Archive for November, 2008

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November 2008 PrefLetter Released!

Sunday, November 16th, 2008

The November, 2008, edition of PrefLetter has been released and is now available for purchase as the “Previous edition”. Those who subscribe for a full year receive the “Previous edition” as a bonus.

Until further notice, the “Previous Edition” will refer to the November, 2008, issue, while the “Next Edition” will be the December, 2008, issue, scheduled to be prepared as of the close December 12 and eMailed to subscribers prior to market-opening on December 15.

PrefLetter is intended for long term investors seeking issues to buy-and-hold. At least one recommendation from each of the major preferred share sectors is included and discussed.

Note: PrefLetter, being delivered to clients as a large attachment by eMail, sometimes runs afoul of spam filters. If you have not received your copy within fifteen minutes of a release notice such as this one, please double check your (company’s) spam filtering policy and your spam repository. If it’s not there, contact me and I’ll get you your copy … somehow!

Posted in PrefLetter | No Comments »

Treasury Announces CDS Policy Objectives

Saturday, November 15th, 2008

Treasury has announced:

the development of credit default swap central counterparties, some of which will commence operations before the end of 2008, and the establishment of a Memorandum of Understanding regarding CDS central counterparties among the Federal Reserve Board of Governors, the Securities and Exchange Commission and the Commodity Futures Trading Commission. The PWG also announced a broad set of policy objectives to guide efforts to address the full range of challenges associated with OTC derivatives and issued a progress summary to provide an overview of the results of ongoing efforts to strengthen the infrastructure of OTC derivatives markets.
…
The [Presidential Working Group]’s top near-term OTC derivatives priority is to oversee the successful implementation of central counterparty services for credit default swaps. A well-regulated and prudently managed CDS central counterparty can provide immediate benefits to the market by reducing the systemic risk associated with counterparty credit exposures. It also can help facilitate greater market transparency and be a catalyst for a more competitive trading environment that includes exchange trading of CDS.

Much of the announcement simply represents Treasury’s imprimatur on the New York Fed’s announces of Big Developments in the CDS Market.

There is more meat in the Statement of Policy Objectives, most important of which is:

Improve Market Transparency and Integrity for Credit Default Swaps
• Public reporting of prices, trading volumes and aggregate open interest should be required to increase market transparency for participants and public.
• Regulators should have access to trade and position information housed at central counterparties (CCPs) and central trade repositories for the purpose of monitoring market trends, identifying potential issues, and preventing market manipulation and insider trading.

Now, these are worthy objectives for investors, but will make the market a lot less profitable for dealers. Profitability in the Eurobond market, for instance, plunged in 1988 (or thereabouts) when Bloomberg became pervasive and prices of various bonds became public knowledge. In a large part, this increase in market efficiency simply highlights gross incompetence in the buy-side community, but nevertheless the effect is real.

However, a more important consideration is: can the US enforce these policy objectives, or will the market simply move to Dubai? You only get to make the rules if you control the game.

I’ll bet that the US still has the influence to enforce the stated policy objectives … but I’ll also bet that the Next Big Thing will come out of a relatively unregulated environment – investors in such places own a huge chunk of the Street at this point – and the US will find that he who has the gold, makes the rules.

Posted in Banking Crisis 2008 | No Comments »

November 14, 2008

Friday, November 14th, 2008

Julia Dickson, OFSI Superintendent, has released a speech made to Langdon Hall Life Insurance Forum:

It is best to see the current cycle through before making major changes to Minimum Continuing Capital and Surplus Requirements (MCCSR);
…
Pillar 3 is all about disclosure and transparency. Shedding additional light on these issues will encourage better risk management. Sunlight is a great disinfectant and I think it encourages good risk management.
…
The changes OSFI made to the seg fund guarantee capital requirements reflected the same thinking – the need for something that stands up to evaluation and is reasonable.

The trouble is, of course, is that

  • A massive change has been made to the MCCSR rules
  • OSFI itself is a secretive organization that seldom, if ever, justifies or explains its decisions
  • The reasoning behind the seg fund guarantee requirements has not even been exposed for evaluation, much less stood up to it.

There has been an inverted credit curve on some financial issues for quite some time, but FT Alphaville has pointed out this is now more common than not:

FT Alphaville claims this is due to front-end-loaded default fears, but Across the Curve says there’s another factor in play:

Time Warner offering of 5 year and 10 year bonds. The 10 year priced at T+525 and recently someone quoted the issue 510/490.

That two tranche offering yesterday pricedwith an inverted credit curve. As I mentioned the 10 year was T+525 but the 5 year issue required a wider spread to Treasury paper and that paper priced at T+590. This phenomenon is not confined to Time Warner but manifests itself in quite a few other names.

Traditionally, that would indicate that investors see a greater a chance for default sooner rather than later and require a wider spread to protect portfolios from that risk.

Conversations with market participants, though, lead to a different conclusion. The credit spread inversion is a function of demand for duration. There is much more demand for 10 year assets from insurance companies and pension funds and that demand is evident in the number of credits which experience the inversion.

Like everything else in the investment world, I’ll suggest that there’s a bit of truth to every half-way reasonable explanation. Here in the preferred share world, I’ve been puzzled for some time as to why BAM Perps yield less than BAM retractibles (discussed on August 22) … the duration hypothesis from Assiduous Reader prefwatcher didn’t convince me at the time and doesn’t convince me now … but who knows?

