PerpetualDiscount Duration Calculation

August 11th, 2008

Very simple.

Given that the yield is “r” per period and that the first payment is received exactly one period hence:

Macaulay Duration = (1+r) / r

Modified Duration = 1 / r

And here’s the proof (TIF file).

Note that, strictly speaking, these are the durations of a perpetual annuity; the assumption of perpetuity gets shakier as redemption becomes more likely.

PFD.PR.A Holders: Show Us the Money!

August 11th, 2008

JovFunds Management Inc. has announced:

at the special meeting of the preferred shareholders of Charterhouse held today, preferred shareholders voted:

a. Against a proposed resolution to approve an amendment of the articles of incorporation of Charterhouse to permit Charterhouse to redeem all outstanding preferred shares on a merger of Charterhouse into the Fairway Diversified Income and Growth Trust; and

b. For a proposed resolution to approve an amendment to the articles of incorporation of Charterhouse to permit the Corporation to redeem all outstanding preferred shares prior the scheduled redemption date. [sic]

The meeting was previously discussed on PrefBlog.

August, 2008, PrefLetter Released!

August 11th, 2008

The August, 2008, edition of PrefLetter has been released and is now available for purchase as the “Previous edition”.

Until further notice, the “Previous Edition” will refer to the August, 2008, issue, while the “Next Edition” will be the September, 2008, issue, scheduled to be prepared as of the close September 12 and eMailed to subscribers prior to market-opening on September 15.

PrefLetter is intended for long term investors seeking issues to buy-and-hold. At least one recommendation from each of the major preferred share sectors is included and discussed.

Note: PrefLetter, being delivered to clients as a large attachment by eMail, sometimes runs afoul of spam filters. If you have not received your copy within fifteen minutes of a release notice such as this one, please double check your (company’s) spam filtering policy and your spam repository. If it’s not there, contact me and I’ll get you your copy … somehow!

Errata, 2008-8-13: Typographical errors on page 2 have been found. The price for BNA.PR.C is 17.20-99; the price for BCE.PR.Z is 24.00-25.

August 8, 2008

August 8th, 2008

Another common equity dividend cut that leaves the preferreds unscathed! This sort of stuff does my heart good!

Fannie Mae, the largest U.S. mortgage- finance company, cut its dividend 86 percent after posting a loss that was more than three times analysts’ estimates and said the worst housing slump since the Great Depression is deepening.

Mudd has raised $14.4 billion since late last year and reduced the dividend from 50 cents since December, though still failed to quell concerns that the company is short of capital. As worries escalated, he dispatched executives to Asia to calm investors. Fannie’s core capital was $47 billion at the end of the quarter, up from $42.7 billion in March, after the company sold $7.4 billion of preferred stock.

The fact that they were able to finance themselves with preferreds underlines the importance to operating companies of maintaining the dividends … Fannie Mae issued $2-billion at 8.25%, $2.25-billion at 8.75% + mandatory conversion and $7-billion at LIBOR+423 last December. The convertable issue, of course, cannot be considered a fixed income security … but the extra security of the dividend until conversion is quite valuable!

The UK Financial Services Authority has concluded its investigation into the HBOS share collapse. Assiduous Readers will remember that the HBOS rights issue flopped. Not suprisingly:

Despite the likelihood that the rumours contributed to the fall in the share price, the FSA has not uncovered evidence that they were spread as part of a concerted attempt by individuals to profit by manipulating the share price.

Of interest is:

The effect of algorithmic trading strategies, which amplified the impact of the initial downward trend in the HBOS share price.

My expectation would have been that algorithmic trading strategies would cushion the downward trend, rather than amplifying it, as swaps between banks became more attractive. Certainly, “algorithmic” doesn’t mean anything in itself, but I would be most interested in learning the details of this automated positive feedback loop … and I bet the FSA is puzzling over this type of trading even now!

