PrefBlog

The markets giveth and the markets taketh away.

The trouble started in Europe, when BNP Paribas halted redemptions on some hedge funds, due to an inability to find a bid on some of their holdings.

“The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating,” BNP Paribas said in a statement.

This caused panic – or, at least, a major recalculation of just how bad things actually are. Overnight LIBOR increased 53bp and the European Central Bank stepped up to flood the system with cash. There is, as yet, no word on whether they have started renting helicopters. Similarly, the Fed pumped in liquidity (albeit not so much) and the Bank of Canada proudly announced that its employees showed up for work today.

The stock market did not like being reminded of sub-prime and showed its displeasure in both the US and Canada. The market is so upset that it has been knocked back all the way to where it was on Monday at about 2pm:

As might be imagined, the bond markets did interesting things. The flood of short-term money from the central banks sent two-year Treasury yields sharply lower. Fears that this money might fuel inflation steepened the curve considerably, both in the US and Canada. It would be really, really nice to see a decent term premium again, y’know? The WSJ has a round-up of reactions to the liquidity pumping.

Thirty-day Fed-Fund Futures are now indicating a rate of 5.20% for August and 4.73% for next February, but it’s an open question about how reliable this predictor is. There’s a lot of arbitrage problems with this contract – it’s hard to short Treasury Bills – as well as segmentation problems.

In stories of continuing interest, Joseph Stiglitz blames the sub-prime mess on Greenspan & Bush and Brad Setser has some things to say about China’s Reserve Policy sabre-rattling.

The preferred share market saw increased volumes today – back to normal levels, perhaps even normal+, with three issues trading in excess of 100,000 shares without being internal crosses or dividend capture plays.

PerpetualDiscount managed to squeak out another daily gain, while perpetualPremiums fell a bit, but nothing too exciting.

In keeping with the “flight to quality” theme, a number of lower-rated issues not included in the indices performed poorly today: NTL.PR.G, -2.89%; HPF.PR.B, -1.71%; DC.PR.A, -1.66%; EPP.PR.A, -1.45%; NTL.PR.F, -1.16%; and our friend from yesterday, YPG.PR.B, -1.14%. I will note that DBRS rates HPF.PR.B as Pfd-2(low), but I don’t understand why.

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

OK, everybody, we can relax now! George W. Bush has stated “I’m not an economist, but my hope is that the market, if it functions normally, will be able to yield a soft landing. That’s kind of what it looks like so far.”  The equity markets immediately responded with a huge advances, both in the US and in Canada.

Sub-prime is old news, as evidenced by the fact that the IMF is pontifficating on the subject. The Europeans say investors can take their lumps anyway. Of far greater interest is rumblings from China that they may be willing, under certain circumstances, to flex their treasury muscle and use their currency reserves as a political weapon. Bush says that this would be foolhardy, and it’s therefore surprising that anybody is still taking the threat seriously. But … there is some concern the Fed doesn’t have the same influence over longer-term rates that it used to. Tom Graff has some comments and I have previously noted the effect of Chinese investment on Treasuries. Their trade surplus rose again in July, so they’ve got plenty of ammunition.

Treasuries got thumped, and whether that’s a rebound of the flight to quality or a China Syndrome is a matter of taste. Canadas followed Treasuries, unnoticed by media and bloggers.

The Wall Street Murdoch is Magnificent Journal posted an interesting comparison of credit markets, now vs. the LCTM blow-up. Given the state of economic education, however, nobody will notice.

It was a good day in pref-land, with volume picking up a bit and numerous “Scraps” issues (those not included in the indices due to either low volume or poor credit) gaining over 1% in price (bid / bid). The PerpetualDiscount index continued to shine and – who knows – might even make it back to its 2006-6-30 level of 1,000.00 before too long.

BAM had an interesting day, with two of its floating-rate issues and one of its perpetualDiscounts gaining over 1% (bid / bid). There seems to have been some pickup in activity in the BAM.PR.M / BAM.PR.N issues but whether this is meaningful remains to be seen. The fund has a position! An attractive yield, anyway – but I will confess I don’t know how many, if any, the underwriters of BAM.PR.N still have to unload. Certain the blow-out sale on EPP.PR.A I was told about has fizzled – the issue immediately started trading below the price I was told and has remained there since.

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

It was a day of mixed indicators, with frenzied traders choosing random bits of data and making bets on them! US equities rose again, continuing a huge rise from yesterday while all sensible people were on holiday, on the very good rationale that the Fed says the economy is growing enough that the main risk is inflation. It therefore makes all kinds of sense that Canadian equities fell on fears that the US Economy is slowing, doesn’t it? Is the glass half-empty or half-full? I guess it depends how far away you are from the glass.

The US Treasury market did homage to the Fed statement as well, falling a bit – not much – as traders appeared to take the view that the expected rate cut will take longer to arrive than expected. Torn between the domestic equity market and the Treasury market, Canadian bonds declined a bit, but nothing to write home about.

