PrefBlog

A provocative BIS working paper by by Előd Takáts is titled Ageing and Asset Prices:

The paper investigates how ageing will affect asset prices. A small model is used to show that economic and demographic factors drive asset, and in particular house, prices. These factors are estimated in a panel regression framework encompassing BIS real house price data from 22 advanced economies between 1970 and 2009. The estimates show that demographic factors affect real house prices significantly. Combining the results with UN population projections suggests that ageing will lower real house prices substantially over the next forty years. The headwind is around 80 basis points per annum in the United States and much stronger in Europe and Japan. Based on the analysis, global asset prices are likely to face substantial headwinds from ageing.
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However, the estimates are still short of the Mankiw and Weil’s (1989) asset price meltdown projection, which would imply around 300 basis points per annum real house price decline.

These estimates are not real house price forecasts, but only estimates of the demographic impact on real house prices. As a number of other factors affect these prices, their movements can be very different from those implied by demographics. For instance, both Italy and Korea experienced strong real house price growth in spite of significant estimated demographic headwinds in the past forty years.

Remember Basis Yield Alpha Fund (last mentioned June 9)? They’re the guys who used their well-honed analytical skills and uncanny grasp of macro-economic trends to buy stuff that the dealer said was good, remember? Goldman is applying to have the boo-hoo-hoo dismissed on on jurisdictional grounds:

Goldman Sachs Group Inc. asked a New York judge to dismiss a $1 billion lawsuit by Australian hedge fund Basis Capital, arguing that a June U.S. Supreme Court decision bars the claim.
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Goldman Sachs argued that the suit is barred by the Supreme Court’s June 24 ruling in Morrison v. National Australia Bank. In that case, the high court held that U.S. securities laws don’t apply to the claims of foreign buyers of non-U.S. securities on foreign exchanges.

“This litigation presents a contract dispute between two foreign entities, executed abroad and governed by English law, and Morrison makes clear that it does not belong in this court,” New York-based Goldman said in a filing dated Aug. 2.

Passive/Active nomenclature is going to get even more blurred:

According to the application filed today, BlackRock will offer ETFs based on indexes that invest in some assets, known as long positions, and sell others to create short positions. The firm may later create funds that are based on indexes that exclusively hold short positions, the filing said.
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BlackRock will initially create a 130/30 fund based on the MSCI USA Barra Earnings Yield index, according to the company’s application. This index uses mathematical models to buy companies with “positive earnings momentum” and sell short those that have negative earnings momentum, the filing said.

A passive fund that uses mathematical models to select securities? Ummmmm….

The Chinese could give the Europeans some lessons on stress-tests:

China’s banking regulator told lenders last month to conduct a new round of stress tests to gauge the impact of residential property prices falling as much as 60 percent in the hardest-hit markets, a person with knowledge of the matter said.

Banks were instructed to include worst-case scenarios of prices dropping 50 percent to 60 percent in cities where they have risen excessively, the person said, declining to be identified because the regulator’s requirement hasn’t been publicly announced. Previous stress tests carried out in the past year assumed home-price declines of as much as 30 percent.

Although mind you, there are persistent worries about Chinese loan quality, with staggering estimates of default risk.

I was going to make the following links into a full post … but that was three months ago! So here are some links on rights issues. Report to HM Treasury on the implementation of the recommendations of the Rights Issue Review Group

See also PRE-EMPTION RIGHTS: FINAL REPORT

summary of UK law:

If a company proposes to allot any relevant shares or relevant employee shares or grant any rights over them, those shares or rights must first be offered (for a period of at least 21 days) to the existing members in proportion to their existing holdings on terms no less favourable than are being offered to any third party. Where there are differing classes of shares, the relevant shares may first be offered to members of the relevant class if the Memorandum or Articles so require. Any shares not taken up must then be offered to the members of the company as a whole.
This does not apply to: …

I ran across some disturbing censored TV ads yesterday and was prompted to send the publishers an eMail:

Sirs,

I have viewed the videos at http://www.homefrontcalgary.com/tv-spots.html and found them quite disturbing – I am not surprised the authorities prefer images of kittens and bunnies.