Well, a week-odd in to August and things are looking a little better! PerpetualDiscounts are up every day month-to-date, totalling 1.38%. They have had only one down-day (July 28) since the trough on July 16 and are now up 6.62% since trough-date. Average dividend yield is now 6.23%, equivalent to 8.72% interest for taxable holders with a 1.4x equivalency factor; long corporates now yield about 6.15% so the PTIE spread is 257bp … still above the previous ten-year high of 250bp.

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 N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.65% 4.37% 58,468 16.44 7 +0.0879% 1,098.8
Floater 4.10% 4.13% 52,120 17.11 3 0.5182% 900.2
Op. Retract 4.97% 4.23% 121,433 2.83 17 +0.1966% 1,046.5
Split-Share 5.35% 6.00% 57,927 4.46 14 +0.2051% 1,035.8
Interest Bearing 6.28% 6.78% 50,634 5.27 2 -0.3571% 1,115.7
Perpetual-Premium 6.19% 6.15% 71,049 2.27 1 -0.0396% 987.7
Perpetual-Discount 6.18% 6.23% 203,557 13.58 67 +0.2989% 859.6
Major Price Changes
Issue Index Change Notes
CM.PR.P PerpetualDiscount -2.3278% Now with a pre-tax bid-YTW of 6.90% based on a bid of 20.14 and a limitMaturity.
BNS.PR.K PerpetualDiscount +1.1429% Now with a pre-tax bid-YTW of 5.70% based on a bid of 21.24 and a limitMaturity.
CM.PR.D PerpetualDiscount +1.1899% Now with a pre-tax bid-YTW of 6.83% based on a bid of 21.26 and a limitMaturity.
CM.PR.H PerpetualDiscount +1.3582% Now with a pre-tax bid-YTW of 6.77% based on a bid of 17.91 and a limitMaturity.
PWF.PR.E PerpetualDiscount +1.4014% Now with a pre-tax bid-YTW of 6.16% based on a bid of 22.43 and a limitMaturity.
SLF.PR.A PerpetualDiscount +1.4256% Now with a pre-tax bid-YTW of 6.28% based on a bid of 19.21 and a limitMaturity.
POW.PR.D PerpetualDiscount +1.4677% Now with a pre-tax bid-YTW of 6.10% based on a bid of 20.74 and a limitMaturity.
CM.PR.I PerpetualDiscount +1.5936% Now with a pre-tax bid-YTW of 6.65% based on a bid of 17.85 and a limitMaturity.
RY.PR.W PerpetualDiscount +1.6203% Now with a pre-tax bid-YTW of 6.13% based on a bid of 20.07 and a limitMaturity.
BAM.PR.B Floater +1.6316%  
CM.PR.J PerpetualDiscount +1.7109% Now with a pre-tax bid-YTW of 6.59% based on a bid of 17.24 and a limitMaturity.
ELF.PR.F PerpetualDiscount +1.8182% Now with a pre-tax bid-YTW of 6.85% based on a bid of 19.60 and a limitMaturity.
MFC.PR.C PerpetualDiscount +1.9191% Now with a pre-tax bid-YTW of 5.82% based on a bid of 19.65 and a limitMaturity.
WFS.PR.A SplitShare +2.2976% Asset coverage of 1.6+:1 as of July 31, according to Mulvihill. Now with a pre-tax bid-YTW of 8.10% based on a bid of 9.35 and a hardMaturity 2011-6-30 at 10.00.
BAM.PR.J OpRet +2.4765% Now with a pre-tax bid-YTW of 6.07% based on a bid of 24.00 and a softMaturity 2018-3-30 at 25.00. Compare with BAM.PR.H (6.49% to 2012-3-30), BAM.PR.I (6.70% to 2013-12-30) and BAM.PR.O (7.21% to 2013-6-30).
POW.PR.A PerpetualDiscount +2.5101% Now with a pre-tax bid-YTW of 6.18% based on a bid of 22.87 and a limitMaturity.
CU.PR.A PerpetualDiscount +2.9399% Now with a pre-tax bid-YTW of 5.92% based on a bid of 24.51 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
CM.PR.G PerpetualDiscount 428,195 Nesbitt crossed 400,000 at 20.00, then another 17,500 at the same price. Now with a pre-tax bid-YTW of 6.78% based on a bid of 20.12 and a limitMaturity.
CM.PR.I PerpetualDiscount 98,660 CIBC crossed 91,500 at 17.86. Now with a pre-tax bid-YTW of 6.65% based on a bid of 17.85 and a limitMaturity.
CM.PR.J PerpetualDiscount 88,839 CIBC crossed 81,500 at 17.26. Now with a pre-tax bid-YTW of 6.59% based on a bid of 17.24 and a limitMaturity.
RY.PR.K OpRet 60,781 Nesbitt crossed 25,000 at 25.00, then CIBC crossed 27,100 at the same price. Now with a pre-tax bid-YTW of 4.00% based on a bid of 24.97 and optionCertainty 2008-9-7 at 25.00. Has been called for redemption August 22 at 25.00.
RY.PR.H PerpetualDiscount 51,480 Nesbitt bought 10,000 from CIBC at 24.34, CIBC crossed 10,200 at 24.30, Nesbitt bought another 11,800 from CIBC at 24.34, then CIBC crossed another 16,300 at 24.30. Now with a pre-tax bid-YTW of 5.84% based on a bid of 24.26 and a limitMaturity.