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.96% 4.92% 68,535 15.77 6 +0.7286% 1,057.2
Floater 8.23% 8.40% 54,615 10.92 2 -9.0582% 425.0
Op. Retract 5.27% 5.38% 135,966 3.77 15 -0.0489% 1,004.1
Split-Share 6.41% 11.07% 58,013 3.90 12 +1.4277% 930.0
Interest Bearing 8.00% 14.20% 56,292 3.23 3 +1.9802% 888.3
Perpetual-Premium N/A N/A N/A N/A N/A N/A N/A
Perpetual-Discount 6.99% 7.07% 176,307 12.50 71 -0.1135% 781.7
Fixed-Reset 5.40% 5.14% 931,016 15.09 12 -0.0500% 1,079.1
Major Price Changes
Issue Index Change Notes
BAM.PR.B Floater -13.1892%  
BAM.PR.J OpRet -7.1429% Now with a pre-tax bid-YTW of 11.89% based on a bid of 16.25 and a softMaturity 2018-3-30 at 25.00. Compare with BAM.PR.H (8.86% to 2012-3-30), BAM.PR.I (9.03% to 2013-12-30) and BAM.PR.O (10.86% to 2013-6-30). Closing quote of 16.25-40, 2×13. Day’s range of 16.40-17.50.
BAM.PR.K Floater -5.3684%  
LBS.PR.A SplitShare -4.0184% Asset coverage of 1.7-:1 as of November 13 according to Brompton Group. Now with a pre-tax bid-YTW of 9.60% based on a bid of 8.36 and a hardMaturity 2013-11-29 at 10.00. Closing quote of 8.36-70, 3×3. Day’s range of 8.69-72 … so the reported drop is more a measure of the thinness of the market than anything else. Maybe!
BAM.PR.M PerpetualDiscount -3.0209% Now with a pre-tax bid-YTW of 9.72% based on a bid of 12.52 and a limitMaturity. Closing quote 12.52-00, 4X16. Day’s range 12.50-99. Note the inversion against the retractibles!
RY.PR.F PerpetualDiscount -2.8153% Now with a pre-tax bid-YTW of 6.49% based on a bid of 17.26 and a limitMaturity. Closing Quote 17.26-69, 5×3. Day’s range of 17.60-00.
W.PR.J PerpetualDiscount -2.7207% Now with a pre-tax bid-YTW of 8.13% based on a bid of 17.52 and a limitMaturity. Closing Quote 17.52-84, 5X4. Day’s range of 17.50-70.
MFC.PR.B PerpetualDiscount -2.5107% Now with a pre-tax bid-YTW of 6.94% based on a bid of 16.77 and a limitMaturity. Closing Quote 16.77-00, 9×2. Day’s range of 16.85-69.
FTN.PR.A SplitShare -2.2843% Asset coverage of 1.9-:1 as of October 31 according to the company. Now with a pre-tax bid-YTW of 10.00% based on a bid of 7.70 and a hardMaturity 2015-12-1 at 10.00. Closing quote of 7.70-80, 5X5. Day’s range of 7.69-80.
BNS.PR.K PerpetualDiscount -2.1610% Now with a pre-tax bid-YTW of 6.70% based on a bid of 18.11 and a limitMaturity. Closing Quote 18.11-78, 10×12. Day’s range of 18.11-80.
GWO.PR.G PerpetualDiscount -2.0635% Now with a pre-tax bid-YTW of 7.16% based on a bid of 18.51 and a limitMaturity. Closing Quote 18.51-71, 4×4. Day’s range of 18.50-98.
BAM.PR.O OpRet +2.3018% See BAM.PR.J, above.
FIG.PR.A InterestBearing +2.5992% Asset coverage of 1.3-:1 as of November 11, based on a Capital Unit NAV of 3.92 and 0.71 Capital Units per Preferred. Now with a pre-tax bid-YTW of 12.49% based on a bid of 7.50 and a hardMaturity 2014-12-31 at 10.00. Closing quote of 7.50-63, 16×1. Day’s range of 7.35-50.
BCE.PR.I FixFloat +2.7111%  
STW.PR.A InterestBearing +2.7778% Asset coverage of 1.4+:1 as of November 6, according to Middlefield. Now with a pre-tax bid-YTW of 14.01% based on a bid of 9.25 and a hardMaturity 2009-12-31 at 10.00. Closing quote of 9.25-47, 20×3. Day’s range of 9.25-28.
PWF.PR.K PerpetualDiscount +3.1609% Now with a pre-tax bid-YTW of 6.97% based on a bid of 17.95 and a limitMaturity. Closing Quote 17.95-99, 3X10. Day’s range of 17.98-07.
PWF.PR.I PerpetualDiscount +3.5645% Now with a pre-tax bid-YTW of 7.06% based on a bid of 17.95 and a limitMaturity. Closing Quote 21.50-99, 2×10. One trade at 22.50.
FBS.PR.B SplitShare +25.00% Asset coverage of 1.4+:1 as of November 6 according to TD Securities. Now with a pre-tax bid-YTW of 11.65% based on a bid of 8.35 and a hardMaturity 2011-12-15 at 10.00. Closing quote of 8.35-60, 6×5. Day’s range of 8.01-40 … yesterday’s vanishing bid made an appearance!
Volume Highlights
Issue Index Volume Notes
TD.PR.C FixedReset 217,947 Nesbitt bought two blocks of 49,900 and one of 50,100 from anonymous, then crossed 50,000, all at 25.08.
RY.PR.L FixedReset 202,105 TD bought 12,700 from Nesbitt at 25.00; RBC bought blocks of 10,000 and 11,300 from anonymous at 24.99.
BAM.PR.B Floater 145,522 Desjardins crossed 131,000 at 9.50
BAM.PR.K Floater 138,040 Desjardins crossed 131,000 at 9.50. Tax loss swap vs. BAM.PR.B?
SLF.PR.D PerpetualDiscount 79,731 National Bank crossed 60,000 at 15.00. Now with a pre-tax bid-YTW of 7.69% based on a bid of 14.75 and a limitMaturity.

