August 29, 2007

OK, everybody! The end of the world, previously scheduled for Friday, has been cancelled. You are encouraged to make plans for the long weekend.

Loyal readers will know that I’ve become sufficiently irritated by calls for increased regulation to write a post on the topic (well, it’s really just a commentary on another essay) and even to initiate a category for what promises to be a series of posts. I don’t think the issue is going to go away any time soon … the New York Times has published an article with many interesting statements:

“In a globalized economy with hedge funds, leveraged buyouts and all these investment funds, we have to ask the question about more transparency,” said Claude Bébéar, the chairman of the supervisory board of the insurance company AXA

I have some free advice for M. Bébéar: ask these questions before investing.

Washington and London rebuffed the German government earlier when it pushed for an international code of conduct for hedge funds. Now some economic advisers to the German government are going further, suggesting that rating agencies should be nationalized, that large-scale loans be registered publicly and that minimum standards be developed for complex debt securities.

Super. “We’re from the German Government and we’re here to help you”. Can’t wait for that. Trouble is, the US national debt, fiscal deficit and trade deficit are all in such lousy shape that the US is not in a strong position to tell its creditors where to stuff their nationalized credit rating agencies. We shall see!

Christian de Boissieu, president of the group and a member of the Committee for Credit and Investment Institutions, which helps regulate French banks, is calling for a global register of hedge funds. In addition, he said, complex securities should be scrutinized before being sold to bank portfolios.

Is M. de Boissieu claiming that complex securities were not scrutinized before being bought by bank portfolios? Quick, tell me which banks! I want to buy a lot of puts on such poorly run stocks … except … um … French banks are halfway nationalized already aren’t they? And thoroughly scrutinized by … um … M. de Boissieu?

“It’s not just the U.S. regulators that failed, though they did fail,” Mr. Rosner said. International regulators have “thrown the keys to the rating agencies,” which have been left in charge of the safety and soundness of bank capital, insurance and pension money.

The article did not specify where the regulators are alleged to have failed. Pension money? Sorry, Mr. Rosner. Responsibility for pension money rests with the pension fund board. If they’ve been sleeping there are lots and lots of regulations on the books about that already.

Oooh, all this jockeying for regulatory power and salaries makes me angry! I do want to stress again, however, that my defense of the ratings agencies does not have an origin in any thought that they’re perfect. They’re not: Credit Anticipation is a perfectly good fixed income management strategy, one that Deutsche Bank has done very well with recently, although maybe that’s just because they’re German and have good connections with the German Government Credit Ratings Analysis Department.

However … in the first place, they offer investment advice. See that word? I’ll bold it. advice. If you don’t trust their advice, don’t take it. If you think their advice is sort-of usually OK but not perfect, then listen to it while checking it and staying diversified. If you believe so completely in their advice that you’re willing to lever up 15:1 (with all your money, not just a small chunk of it as your ‘hedge fund flutter’), on the basis that not only is it perfect but that everybody else will also always believe it’s perfect … then go home and play with your dollies.

In the second place, they major agencies have extremely good track records. Better than virtually all of their critics are willing to disclose, anyway.

And in the third place, I have yet to see any actual evidence that they’ve made any mistakes other than, possibly, the defaults on some ABCP issues. This is a black eye, definitely, but are due to market convulsions rather than actual deterioration of the underlying; market convulsions are very hard to predict. Shall we fault them, for instance, for the fact that 100-year floaters (e.g. Royal Bank) are now almost impossible to sell at a decent price [CUSIP# 780087AK8. Indicated at $94.50]? If recovery is (eventually) 100% it’s not the worst catastrophe finance has ever seen.

So there.

Return to my usual boring drone about economics, there is renewed discussion of the efficiacy of the yield curve in predicting recessions. Some of the data looks a little dated already:

The spread has turned negative with the 10-year rate at 4.79 percent and the 3-month rate at 4.83 percent (both for the week ending August 10).

With luck, however, the German government will soon regulate yield curve slopes and then we’ll never have a recession again. Econbrowser notes that the Fed Funds market is starting to look almost normal again. Tomorrow the US Treasury will release statistics on Commercial Paper Outstandings, which should be quite interesting. RAMS is liquidating as well as Cheyne, to name but two.