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

Update: Assiduous Reader prefwatcher takes me to task in the comments for not hating the Fannie Mae preferreds and suggests I look at the charts … so here’s the common vs. FNMPRG:

Clearly, not pretty for the preferreds – but, my point was, even less pretty for the common.

My glee at seeing common dividends cut while preferreds continue rolling along is, perhaps, a little exagerated … but there are so many commentators who take the view that preferred dividends are easy to cut I take great pleasure in pointing out contrary evidence. Fannie’s preferred stock is rated A1 Review-Negative by Moody’s, by the way. This note has also attracted attention at FWR.

August PrefLetter Now in Preparation

August 8th, 2008

The markets have closed and the August edition of PrefLetter is now being prepared.

PrefLetter is the monthly newsletter recommending individual issues of preferred shares to subscribers. There is at least one recommendation from every major type of preferred share; the recommendations are taylored for “buy-and-hold” investors.

The August issue will be eMailed to clients and available for single-issue purchase with immediate delivery prior to the opening bell on Monday. I will write another post on the weekend advising when the new issue has been uploaded to the server … so watch this space carefully if you intend to order “Next Issue” or “Previous Issue”!

August 7, 2008

August 7th, 2008

Menzie Chinn of Econbrowser passes along a very gloomy paper on the interaction of recessions, credit contractions, housing price declines and stock market declines:

In particular, we show that recessions associated with credit crunches and house price busts are deeper and last longer than other recessions are.

Citigroup has agreed to a plan to bail-out holders of Auction Rate Securities:

Cuomo accused Citigroup of fraud in an Aug. 1 letter, claiming the firm should have told clients the auction-rate market survived between August 2007 and February 2008 only because of bidding from the bank. The letter demanded Citigroup buy back investors’ holdings in the “immediate future,” reimburse their damages and pay a “significant” fine.

Total craziness. If the politicians and the bureaucrats really think they’re helping the capital markets in the long-term with this sort of nonsense, their successors will have another think coming. All that is accomplished by this sort of thing is the creation of an aversion for anything but the plainest of vanilla offerings from the big investment banks. If any retail-scum investor actually wishes to buy things like this in the future – too bad! It will be too risky for the bank to sell it to you.

