253 4.31 15 -0.2145% 1,025.4
Interest Bearing 6.37% 6.98% 66,699 3.65 4 -0.2557% 1,048.6
Perpetual-Premium 5.84% 5.58% 86,717 6.09 11 +0.2589% 1,009.9
Perpetual-Discount 5.63% 5.68% 403,293 14.36 55 -0.3673% 904.4
Interesting External Papers

Willem Buiter's Prescription

Willem Buiter of the London School of Economics has authored Lessons from the 2007 Financial Crisis, published by the Centre for Economic Policy Research.

The paper includes one thoroughly delicious quote that shows the author understands the nature of regulation:

Because Sarbanes-Oxley compliance is mainly a matter of box-ticking (like most realworld compliance, especially compliance originating in the USA), it has not materially improved the informational value of accounting or the protection offered to investors.

All in all, the essay is extremely good … I may not agree with all of it, but the man makes some good points and has some well-founded opinions. I’ll present some quotes from the essay with my own thoughts … but the full document is well worth reading.

There is a long section on the credit rating agencies. Mr. Buiter states as problems:

  • Any model of credit risk will have flaws and these flaws may be exploited by issuers. Even honest models won’t work particularly well during black swan events.
  • Only default risk is rated – not market risk and not liquidity risk
  • agencies are conflicted, in that:
    • they are paid by the issuers
    • they sell advisory services to their rating service clients
    • the complexity of some instruments results in designer and issuer working with the same model … possibly one designed by the issuer

To Mr. Buiter’s credit, he does not attempt to solve the first two problems with rhetoric:

There is no obvious solution other than ‘try harder and don’t pretend to know more than you know’ for the first problem. The second problem requires better education of the investing public.

His third problem, which has three facets, has a five part solution:

  • Reputational concerns
  • Remove the CRA’s quasi-regulatory role
  • Make the CRAs one-product firms
  • End payment by issuer
  • Increase competition

I don’t have a major problem with the idea of removing the CRAs’ quasi-regulatory role (their ratings are a factor in determining the credit conversion factor that converts the total value of the loan to risk-weighted assets), but Mr. Buiter is not clear on what is to replace the current system.

It seems clear that a loan to IBM is safer than a loan to Joe’s Barbershop; it also seems clear that this difference should have an effect on the measured risk profile of the bank. I suggest that the CRAs have a very good track record in assessing these risks – and yes, I am including the subprime & Enron debacles when reviewing their record.

The thing about risk, you see, is that it’s risky.

With respect to his third proposition, making the CRAs one-product firms … how is he going to enforce this and why would he want to? Yesterday we saw extremely poor performance by the CIBC preferred issues. I will suggest that some portion of this, at least, was due to stockbrokers telling their clients that CIBC was a relatively poor credit (relative to other banks, and relative to their financial position last year at this time) and exposure to it should be minimized. In such a case, the stockbroker is acting as a Credit Rating Agency.

In the absence of a regulatory role for CRAs, how is one to differentiate between a one-product-by-regulation firm and … anybody else?

His proposal for ending issuer payment is so convoluted I will reproduce it in full, to avoid charges of mockery by misquotation:

Payment by the buyer (the investors) is desirable but subject to a ‘collective action’ or ‘free rider’ problem. One solution would be to have the ratings paid for by a representative body for the (corporate) investor side of the market. This could be financed through a levy on the firms in the industry. Paying the levy could be made mandatory for all firms in a regulated industry. Conceivably, the security issuers could also be asked to contribute. Conflict of interest is avoided as long as no individual issuer pays for his own ratings. This would leave some free rider problems, but should permit a less perverse incentivised rating process to get off the ground. I don’t think it would be necessary (or even make sense) to socialise the rating process, say by creating a state-financed (or even industryfinanced) body with official and exclusive powers to provide the ratings.

Frankly, I don’t understand why his proposed solution, involving mandatory payments by firms in the industry, is different from the socialization he decries. There may also be some conflict with his proposal to emphasize reputational concerns and competition … how do I go about getting some of the lolly? Can I just declare to the central body that I am a credit rater, that will be $500,000 please?

