PrefBlog

Greece is teetering:

Greek economic prospects darkened as European bickering risked delaying the next rescue payment and defections weakened Prime Minister George Papandreou’s majority.

An emergency session of euro finance chiefs in Brussels yesterday failed to break a deadlock on how to enroll investors in a second bailout without triggering a default, casting doubt on funds due from the International Monetary Fund next month.

“enroll investors without triggering a default”! Having thrown out bankruptcy law, the politicians are now working on commercial law!

The FRB-Kansas City has published a paper by Edward S. Knotek II and Shujaat Khan titled How Do Households Respond to Uncertainty Shocks? (they don’t):

Uncertainty surged during the financial crisis in 2008 and remained high through a considerable portion of the recovery into 2010. Since then, uncertainty has risen again due to the recent oil price spikes and the March 11, 2011, earthquake and tsunami in Japan. This heightened uncertainty raises the question: How does it affect economic activity?

This article focuses on how households respond to uncertainty shocks—sudden, unexpected events that raise the possibility of extreme future outcomes, either good or bad. Economic theory predicts that household purchases would decline immediately following an uncertainty shock because households would find a value in waiting to make big, irreversible purchases to see how the uncertain environment plays out.

The empirical results, however, suggest that uncertainty shocks tend to curtail household spending only modestly. In some cases, these responses manifest themselves only after a considerable period. In addition, uncertainty shocks account for only a small portion of the total fluctuations in household spending. These results suggest that commonly used measures of uncertainty shocks do not appear to be a key factor driving households’ spending decisions and, in turn, economic weakness.

Speaking of uncertainty in the stock market…:

U.S. investors last week pulled the most money from domestic stock funds in six months after equities fell on concerns that the economic recovery may be faltering.

Funds that invest in U.S. stocks lost $5.46 billion in the week ended June 8, the biggest redemptions since the week ended Dec. 8, when investors withdrew $7.6 billion, according to the Washington-based Investment Company Institute. Funds that invest in international equities had $291 million in withdrawals last week, the ICI said today in an e-mail.

There is no word as to whether the authorities are still blaming equity mutual fund outflows on the flash crash of 2010-5-6.

The Yellow Badge of Damage was prominent today:

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts down 9bp, FixedResets losing 9bp and DeemedRetractibles getting hit for 16bp. Not much volatility, volume was again above average.

PerpetualDiscounts now yield 5.51%, equivalent to 7.16% interest at the standard equivalency factor of 1.3x. Long Corporates yield about 5.3%, so the pre-tax interest-equivalent spread is now about 185bp, unchanged from June 1.

OSFI’s revolving door revolved again, with the departure of the Assistant Croupier:

I am writing to announce the departure from OSFI of Mark White, Assistant Superintendent, Regulation Sector, effective October 31, 2011. Mark has accepted a position with a federally regulated financial institution and will assume his new role on November 1, 2011.

You can’t see the Sino-Forest for the trees:

Horsley, Chief Executive Officer Allen Chan, and director William Ardell held a 68-minute conference call with investors and analysts yesterday to refute assertions from Block’s Muddy Waters LLC that Sino-Forest overstated its timber holdings. Sino-Forest slumped 33 percent yesterday after the company’s earnings missed analysts’ estimates.

Paulson may have lost about C$515.5 million ($532.4 million) since June 1, the day before the Muddy Waters report on Sino-Forest was released.
…
“Because Muddy Waters never approached the company before it issued the report, it came as a total surprise to us,” Chan said. “Had Muddy Waters approached us before the release of the report, definitely we would have had lots of opportunity to explain to them, to show them all the errors that they have made in the report.”

The company has established an independent committee to investigate Muddy Waters’ allegations and appointed PricewaterhouseCoopers LLP to assist. The probe won’t be finished for two to three months, slowing the pace of timberland acquisitions, Sino-Forest said yesterday in its earnings statement.

From the last two paragraphs, I’m not sure whether refuting the allegations is supposed to be easy or hard!

Time for some yellow journalism!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 15bp, FixedResets losing 1bp and DeemedRetractibles gaining 11bp. Volume was good.