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

Posted in Market Action | 7 Comments »

November PrefLetter Now in Preparation

Friday, November 14th, 2008

The markets have closed and the November edition of PrefLetter is now being prepared.

PrefLetter is the monthly newsletter recommending individual issues of preferred shares to subscribers. There is at least one recommendation from every major type of preferred share (two of them recently added); the recommendations are taylored for “buy-and-hold” investors.

The November issue will be eMailed to clients and available for single-issue purchase with immediate delivery prior to the opening bell on Monday. I will write another post on the weekend advising when the new issue has been uploaded to the server … so watch this space carefully if you intend to order “Next Issue” or “Previous Issue”! Until then, the “Next Issue” is the November Issue.

Posted in PrefLetter | No Comments »

RPA.PR.A Downgraded to P-2 by S&P

Friday, November 14th, 2008

ROC Pref Corp II has announced:

that Standard & Poor’s (“S&P”) lowered its ratings on ROC II’s Preferred Shares from P-1 (low) to P-2 and the Preferred Shares remain on CreditWatch withnegative implications. S&P expects to resolve the CreditWatch placement within a period of 90 days and update its opinion. As announced in a press release dated September 25, the move comes as a result of the Lehman Brothers HoldingsInc. credit event as well as several downgrades of companies held in the Reference Portfolio.

ROC Pref II Corp.’s Preferred Shares pay a fixed quarterly coupon of 4.65% on their $25.00 principal value and will mature on December 31, 2008. The Standard & Poor’s rating addresses the likelihood of full payment of distributions and payment of $25.00 principal value per Preferred Share on the maturity date.

There’s an error in the release – the actual maturity date of the prefs is Dec. 31 2009, according to the prospectus, which makes the 90 day delay until resolution of the Credit Watch Negative much less amusing.

According to the 3Q08 Performance Report, the credit distribution is:

and

The subordination provides protection of approximately 5.5 defaults net of the estimated recovery rate of 40%, which is 6.6 times the average and 3.0 times the worst cumulative historical default level for a portfolio with the same credit ratings distribution over rolling 1.25-year periods (being equal to the remaining life of ROC II) during the 25-year period ending 20071. Although the trading reserve account has increased since inception, the rising cost of subordination (default protection or “safety cushion”) has reduced HSBC’s (the issuer of the credit linked note) estimate of the amount of additional protection that can be purchased in the event that CC&L decides to use the trading reserve account to purchase additional subordination by approximately 0.3 defaults. Inclusive of the trading reserve account, the additional number of defaults that ROC II can withstand declined by approximately 2.0 defaults during the quarter to 5.5 defaults.

RPA.PR.A was last discussed on PrefBlog when the effects of the Lehman bankruptcy were announced.

RPA.PR.A is not tracked by HIMIPref™.

Posted in Issue Comments | 1 Comment »

All-or-None Orders to be Eliminated?

Friday, November 14th, 2008

I am advised that AON orders will no longer be accepted on the Toronto Exchange after December 12, but am unable to find any official confirmation.

Their demise will not be regretted by most. They were placed in the “terms” market and there was very little (if any) electronic communication between the terms and regular markets – the regular market could be showing size in excess of the AON size at a better price, without the AON order being executed, if I remember correctly.

Still, this will help out the industry’s lack of commissions – it will now be even easier for them to execute Granny’s 500 share order at 100 shares per day, extracting the “minimum commission” each time.

Posted in Miscellaneous News | 1 Comment »

November 13, 2008

Friday, November 14th, 2008

Assiduous Reader MP alerts me to the fact that both POW and PWF have filed shelf prospectuses for new series of prefs. We shall see!

Accrued Interest notes that the long Treasury auction today was terrible:

Across the Curve estimates that the sloppy auction cost US taxpayers $175-million.

In sympathy, Canadas got whacked for about 7bp across the curve today.

TD Bank talked a good game about BCE debt (if there should happen to be any):

Toronto-Dominion Bank, one of the lenders financing the C$51.7 billion ($42.6 billion) takeover of BCE Inc., may have to keep the loans on its balance sheet because selling new debt will be difficult amid the credit crisis, the bank’s top executive said.