Reputational concerns and competition currently work along the lines of … some firms are better regarded by investors than others. I, for instance, have greater respect for Fitch and Moody’s than for S&P and DBRS … give me my choice of any two ratings on a bond, and you know which ones I’ll pay attention to! How would this be reflected in such a centralized system?

In the end, I have to reiterate my familiar refrain: Credit Ratings are Advice. Take it, leave it, your choice. So far, the Bank of Canada has said it best:

investors should not lose sight of the fact that one can delegate tasks but not accountability.

After reviewing the macroeconomic situation he makes further proposals, including:

if a financial institution borrows short and lends long, if it borrows liquid (during normal times, but with the risk of occasional illiquidity in its usual funding channels) and lends illiquid, and if banks are substantially exposed to it, then it should be regulated like a bank, even if it says ‘Hedge Fund’ on the letterhead. The rules should aggressively chase the unceasing attempts, through institutional and instrument innovation, to avoid regulation.

I disagree with this, particularly with the implicit belief that rules exist in order that they be followed. The weak point of the argument here is “if banks are substantially exposed to it“. It does seem likely that there has been far too much contagion in the past crisis, but regulating the universe is not the proper answer. What should be done is to improve the capital requirement rules and force the banks to make a more substantial capital provision for their riskier assets – such as Mr. Buiter implies is a good description for their hedge fund exposure.

If the risk weights applied to, for instance, the provision of a global liquidity line to a SIV have been shown to be inadequate (and this has not been documented, although I suspect that it is the case) … increase the risk weight of the line! Currently it’s at a flat 10% … I suggest that a tiering be considered, so that a bank with $10-billion of tier 1 capital can extend such a line for $10-billion at the 10% rate, but the next ten billion is charged at a 20% rate, etc.

Ensuring that everything is regulated is poor policy. Let us ensure that the core of the financial system – the banks, who have access to lines provided by the central banks – is secure, and then let people play around on the edges to their, and their investors’, hearts’ content.

The main problem with the arrangement [separating bank supervision functions from liquidity provision functions] is that it puts the information about individual banks in a different agency (the FSA) from the agency with the liquid financial resources to provide short-term assistance to a troubled bank (the Bank of England). This happened when the Bank lost banking sector supervision and regulatory responsibility on being made operationally independent for monetary policy by Gordon Brown in 1997. It’s clear this separation of information and resources does not work.

This issue was discussed on December 5.

Liquidity can vanish today, because market participants with surplus liquidity fear that both they themselves and their potential counterparties will be illiquid in the future (say, three months from now), when the loans would have to be repaid. A credible commitment by the Central Bank to provide liquidity in the future (three months from now) would solve the problem, but it is apparent that the required credibility simply does not exist. Therefore, the only time-consistent solution, in the absence of a credible commitment mechanism, is to intervene today at a three-month maturity.

One lesson – that Canadian non-bank ABCP investors will be happy to explain thoroughly – from the current crisis is that liquidity risk is different from credit risk. Traditionally, LIBOR spreads are explained in terms of credit risk – I suggest that liquidity risk is the operational concern and that liquidity hoarding is its sympton. I remember on anecdote from the Panic of 1907 … a banker complained to J.P. Morgan that his liquid assets had been eroded to 18% … Morgan gave him the what-for, telling him that liquid assets were held precisely for such circumstances.

If a bank’s afraid to make three-month interbank loans because it might have its credit lines drawn on in the intervening time, then part of the problem is that it has too many lines – a problem that would be addressed by higher capital charges.

To address the point, however, I have no problem with, for instance, a regular three month term facility, to be financed with treasury bills as a neutralizer.

