PrefBlog

Today’s top news is that inflation is no longer a problem:

Schroder Investment Management’s David Scammell is so convinced inflation has crested that the bond fund manager this quarter has sold securities designed to protect from rising consumer prices.
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Scammell is no lonely voice. A survey out today of 25 bond fund managers controlling $1.41 trillion of assets by Jersey City, New Jersey-based Ried, Thunberg & Co. found that 79 percent expect inflation “to moderate late this year into 2009.”

And certainly the market expectations computed by the Cleveland Fed are in a downturn. Isn’t it exciting? I wonder how the world will end next week!

Somebody made a massive bet against Bear Stearns just before its collapse, which is leading to mutterings that the firm’s collapse was a confidence game. This was last discussed on July 17. The Internuts’ position to date has been that BSC was a stupid firm, leveraged up to the eyeballs with junk and having a negative net worth. It will be most interesting to see if they switch to the “evil hedge fund rumour-monger” meme. As for me … sudden losses of confidence happen. Bear Stearns was an extreme example; they shouldn’t have gone under, but management shouldn’t have made them vulnerable either.

Predictions, of course, have a very poor track record. But there’s one prediction I hope comes true … the bond vigilantes were FUN:

The bond vigilantes who’ve been missing in action under George W. Bush may be preparing for a return engagement once Barack Obama or John McCain takes office next year.
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“Though times are different and a lot of the government spending is necessary, we’re going to see rates rise in a saw- tooth pattern over the next few years,” says E. Craig Coats Jr., the head of Salomon Brothers’ government securities desk when it was the world’s biggest bond trader. Coats considers himself one of the original vigilantes, the bearish traders who drove up long-term interest rates, persuading Clinton to place deficit-reduction above fulfilling his spending promises.

That course-reversal prompted Clinton political adviser James Carville to observe at the time: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

Another good strong day in the markets, with volume picking up slightly.

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

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.
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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.

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.

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.

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