However, I am curious regarding the efficiacy of the approach. The main message is addressed to the abuser, who has presumably been preached at many times in his life and will simply shrug off the message or rationalize his actions in some manner.

Would it not be better to address TV spots of this nature towards the abused woman, something along the lines of “You don’t need to tolerate this, your life can be better, here’s what to do:”?

Today I received a standardized response from them – sufficiently general as to indicate it is the response for any letter having to do with the videos. When even the do-gooders brush off your queries, you know you’re in trouble!

Another day of solid advances on the Canadian preferred share market today, with PerpetualDiscounts up 18bp and FixedResets gaining 5bp. The median weighted average yield on the latter class is now 3.39% … the fifth-lowest on record and within striking distance of the all-time low of 3.31%. Amusingly, the Bozo Spread (Current Yield PerpetualDiscounts less Current Yield FixedResets) remains steady at 50bp.

This is going to end in tears.

PerpetualDiscounts now yield 5.84%, equivalent to 8.18% interest at the standard equivalency factor of 1.4x. Long corporates now yield about 5.5%, so the pre-tax interest-equivalent spread (aka the Seniority Spread) now stands at about 270bp, a small (and perhaps meaningless) tightening from the 275bp reported on July 30.

European banks have a lot of refinancing to do:

Banks in Europe’s most indebted nations need to refinance $122 billion of bonds this year, likely paying high interest costs even after receiving a clean bill of health from regulators.

Italy’s Intesa Sanpaolo SpA has the most debt coming due at $28 billion, followed by UniCredit SpA with $21 billion, according to data compiled by Bloomberg. Italian banks must refinance a total $69 billion of bonds this year and $157 billion in 2011, while Spanish lenders have $28 billion and $73 billion of debt that needs to be paid.

Banks in so-called peripheral European countries from Greece to Ireland have been largely shut out of debt markets since April amid concern their governments will struggle to cut budget deficits.
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The extra yield investors demand to own European financial- company bonds has climbed 0.5 percentage point to 2.17 percentage points from a 29-month low on April 16, according to Bank of America Merrill Lynch’s EMU Financial Corporate Index.

Spanish bank spreads average 333 basis points, 62 percent wider than at the beginning of April. Portuguese lenders’ margins average 495 basis points, 85 percent wider, while Irish financial debt pays a 585 basis-point margin, 35 percent more. Italian bank spreads are 218 basis points, an increase of 34 percent compared with four months ago.

With many frozen out of the bond market, banks in the peripheral countries are relying on the European Central Bank for the bulk of their funding. Spanish lenders, which account for 10.5 percent of assets in the EU financial system, borrowed a record 126.3 billion euros from the Frankfurt-based ECB in June, the most recent Bank of Spain data show.

The Americans found out during the S&L Crisis that there is a vital difference between “illiquid” and “insolvent” banks, and that the Fed should not prop up the latter. Have the Europeans learnt the same lesson?

There are encouraging reports from Greece:

Prime Minister George Papandreou has raised taxes, cut wages and overhauled the state-run pension system, while braving months of strikes against the measures that helped shrink the budget gap by 45 percent in the first half. Sustaining the effort and qualifying for another 9 billion euros of EU-IMF funds will be complicated by a recession that has been deepened by his steps.
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For Papandreou, abiding by the EU-IMF recommendations may trigger further protests. Both institutions have said part of the inflation jump is from a lack of competitiveness that can be addressed in part by opening up professions deemed “closed,” such as trucking.

Truckers last week starved Greek gas stations of fuel as they opposed the government’s plan to issue the first new licenses since 1971. The strike was called off on Aug. 1 after the government commandeered trucks and said the drivers would be prosecuted. Papaconstantinou has pledged to push ahead with changes to open up professions ranging from pharmacists to architects.

“Closed professions will open,” he said in Parliament on July 28. “They will open because prices must fall. They will open because this will help the budget of each household and they will open because that is how the country’s growth will be helped.”

I’m not sure how far their deficit numbers can be trusted, but increased competition amongst previously closed shops has to be a good thing.