Capitalism, based on greed, private property rights and decentralised decision making, is both cyclical and subject to bouts of financial manic-depressive illness. There is no economy-wide auctioneer, no enforcer of systemic ‘transversality conditions’ to rule out periodic explosive bubble behaviour of asset prices in speculative
markets. It’s unfortunate, but we have to live with it. The last time humanity tried to do away with these excesses of capitalism, we got central planning, and we all know now how well that worked. Hayek and Keynes were both right.

Hear, hear!

All in all, a fine article.

Market Action

December 20, 2007

I’m sorry. I had witty & trenchant analysis planned, the secrets of the universe unveiled and was even going to tell you what the price of oil will be exactly one year hence … but now I’ve run out of time. So all you’re going to get is the links:

Yet More Trouble for Bear?

Lacker: Fed Auction’s Effect Unclear

CEPR Policy Insight #18 (there will be a separate post devoted to this one … tomorrow?)

MBIA Tumbles on $8.1 Billion of CDOs, Fitch Warning

So How Did Morgan Stanley Lose That $9.4  Billion

Lessons from the North Atlantic Financial Crisis

SunTrust Injects $1.4 Billion to Protect Money Funds

Merrill’s Writedowns to Top $8 Billion, Analysts Say

The alliance between China’s (nominally) communist government and Wall Street deepens …

A Proposal for Reviving the Credit Markets

Experts Weigh in on Merits of Fiscal Stimulus

Whoosh! There’s a day and a half, for anybody keeping track! Preferreds were down again on the day, on heavy volume. The CIBC issues were extremely badly hurt, presumably on news of their subprime/ACA problems discussed yesterday, which may have been exacerbated by tax loss selling.

There’s some interesting timing issues with the CIBC issues … the last day for tax-loss selling is December 24, and that is their ex-date for the current dividend … tomorrow, December 21, is their last cum-date. So … if you have such an issue you really want to sell, when do you sell it? Decisions, decisions …

Remember the discussion of Weston yield spreads that included a note that the CM.PR.? issues were trading with a yield spread of 11bp? That’s way, way, way out of date now. Looking solely at the bid-YTW of their PerpetualDiscount issues, I make the high yield 6.30% (CM.PR.I) and the low yield 5.91% (CM.PR.D)

