On August 6 I reported that one guy with a good track record was calling for low Fed rates for a long time. Another guy with a good track record seems to think otherwise:
Warren Buffett shortened the duration of bonds held by his Berkshire Hathaway Inc. after warning that deficit spending could force inflation higher.
Twenty-one percent of holdings including Treasuries, municipal debt, foreign-government securities and corporate bonds were due in one year or less as of June 30, Omaha, Nebraska-based Berkshire said in a filing Aug. 6. That compares with 18 percent on March 31, and 16 percent at the end of last year’s second quarter.
Econbrowser‘s Menzie Chinn discusses the inflation/deflation arguments in his post From Disinflation to Deflation?.
I have long advocated the consolidation of Money Market Funds into the balance sheets of their sponsoring institutions, but the industry declares (and their future employees in the regulators’ offices accept) that credit risk can be completely eliminated via box-ticking. Now Moody’s reports on the scale of support required during the crisis:
At least 36 money-market funds in the U.S. and about 26 in Europe had to be supported during the global financial crisis, according to a report from Moody’s Investors Service.
At least 20 managers pumped more than a combined $12.1 billion into their prime funds, or money funds that can invest in corporate debt, during the crisis from August 2007 till December 2009, according to the report.
Dan Hallett had a piece in the Globe today titled Some tax-friendly investing alternatives to RRSPs in which he was kind enough to mention my firm:
There are two preferred share mutual funds (from Omega Funds and Manulife/AIC), an ETF from Claymore and a pooled fund from Hymas Investment Management Inc.
Dan was even more effusive in his blog post, Tax Friendly Bond Exposure:
Hymas Investment Management’s Malachite Aggressive Preferred fund, however, deserves a special mention. While it is only available to accredited investors – i.e. it is sold by Declaration of Trust, not by Prospectus – the fund offers more transparency than any prospectus-sold mutual fund. For example, while mutual funds now refuse to show trading summaries (because they don’t have to), Hymas freely posts statements of portfolio transactions on his website.
Hymas, who previously ran the GBC Bond Fund, also boasts a track record that is nothing short of superb. With large investors having exited the preferred share market over the past 15 years, the opportunity grew for astute investors like Hymas to capitalize on this inefficient market. While we have yet to complete our formal work on Hymas and his fund, there is a lot to like. You can also peek into Hymas’ brain by checking out his blog – PrefBlog.
Thanks, Dan! Note that a lot of other clients were run at the time of GBC Bond Fund – GBA had $1.7-billion under management.
There’s a new trend in the States that uncovers a peculiar ethical question:
Harvey Collier, a mortgage broker in Fort Lauderdale, Florida, says he gets as many as 10 calls a month from people planning to default on their loans. The twist: They first want financing to buy another home.
Real estate professionals call it “buy and bail,” acquiring a new house before the buyer’s credit rating is ruined by walking away from the old one because it’s “underwater,” or worth less than the mortgage. It’s an attempt to escape payments on a home whose value may never recover while securing a new property, often at a lower price with a more affordable loan.
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About 12 percent of residential-loan defaults in February were strategic, meaning homeowners decided not to make payments even though they could afford to, New York-based Morgan Stanley said in an April 29 report.
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People who choose to default typically have lost $100,000 or more in property value, said Brent White, a law professor at the University of Arizona in Tucson. No data exist on strategic defaults done in tandem with buy-and-bail purchases.Buy and bail is most often pursued by people with big enough paychecks and low enough debt to qualify for two homes, according to Mark Goldman, a broker at Cobalt Financial Corp. in San Diego.
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“We’re always looking for ways to discourage the practice of buy and bail, but it still seems to be going on,” said Brad German, a Freddie Mac spokesman. “It ultimately leads to higher costs for everyone as investors and others look for ways to price in the risk.”
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Even if owners have underwater loans, walking away is unethical, said Scott LeForce, president of Realty World Northern California Inc.“A loss of value doesn’t mean you have permission to run from your obligations,” he said.
