PrefBlog

American real estate agents are going hungry:

Purchases of U.S. new homes fell in May to the lowest level on record after a tax credit expired, showing the market remains dependent on government support.

Sales collapsed an unprecedented 33 percent from April to an annual pace of 300,000, less than the median estimate of economists surveyed by Bloomberg News and the fewest in data going back to 1963, figures from the Commerce Department showed today in Washington. Demand in prior months was revised down.

Like the Fed says:

Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months.
…
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

But fear not! Fannie Mae is tightening standards:

Borrowers who have the means to make mortgage payments and don’t work with lenders to restructure loans will be banned from obtaining new mortgages backed by Fannie Mae for seven years from the date of foreclosure, the company said today in a statement.
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Homeowners walking away from mortgages they can afford accounted for about 12 percent of U.S. mortgage defaults in February, New York-based Morgan Stanley said in an April report.

It would be much more to the point if non-recourse mortgages carried a penalty rate; but that would be too logical.

Argentina is showing Greece how it’s done:

The results of Argentina’s debt swap offer exceeded the government’s expectations and will help close a chapter on the country’s record $95 billion default in 2001, Economy Minister Amado Boudou said.

Creditors holding about $12.1 billion of $18.3 billion in defaulted debt tendered their securities in the restructuring, which Boudou said was the result of “hard” negotiating on the part of Argentina. Combined with the results of a 2005 restructuring, a total of 92.4 percent of the defaulted debt has been swapped for a mix of new bonds, he said.
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The government has no fiscal need to issue debt and can wait until it is able to sell bonds that yield less than 10 percent, Boudou said.

Yields on the country’s benchmark dollar bonds due in 2015 rose 11 basis points, or 0.11 percentage point, to 12.86 percent at 10:59 a.m. New York time.

The question is … will a serial defaulter ever be able to issue bonds at less than 10%?

All the money that’s being dropped on the G-20 is having an effect.

PerpetualDiscounts kept the streak alive in the Canadian preferred share market, gaining 11bp, while FixedResets were down 11bp. Volume was moderate.

PerpetualDiscounts now yield 6.02%, equivalent to 8.43% interest at the standard equivalency factor of 1.4x. Long Corporates are now at about 5.55% so the pre-tax interest equivalent spread (also called the Seniority Spread) is now about 290bp, a significant widening from the +270bp reported on June 16 due to the sharp decline in long yields.

Click for big

Nothing happened today.

The Canadian preferred share market was fairly well-behaved today, with PerpetualDiscounts up 7bp to keep the streak alive (only six more trading days until month-end!) and FixedResets down 6bp. Volume was slighly above average, but there is only one entry in the performance highlights.

Good article in The Atlantic about algorithmic and high-frequency trading, titled Monsters in the Market. I was a little disappointed by the precious tone of their comments:

At least a few high-frequency traders have learned to make a killing by detecting the more simplistic algo strategies deployed by basic pension funds and mutual funds, buying the next stock the funds plan to buy, and then selling it to them at a higher price. This may not be illegal, but it’s almost certainly unfair to the funds’ investors. “It is increasingly clear that there are quite a number of high-frequency bandits in the high- frequency-trading community who pump up volume statistics, front-run investor orders, increase transaction costs, and hurt real liquidity,” David Weild, an adviser at Grant Thornton and a former vice chairman of Nasdaq, told me. *

I would have been much more interested in an expose of just why basic pension funds and mutual funds are using the “more simplistic algo stretegies”. My guess is that they can’t be bothered; the money is much better spent on marketting.

It should also be noted that David Weild’s use of the term “front-run” is moronic. There is no misappropriation of client information in these strategies. One wonders what Mr. Weild’s performance track record is like! Vice Chairman of NASDAQ? Big deal, Madoff was chairman.

The UK will probably be getting a bank tax:

U.K. Chancellor of the Exchequer George Osborne is pushing ahead with plans to tax banks in his first budget, according to three people with knowledge of the plans, an announcement to go along with spending cuts that may prompt forecasters to lower economic-growth estimates.

The tax, which may be imposed on assets or liabilities, could raise at least 2 billion pounds ($3 billion), one of the people said. Osborne has said the June 22 budget statement would set the stage for the deepest spending reductions since the 1980s.

There is some reporting of the dissent regarding the ECB’s bond-buying:

On May 10, just hours after the European Central Bank stepped into government bond markets for the first time, Axel Weber broke ranks with most of his colleagues on the ECB’s Governing Council — including his boss, President Jean-Claude Trichet.

“The purchase of government bonds poses significant stability risks, and that’s why I’m critical of this part of the ECB council’s decision,” said Weber, president of Germany’s Bundesbank.
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“Weber’s public opposition to a policy move by the ECB that the politicians are presumably very keen on could make his appointment a bit difficult,” says David Mackie, chief European economist at JPMorgan Chase & Co. in London. “They might feel: ‘Do we really want this guy to be in charge?’”

Weber was nonetheless right to warn about the danger of buying bonds, Mackie says. By taking the helm of the world’s second-most-important central bank, Weber would face “huge” challenges, says Nouriel Roubini, the New York University economist who predicted the financial crisis.

Quite right. The sovereign debt problem (crisis?) is not one that can be solved with liquidity injections, like the banks’ crisis. The banks, to a large extent, simply needed time for the markets to reflect values and for their short-term assets to run off the books … in such a case, Bagehot’s principle of supplying liquidity to an illiquid, but solvent, bank is the correct prescription. For the sovereigns, however, the problem is of spending and structural deficits and while bond-buying may buy time, it does not even begin to address the underlying problem.

Those puzzled by the SEC’s handling of the Goldman lawsuit can rest assured that yes, sometimes the SEC does manage to make allegations of genuine wrongdoing:

ICP kept some bonds in one of AIG’s CDOs after the New York-based insurer rejected them in October 2007, the SEC said. “In late 2008, after AIG complained about unauthorized trades, ICP was compelled to stop nearly all reinvestments by the Triaxx CDOs,” the complaint said.
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[ICP founder and CEO Thomas] Priore also backdated trades of mortgage-backed bonds in 2008, using prices from a year earlier, causing one of the Triaxx vehicles to overpay by about $3.5 million, the SEC said.

The Canadian preferred share market rally just kept on going today, the PerpetualDiscounts up 15bp and FixedResets up 10bp, with a slight uptick in volume. The performance highlights table is sparsely populated and the volume highlights are dominated by PerpetualDiscounts.