The US mortgage market is tightening, with banks both having less money to lend AND not being able to securitize as efficiently as they used to. The mortgage curve is now inverted, which seems very strange. All the short money has been sucked up by distressed ABCP issuers. Bernanke has opined that US Agencies should stick to securitization and not increase their leverage for the time being, which probably disappoints many.

US Equities roared back from the horror of yesterday and were accompanied by their Canadian cousins. Three-Month US T-Bills continued their wild ride (this is really strange, by the way) even as Treasury notes got whacked. Canadas were hurt as well, in what may be dubbed a Flight to Equity.

There has as yet been no comment from the German Government concerning the correct level of bond yields.

It took nine straight days of gains, but the PerpetualDiscount index is now up on the month, albeit marginally. Only floaters and splitShares are still under water.


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
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet 4.83% 4.85% 22,739 15.86 1 +0.0358% 1,044.5
Fixed-Floater 4.97% 4.79% 113,942 15.87 8 +0.2634% 1,025.7
Floater 4.93% -0.41% 74,627 7.93 4 -0.0913% 1,037.1
Op. Retract 4.84% 4.00% 81,200 3.05 15 +0.2936% 1,025.5
Split-Share 5.07% 4.87% 94,994 3.85 15 +0.1115% 1,044.3
Interest Bearing 6.21% 6.59% 67,257 4.61 3 +0.6483% 1,044.0
Perpetual-Premium 5.52% 5.10% 93,750 5.67 24 +0.1590% 1,026.6
Perpetual-Discount 5.11% 5.14% 268,800 15.27 39 +0.2064% 973.7
Major Price Changes
Issue Index Change Notes
BNA.PR.A SplitShare -1.4961% These BNA issues all have massive asset coverage; the constraint on their rating is simply that their sole holding is BAM.A, and therefore their credit ceiling is equal to the BAM preferreds. Now with a pre-tax bid-YTW of 6.21% based on a bid of 25.02 and a hardMaturity 2010-9-30 at 25.00.
CL.PR.B PerpetualPremium +1.1594% Now with a pre-tax bid-YTW of 4.07% based on a bid of 25.84 and a call 2008-1-30 at 25.75.
FTU.PR.A SplitShare +1.2228% Asset coverage of just over 2.0:1 as of August 15 according to Quadravest. Now with a pre-tax bid-YTW of 4.83% based on a bid of 10.20 and a hardMaturity 2012-12-1 at 10.00.
RY.PR.F PerpetualDiscount +1.2545% Now with a pre-tax bid-YTW of 4.95% based on a bid of 22.60 and a limitMaturity.
IAG.PR.A PerpetualDiscount +1.2582% Now with a pre-tax bid-YTW of 5.03% based on a bid of 22.85 and a limitMaturity.
RY.PR.E PerpetualDiscount +1.2826% Now with a pre-tax bid-YTW of 4.94% based on a bid of 22.90 and a limitMaturity.
BSD.PR.A InterestBearing +1.7989% Asset coverage of just under 1.8:1 as of August 24, according to Brookfield Funds. Now with a pre-tax bid-YTW of 6.92% (mainly as interest) based on a bid of 9.47 and a hardMaturity 2015-3-31 at 10.00
IGM.PR.A OpRet +2.5221% Now with a pre-tax bid-YTW of 3.52% based on a bid of 26.85 and a call 2009-7-30 at 26.00. Even with an equivalency factor of 1.4, why wouldn’t you just buy a bond?
Volume Highlights
Issue Index Volume Notes
TOC.PR.B Floater 88,100 Desjardins crossed 73,600 at 25.24.
BCE.PR.A FixFloat 61,100 RBC crossed 50,000 at 24.50.
PWF.PR.F PerpetualDiscount 45,775 National Bank crossed 30,800 at 24.74. Now with a pre-tax bid-YTW of 5.35% based on a bid of 24.75 and a limitMaturity.
PWF.PR.K PerpetualDiscount 39,738 Nesbitt crossed 35,500 at 24.00. Now with a pre-tax bid-YTW of 5.19% based on a bid of 24.06 and a limitMaturity.
TD.PR.O PerpetualDiscount 33,900 Scotia crossed 30,000 at 24.70. Now with a pre-tax bid-YTW of 4.97% based on a bid of 24.61 and a limitMaturity.

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

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