In about two-thirds of U.S. states, including Florida, lenders may pursue a borrower after foreclosure by seeking a deficiency judgment allowing a lien on new property for the amount still owed on a previous mortgage. In states such as California and Arizona, lenders may not have that option if the original home was a primary residence.
“Making it possible to pursue people who do this particular kind of default would go a long way to addressing the buy-and-bail problem,” said Jay Brinkmann, chief economist for the Mortgage Bankers Association in Washington.
OK – for the life of me, I don’t understan why buy-and-bail should be considered an ethical problem. The lender either has recourse, or he doesn’t have recourse. That’s the lender’s decision (possibly affected by state law) … why has Freddie Mac, one of the largest mortgage lenders in the world, joined the boo-hoo-hoo brigade?
Assiduous Readers will remember that one reason why I consider Brookfield’s debt to be not as scary as the consolidated balance sheets might otherwise indicate is because most of it’s non-recourse. I don’t think they’ve ever sent their lenders jingle-mail, but H&R REIT has:
[Mortgages Payable on Demand in Note 8 of the 2009 Annual Report] Relates to 10 non-recourse mortgages to the REIT for income properties in which the tenants, Boscov’s Department Stores, Circuit City and Bruno’s Supermarkets, LLC, have filed for protection under Chapter 11 of the United States Bankruptcy Code. The REIT has handed over control of seven of these income properties to the lenders and therefore expects to be released from any further obligations under these non-recourse mortgages upon the transfer of title to the lenders.
Is H&R REIT unethical? Not if they’ve fulfilled their contract. So why are the buy-and-bail guys unethical? Why are big-time lenders, with their multiple billions, legions of lawyers and thousands of whip-smart MBAs pleading for sympathy and rule-changes because they are completely unable to write a contract competently? Why doesn’t Freddie Mac differentiate between recourse and non-recourse mortgages when pricing and repackaging mortgages. I just don’t get it. But then, quite a lot has happened in the past few years that I just don’t get.
The FOMC Statement was gloomy:
Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.
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To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve’s holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal Reserve’s holdings of Treasury securities as they mature.
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Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee’s ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve’s holdings of longer-term securities at their current level was required to support a return to the Committee’s policy objectives.
Due consideration of the Panic of 2007 has resulted in action that has been successful in reducing unemployment:
The FDIC board today also approved creation of two new divisions to help carry out the agency’s responsibilities under the regulatory overhaul. The Office of Complex Financial Institutions will oversee bank-holding companies with more than $100 billion in assets and non-bank firms deemed systemically important by the new Financial Stability Oversight Council.
The office will be responsible for liquidating failed bank- holding companies and non-bank firms.
The agency also established a Division of Depositor and Consumer Protection to help enforce rules that will be created by the new Bureau of Consumer Financial Protection. The FDIC will be responsible for policing banks with less than $10 billion in assets.
There’s a rather odd US court battle over Germany’s sovereign default:
Germany must face a lawsuit over bonds defaulted under Adolf Hitler in the 1930s, a U.S. appeals court ruled, saying the nation isn’t immune from the claims and that American courts have jurisdiction to decide whether the bonds are enforceable.
World Holdings LLC, based in Tampa, Florida, claimed it owns a “significant number” of $208 million in bonds sold to U.S. purchasers following World War I and has been rebuffed when it sought repayment by the German government. The firm is seeking “hundreds of millions of dollars” in the suit, said Michel Elsner, an attorney for the investors.
Germany sold the bonds in an effort to finance rebuilding following the conclusion of the war, according to court papers. By the mid-1930s, after Hitler became chancellor, Germany had stopped making payments on the bonds in the run up to World War II, according to the ruling issued yesterday by a federal appeals court in Atlanta.
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The case is World Holdings LLC v. The Federal Republic of Germany, 09-14359, U.S. Court of Appeals for the Eleventh Circuit (Atlanta).