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.13% 5.13% 83,476 15.22 2 +0.4326% 1,051.0
Fixed-Floater 4.87% 5.07% 95,550 15.38 8 -0.1635% 1,024.0
Floater 6.10% 6.12% 131,032 13.74 2 +1.0329% 790.8
Op. Retract 4.88% 3.06% 86,884 3.29 16 +0.2399% 1,034.1
Split-Share 5.31% 5.43% 111,961 4.31 15 +0.1808% 1,027.6
Interest Bearing 6.36% 6.92% 67,495 3.66 4 -0.2503% 1,051.3
Perpetual-Premium 5.86% 5.63% 86,708 6.94 11 -0.5641% 1,007.3
Perpetual-Discount 5.61% 5.66% 395,551 14.39 55 -0.6695% 907.7
Major Price Changes
Issue Index Change Notes
BAM.PR.G FixFloat -4.9974%  
CM.PR.I PerpetualDiscount -4.8573% Now with a pre-tax bid-YTW of 6.30% based on a bid of 19.00 and a limitMaturity.
CM.PR.H PerpetualDiscount -4.6967% Now with a pre-tax bid-YTW of 6.27% based on a bid of 19.48 and a limitMaturity.
CM.PR.J PerpetualDiscount -4.4388% Now with a pre-tax bid-YTW of 6.11% based on a bid of 18.73 and a limitMaturity.
CM.PR.G PerpetualDiscount -3.3755% Now with a pre-tax bid-YTW of 5.99% based on a bid of 22.90 and a limitMaturity.
CM.PR.P PerpetualDiscount -3.3531% Now with a pre-tax bid-YTW of 6.11% based on a bid of 22.77 and a limitMaturity.
CM.PR.E PerpetualDiscount -3.2635% Now with a pre-tax bid-YTW of 5.92% based on a bid of 24.01 and a limitMaturity.
CIU.PR.A PerpetualDiscount -2.8708% Now with a pre-tax bid-YTW of 5.73% based on a bid of 20.30 and a limitMaturity.
CU.PR.A PerpetualPremium -2.4951% Now with a pre-tax bid-YTW of 5.85% based on a bid of 25.01 and a limitMaturity.
W.PR.J PerpetualDiscount -2.1277% Now with a pre-tax bid-YTW of 6.20% based on a bid of 23.00 and a limitMaturity.
W.PR.H PerpetualDiscount -1.9531% Now with a pre-tax bid-YTW of 6.18% based on a bid of 22.59 and a limitMaturity.
GWO.PR.G PerpetualDiscount -1.6949% Now with a pre-tax bid-YTW of 5.62% based on a bid of 23.20 and a limitMaturity.
BMO.PR.J PerpetualDiscount -1.6585% Now with a pre-tax bid-YTW of 5.64% based on a bid of 20.16 and a limitMaturity.
PWF.PR.L PerpetualDiscount -1.6463% Now with a pre-tax bid-YTW of 5.55% based on a bid of 23.30 and a limitMaturity.
CM.PR.D PerpetualPremium (for now!) -1.5538% Now with a pre-tax bid-YTW of 5.91% based on a bid of 24.71 and a limitMaturity.
BSD.PR.A InterestBearing -1.5301% Asset coverage of 1.6+:1 as of December 14, according to the company. Now with a pre-tax bid-YTW of 7.89% (mostly as interest) based on a bid of 9.01 and a hardMaturity 2015-3-31 at 10.00.
RY.PR.G PerpetualDiscount -1.3333% Now with a pre-tax bid-YTW of 5.49% based on a bid of 20.72 and a limitMaturity.
SLF.PR.C PerpetualDiscount -1.2566% Now with a pre-tax bid-YTW of 5.47% based on a bid of 20.43 and a limitMaturity.
PWF.PR.J OpRet -1.2039% Now with a pre-tax bid-YTW of 4.50% based on a bid of 25.44 and a softMaturity 2013-7-30 at 25.00.
CL.PR.B PerpetualPremium -1.1534% Now with a pre-tax bid-YTW of 5.20% based on a bid of 25.71 and a call 2009-1-30 at 25.50 OR a call 2010-1-30 at 25.25.
RY.PR.D PerpetualDiscount -1.1374% Now with a pre-tax bid-YTW of 5.46% based on a bid of 20.86 and a limitMaturity.
BNA.PR.C SplitShare -1.0183% Asset coverage of 3.7+:1 as of November 30 according to the company. Now with a pre-tax bid-YTW of 8.65% based on a bid of 17.65 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (5.99% to 2010-9-30) and BNA.PR.B (7.49% to 2016-3-25).
RY.PR.E PerpetualDiscount -1.0422% Now with a pre-tax bid-YTW of 5.45% based on a bid of 20.89 and a limitMaturity.
WFS.PR.A SplitShare +1.0091% Asset coverage of just under 2.0:1 as of December 13 according to Mulvihill. Now with a pre-tax bid-YTW of 5.20% based on a bid of 10.01 and a hardMaturity 2011-6-30 at 10.00.
POW.PR.B PerpetualDiscount +1.0947% Now with a pre-tax bid-YTW of 5.57% based on a bid of 24.01 and a limitMaturity.
SBN.PR.A SplitShare +1.1000% Asset coverage of 2.3+:1 as of December 13, according to Mulvihill. Now with a pre-tax bid-YTW of 5.08% based on a bid of 10.11 and a hardMaturity 2014-12-1 at 10.00.
SLF.PR.B PerpetualDiscount +1.1682% Now with a pre-tax bid-YTW of 5.55% based on a bid of 21.65 and a limitMaturity.
PWF.PR.F PerpetualDiscount +1.3356% Now with a pre-tax bid-YTW of 5.48% based on a bid of 24.28 and a limitMaturity.
GWO.PR.I PerpetualDiscount +1.3426% Now with a pre-tax bid-YTW of 5.55% based on a bid of 20.38 and a limitMaturity.
BAM.PR.K Floater +1.7585%  
IAG.PR.A PerpetualDiscount +1.9250% Now with a pre-tax bid-YTW of 5.60% based on a bid of 20.65 and a limitMaturity.
LBS.PR.A SplitShare +1.9901% Asset coverage of 2.4+:1 as of December 13 according to Brompton. Now with a pre-tax bid-YTW of 4.98% based on a bid of 10.25 and a hardMaturity 2013-11-29 at 10.00.
BAM.PR.J OpRet +2.0494% Now with a pre-tax bid-YTW of 5.73% based on a bid of 24.40 and a softMaturity 2018-3-30 at 25.00.
Volume Highlights
Issue Index Volume Notes
IQW.PR.C Scraps (would be OpRet, but there are credit concerns) 419,634 In default.
IQW.PR.D Scraps (would be PerpetualDiscount, but there are credit concerns) 198,225 In default.
SLF.PR.C PerpetualDiscount 126,630 Now with a pre-tax bid-YTW of 5.47% based on a bid of 20.43 and a limitMaturity.
SLF.PR.A PerpetualDiscount 99,502 Now with a pre-tax bid-YTW of 5.60% based on a bid of 21.30 and a limitMaturity.
BMO.PR.J PerpetualDiscount 90,390 Now with a pre-tax bid-YTW of 5.64% based on a bid of 20.16 and a limitMaturity.
SLF.PR.E PerpetualDiscount 88,340 Now with a pre-tax bid-YTW of 5.48% based on a bid of 20.63 and a limitMaturity.
BAM.PR.M PerpetualDiscount 79,080 Now with a pre-tax bid-YTW of 6.75% based on a bid of 17.69 and a limitMaturity.
BNS.PR.M PerpetualDiscount 76,164 Now with a pre-tax bid-YTW of 5.36% based on a bid of 21.32 and a limitMaturity.