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 N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.65% 4.37% 58,346 16.45 7 +0.4065% 1,097.8
Floater 4.12% 4.15% 53,960 17.07 3 0.0000% 895.6
Op. Retract 4.98% 4.18% 121,836 2.77 17 +0.1618% 1,044.4
Split-Share 5.36% 6.06% 58,123 4.46 14 -0.0842% 1,033.7
Interest Bearing 6.25% 6.70% 49,427 5.27 2 +0.4100% 1,119.7
Perpetual-Premium 6.19% 6.13% 68,898 2.27 1 +0.0396% 988.1
Perpetual-Discount 6.20% 6.25% 205,166 13.56 67 +0.3491% 857.0
Major Price Changes
Issue Index Change Notes
NA.PR.L PerpetualDiscount -1.1640% Now with a pre-tax bid-YTW of 6.53% based on a bid of 18.68 and a limitMaturity.
FFN.PR.A SplitShare -1.1134% Asset coverage of 1.8+:1 as of July 31 according to the company. Now with a pre-tax bid-YTW of 5.74% based on a bid of 9.77 and a hardMaturity 2014-12-1 at 10.00.
GWO.PR.H PerpetualDiscount +1.0000% Now with a pre-tax bid-YTW of 6.09% based on a bid of 20.20 and a limitMaturity.
CM.PR.J PerpetualDiscount +1.0733% Now with a pre-tax bid-YTW of 6.71% based on a bid of 16.95 and a limitMaturity.
BCE.PR.G FixFloat +1.1642%  
GWO.PR.I PerpetualDiscount +1.2221% Now with a pre-tax bid-YTW of 5.99% based on a bid of 19.05 and a limitMaturity.
CM.PR.P PerpetualDiscount +1.2270% Now with a pre-tax bid-YTW of 6.74% based on a bid of 20.62 and a limitMaturity.
BAM.PR.J OpRet +1.2976% Now with a pre-tax bid-YTW of 6.41% based on a bid of 23.42 and a softMaturity 2018-3-30 at 25.00. Compare with BAM.PR.H (6.47% to 2012-3-30), BAM.PR.I (6.77% to 2013-12-30) and BAM.PR.O (7.30% to 2013-6-30).
CM.PR.G PerpetualDiscount +1.3020% Now with a pre-tax bid-YTW of 6.74% based on a bid of 20.23 and a limitMaturity.
CM.PR.I PerpetualDiscount +1.3264% Now with a pre-tax bid-YTW of 6.76% based on a bid of 17.57 and a limitMaturity.
BNS.PR.K PerpetualDiscount +2.3891% Now with a pre-tax bid-YTW of 5.77% based on a bid of 21.00 and a limitMaturity.
POW.PR.D PerpetualDiscount +2.6620% Now with a pre-tax bid-YTW of 6.19% based on a bid of 20.44 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
RY.PR.G PerpetualDiscount 54,635 RBC crossed 50,000 at 18.31. Now with a pre-tax bid-YTW of 6.17% based on a bid of 18.30 and a limitMaturity.
MFC.PR.C PerpetualDiscount 51,700 RBC crossed 50,000 at 19.40. Now with a pre-tax bid-YTW of 5.93% based on a bid of 19.28 and a limitMaturity.
RY.PR.W PerpetualDiscount 45,000 National crossed 34,400 at 19.75. Now with a pre-tax bid-YTW of 6.23% based on a bid of 19.75 and a limitMaturity.
SLF.PR.A PerpetualDiscount 35,300 Now with a pre-tax bid-YTW of 6.37% based on a bid of 18.94 and a limitMaturity.
BCE.PR.G FixFloat 35,300 RBC crossed 30,000 at 24.33.

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

CRM Policy Group & Leverage Ratios

August 7th, 2008

The Counterparty Risk Management Policy Group has released its August 6, 2008 Report. I have not read it in full, but it does have some things to say about the “leverage ratio” – known, roughly, in Canada as the Assets-to-Capital Multiple:

The Policy Group is strongly of the view that leverage ratios are a seriously flawed
measure of capital adequacy, except in highly unusual circumstances. The limitations that are inherent to leverage ratios were spelled out in the CRMPG I Report in 1999 and repeated in the CRMPG II Report in 2005.