Toronto equities were heading for a new low but then recovered. Preferreds did much the same, but didn’t recover completely.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.99% 4.96% 67,720 15.70 6 -0.4499% 1,049.6
Floater 7.47% 7.61% 51,496 11.75 2 -3.3959% 467.3
Op. Retract 5.26% 5.95% 136,791 3.85 15 +0.0961% 1,004.6
Split-Share 6.47% 11.46% 57,010 3.92 12 -1.9526% 916.9
Interest Bearing 8.15% 15.46% 56,209 3.23 3 -0.6611% 871.1
Perpetual-Premium N/A N/A N/A N/A N/A N/A N/A
Perpetual-Discount 6.98% 7.06% 176,911 12.51 71 -1.2658% 782.6
Fixed-Reset 5.40% 5.13% 938,678 15.10 12 -0.4667% 1,079.6
Major Price Changes
Issue Index Change Notes
FBS.PR.B SplitShare -19.5181% Asset coverage of 1.4+:1 as of November 6 according to TD Securities. Now with a pre-tax bid-YTW of 20.19% based on a bid of 6.68 and a hardMaturity 2011-12-15 at 10.00. Closing quote of 6.68-8.40 (!) 15×10. Day’s range of 8.25-40 … so the closing bid is spurious, but illustrates the lack of depth in the market.
PWF.PR.I PerpetualDiscount -8.3444% Now with a pre-tax bid-YTW of 7.31% based on a bid of 20.76 and a limitMaturity. Closing quote 20.76-50, 10×9. Day’s range 20.00-23.25 (!).
GWO.PR.I PerpetualDiscount -7.3395% Now with a pre-tax bid-YTW of 7.57% based on a bid of 15.15 and a limitMaturity. Closing Quote 15.15-75, 2×2. Day’s range of 15.00-16.35.
ELF.PR.G PerpetualDiscount -6.8772% Now with a pre-tax bid-YTW of 9.11% based on a bid of 13.27 and a limitMaturity. Closing Quote 13.27-14.49, 2×5. Day’s range of 12.77-14.25.
GWO.PR.H PerpetualDiscount -5.3467% Now with a pre-tax bid-YTW of 7.68% based on a bid of 16.11 and a limitMaturity. Closing Quote 16.11-65, 4×2. Day’s range of 16.11-17.39.
DFN.PR.A SplitShare -4.7619% Asset Coverage of 1.9+:1 as of October 31 according to the company. Now with a pre-tax bid-YTW of 8.35% based on a bid of 8.60 and a hardMaturity 2014-12-1 at 10.00. Closing quote of 8.60-75, 4×8. Day’s range of 8.60-9.03.
PWF.PR.E PerpetualDiscount -4.6667% Now with a pre-tax bid-YTW of 6.95% based on a bid of 20.02 and a limitMaturity. Closing Quote 20.02-53, 6×3. Day’s range of 20.02-76.
BAM.PR.K Floater -4.0404%  
NA.PR.M PerpetualDiscount -3.7239% Now with a pre-tax bid-YTW of 7.13% based on a bid of 21.20 and a limitMaturity. Closing Quote 21.20-88, 3×5. Day’s range of 21.10-22.25.
W.PR.H PerpetualDiscount -3.6244% Now with a pre-tax bid-YTW of 7.97% based on a bid of 17.55 and a limitMaturity. Closing Quote 17.55-75, 8×8. Day’s range of 17.55-21.
FIG.PR.A InterestBearing -3.5620% Asset coverage of 1.3-:1 as of November 11, based on a Capital Unit NAV of 3.92 and 0.71 Capital Units per Preferred. Now with a pre-tax bid-YTW of 13.04% based on a bid of 7.31% and a hardMaturity 2014-12-31 at 10.00. Closing quote of 7.31-65, 3×1. Day’s range of 7.01-89.
SLF.PR.B PerpetualDiscount -3.4332% Now with a pre-tax bid-YTW of 7.91% based on a bid of 15.47 and a limitMaturity. Closing Quote 15.47-70, 7×3. Day’s range of 15.50-13.
ENB.PR.A PerpetualDiscount -3.2609% Now with a pre-tax bid-YTW of 6.19% based on a bid of 22.25 and a limitMaturity. Closing Quote 22.25-50, 4×10. Day’s range of 22.00-23.24.
SLF.PR.A PerpetualDiscount -3.0189% Now with a pre-tax bid-YTW of 7.86% based on a bid of 15.42 and a limitMaturity. Closing Quote 15.42-89, 3×3. Day’s range of 15.32(?)-89.
NA.PR.L PerpetualDiscount -2.8000% Now with a pre-tax bid-YTW of 7.19% based on a bid of 17.01 and a limitMaturity. Closing Quote 17.01-24, 4×3. Day’s range of 17.01-51.
POW.PR.C PerpetualDiscount -2.7896% Now with a pre-tax bid-YTW of 7.16% based on a bid of 20.56 and a limitMaturity. Closing Quote 20.56-81, 3×1. Day’s range of 20.51-15.
BAM.PR.B Floater -2.7340%  
BCE.PR.A FixFloat -2.7234%  
FTN.PR.A SplitShare -2.7160% Asset coverage of 1.9-:1 as of October 31 according to the company. Now with a pre-tax bid-YTW of 9.57% based on a bid of 7.88 and a hardMaturity 2015-12-1 at 10.00. Closing quote of 7.88-99, 5×10. Day’s range of 7.88-10.
BMO.PR.H PerpetualDiscount -2.5907% Now with a pre-tax bid-YTW of 7.09% based on a bid of 18.80 and a limitMaturity. Closing Quote 18.80-09, 4×1. Day’s range of 18.50-17.
BMO.PR.K PerpetualDiscount -2.5250% Now with a pre-tax bid-YTW of 7.13% based on a bid of 18.53 and a limitMaturity. Closing Quote 18.53-95, 21×10. Day’s range of 18.52-01.
PWF.PR.K PerpetualDiscount -2.5210% Now with a pre-tax bid-YTW of 7.20% based on a bid of 17.40 and a limitMaturity. Closing Quote 17.40-50, 5×10. Day’s range of 16.71-76.
POW.PR.D PerpetualDiscount -2.3550% Now with a pre-tax bid-YTW of 7.47% based on a bid of 17.00 and a limitMaturity. Closing Quote 17.00-11, 3×1. Day’s range of 16.89-41.
MFC.PR.B PerpetualDiscount -2.2346% Now with a pre-tax bid-YTW of 6.78% based on a bid of 17.50 and a limitMaturity. Closing Quote 17.50-80, 2×19. Day’s range of 17.51-15.
PWF.PR.L PerpetualDiscount -2.2222% Now with a pre-tax bid-YTW of 7.33% based on a bid of 17.60 and a limitMaturity. Closing Quote 17.60-94, 1×4. Day’s range of 17.61-00.
TCA.PR.X PerpetualDiscount -2.1013% Now with a pre-tax bid-YTW of 6.37% based on a bid of 44.26 and a limitMaturity. Closing Quote 44.26-95, 5×8. Day’s range of 44.95-21.
BSD.PR.A InterestBearing +2.0168% Asset coverage of 1.0+:1 as of November 7 according to the company. Now with a pre-tax bid-YTW of 16.60% based on a bid of 6.07 and a hardMaturity 2015-3-31 at 10.00. Closing quote of 6.07-34, 4×9. Day’s range of 6.06-50.
WFS.PR.A SplitShare +2.3313% Asset coverage of 1.3+:1 as of November 6 according to Mulvihill. Now with a pre-tax bid-YTW of 13.34% based on a bid of 8.34 and a hardMaturity 2011-6-30 at 10.00. Closing quote of 8.34-68, 10×27. Day’s range of 8.21-50.
Volume Highlights
Issue Index Volume Notes
SLF.PR.D PerpetualDiscount 184,221 National crossed 40,000 at 15.18, then anonymous bought 3 blocks of 10,000 each from RBC at 15.00, 14.95 & 14.95; finally, anonymous “crossed” 10,000 at 14.95. Now with a pre-tax bid-YTW of 7.66% based on a bid of 14.80 and a limitMaturity.
L.PR.A Scraps (Would be OpRet but there are credit concerns) 124,190 CIBC crossed 100,000 at 22.95, then bought 13,600 from RBC at the same price. Now with a pre-tax bid-YTW of 7.67% based on a bid of 22.90 and a softMaturity 2015-7-30 at 25.00.
BPO.PR.F Scraps (would be OpRet but there are credit concerns) 105,408 TD crossed 49,300 at 17.50, then another 50,000 at the same price. Now with a pre-tax bid-YTW of 16.25% based on a bid of 17.46 and a softMaturity 2013-3-30 at 25.00.
GWO.PR.X OpRet 73,863 CIBC crossed 71,000 at 25.00. Now with a pre-tax bid-YTW of 4.92% based on a bid of 25.05 and a softMaturity 2013-9-29 at 25.00.
BMO.PR.H PerpetualDiscount 66,370 CIBC crossed 40,000 at 18.75, then another 20,000 at the same price. Now with a pre-tax bid-YTW of 7.09% based on a bid of 18.80 and a limitMaturity.
RY.PR.I FixedReset 58,309 CIBC bought 10,000 from anonymous at 24.01.
BMO.PR.J PerpetualDiscount 55,940 Nesbitt crossed 42,000 at 16.26. Now with a pre-tax bid-YTW of 6.96% based on a bid of 16.26 and a limitMaturity.

