PrefBlog

Assiduous Readers will know that I am not averse to a little bit of stimulus in this lousy economy. Deficits are fine, provided they’re backed up with credible research showing a good healthy surplus through a business cycle – many of our current problems are the result of What-Debt? and Spend-Every-Penny goosing an already over-stimulated economy with not just tax cuts, but moronic tax cuts – like cutting the GST.

Infrastructure would be a marvellous place to start. It has a very high economic multiplier and is the type of thing that has a very logical end-point, making it possible to turn off the tap without too much controversy – once you’ve built your subway or repaired your bridge … it’s built! There is only so much you can do (take it too far, for instance, and we end up with 1000% over-capacity in the cement industry and a lot of really shoddy construction that has to be torn down), but in Canada and the Western world generally, there is a huge list of neglected infrastructure that would be a Very Good Thing to chip away at.

However, from Japan comes a cautionary tale about idiotic infrastructure spending:

Japan’s $268 million Ibaraki Airport is on schedule to open for business in March 2010. The hard part will be persuading an airline to fly there.

The government and Ibaraki prefecture, home to 3 million people, are paying for the airport north of Tokyo, which won’t have train services and is a half-hour drive from Ibaraki’s capital, Mito. Japan Airlines Corp. and All Nippon Airways Co., which operate 90 percent of flights in the country, don’t plan to use it.

We don’t have to worry about such boondoggles in Canada, though! What-Debt? has reacted forcefully and decisively to the global economic crisis by forcefully and decisively running away from Parliament for eight weeks. See ya!

The Amazing Takeover Bid That Will Never End continued its gyrations today, with Bloomberg reporting:

The private-equity firms that agreed to buy BCE Inc. for C$52 billion ($42 billion) may instead seek to acquire a minority stake in the Canadian phone company, according to two people with knowledge of the plan.
…
The alternative proposal involves the buyers investing C$8 billion to C$10 billion in preferred securities for about 20 percent of BCE. It also calls for a cash dividend of C$8 to C$10 a share to paid to BCE shareholders.

Citigroup Inc., based in New York, and Frankfurt-based Deutsche Bank AG are leading a group of lenders that also includes Toronto-Dominion Bank and Royal Bank of Scotland Group Plc. The banks would need to approve the new transaction. The debt required to finance the minority stake would be around C$7 billion or C$8 billion, compared with the C$34 billion the banks would fund if the buyout went ahead.

Bloomberg also has a piece on Municipal credit rating upgrades, implying skullduggery by S&P. All the data is cherry-picked, of course, so whether there’s an actual trend or not remains to be see. But I bring this up because of the most interesting quote:

Recent default studies suggesting municipalities’ enhanced creditworthiness don’t account for what happened to issuers during the Great Depression, according to Richard Ciccarone, chief research officer of McDonnell Investment Management LLC. The Oak Brook, Illinois-based firm has $12 billion under management, including municipal bonds.

In 1929, more than 98 percent of the largest U.S. cities were rated Aa or better, according to Ciccarone’s research, which cites a study of municipal bonds showing that 3,252 issues went into default at the peak of the economic contraction in 1935. Almost half the bonds in default were rated Aaa in 1929.

“We may be facing the same conditions today that we did in the 1930s, but they could be worse because of pension and other liabilities,” Ciccarone said. “We have some huge liabilities at the same time that real estate values are falling.”

Yo! Ciccarone! Get with the programme! There’s some political theatre that needs to be played out! What do you think you are, some kind of investment expert or something?

I got a little curious today about relative performances;

RY.PR.D vs. common:

CM.PR.H vs common:

Make of it what you will.

Volume continued heavy today; volume and price advances in split shares were again particularly noteworthy.

There were sixty-one index-included $25-pv-equivalent issues trading over 10,000 shares today

Econbrowser‘s James Hamilton reviews 5-Year TIPS, which have been showing some rather unusual behaviour recently:

on Monday, the TIPS yield fell 214 basis points, while the nominal yield was down only 22 basis points, leaving the TIPS yield only slightly above the nominal.

Dr. Hamilton quotes extensively from Greg Mankiw who points out:

Starting 12/01/2008, the TIPS yield curve will use on-the-run TIPS as knot points rather than all securities under 20 years

There are two kinds of TIPS – on-the-run (recent issue) and off-the-run (old issue). The older issues will have a lot of prior inflation embedded in their price; the new issues will have none. Since the minimum redemption value of a TIPS is par, this means that a deflationary environment will erode the principal of off-the-run TIPS while leaving the on-the-run issues unscathed; hence, there is now not simply a liquidity premium contributing to the difference in yields, but an embedded put as well.

Assiduous Readers will remember that continued five-year TIPS issuance is dubious. They will also be aware that the Cleveland Fed has given up trying to figure out what TIPS yields really mean!

Entirely reasonable performance today on continued high volume. Of particular interest is the spike in volume and prices of splitShare corporations.

There were sixty-seven index-included $25-pv-equivalent issues trading over 10,000 shares today

Bloomberg reports:

The U.S. Securities and Exchange Commission may act to curb conflicts of interest at credit-rating companies while delaying a mortgage-bond ranking proposal faulted by underwriters, two people familiar with the matter said.

SEC commissioners plan to bar employees who assess debt from discussing compensation with the bankers selling the bonds, said the people, who declined to be identified before a vote in Washington tomorrow. Commissioners also may limit gifts from underwriters and restrict debt analysts from offering advice on structuring securities to win top grades.

Well, it sure sounds tough doesn’t it? The whole point is to ensure that there are enough rules to ensure that everybody is guilty of something. Then when things go wrong, you have your choice of scapegoat … that’s what regulation’s all about. However, some good might come out of the process:

The SEC sought to encourage unsolicited rankings by proposing another rule in June that would have forced credit- rating companies to publish the data that goes into their assessments. As a result, competitors could have graded bonds even if they weren’t paid by debt underwriters.

New York-based Moody’s in a July 28 letter to the SEC said the proposal would trigger lawsuits and encourage banks to take their business to the credit-rating company that asked for “the least amount of information.”

SEC commissioners will seek a second round of public comment on the proposal instead of adopting it at tomorrow’s 10 a.m. Washington time meeting, the people said.

The ratings agencies’ exemption from Regulation FD must be repealed. It’s the only way … I’ve written an essay on the topic. Unfortunately, however, addressing this issue would involve the authorities admitting that the current system works pretty well and the agencies do a pretty good job … subject to all the caveats that apply in assessment of any forecasting ability.

Since the regulators’ myth-du-jour is that the credit crunch was caused by Evil Credit Agency exploitation of Innocent Portfolio Managers (rarely, if ever, criticized; presumably because they already have regulations coming out their ying-yang) it will be inconvenient to acknowledge reality. Fortunately, this bothers neither regulators nor politicians.

A good solid day for PerpetualDiscounts, up nearly 1% in a sloppy market. Another two weeks of good returns like this and we’ll make up for November!

There were fifty-seven index-included $25-pv-equivalent issues trading over 10,000 shares today