As set out in detail in Appendix A of the CRMPG I Report, traditional measures of leverage, such as total on-balance sheet assets to equity, are misleading because they inadequately capture the relationship between the real risk of loss and the capital available to absorb it. A gross on-balance sheet leverage measure (1) does not take into account the potential variability in the value of off-balance sheet assets, (2) does not capture the risk dynamics of assets with embedded leverage, (3) does not give credit for hedging (including when matched book assets are perfectly hedged with offsetting liabilities), and (4) most importantly, fails to distinguish between assets with the same balance sheet value but widely differing risk. All balance sheet measures of leverage share a critical flaw in that a firm that appears to have relatively low leverage can nonetheless be taking substantial risks, while a firm that looks relatively highly leveraged may well be taking little risk. Viewed in isolation without greater understanding of the risk characteristics of portfolio assets, balance sheet measures of leverage can send false signals about a firm’s financial and risk condition. Appendix A to the CRMPG I Report explored these flaws and offered progressively more sophisticated measures of leverage to address them. In the end, CRMPG I concluded there is no single right measure of leverage. The challenge for financial institutions is to ensure that there is deep understanding and management of how asset liquidity and funding liquidity interact dynamically for a given portfolio of assets and sources of financing, including capital.

Notwithstanding the Policy Group’s view as to the shortcomings of leverage ratios, the Policy Group does recognize that (1) in some circumstances they can provide useful information and (2) in the aftermath of the credit market crisis they cannot be dismissed out of hand.

Recommendations
IV-21a. The Policy Group recommends that where the use of leverage ratios is compulsory, supervisors monitor such leverage ratios using the Basel II, Pillar II techniques and intervene regarding the adequacy of such leverage ratios only on a case-by-case basis.

IV-21b. The Policy Group recommends that efforts be directed at either (1) framing more meaningful leverage ratios where they exist or (2) phasing out their use and implementing alternative risk measures that more effectively fulfill their intended objectives.

The Policy Group is too ashamed of its 1999 Report to make it available on its website, but it’s available from the US Government

CGI.PR.A to be Redeemed

August 7th, 2008

Morgan Meighan has announced that:

Canadian General Investments, Limited (the “Company”) today announced that it has provided notice to holders of its $60,000,000 5.40% Cumulative Redeemable Class A Preference Shares, Series 1 that the Company will redeem all of such Shares on October6, 2008 for the redemption price of $25.00 per share plus accrued and unpaid dividends (from and including the last scheduled dividend payment date, September15, 2008, to but excluding the date of redemption, and being in the amount of $0.07767 per share), less any required withholding tax.

This is the first date that the issue becomes retractible, according to the prospectus:

On and after October 5, 2008, Canadian General Investments, Limited (“CGI” or the “Corporation”) may, on not less than 30 nor more than 60 days’ notice, redeem for cash the Series 1 Shares in whole or in part, at the Corporation’s option, at $25.00 per share together with all accrued and unpaid dividends to the date of redemption. On and after October 5, 2003 the Corporation may, on not less than 30 nor more than 60 days’ notice redeem for cash all but not less than all of the Series 1 Shares upon payment of a redemption price equal to the higher of the Yield Price (as defined) and $25.00 per share together with accrued and unpaid dividends to the date of redemption. On and after October 5, 2008, the Series 1 Shares will be redeemable for cash, at the option of the holder, for $25.00 per share, plus accrued and unpaid dividends to the date of retraction.

CGI.PR.A is tracked by HIMIPref™. I consider it to be a SplitShare but it is in the “Scraps” index due to volume concerns.

Update: Morgan Meighan has issued a press release:

Canadian General Investments, Limited (the “Company”) today completed the previously announced redemption of its $60,000,000 5.40% Cumulative Redeemable Class A Preference Shares, Series 1. This redemption is in accordance with the terms of the governing short form prospectus. The aggregate amount of $60,186,480 (including accrued and unpaid dividends from September 15, 2008) was funded through the sale of portfolio securities.

… but the TMX website continues to report trading. I don’t know what the story on this one’s all about!