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

Posted in Market Action | 2 Comments »

IMF: World Economic Outlook, October 2008

Thursday, November 13th, 2008

This would have been a better post yesterday, but I’ve never claimed to be much good at market timing!

The IMF has published its World Economic Outlook, October 2008, Financial Stress, Downturns, and Recoveries. There’s some very interesting data in Chapter Four, discussing “The Current Financial Crisis in Historical Context”.

The global nature of the crisis as illustrated by this report has been discussed on FT-Alphaville on November 3, so I won’t repeat that stuff. Instead, I’ll show a chart of XIU vs. the S&P 500 for the past year:

… and the IMF chart of equity returns …

… and a table from Stock Market Bubbles: Some Historical Perspective, by Achla Marathe and Edward Renshaw:

Declines of Three Percent or More in the S&P 500 Stock Price Index After it
Has Achieved a New All Time High Since September 7, 1929


                                          % Change S&P
      Date of         Value S&P Index   -----------------------------------------       Trading
-------------------   ---------------    Peak to   Peak to                            Day
   Peak      Trough    Peak    Trough    Peak      Trough      Duration
                        (1)      (2)      (3)        (4)       (5)n

 9/ 7/29    6/ 1/32   31.92     4.40**    ---      -86.2

10/ 6/54   10/29/54   32.76    31.68      2.6      - 3.3        10
 1/ 3/55    1/17/55   36.75    34.58     12.2$     - 5.9#       40H
 3/ 4/55    3/14/55   37.52    34.96      2.1$     - 6.8        19
 4/21/55    5/17/55   38.32*   36.97      2.1      - 3.5         7
 7/27/55    8/10/55   43.76    41.74     14.2      - 4.6#       37
 9/23/55   10/11/55   45.63    40.80      4.3      -10.6        13
11/14/55    1/23/56   46.41    43.11      1.7$     - 7.1         0
 3/20/56    5/28/56   48.87    44.10      5.3$     - 9.8         7
 8/ 2/56   10/22/57   49.74    38.98**    1.8      -21.6        13

11/17/58   11/25/58   53.24    51.02      7.0      - 4.2#       37
 1/21/59    2/ 9/59   56.04    53.58      5.3$     - 4.4#       27
 5/29/59    6/10/59   58.68    56.36      4.7      - 4.0#       61H
 8/ 3/59   10/25/60   60.71*   52.30**    3.5      -13.9        22