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

HIMI Preferred Indices

HIMIPref™ Preferred Indices : January 2005

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

HIMI Index Values 2005-1-31
Index Closing Value (Total Return) Issues Mean Credit Quality Median YTW Median DTW Median Daily Trading Mean Current Yield
Ratchet 1,344.4 1 2.00 2.44% 21.2 101M 2.46%
FixedFloater 2,251.3 8 2.00 2.30% 1.8 70M 5.25%
Floater 1,990.5 5 2.00 -5.27% 0.08 50M 3.28%
OpRet 1,822.7 20 1.51 2.75% 3.5 89M 4.63%
SplitShare 1,855.6 13 1.92 3.23% 3.5 92M 4.95%
Interest-Bearing 2,237.7 8 2.00 3.97% 2.0 94M 6.51%
Perpetual-Premium 1,405.8 35 1.63 4.31% 3.1 107M 5.34%
Perpetual-Discount 1,670.3 0 0 0 0 0 0

Index Constitution, 2005-1-31, Pre-rebalancing

Index Constitution, 2005-1-31, Post-rebalancing

Market Action

December 19, 2007

Today’s big news was the downgrade of ACA Financial by S&P, the subject of speculation on December 13. According to the S&P Press release:

The rating actions were prompted by worsening expectations for the performance of insured nonprime residential mortgage backed securities and CDOs of asset backed securities. Based upon current stress test analysis, the details of which are being published simultaneously with this release, the affected companies may experience claims and/or capital consumptive negative rating transitions such that their capital resources may no longer be sufficient at their respective rating levels. Another consideration in the analysis, if there is a capital shortfall, is the magnitude of the shortfall and the extent to which the company has raised or is planning to raise new capital, and the viability of that capital plan.

Standard & Poor’s will host a teleconference today at 3 p.m. EST.