MAPF Performance: July, 2008

August 7th, 2008

The market experienced a wild ride in July, with the PerpetualDiscount index down 8.85% for the month at nadir on July 16, subsequently recovering to a loss of “only” 3.34% as the bargain-hunters swooped in on some very juicy yields. See Best & Worst Performers, which shows results for both parts of the month as well as the whole, and Index Performance, July 2008 for comparison with other subindices and the two exchange-traded funds.

The fund, with its heavy weighting in PerpetualDiscounts (see MAPF Portfolio Composition, July 2008), was not immune to the carnage and declined 2.31% on the month, before fees but after expenses.

Returns to July 31, 2008
Period MAPF Index
One Month -2.31% -2.09%
Three Months -7.26% -4.20%
One Year -7.10% -7.58%
Two Years (annualized) -0.96% -3.54%
Three Years (annualized) +0.85% -1.37%
Four Years (annualized) +2.44% +0.20%
Five Years (annualized) +5.59% +1.34%
Six Years (annualized) +6.85% +2.14%
Seven Years (annualized) +7.48% +2.41%
The Index is the BMO-CM “50”

Returns assume reinvestment of dividends, and are shown after expenses but before fees. Past performance is not a guarantee of future performance. You can lose money investing in Malachite Aggressive Preferred Fund or any other fund. For more information, see the fund’s main page.

The yields available on high quality preferred shares remain elevated, which is reflected in the current estimate of sustainable income.

Calculation of MAPF Sustainable Income Per Unit
Month NAVPU Portfolio
Average
YTW
Leverage
Divisor
Securities
Average
YTW
Sustainable
Income
June, 2007 9.3114 5.16% 1.03 5.01% 0.4665
September 9.1489 5.35% 0.98 5.46% 0.4995
December, 2007 9.0070 5.53% 0.942 5.87% 0.5288
March, 2008 8.8512 6.17% 1.047 5.89% 0.5216
June 8.3419 6.034% 0.952 6.338% $0.5287
July, 2008 8.1495 7.211% 1.036 6.960% $0.5672
NAVPU is shown after quarterly distributions.
“Portfolio YTW” includes cash (or margin borrowing), with an assumed interest rate of 0.00%
“Securities YTW” divides “Portfolio YTW” by the “Leverage Divisor” to show the average YTW on the securities held; this assumes that the cash is invested in (or raised from) all securities held, in proportion to their holdings.
“Sustainable Income” is the best available estimate of the fund’s dividend income per unit.

It is very gratifying to see the sharp increase in expected income per unit – if there was no trading in the fund, this would be a constant number. While it is disappointing to see the net asset value per unit decline, it is the expected income per unit that will determine the long term performance of the fund as the market stabilizes.

I must point out, however, that the expected income is a little skewed this month due to the extraordinarily high yield available on WFS.PR.A, which was purchased in quantity during July. At month-end, this position was valued to have a yield of 9.50% (as a dividend!), but the security matures in three years time – so, while the calculation shown is accurate as far as it goes, as a long-term indicator it is expected to decline in three years when WFS.PR.A is redeemed and the proceeds reinvested in a security that will not necessarily yield 9.50%.

If WFS.PR.A had been sold at market value at the end of July and the proceeds reinvested proportionately in the existing portfolio, the “Securities Average YTW” in the table above would have fallen about thirty basis points (0.30%) to approximately 6.66%; this would result in an estimate of “Sustainable Income” of $0.5428; less than is reported, but still a substantial increase from previous figures. It is hoped, of course, that the market will shortly recognize the merits of WFS.PR.A and bid up the price until the yield is – according to me! – more reasonable, which should allow the fund to take a good-sized capital gain when swapping it for another issue with upside potential.

So, despite the poor price performance in July, we must remember that we are fixed-income investors. The expected annual income per unit (these are shown gross of fees and expenses) continues to show an upward path … and it is the income that makes the asset class worthwhile.

I should emphasize, however, that the fund does not explicitly seek to maximize this number. Yield on the portfolio will be given up when it is possible to exchange it for something else that is attractive: credit quality, say, or retractibility. Over the very long term, however, it is the prime objective of fixed income management to maximize the income received from a given amount of capital.