 4/17/61    4/24/61   66.68    64.40      9.8      - 3.4#       54H
 5/17/61    7/18/61   67.39E   64.41D     1.1      - 4.4         2
 9/ 6/61    9/25/61   68.46E   65.77D     1.6      - 3.9        22
12/12/61    6/26/62   72.64E*  52.32D**   6.1      -28.0        35

10/28/63   11/22/63   74.48    69.61      2.5      - 6.5        39
 5/12/64    6/ 8/64   81.16    78.64      9.0      - 3.1#      101H
 7/17/64    8/26/64   84.01    81.32      3.5      - 3.2#       15
11/20/64   12/15/64   86.28*   83.22      2.7      - 3.5        17
 5/13/65    6/28/65   90.27    81.60      4.6      - 9.6        81
 2/ 9/66   10/ 7/66   94.06    73.20**    4.2      -22.2        94

 5/ 8/67    6/ 5/67   94.58    88.43       .6      - 6.5         2
 8/ 4/67    8/28/67   95.83    92.64      1.3      - 3.3         4
 9/25/67    3/ 5/68   97.59    87.72      1.8$     -10.1         8
 7/11/68    8/ 2/68  102.39*   96.63      4.9      - 5.6        44H
11/29/68    5/26/70  108.37    69.29**    5.8      -36.1        38

 4/12/72    5/ 9/72  110.18   104.74D     1.7      - 4.9        24
 5/26/72    7/20/72  110.66   105.81D      .4      - 4.4         2
 8/14/72   10/16/72  112.55   106.77D     1.7      - 5.1         4
12/11/72   12/21/72  119.12*  115.11D     5.8      - 3.4#       26H
 1/11/73P  10/ 3/74  120.24    62.28D**    .9      -48.2         6
 8/22/80P   8/28/80  126.02   122.08      4.8$     - 3.1#       26H
 9/22/80P   9/29/80  130.40   123.54      3.5$     - 5.3        13
10/15/80P  10/30/80  133.70   126.29      2.5$     - 5.5         7
11/28/80P   8/12/82  140.52*  102.42**    5.1$     -27.1        11

11/ 9/82   11/23/82  143.02   132.93      1.8$     - 7.1         4
 1/10/83    1/24/83  146.78   139.97      2.6$     - 4.6         2
 6/22/83    8/ 8/83  170.99   159.18     16.5      - 6.9#       94H
10/10/83    7/24/84  172.65*  147.82**    1.0$     -14.4         0

 2/13/85    3/15/85  183.35   176.53      6.2$     - 3.7#       17
 6/ 6/85    6/13/85  191.06   185.33      4.2      - 3.0#       29
 7/17/85    9/25/85  195.65   180.66      2.4      - 7.7        13
 1/ 7/86    1/22/86  213.80*  203.49      9.3$     - 4.8#       37
 3/27/86    4/ 7/86  238.97   228.63     11.8      - 4.3#       37
 4/21/86    5/16/86  244.74   232.76      2.4$     - 4.9         3
 5/29/86    6/10/86  247.98   239.58      1.3$     - 3.4         2
 7/ 2/86    7/15/86  252.70   233.66      1.9      - 7.5         5
 9/ 4/86    9/29/86  253.83   229.91       .4$     - 9.4         6
12/ 2/86   12/31/86  254.00   242.17       .1$     - 4.7         0
 3/24/87    3/30/87  301.64   289.20     18.8      - 4.1#       53H
 4/ 6/87    5/20/87  301.95   278.21D      .1      - 7.9         0
 8/25/87   12/ 4/87  336.77   223.92**   11.5      -33.5        50

 9/ 1/89    9/14/89  353.73   343.16      5.0$     - 3.0#       27H
10/ 9/89    1/30/90  359.80   322.98      1.7$     -10.2         4
 6/ 4/90P   6/26/90  367.40   352.06      2.1$     - 4.2         4
 7/16/90P  10/11/90  368.95*  295.46**     .4      -19.9         0

 4/17/91    5/15/91  390.45   368.57      5.8      - 5.6#       43
 8/ 6/91    8/19/91  390.62   376.47       .0$     - 3.6         0
 8/28/91   10/ 9/91  396.64   376.80      1.5      - 5.0         4
11/13/91   11/29/91  397.41E* 375.22       .2      - 5.6         1
 1/15/92    4/ 8/92  420.77E  394.50      5.9      - 6.2        14
 8/ 3/92    8/24/92  425.09E  410.72      1.0$     - 3.4         3
 9/14/92   10/ 9/92  425.27E  402.66D      .0$     - 5.3         0
 2/ 4/93    2/18/93  449.56E  431.90      5.7      - 3.9#       51
 3/10/93    4/26/93  456.33E  433.54D     1.5$     - 5.0         2
 2/ 2/94    4/ 4/94  482.00E  438.92D     5.6      - 8.9       116
12/13/95    1/10/96  621.69   598.48D    29.0      - 3.7#      210H
 2/12/96    4/11/96  661.45   631.18D     6.4      - 4.6#       10
 5/24/96    7/24/96  678.51   626.65D     2.6$     - 7.6         9
11/18/96   12/16/96  757.03   720.98D    15.1G$    - 4.8#       51
 2/18/97             816.29         D     7.8G         ?        26

Footnotes for Table 20.1

(5)n. Number of additional trading days after the recovery to a first new
high to the last new high or peak date.

* Fourth new high to be followed by a three percent decline for the bull
market in question.