Replay Numbers:
US/Canada: 1-866-455-0459
All Others: 1-203-369-1259
Replay will expire on Jan. 16, 2008

CIBC had this to say:

Following Standard and Poor’s announcement today that it had reduced the credit rating of ACA Financial Guaranty Corp. from “A” to “CCC”, CIBC confirmed that ACA is a hedge counterparty to CIBC in respect
of approximately U.S. $3.5 billion of its U.S. subprime real estate exposure.

    It is not known whether ACA will continue as a viable counterparty to CIBC. Although CIBC believes it is premature to predict the outcome, CIBC believes there is a reasonably high probability that it will incur a large charge in its financial results for the First Quarter ending January 31, 2008.

    As CIBC disclosed on page 52 of its Investor Presentation dated December 6, 2007, the mark of the hedge protection from the “A-rated” counterparty (ACA) as at October 31, 2007 was U.S. $1.71 billion. As at November 30, 2007, this mark was US$2.0 billion. If the charge in the First Quarter were to be U.S. $2.0 billion (US$1.3 billion after tax) CIBC currently projects its Tier 1 capital ratio to remain in excess of 9% as at January 31, 2008.

Exciting times for CIBC! I have previously examined their capitalization and later compared it to the other Canadian banks.

Morgan Stanley had another example of sub-prime related write-offs:

Morgan Stanley wrote down its subprime-infected mortgage holdings by a greater-than-expected $9.4 billion and received a $5 billion cash infusion from state- controlled China Investment Corp.

To put those numbers into perspective, have a look at the actual quarterly report:

Total capital as of November 30, 2007 was $193.7 billion, including $36.1 billion of common shareholders’ equity, preferred equity and junior subordinated debt issued to capital trusts. Book value per common share was $28.56, based on 1.1 billion shares outstanding.

The $36.1-billion figure is what would usually be referred to a “equity capital”, the rest is simply long-term subordinated debt.

I mentioned Bloomberg’s story about the antics at a Californian sub-prime origination office yesterday. They continue the series today with the story of Hayman Capital Partners that bet against them and made a fortune. Fascinating stuff!

