PrefBlog

I received an eMail from an Assiduous Reader today, asking whether I agreed that the pref market was looking rather frothy.

Well – I agree it’s frothy, in that there are huge discrepencies between issues – it’s not too difficult to pick pairs of issues where one is as obviously expensive as the other is cheap. However, “frothy” has a connotation of “toppy”, and I’m not so sure that I agree with the word as far as that goes. Having a look at the four bellwether indices:

Toppy? It looks more as if the bad dream of the fourth quarter has faded like gossamer … one might be able to make the case that the OpRet Index is toppy, since there’s not much interest-equivalent premium to bonds … but PerpetualDiscounts still have an average pre-tax bid-YTW of 5.49 … interest-equivalent of 7.69% … long corporates are a shade over 5.6%, according to Canadian Bond Indices …. this is within spitting distance of the October 30 spread.

Meanwhile, long Canadas yield 4.04% (!) for an interest-equivalent spread of about 365bp – this has widened considerably since this was checked on October 10.

So, as with all market-timing type questions, I will respond … “You’re asking me?”

Volume picked up slightly, but not much, on another good day. BNA.PR.C was astounding.

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

There’s a real dearth of news and informed commentary today!

The US had a bad jobs number today, but that’s about it.

Otherwise, the only thing I saw today of even passing interest was Springfield, Massachusetts, getting angry at Merrill because some sub-prime linked CDOs that they bought have gone down in price. According to Steven Syre of the Boston Globe:

City officials say Merrill Lynch, an active player in the municipal finance business, sold them securities that cities in Massachusetts aren’t legally allowed to own for reasons of safety and liquidity. What the broker actually disclosed about the nature of those investments at the time of the sale remains murky.

“We take very seriously the financial cost and the breach of public interest,” said Chris Gabrielli, the chairman of Springfield’s Finance Control Board and former gubernatorial candidate. “Our view is that Merrill Lynch has responsibility here and is accountable. We shouldn’t have to settle for less than getting the money back.”

A Merrill spokesman said Springfield officials had sought AAA-rated securities offering higher returns than they had been getting. “These investments met both those criteria, and each was reviewed, approved, and authorized by Springfield officials.”

Who knows? It is possible, I suppose, that Merrill misrepresented the investment. I consider it far more likely that a few snivel-servants with Springfield were just thrilled to pieces about being big-shot hard-nosed investment geniuses, until they got to the “taking responsibility” part. We’ll see!

An excruciatingly slow day on the preferred share market, but performance continued to be good.

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

Here’s a switch! US ABCP outstanding actually increased last week, from USD 747.6-billion to USD 773.8-billion. It has been suggested that the market is stabilizing … but I’ll wait for a little more data, not taken at year-end in the midst of an enormous liquidity injection, before celebrating.

An article on the collapse of the Bear Stearns hedge funds provides some food for thought:

Some 90 percent of the face value of the CDOs was loaned to Bear by Merrill, as is normal in such transactions. When the prices of the funds’ CDO holdings started to fall in June, Merrill demanded that the firm increase collateral in what’s known in the debt markets as a margin call.

Bear Stearns executives pleaded for time, arguing that the forced sale of their assets would push down all CDO prices. Merrill Lynch officials brushed off the entreaty, according to people involved in the discussions.

In June, the hedge funds, run by Ralph Cioffi, sold $3.8 billion of CDOs to meet margin calls by Merrill and other lenders that were following its lead. The fire sale led to a further drop in CDO prices.

Whenever this sort of thing has happened in the past, regulators have responded by tightening margin requirements. Perhaps derivative debt should be eligible for only 15% margin; perhaps 20%. I suspect we will be hearing a lot more about this over the next while. There will be definitional problems, to be sure!

In what may well turn out to be a sign of the times, there was a US junk bond default today:

Buffets, a closely held company based in Eagan, Minnesota, failed to make the coupon payment yesterday on its 12.5 percent notes maturing in 2014, according to Matthew Lee, a customer service representative at U.S. Bank National Association in St. Paul, Minnesota, the trustee for the debt.

Buffets is at least the second company to miss an interest payment in the past week as the worst home sales market since 1981 stokes concern about a slowing economy. Tousa Inc., the Florida homebuilder that lost 99 percent of its market value in the past year, also missed interest payments on $485 million in debt, the company said in a regulatory filing yesterday.
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The 12 month dollar-weighted high-yield default rate will rise to 2.25 percent by the end of this year from 0.34 percent in December, JPMorgan Chase & Co. high-yield strategist Peter Acciavatti in New York predicted in a report dated yesterday. The rate will climb to 4 percent by year-end 2009, he forecast.

And finally, Accrued Interest reminds us of what “crisis” really means:

In my mind, a marriage in crisis is one where divorce is an imminent possibility. Not one where the couple just had a big ugly fight.
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So back to the “crisis” question. It is these speculators who are insolvent. So what we have are people who speculated in houses and lost. We have are banks who lent to the afore mentioned speculators and have lost too. Bear in mind, these banks are the ones who agreed to limited documentation of income (perhaps so the speculator could claim this would be his/her primary residence?) or minimal down payments.
…
All this isn’t a crisis. Its how the credit cycle works. When credit becomes too easy, bad loans get made. People get hurt. But that’s the way of the world. You move on.

Where a crisis could develop is when the innocent are hurt just because capital becomes tight. Where a good borrower can’t get a mortgage loan. Where a solid commercial real estate project can’t roll over its bridge loan because banks are short on capital. That’s where the real crisis can get going. Foreclosures happen that didn’t need to happen, driving the price of assets lower. Lenders start taking losses on good loans, and suddenly are unwilling to lend to anyone. Investors struggle to value assets, not because of unknown losses, but because of unknown liquidity. Bids dissappear.

That’s a crisis.

Meanwhile, President Bush is contemplating fiscal stimulus. Some might say there is far too much fiscal stimulus already.

Another day of light volume and strong returns for preferreds. It should be most interesting to see whether the returns stand up next week when I assume volume will return … particularly with stocks looking sick in Japan and the US.

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

Accrued Interest leads off with a very informative discussion of American Municipal Bond Insurance, something that is in the news lately, what with credit problems and Berkshire Hathaway’s entry to the field.

A very light day on the preferred share market, but performance was good.

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