**A major bear market low.

$ identifies cases where the first new high was associated with a daily gain
of 1.1 percent or more.

#Cases where the peak to trough decline in column (4) is less than the
preceding peak to peak increase in column (3).

D identifies cases where the first new high occurred after a month when the
dividend yield for the S&P index was equal to 3.0 percent or less.

E identifies cases where the first new high occurred after a quarter when
the P/E ratio for the S&P index was equal to 20.50 or more.

G identifies peak to peak gains that may have encouraged Fed Chairman Alan
Greenspan to warn investors about the possibility of irrational exuberance.

H identifies the trading day duration record, without a cumulative decline
of three percent or more, for each bull market separated by cumulative
declines of 13 percent or more.

P identifies declines of three percent or more that occurred during years
containing a recessionary peak designated by the National Bureau of Economic
Research.

Source of basic data: The Practical Forecasters’ Almanac(Burr Ridge,
Illinois: Irwin, 1992), Table 3.05 and Standard and Poor’s Security
Price Index Record.

Update: See also this source:

S&P 500 Index:

March 24, 2000 closes at 1527.46 (Peak)
July 23, 2002 closes at 797.70 (Trough)
Percentage decline from Peak to Trough: 47.78%

and

from FAC Wealth Management.

Posted in Banking Crisis 2008, Interesting External Papers | No Comments »

November 12, 2008

Thursday, November 13th, 2008

The Fed and other US regulators have released a motherhood statement on banking practices:

  • DO lend to your regular customers
  • DON’T pay excessive dividends
  • DON’T be unnecessarily mean to delinquent mortgagees
  • DON’T pay dumb bonuses to management

A nod’s as good as a wink to a blind man, eh?

On September 25 I predicted that TARP would fail for the same reason MLEC failed: disagreement over valuation of assets. So I pleased to see that Paulson has abandoned the asset-buying idea:

U.S. Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets.
…
Paulson’s remarks are an acknowledgement that the centerpiece of the $700 billion bailout request to lawmakers was ill-conceived. Neel Kashkari, the Treasury official who heads the rescue program, told legislators last month that officials shifted to buying stakes in banks because it was a faster way revive capital markets and the economy.

“I will never apologize for changing a strategy or an approach if the facts change,” Paulson said.

The nice part about being part of a lame-duck administration – or working out your notice at McDonalds, or whatever – is the joyous feeling of being able to tell the truth and behave intelligently! Accrued Interest mourns the plan’s failure.

Spend-every-Penny has announced a $50-billion mortgage swap with Canadian Banks:

The Honourable Jim Flaherty, Minister of Finance, today announced the Government will purchase up to an additional $50 billion of insured mortgage pools by the end of the fiscal year as part of its ongoing efforts to maintain the availability of longer-term credit in Canada.

This action will increase to $75 billion the maximum value of securities purchased through Canada Mortgage and Housing Corporation (CMHC) under this program.

Also announced was:

Jon Danielsson reviews the Icelandic situation on VoxEU:

A third of the population is considering emigration.

Does anybody remember Richard Rohmer’s book, Exodus UK?

The first main cause of the crisis was the use of inflation targeting. Throughout the period of inflation targeting, inflation was generally above its target rate. In response, the central bank keep rates high, exceeding 15% at times.

In a small economy like Iceland, high interest rates encourage domestic firms and households to borrow in foreign currency; it also attracts carry traders speculating against ‘uncovered interest parity’. The result was a large foreign-currency inflow. This lead to a sharp exchange rate appreciation that gave Icelanders an illusion of wealth and doubly rewarding the carry traders. The currency inflows also encouraged economic growth and inflation; outcomes that induced the Central Bank to raise interest rates further.