There is the possibility that US Banks are finally putting their excess reserves to work, buying Mortgage-Backeds:

Large U.S. commercial banks added $51.4 billion of so- called agency mortgage-backed securities in the two weeks ended July 21, according to the latest data released by the Federal Reserve. The holdings fell from $696.6 billion in the middle of 2009 to $687.2 billion on July 7 even as the lenders’ portfolios of Treasuries and agency corporate debt grew $104 billion.

Large banks, which now hold $736.8 billion of the securities, avoided the debt as the Fed’s $1.25 trillion of buying drove down yield premiums to record lows relative to 10- year Treasuries, and acquisitions by private investors then restrained spreads.
Fannie Mae’s current-coupon notes, or those trading closest to face value, yield 3.54 percent as of 12:37 p.m. in New York, according to data compiled by Bloomberg. That’s 0.64 percentage point more than 10-year Treasuries, up from a record low of 0.54 percentage point reached July 30, Bloomberg data show.

Checking accounts, among the means through which banks raise money that they can invest in securities, pay depositors 0.53 percent on average, according to Bankrate.com data. Rates on the accounts typically vary based in part on the Fed’s target rates. A rise in banks’ deposits, which Fed data show growing for large banks by $37 billion from April 21, has contributed to their desire to invest more in mortgage securities, [Barclays analyst Derek] Chen wrote.

Additionally, excess reserves are down by a preliminary $35-billion in the period June 2 – July 28. Who knows? Maybe this new-found interest in RMBS is a tiny step towards James Hamilton’s archetypal car loans.

The SEC’s Department of Making Prospectuses Longer has been working overtime:

U.S. regulators said mutual funds aren’t telling investors enough about why they use derivatives, with some funds providing “generic” disclosures and others failing to explain how the products affect performance.

Regulators said they are concerned that the use of derivatives has increased in the mutual-fund industry without shareholders comprehending the risks or investment strategies. Some funds offer information that “may not be consistent with the intent” of required registration forms, the Securities and Exchange Commission wrote in a July 30 letter to the Investment Company Institute, the industry’s biggest trade group.

The SEC also raised concerns about “abbreviated” disclosures that give investors a false sense of security about how much funds rely on derivatives.

Speaking of the SEC, former Countrywide CEO Mozila is fighting his battles in (gasp!) court:

“The undisputed evidence establishes, and the SEC now admits, that stockholders understood Countrywide’s underwriting guidelines expanded over time,” lawyers for Mozilo and the two other defendants said in the filing.

The SEC admitted in response to inquiries from the defendants’ lawyers that information about its riskier loans was reflected in the company’s stock price, according to Mozilo’s filing. Countrywide provided information about those loans in prospectus supplements for mortgage-backed securities sold in the secondary market, Mozilo said in the filing.

John McCoy, a lawyer for the SEC, didn’t immediately return a call seeking comment.

The SEC sued Mozilo in June 2009, saying he publicly reassured investors about the quality of Countrywide’s loans while he issued “dire” internal warnings and sold about $140 million of his own Countrywide shares. Mozilo wrote in an e-mail that Countrywide was “flying blind” and had “no way” to determine the risks of some adjustable-rate mortgages, according to the SEC complaint.

I don’t have a view on Mozilo’s guilt or innocence … but I have a view on the desirability of the SEC getting a black eye!

Interesting article about Somali piracy, but the world has become awfully wussy. Julius Caesar knew what to do about pirates; so did Thomas Jefferson.

Premier Dad has clearly identified “morons” as a crucial demographic for the next election with his ‘Zero-Brains’ policy on young drivers and alchohol. “Better enforcement tools for the police!” cheer the dimwits. “So much more efficient than the silly old court system!”. After all, police would never abuse their authority, would they? And they always tell the truth, right? So what do we need the courts for, anyway?

The Canadian preferred share market moved up today on light trade, as PerpetualDiscounts gained 2bp and FixedResets gained 16bp, taking the median weighted average yield to worst of the latter class all the way down to 3.44%. That’s the eighth lowest yielding close on record … can we push past the 3.31% mark, set March 26? Stay tuned! The Bozo Spread (Current Yield PerpetualDiscounts less Current Yield FixedResets) remains in its range at 51bp … which makes me laugh.