PrefBlog

Manor & Mendelson, co-founders of Portus Alternative Asset Management Inc., are being charged:

with 12 counts of fraud, money laundering, and possession of property obtained by crime on Wednesday, the result of a lengthy international investigation.

It has been quite some time since I saw Boaz – I look forward to seeing him in the dock. Regardless of guilt or innocence of these particular charges, he ran away from 26,000 customers, 100 employees, and me. That’s not cricket.

Inquiries into the Credit Rating Agencies has begun:

The SEC wants to know whether issuers pushed credit raters to “diverge from their stated methodologies and procedures,” Cox said in testimony prepared for the Senate Banking Committee today. In particular, the commission is “examining” whether firms were “unduly influenced by issuers and underwriters,” he said.

I have posted further detail of the hearings and will continue to plough through the testimony. Alex Cukierman has written an essay on VoxEU regarding central bank independence, which may possibly be a move in the Trichet / Sarkozy game. And this game is just simply a part of the markets / politicians tournament, just like the credit ratings agency investigations. I am attempting to form a troupe of attractive Swedish cheerleaders to encourage the Markets faction … if you qualify, drop me a line!

In somewhat related news, Larry Summers has (quite correctly) warned against giving the Feds too many hats to wear.

“I think it’s clear that when you vest regulation for consumer protection with agencies like the Federal Reserve whose primary mandate is the health of the financial system or the health of the lenders, you are going to get insufficient vigilance with respect to consumer protection,” he said during a panel discussion for the Brookings Institution’s Hamilton Project.

The next US jobs number, due a week Friday, will be closely watched – especially as there are some concerns that the last one might have been distorted:

Many economists suspect the drop in August payrolls was exaggerated by a fluky fall in local government payrolls, and new data from the Bureau of Labor Statistics supports that.

On Tuesday the BLS released state payroll data for August. If you sum up the changes across the 50 states and the District of Columbia, the total rose 159,000, compared to the decline of 4,000 in the national data.

With all the worries in the High-Yield market and concerns over the stability of the banking system,  yesterday’s news release regarding large loans syndicated in the US was a good sign.

The volume of Shared National Credits (SNC) rose by 21% in 2006, the fastest pace since 1998, reflecting, in part, significant merger and acquisition lending, according to the SNC² review results released today by federal bank and thrift regulators.
…
Criticized commitments rose to $114 billion, but still remain less than half of their peak dollar level in 2002. Criticized credits represent a modest 5.0 percent of total commitments, about the same rate experienced over the past three SNC reviews.

Which is not to say, of course, that everything is unfolding as one might have thought six months ago. It looks like the Sallie Mae takeover will not proceed as originally planned, if at all:

SLM Corp. said a group led by J.C. Flowers & Co. won’t complete the $25.3 billion purchase of the largest U.S. student loan company. The group said it’s open to negotiation.

The group doesn’t expect to complete the $60-a-share acquisition, Reston, Virginia-based SLM, known as Sallie Mae, said today in a statement. Under an agreement announced in April, SLM was to be sold for $60 a share to an entity 50.2 percent- owned by Flowers, with JPMorgan Chase & Co. and Bank of America Corp. each holding 24.9 percent.

Shake-ups in the Very Big Brokerage segment are coming! The Chinese brokerage, Citic, is now number eight globally, although that’s with rankings by market capitalization and:

The S&P 500’s measure of seven U.S. securities firms is valued at 8.8 times estimated profit, about a quarter of the 38 times for their four listed Chinese peers. Citic trades at 34 times estimated earnings, compared with 10 times profit for Bear Stearns, 7.9 times for Morgan Stanley, and Lehman’s 8 times. Haitong Securities trades at 52 times estimated profit, Hong Yuan is at 39 times, while Northeast Securities is at 28 times profit.

Still, it’s not too long since no such qualification would have been necessary. And it looks like Warren Buffet, saviour of Salomon, is sniffing around Bear Stearns:

Bank of America Corp., Wachovia Corp., and two Chinese companies, Citic Group and China Construction Bank Corp., also are among the potential bidders, the New York Times reported, citing unidentified sources.

I can just imagine the consternation if a Chinese firm takes over an iconic trader like the Bear – particularly given concern about the Chinese government’s commitment to the free flow of information. But then, the big brokerages have had a few problems recently:

Merrill Lynch & Co., the third biggest U.S. securities firm, may record losses of as much as $4 billion on fixed-income assets, resulting in the lowest quarterly earnings in almost six years, Goldman Sachs Group Inc. analyst William Tanona said.

And, in late news, it was announced that Canada’s getting into the act:

Australian investment bank Macquarie Bank Ltd will buy Canadian investment and brokerage firm Orion Financial Ltd for about C$147 million ($146 million) in cash and stock.

Menzie Chinn of Econbrowser notes that the latest dust-up in American politics is over a relatively picayune $5-billion for children’s health; suggesting there are other exposures that have been recklessly undertaken in the past five years. It is clear that some hard measures will need to be taken if the dollar is to retain value, a matter that Accrued Interest notes is of increasing concern. I’m just happy that the GAO is now referring to the decline of the Roman Empire as opposed to the fall of the Roman Republic as a metaphor. If we’re going to decline and fall all over the place, let’s at least get the metaphors right!

US Equities had a good day, with financials leading the way – attributed to the idea that Warren Buffett might possibly like the sector.

If it turns out that the sector does poorly, will there be a Senate Inquiry?

Tech stocks led Canadian equities up a bit.

Treasuries did almost nothing, but did it while attracting lots of bids to the quarterly refunding (it was the two-year today). One has to feel sorry for a reporter so abjectly desperate to make things sound interesting that she writes:

The benchmark 10-year note’s yield rose almost 1 basis point to 4.63

The only thing worse is having to quote such a report! Canadas were weak, but nothing out of the ordinary.