Everything old is new again! Treasury STRIPS are popular:

Demand for zero-coupon bonds is rising so fast that Wall Street banks created $205.2 billion of them as of May, the most in three years and just $3.6 billion away from levels last seen at the beginning of 2000, according to the Treasury Department.
…
Zero-coupon securities due in 30 years had their best and worst months in more than two decades during the last recession. The debt returned 26.7 percent in December 2008, a month after the consumer price index plunged 1.8 percent, the biggest drop in history, according to Bank of America Merrill Lynch index data. A month later, the securities lost 24 percent.

S&P downgrades Greece:

Greece had its credit rating cut three levels by Standard & Poor’s, which branded the nation with the world’s lowest debt grade and said a restructuring looks “increasingly likely.”

The move to CCC from B reflects “our view that there is a significantly higher likelihood of one or more defaults,” S&P said in a statement today. “Risks for the implementation of Greece’s EU/IMF borrowing program are rising, given Greece’s increased financing needs and ongoing internal political disagreements surrounding the policy conditions required.”

The downgrade follows Moody’s Investors Service’s decision this month to grade Greece only one level higher and may intensify pressure on European governments to stem the region’s sovereign-debt crisis. Credit-default swaps on Greece, Ireland and Portugal surged to records today on concern governments’ struggles to resolve the turmoil will threaten their ability to pay off their debts.

US housing remains nasty:

Southern California home prices fell 8.2 percent … as unemployment remained high and mortgages were hard to obtain, DataQuick said.

The median paid in the six-county region was $280,000, down from $305,000 a year earlier and unchanged from April, the San Diego-based data seller said today in a statement. Sales fell 17 percent from May 2010 to a total of 18,394 new and resale houses and condominiums, the 11th straight year-over-year decline.

DBRS confirmed SLF:

In recent years, the requirement for additional regulatory capital at its operating subsidiaries has resulted in an increase in the Company’s consolidated financial leverage as measured by the ratio of debt plus preferred shares to total capitalization. The Company is currently operating with this ratio at greater than 30%, which, while an increase from less than 25% which it reported five years ago, is no higher than its peers. Given the Company’s relative conservatism from a business risk perspective, DBRS believes that this level is still acceptable for the Company’s current ratings, especially given that several points of the recent increase in the debt ratio reflects the reduction in shareholders’ equity related to the $1.7 billion writedown in goodwill following the implementation of IFRS. However, since higher leverage combined with weaker earnings has resulted in lower expected fixed charge coverage ratio, the Company does not have a lot of excess financial flexibility. Fortunately, the Company has excellent sources of liquidity as represented by excess regulatory capital, a highly liquid asset portfolio and about $800 million in cash on hand at the holding company level, which is available to reduce financial leverage.

… but they downgraded the Bank of Ireland:

DBRS Inc. (DBRS) today has downgraded the ratings of all dated subordinated debt issued by The Governor and Company of the Bank of Ireland (Bank of Ireland) to “C” from CCC. Furthermore, DBRS has downgraded Bank of Ireland’s Primary Capital Notes to “C” from CCC (low), as well as the Perpetual Preferred Securities of various related entities to “C” from CC. Today’s downgrade follows the announcement by the Bank of Ireland that it has commenced an offer to exchange the aforementioned securities for cash or equity and a solicitation of consents in relation to the securities. Moreover, DBRS expects to downgrade the securities discussed above to “D” at completion of the buyback; as such, the securities remain Under Review with Negative Implications, where they were placed on 3 December 2010.

In DBRS’s view, the exchange offer, when completed, is tantamount to a default as defined by DBRS policy. DBRS views the proposed exchange offer as coercive as the offer affords investors in these instruments limited options. Should investors in these instruments reject the proposed offer, at a 80-90% discount if accepting the cash option, or a 60-80% discount if accepting the equity option, on the tendered securities, they risk receiving substantially less if the proposed consent amendments are ratified. Remaining investors in these instruments would then receive 0.001% of par value, should the consent to allow the “clean-up” of residual notes be accepted by tendering investors.

Mean Joe Green used to crash through offensive lines. Mean Joe Yellow offensively crashes through your portfolio.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts getting whacked for 30bp, FixedResets losing 5bp and DeemedRetractibles gaining 1bp. BAM and BAM-related issuers dominated the Performance table (BAM itself was ex-dividend today) and volume was actually quite good.