The knock-on effects of tighter credit in the wake of the sub-prime frenzy are showing amongst those firms attempting to finance share buy-backs in the bond market. Bear Stearns, which has been caught up in this debacle more than it would probably like to, has indicated it will not be buying back shares, has paid up big-time to get some five-year money to reduce dependence on the money-market, and gotten rid of a high-ranking executive. Sounds like they’re taking things seriously!

The Fed statement today was notable for more than the usual reasons. There was a rare mention of the global economy, and its role in buying American stuff rather than selling cheap stuff to Americans. There is some further comment to the effect that American productivity growth is slowing. Meanwhile, there are rumblings that maybe Greenspan should be blamed for sub-prime and that US officials think the market is always perfect.

All in all, an interesting day!

Not the most active of days in the preferred share market, but at least trading was more inspired than it was Friday. InterestBearing issues did well and the PerpetualDiscount index continued what has been a fairly steady grind upwards since mid-July.

A number of Pfd-3 and worse issues did horribly, with YPG.PR.B, for instance, hitting a new low. It can only be detected over long periods of time … but yes, the preferred market does eventually  reflect the bond market! YPG.PR.B now yields 6.48% based on a bid of 22.60 and a softMaturity 2017-6-29 at 25.00 … not bad! At a conversion factor of 1.4, that’s equivalent to interest of over 9% …. but it’s a Pfd-3(high). Suitable only in very sparing quantities!

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

It turned out that the end of the world, previously thought to have been cancelled, was merely postponed; a few proponents of the Efficient Market Hypothesis (strong form) received bruises in the rush to the exits but, as they themselves noted, they probably would have got them anyway.

The day started well for fixed-income investors, with the Non-Farm Payrolls report showing that 92,000 jobs were created while unemployment crept up a fraction. James Hamilton at Econbrowser says it actually be worse than it looks, since it does not go far enough to contradict his other indicators. Other reactions have been compiled by the Wall Street Murdoch is Magnificent Journal.

The report was weak enough that even hawkish economists conceded a rate-increase might be further off than anticipated so Treasuries had a great day, closely followed by Canadas.

This exuberance does not extend to lending money to actual companies, however, especially not those involved in sourcing, packaging and selling mortgages. Employees of such firms hoping to get work processing redemptions from hedge funds were disappointed when another European fund halted redemptions.

All this crushed US stocks, while Canada had to deal not only with the US news, but also the fact that it doesn’t look like we’ll be able to go work at Telus, either. So Canada got squashed.

Speaking of Telus, they released their quarterlies today, and noted:

TELUS in July continued its assessment of whether it should potentially make a competing offer for BCE. TELUS has concluded this assessment and it does not intend to submit a competing offer to acquire BCE.

I’m still not convinced that Teachers / BCE story is over yet. I have convinced myself, however, that the secret of happiness is putting oneself into a position of not caring. Which is to say, not holding BCE Prefs.

Meanwhile, the preferred share market simply continued not reacting much to anything at all, but there was one notable exception. The Argus Preferreds, AR.PR.B, are tracked by HIMIPref™ for the very good reason that about ten years ago they were in an index for ten minutes. They were down 63.69% today (bid/bid) on no volume, as the already pathetic bid vanished. To be perfectly frank, I don’t know off the top of my head who owns Argus. Is it the soon to be bankrupt Hollinger or the soon to be jailed Lord Black? Whatever … this issue hasn’t paid its dividend for over two years, so it will be of interest only to hedge funds and scrip collectors.

The post regarding Malachite’s recent performance has been updated with figures for DPS.UN and a joke, so read it again. Read it many times!

There were NO other $25-equivalent index-included issues trading over 10,000 shares today.

Zip. Zero. Zilch. There weren’t even enough issues trading in size to fill a table with five prime examples.

Much to investors’ relief, the previously scheduled end of the world was cancelled today, which was considered good news for both American and Canadian equities. A good day all ’round, in fact, as Treasuries rose, dutifully followed by Canadas.

It is entirely possible that this exuberance has been caused by reports that Stephen Harper said there had been a lot of easy credit internationally, suggesting the recent turmoil was a reassessment of risk. We shall all sleep better tonight provided, of course, that the cheques resulting from massive redemptions of US Junk Funds don’t bounce. Meanwhile, Flaherty says he’s from the government and he’s here to help us.

Sub-Prime had a bad day amongst some indications that credit standards spiralled downwards over the past few years:

It makes one feel at least a little bit more sympathetic to the ratings agencies criticized for over-optimism!

Fed Funds contracts are showing a Fed easing ahead, but this is not necessarily a logical conclusion, especially considering that Europe might tighten.

Rio Tinto’s financing of its Alcan takeover is reported to be doing well.

As far as prefs are concerned … BSN.PR.A has been removed from the HIMIPref™ universe, due to its redemption.

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