Funny day today. Trading continued fast and furious – next Monday, Dec. 24, is the last day for tax loss selling – and there were some very strange moves. The market was down again – with the suddenly dubious Canadian Imperial Bank of Commerce greatly over-represented in the losers’ list.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 5.13% 5.13% 85,670 15.22 2 +0.1234% 1,046.4
Fixed-Floater 4.86% 5.05% 95,746 15.42 8 -0.0283% 1,025.7
Floater 6.17% 6.18% 123,629 13.65 2 +1.2416% 782.7
Op. Retract 4.89% 3.80% 85,957 3.45 16 -0.0507% 1,031.6
Split-Share 5.32% 5.44% 110,054 4.31 15 +0.1921% 1,025.8
Interest Bearing 6.34% 6.85% 65,562 3.67 4 +0.2064% 1,054.0
Perpetual-Premium 5.82% 4.64% 84,952 6.90 11 -0.1018% 1,013.0
Perpetual-Discount 5.57% 5.62% 389,951 14.45 55 -0.2077% 913.9
Major Price Changes
Issue Index Change Notes
BNA.PR.C SplitShare -2.4189% Asset coverage of 3.7+:1 as of November 30, according to the company. Now with a pre-tax bid-YTW of 8.52% (interest equivalent: 11.93%!) based on a bid of 17.75 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (6.12% to 2010-9-30) and BNA.PR.B (7.49% to 2016-3-25).
CM.PR.J PerpetualDiscount -2.0000% Now with a pre-tax bid-YTW of 5.84% based on a bid of 19.50 and a limitMaturity.
GWO.PR.I PerpetualDiscount -1.4216% Now with a pre-tax bid-YTW of 5.62% based on a bid of 20.11 and a limitMaturity.
CM.PR.G PerpetualDiscount -1.4143% Now with a pre-tax bid-YTW of 5.78% based on a bid of 23.70 and a limitMaturity.
CM.PR.P PerpetualDiscount -1.3813% Now with a pre-tax bid-YTW of 5.88% based on a bid of 23.56 and a limitMaturity.
W.PR.H PerpetualDiscount -1.3276% Now with a pre-tax bid-YTW of 6.05% based on a bid of 23.04 and a limitMaturity.
CM.PR.I PerpetualDiscount -1.2852% Now with a pre-tax bid-YTW of 5.99% based on a bid of 19.97 and a limitMaturity.
RY.PR.F PerpetualDiscount -1.1990% Now with a pre-tax bid-YTW of 5.46% based on a bid of 20.60 and a limitMaturity.
RY.PR.G PerpetualDiscount -1.1765% Now with a pre-tax bid-YTW of 5.42% based on a bid of 21.00 and a limitMaturity.
IAG.PR.A PerpetualDiscount -1.1707% Now with a pre-tax bid-YTW of 5.70% based on a bid of 20.26 and a limitMaturity.
PWF.PR.G PerpetualDiscount -1.1417% Now with a pre-tax bid-YTW of 5.96% based on a bid of 25.11 and a limitMaturity.
CM.PR.H PerpetualDiscount -1.0169% Now with a pre-tax bid-YTW of 5.97% based on a bid of 20.44 and a limitMaturity.
BCE.PR.T FixFloat +1.0225%  
FTN.PR.A SplitShare +1.0902% Asset coverage of 2.5+:1 as of December 14, according to the company. Now with a pre-tax bid-YTW of 3.26% based on a bid of 10.20 and a hardMaturity 2008-12-1 at 10.00.
FTU.PR.A SplitShare +1.2618% Asset coverage of 1.7+:1 as of December 14, according to the company. Now with a pre-tax bid-YTW of 6.22% based on a bid of 9.63 and a hardMaturity 2012-12-1 at 10.00.
ELF.PR.F PerpetualDiscount +1.5294% Now with a pre-tax bid-YTW of 6.57% based on a bid of 20.58 and a limitMaturity.
POW.PR.B PerpetualDiscount +1.5790% Now with a pre-tax bid-YTW of 5.63% based on a bid of 23.75 and a limitMaturity.
POW.PR.D PerpetualDiscount +1.9969% Now with a pre-tax bid-YTW of 5.48% based on a bid of 22.80 and a limitMaturity.
BAM.PR.K Floater +2.7711%  
DFN.PR.A SplitShare +2.7711% Asset coverage of just under 2.7+:1 as of December 14, according to the company. Now with a pre-tax bid-YTW of 4.71% based on a bid of 10.36 and a hardMaturity 2014-12-1 at 10.00.
BAM.PR.G FixFloat +5.611%  
Volume Highlights
Issue Index Volume Notes
TD.PR.P PerpetualDiscount 291,550 Now with a pre-tax bid-YTW of 5.34% based on a bid of 24.88 and a limitMaturity.
BAM.PR.N PerpetualDiscount 142,985 Now with a pre-tax bid-YTW of 6.73% based on a bid of 17.75 and a limitMaturity.
BAM.PR.M PerpetualDiscount 113,310 Now with a pre-tax bid-YTW of 6.71% based on a bid of 17.80 and a limitMaturity.
BNS.PR.M PerpetualDiscount 79,165 Now with a pre-tax bid-YTW of 5.34% based on a bid of 21.41 and a limitMaturity.
BAM.PR.K Floater 66,820  
CM.PR.I PerpetualDiscount 66,312 Now with a pre-tax bid-YTW of 5.99% based on a bid of 19.97 and a limitMaturity.