The fund’s heavy weighting in the underperforming PerpetualDiscounts hurt performance for the month; within that group, a relatively large exposure to CM issues was another negative factor. The fund was able to mitigate the effects of these two allocations by frequent trading within these two groups; trading was very heavy during the month, representing approximately 100% of portfolio value.

Post Mortem: Some Trading in CM PerpetualDiscounts
Date CM.PR.I CM.PR.J CM.PR.E CM.PR.P
June 30
Closing bid
Yield
18.53
6.35%
17.52
6.43%
22.76
6.15%
21.76
6.32%
Trade, 7/16
Price
Including
Commission
Sold
16.21
Sold
15.62
Bought
18.95
 
Trade
7/24 & 7/25
    Sold
20.75
Bought
20.04
July 31
closing bid
bid-YTW
17.18
6.90%
16.68
6.80%
20.68
6.83%
20.05
6.92%
Dividends No dividends earned in month
This table is an attempt to present fairly a series of trades that are not necessarily the same size and may be groupings of multiple smaller trades. Full disclosure of precise trades will be made when the Financial Statements for 2008 are released.

As may be seen in the table above, there was considerable chaos in the downward movement of the CM issues, which was mitigated by opportunistic trading between the issues. These trades did not, in and of themselves, change the portfolio’s credit risk or have a material effect on any element of the portfolio’s overall risk profile. Opportunistic trading is what MAPF is all about!

Overall, the market has normalized somewhat since the end of June. The extremely strange – and theoretically unsupportable – relationship that existed a month ago between prices and yields has basically reversed itself – although there remain small pockets of strangeness and always will! Theory will always reassert itself in the long run; it is simply unfortunated that in June I was caught in the underperforming end of the strangeness and hence could not execute trades to exploit the disparities.

And for the future? In the first few days of August, the market has moved higher, with PerpetualDiscounts up 0.72% in the first few days. The average yield on PerpetualDiscounts at month-end was 6.32% (as dividends), equivalent to interest income of 8.85% at the standard equivalency factor of 1.4x. This in turn represents a spread of 270bp over long corporates – and, as has been previously mentioned, the previous 10-year high was 250bp – so, some might say, we are still well within the area of a 10-year buying opportunity!

While it will take the credit crunch a great deal of time to unwind – and while I continue to disdain market timing, these elevated yields should gradually attract bond investors, which will help prices recover. But … keep your eyes on the income! I continue to apply and refine my processes for finding opportunities, such as the CM swaps shown above, to execute swaps with a favourable risk/return profile.

My next article for Canadian Moneysaver will discuss the events of the last two months in more detail and, once the black-out period has expired, will be republished here.

August 6, 2008

August 6th, 2008

Freddie Mac took a big loss on subprime:

Freddie wrote down the value of subprime and low-quality mortgage securities for the first time, taking a loss of $826 million, adding to signs the company sees tougher times ahead.

Freddie today reported a second-quarter net loss of $821 million, or $1.63 a share, its fourth straight loss, compared with the 54 cents a share average estimate of nine analysts in a Bloomberg survey.

The common-share dividend will be reduced to 5 cents or less from 25 cents, the second reduction in nine months. The preferred stock dividend won’t be affected, Freddie said in a statement.

Syron, 64, said in a statement today he still plans to raise capital after agreeing to sell $5.5 billion in equity.

So the common shareholders are seeing their dividends slashed and their equity diluted … while preferred shareholders are not (yet!) affected. It will be most interesting to track these things over the first decade of this century to see just how the risk/reward ultimately turns out.