The end result was a bubble caused by the interaction of high domestic interest rates, currency appreciation, and capital inflows. While the stylized facts about currency inflows suggest that they should lead to lower domestic prices, in Iceland the impact was opposite.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 4.97% 4.93% 68,727 15.72 6 -0.7563% 1,054.3
Floater 7.21% 7.34% 52,104 12.06 2 -2.9500% 483.7
Op. Retract 5.27% 5.99% 137,280 3.85 15 -0.0078% 1,003.7
Split-Share 6.32% 10.80% 56,532 3.90 12 -0.2896% 935.1
Interest Bearing 8.10% 15.22% 56,536 3.25 3 -1.4779% 876.9
Perpetual-Premium N/A N/A N/A N/A N/A N/A N/A
Perpetual-Discount 6.88% 6.96% 176,297 12.62 71 -0.4212% 792.7
Fixed-Reset 5.37% 5.11% 949,807 15.15 12 -0.2776% 1,084.7
Major Price Changes
Issue Index Change Notes
MFC.PR.C PerpetualDiscount -4.2806% Now with a pre-tax bid-YTW of 7.13% based on a bid of 16.10 and a limitMaturity. Closing quote 16.10-50, 4×5. Day’s range 16.07-50.
PWF.PR.G PerpetualDiscount -3.0937% Now with a pre-tax bid-YTW of 7.00% based on a bid of 21.30 and a limitMaturity. Closing Quote 21.30-24, 2×3. Day’s range of 21.28-97.
BCE.PR.I FixFloat -3.0638%  
BAM.PR.J OpRet -3.0405% Now with a pre-tax bid-YTW of 10.98% based on a bid of 17.22 and a softMaturity 2018-3-30 at 25.00. Compare with BAM.PR.H (8.40% to 2012-3-30), BAM.PR.I (9.49% to 2013-12-30) and BAM.PR.O (11.46% to 2013-6-30). Closing quote of 17.22-83, 3×11. Day’s range of 17.17-00.
BAM.PR.B Floater -2.9592%  
PWF.PR.H PerpetualDiscount -2.9484% Now with a pre-tax bid-YTW of 7.36% based on a bid of 19.75 and a limitMaturity. Closing Quote 19.75-74, 5×1. No Trades.
BAM.PR.K Floater -2.9412%  
FBS.PR.B SplitShare -2.9240% Asset coverage of 1.4+:1 as of November 6 according to TD Securities. Now with a pre-tax bid-YTW of 11.85% based on a bid of 8.30 and a hardMaturity 2011-12-15 at 10.00. Closing quote of 8.30-94, 20×10. Day’s range of 8.40-55.
BCE.PR.R FixFloat -2.7484%  
HSB.PR.C PerpetualDiscount -2.7322% Now with a pre-tax bid-YTW of 7.30% based on a bid of 17.80 and a limitMaturity. Closing Quote 17.80-38, 9×2. Day’s range of 17.50-18.90.
W.PR.J PerpetualDiscount -2.4051% Now with a pre-tax bid-YTW of 7.79% based on a bid of 18.26 and a limitMaturity. Closing Quote 18.26-35, 2×4. Day’s range of 18.25-70.
BAM.PR.O OpRet -2.3500% See BAM.PR.J, above.
PWF.PR.E PerpetualDiscount -2.3256% Now with a pre-tax bid-YTW of 6.62% based on a bid of 21.00 and a limitMaturity. Closing Quote 21.00-25, 2×4. Day’s range of 21.01-50.
FIG.PR.A InterestBearing -2.1935% Asset coverage of 1.3-:1 as of November 11, based on a Capital Unit NAV of 3.92 and 0.71 Capital Units per Preferred. Now with a pre-tax bid-YTW of 12.25% based on a bid of 7.58% and a hardMaturity 2014-12-31 at 10.00. Closing quote of 7.58-80, 2×1. Day’s range of 7.58-75.
BNA.PR.C SplitShare -2.1480% Asset coverage of just under 2.8:1 as of September 30 according to the company. Coverage now of 2.0+:1 based on BAM.A at 21.04 and 2.4 BAM.A held per preferred. Now with a pre-tax bid-YTW of 14.15% based on a bid of 12.30 and a hardMaturity 2019-1-10 at 25.00. Compare with BNA.PR.A (16.58% to 2010-9-30) and BNA.PR.B (9.38% to 2016-3-25). Closing quote 12.30-56, 2×5. Day’s range 12.27-41.
MFC.PR.B PerpetualDiscount +2.1690% Now with a pre-tax bid-YTW of 6.62% based on a bid of 17.90 and a limitMaturity. Closing Quote 17.90-15, 5X3. Day’s range of 17.75-29.
RY.PR.A PerpetualDiscount +2.9994% Now with a pre-tax bid-YTW of 6.14% based on a bid of 18.20 and a limitMaturity. Closing Quote 18.20-35, 7×3. Day’s range of 17.50-35.
Volume Highlights
Issue Index Volume Notes
GWO.PR.X OpRet 248,528 CIBC crossed 175,000 at 25.00, then another 68,500 at the same price. Now with a pre-tax bid-YTW of 4.73% based on a bid of 25.25 and a softMaturity 2013-9-29 at 25.00.
PWF.PR.D OpRet 93,600 CIBC crossed 89,000 at 25.25. Now with a pre-tax bid-YTW of 5.00% based on a bid of 25.25 and a softMaturity 2012-10-30 at 25.00.
PWF.PR.J OpRet 85,781 CIBC crossed 85,000 at 25.00. Now with a pre-tax bid-YTW of 5.05% based on a bid of 24.71 and a softMaturity 2013-7-30 at 25.00.
TD.PR.C Fixed-Reset 76,840 CIBC crossed 50,000 at 25.00.
RY.PR.L FixedReset 65,850  

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

Posted in Market Action | 2 Comments »

BIS Releases OTC Derivative Statistics

Wednesday, November 12th, 2008

The BIS Semi-Annual OTC Derivatives Package has been released … and CAD interest rate options got a mention!

Concentration in options on Canadian dollar interest rates rose to the highest level recorded so far.
…
The Herfindahl index represents a measure of market concentration and is defined as the sum of the squares of the market shares of each individual institution. It ranges from 0 to 10,000. The more concentrated the market, the higher the measure becomes. If the market is fully concentrated (only one institution), the measure will have the (maximum) value of 10,000.

The Herfindahl Index for CAD Interest Rate options was 3,314.

The press release summarizes:

The notional amounts outstanding of over-the-counter (OTC) derivatives continued to expand in the first half of 2008. Notional amounts of all types of OTC contracts stood at $683.7 trillion at the end of June, 15% higher than six months before. Multilateral terminations of outstanding contracts resulted in the first ever decline of 1% in the volume of outstanding credit default swaps (CDS) since the first publication of CDS statistics in December 2004. The average growth rate for outstanding CDS contracts over the last three years has been 45%. In contrast to CDS markets, markets for interest rate derivatives and FX derivatives both recorded significant growth. Open positions in interest rate derivatives contracts rose by 17%, while those in FX contracts expanded by 12%. Gross market values, which measure the cost of replacing all existing contracts and are thus a better gauge of market risk than notional amounts, increased by 29% to $20.4 trillion at the end of June 2008.

Posted in Interesting External Papers | No Comments »

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