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

HIMI Preferred Indices

HIMIPref™ Preferred Indices : December 2004

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

HIMI Index Values 2004-12-31
Index Closing Value (Total Return) Issues Mean Credit Quality Median YTW Median DTW Median Daily Trading Mean Current Yield
Ratchet 1,347.1 1 2.00 2.59% 20.8 108M 2.61%
FixedFloater 2,243.3 8 2.00 2.49% 19.2 60M 5.24%
Floater 1,978.6 6 2.00 -5.74% 0.08 51M 3.28%
OpRet 1,815.6 20 1.51 2.88% 3.6 76M 4.63%
SplitShare 1,849.9 14 1.93 3.38% 2.8 97M 5.01%
Interest-Bearing 2,250.6 8 2.00 3.44% 2.0 86M 6.47%
Perpetual-Premium 1,446.3 35 1.63 4.11% 3.1 106M 5.34%
Perpetual-Discount 1,718.5 0 0 0 0 0 0

Index Constitution, 2004-12-31, Pre-rebalancing

Index Constitution, 2004-12-31, Post-rebalancing

Issue Comments

CM on Credit Review Negative

DBRS placed the Canadian Imperial Bank of Commerce under Credit Review Negative today:

DBRS has today placed all ratings of Canadian Imperial Bank of Commerce (CIBC or the Bank) Under Review with Negative Implications including its long-term, short-term and preferred ratings. This rating action is a result of concentration risk to some hedge counterparties that have and continue to experience credit weakness. With the meaningful downgrade action today of ACA Financial Guarantee Corporation, CIBC would be expected to take a pre-tax charge in Q1 2008. As of November 30, 2007 the mark was USD2.0 billion. If the charge were to be USD2.0 billion (USD1.3 billion after tax), CIBC expects its Tier 1 capital ratio will remain above 9% at the end of Q1 2008.

The Under Review with Negative Implications action considers:

(1) A higher than expected concentration risk of counterparty exposure, which does not reflect positively on the overall risk management ability of the Bank.
(2) With ongoing deterioration in the U.S. subprime market, the long-term viability of some of CIBC’s other hedge counterparties will remain uncertain. As such capital ratios will be under pressure if further negative events were to occur.
(3) The reputational related damage could have negative implications on CIBC’s business activities.

Fitch does not rate the preferreds, but has put the debt on Rating Watch Negative:

Fitch Ratings-New York-19 December 2007: Fitch Ratings has placed Canadian Imperial Bank of Commerce’s (CIBC) ‘AA-/F1+’ long- and short-term Issuer Default Ratings (IDRs) on Rating Watch Negative. CIBC has significant exposure to U.S. CDOs comprised of largely subprime RMBS. This portfolio had been hedged with credit default swaps (CDS) from either highly rated banks or financial guarantors. However, a significant portion of the CDS protection ($3.5 billion) was written by a now weak financial guarantor. As disclosed today, CIBC’s mark against this exposure was $2 billion at Nov. 30, 2007. This means CIBC will most likely take a significant charge in the current quarter (first quarter-2008) against this exposure. CIBC has previously taken significant marks ($777 million, net of ABX hedge gains), in fiscal 2007, against its unhedged CDO/RMBS exposures.

Aside from this exposure, CIBC’s recent earnings have exhibited improving trends, with a strong performance from the Retail Markets business. Traditional asset quality measures remain quite good and liquidity is prudently managed. CIBC’s Tier I risk adjusted capital ratio was comfortably in excess of regulatory requirements at 9.7% at fiscal year-end.

Fitch expects CIBC to be able to manage through this situation, despite the potentially significant earnings charges. With a good capital cushion at the present time, to the extent that any charges erode capital, Fitch expects that capital would be rebuilt quickly. In fact, this management team has already established a track record in this regard. Nevertheless, the capital markets have been challenging since the summer. CIBC previously expressed its intent to build capital, starting with the cessation of share repurchases. However, CIBC continues to rely heavily on hybrid forms of capital. Tangible common equity represented 2.74% of tangible assets (down from 2.96% at Oct. 31, 2006) and 7.31% of risk-weighted assets as of Oct. 31, 2007.

It hasn’t been too long since the bank was on Credit Watch Positive! What a difference nine months makes, as the Bishop said to the actress. 

The bank has the following series of preferred shares: CM.PR.A, CM.PR.D, CM.PR.E, CM.PR.G, CM.PR.H, CM.PR.I, CM.PR.J, CM.PR.P and CM.PR.R.