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 N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.67% 4.39% 57,848 16.42 7 +0.2662% 1,093.4
Floater 4.12% 4.15% 54,380 17.07 3 -0.1808% 895.6
Op. Retract 4.99% 4.26% 123,832 2.93 17 +0.1755% 1,042.7
Split-Share 5.35% 6.02% 57,925 4.46 14 +0.1227% 1,034.6
Interest Bearing 6.28% 6.78% 48,099 5.27 2 +0.4657% 1,115.1
Perpetual-Premium 6.19% 6.14% 71,655 2.27 1 0.0000% 987.7
Perpetual-Discount 6.22% 6.27% 206,439 13.53 67 +0.4784% 854.1
Major Price Changes
Issue Index Change Notes
BAM.PR.I OpRet -1.1642% Now with a pre-tax bid-YTW of 6.77% based on a bid of 23.77 and a softMaturity 2013-12-30 at 25.00. Compare with BAM.PR.H (6.48% to 2012-3-30), BAM.PR.J (6.59% to 2018-3-30) and BAM.PR.O (7.36% to 2013-6-30).
CM.PR.G PerpetualDiscount +1.0116% Now with a pre-tax bid-YTW of 6.83% based on a bid of 19.97 and a limitMaturity.
BNS.PR.K PerpetualDiscount +1.0345% Now with a pre-tax bid-YTW of 5.90% based on a bid of 20.51 and a limitMaturity.
SLF.PR.A PerpetualDiscount +1.0638% Now with a pre-tax bid-YTW of 6.35% based on a bid of 19.00 and a limitMaturity.
SLF.PR.C PerpetualDiscount +1.0668% Now with a pre-tax bid-YTW of 6.27% based on a bid of 18.00 and a limitMaturity.
BCE.PR.A FixFloat +1.0766%  
BNS.PR.L PerpetualDiscount +1.1407% Now with a pre-tax bid-YTW of 6.10% based on a bid of 18.62 and a limitMaturity.
GWO.PR.G PerpetualDiscount +1.2235% Now with a pre-tax bid-YTW of 6.13% based on a bid of 21.51 and a limitMaturity.
FFN.PR.A SplitShare +1.3333% Asset coverage of 1.8+:1 as of July 31 according to the company. Now with a pre-tax bid-YTW of 5.53% based on a bid of 9.88 and a hardMaturity 2014-12-1 at 10.00.
BNS.PR.M PerpetualDiscount +1.4130% Now with a pre-tax bid-YTW of 6.08% based on a bid of 18.66 and a limitMaturity.
ELF.PR.G PerpetualDiscount +1.7544% Now with a pre-tax bid-YTW of 6.91% based on a bid of 17.40 and a limitMaturity.
GWO.PR.I PerpetualDiscount +1.8398% Now with a pre-tax bid-YTW of 6.07% based on a bid of 18.82 and a limitMaturity.
CM.PR.P PerpetualDiscount +2.5693% Now with a pre-tax bid-YTW of 6.82% based on a bid of 20.36 and a limitMaturity.
BAM.PR.J OpRet +3.2604% See above.
MFC.PR.C PerpetualDiscount +3.4390% Now with a pre-tax bid-YTW of 5.94% based on a bid of 19.25 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
SLF.PR.A PerpetualDiscount 108,900 Nesbitt crossed 59,000 at 19.00, then 40,000 at the same price. Now with a pre-tax bid-YTW of 6.35% based on a bid of 19.00 and a limitMaturity.
BNS.PR.L PerpetualDiscount 65,540 Nesbitt sold three lots to anonymous: 10,000 at 18.50, another 10,000 at the same price, and finally 29,200 at 18.45. Now with a pre-tax bid-YTW of 6.10% based on a bid of 18.62 and a limitMaturity.
BCE.PR.A FixFloat 62,900 CIBC crossed 36,900 at 24.35, then another 15,000 at the same price.
TD.PR.O PerpetualDiscount 57,450 Nesbitt crossed 50,000 at 20.75. Now with a pre-tax bid-YTW of 5.86% based on a bid of 20.88 and a limitMaturity.
SLF.PR.C PerpetualDiscount 50,385 Nesbitt bought 19,600 from anonymous at 18.00. Now with a pre-tax bid-YTW of 6.27% based on a bid of 18.00 and a limitMaturity.

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