The preferred share market normalized a bit after yesterday’s repricing, but the PerpetualDiscount sector continued to fall. Volume returned to the light-but-still-reasonable levels that have been in effect all month.

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

Today’s word is confidence. Sadly, it’s only a word:

Consumer confidence slumped to the lowest level in almost two years and home sales weakened, threatening U.S. household spending and bolstering the case for the Federal Reserve to keep cutting interest rates.

The Conference Board’s index of consumer confidence fell more than forecast in September, to 99.8 from 105.6.

The consequences of extreme lack of confidence are currently illustrated by the continuing Northern Rock saga, in which some possible bidders are thought to think it’s worth more dead than alive:

Former Goldman banker Chris Flowers may join the Cerberus Capital Management LP and Citadel Investment Group LLC hedge funds in splitting up Northern Rock, the Sunday Telegraph reported Sept. 23, citing an unidentified person familiar with the proposal.

A Northern Rock bail-out might cause some embarrassment with UK regulators :

The U.K.’s Financial Services Compensation Scheme has 4.4 million pounds to protect deposits, compared with $49 billion at a similar fund in the U.S., the London-based Independent reported today, without saying where it got the information.

Even that, though, is a huge bankroll compared to what we have in Canada: $1.4-billion as of 2006-3-31. The 2006 report is the one relevant to the 2007 Annual Public Meeting. Call the papers! I want to revise my confidence number!

The WSJ republished the IMF’s risk diagram, which is cool enough to be worth posting:

The further from the centre, the riskier the axis.

The S&P/Case-Shiller US Housing Price Indices were released today and flesh out the anecdotal descriptions of how bad the US market is:

10-City Composite was down 4.5% versus July of 2006, while the 20-City Composite was down 3.9% over the same time period.

This is the first significant yoy decline in these indices since the recession of Bush the Elder; the worst three cities for housing in the past year have been Detroit (-9.7%); Tampa (-8.8%); and San Diego (-7.8%). It’s Detroit that looks really ugly: the index level, set to a base of 100 in January 2000, is only 111.3 in July 2007, implying an annualized rate of return of less than 1.5%. So much for housing as a long term investment, in Detroit, anyway! For those who look at the detailed data and want a comparison, US Inflation data is available from the Bureau of Labour Labor Statistics: The Jan 2000 “All items less food and energy” index (US City Average, Not Seasonally Adjusted) was 100.3; July 2007 is 115.1, implying the average Case-Shiller index should be about 114.7 to stay even.

Since the 10-city composite is actually 215.9 and the 20-city composite is 198.4, there are two ways of looking at it: (i) What are those greedy Americans complaining about?, or (ii) Wow, they’ve got a lot further to fall. JDH at Econbrowser discusses the matter and worries about repercussions in the financial markets. If he’s not gloomy enough for your tastes, Dear Reader, try Nouriel Roubini:

So as JP Morgan rightly put it there is “no sign of a floor for housing”. The housing recession will continue throughout 2008 and the fall in home prices will continue into 2009 before any bottom is reached.

As an aside, the WSJ has highlighted some research by the Atlanta Fed showing that home ownership in the States increased from 64% in 1994 to 69% in 2005. The rate had been static from the mid-sixties to 1994.

Speaking of the CPI, a Bloomberg columnist has produced a column pandering to the ‘CPI Lie’ crowd. It’s certainly a pleasant change to see some actual meat on the bones of the slogan! He states, for instance:

Medical expenses are given short shrift as well. It wasn’t that long ago when employers could cover almost all of an employee’s health-care bills.

Now workers are shelling out an average of $3,281 from their paychecks for family medical coverage, according to the Kaiser Family Foundation, a non-profit organization based in Menlo Park, California. The average premium for a family policy is more than $12,000 annually.

So why is this a measure of inflation? It looks more like a cut in salary (via reduction in benefits) to me … which may come to the same thing to somebody attempting to maintain a standard of living with the same work, but should not be mis-labelled.

Willem Buiter took a break from writing for VoxEU to post to his own blog, criticizing Trichet for rising to Sarkozy’s bait. Buiter is quite right; Trichet should retain his dignity and leave the criticism of Sarkozy to me!

US equities were flat, with a few high-profile drops due to earnings-forecast revisions being greatly overemphasized by the media. Canadian equities were very slightly up, with a few advances desperately siezed on by reporters in dire need of something to report.

Treasuries had a good day, with predictions of further Fed cuts bringing some more highly-desirable term spread into the curve:

The difference in yield, or spread, between 10- and two-year yields was 63 basis points today, the widest since April 2005.

Canadas did nothing much.

It was an exciting day in the preferred share market today, almost certainly due to the BNS 5.25% Perp New Issue, which seems to have had the effect of repricing the entire spectrum of perpetuals. In other words, the universe has adjusted itself to the new issue, rather than the other way ’round.

Perpetuals dropped quite significantly, as perpetualDiscounts, yesterday priced to yield 5.09% suddenly dropped in price to yield 8bp more – exactly half of the distance between the universe and new issue yield, deciding 5.17% was a much better level.  The perpetualPremium index, formerly 5.13%, is now 5.29%. This figure is not only more than the new issue yield, but is more than the perpetualDiscount yield … I would normally expect discounts to yield more than premiums, to compensate for the greater – and more immediate – interest rate risk. Markets, however, sometimes don’t listen to me as well as they should.

The Claymore Preferred share ETF had a $0.35 drop in NAV today after a distribution of $0.2185. The fund offered by my firm, MAPF, did not have its most pleasant day ever recorded, but is now well ahead of CPD on the month to date. We’ll see what the last three trading days bring!

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