It’s not quite as ludicrous as it sounds … it’s another one of those nightmarish lawsuits that seeks to maintain property rights despite interim government action, war, looting …
DBRS today confirmed thirty-eiqht split share ratings:
Each of the Issuers has invested in a portfolio of securities (the Portfolio) funded by issuing two classes of shares – dividend-yielding preferred shares or securities (the Preferred Shares) and capital shares or units (the Capital Shares). The main form of credit enhancement available to the Preferred Shares is a buffer of downside protection. Downside protection corresponds to the percentage decline in market value of the Portfolio that must be experienced before the Preferred Shares would be in a loss position. The amount of downside protection available to the Preferred Shares will fluctuate over time, based on changes in the market value of the Portfolio.
Canadian equity performance has been relatively stable in 2010 to date, following the extraordinary decline and rebound experienced during 2008 and 2009. The difference between the minimum and maximum values of the S&P/TSX Composite Index observed during 2010 is approximately 10% of the average level, compared with roughly 40% in 2009 and 60% in 2008. The increased stability in prices has contributed to today’s confirmation of the Preferred Share ratings.
You see that, everybody? DBRS says volatility has gone away forever or, if not forever, than at least through the cycle! Yay!
Volume increased to above-average levels in the Canadian preferred share market, with PerpetualDiscounts gaining 11bp and FixedResets down 3bp on the day.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2099 % | 2,075.3 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2099 % | 3,143.9 |
| Floater | 2.52 % | 2.13 % | 40,174 | 22.01 | 4 | 0.2099 % | 2,240.8 |
| OpRet | 4.88 % | -1.45 % | 106,156 | 0.22 | 9 | -0.0899 % | 2,358.5 |
| SplitShare | 6.11 % | -2.15 % | 68,494 | 0.08 | 2 | 0.5724 % | 2,268.6 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0899 % | 2,156.7 |
| Perpetual-Premium | 5.82 % | 5.58 % | 98,667 | 5.60 | 7 | 0.0170 % | 1,945.8 |
| Perpetual-Discount | 5.80 % | 5.82 % | 175,838 | 14.05 | 71 | 0.1074 % | 1,870.3 |
| FixedReset | 5.31 % | 3.44 % | 281,698 | 3.40 | 47 | -0.0268 % | 2,232.0 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| PWF.PR.O | Perpetual-Discount | 1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-08-10 Maturity Price : 24.21 Evaluated at bid price : 24.41 Bid-YTW : 5.98 % |
| ELF.PR.F | Perpetual-Discount | 1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-08-10 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 6.31 % |
| BNA.PR.C | SplitShare | 1.26 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-01-10 Maturity Price : 25.00 Evaluated at bid price : 20.93 Bid-YTW : 7.11 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| NA.PR.P | FixedReset | 77,020 | Nesbitt crossed 75,000 at 27.45. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-17 Maturity Price : 25.00 Evaluated at bid price : 27.45 Bid-YTW : 3.69 % |
| CM.PR.M | FixedReset | 74,320 | Desjardins crossed 15,000 at 28.05; anonymous crossed 31,900 at 28.00. Desjardins crossed 20,000 at 28.01. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 28.00 Bid-YTW : 3.38 % |
| MFC.PR.A | OpRet | 59,560 | RBC crossed 50,000 at 25.55. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2015-12-18 Maturity Price : 25.00 Evaluated at bid price : 25.50 Bid-YTW : 3.82 % |
| CM.PR.A | OpRet | 55,675 | RBC crossed 50,000 at 25.56. YTW SCENARIO Maturity Type : Call Maturity Date : 2010-09-09 Maturity Price : 25.25 Evaluated at bid price : 25.51 Bid-YTW : -5.42 % |
| TRP.PR.C | FixedReset | 34,725 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-08-10 Maturity Price : 23.19 Evaluated at bid price : 25.20 Bid-YTW : 3.82 % |
| TD.PR.K | FixedReset | 32,075 | TD crossed 25,000 at 27.74. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-30 Maturity Price : 25.00 Evaluated at bid price : 27.74 Bid-YTW : 3.42 % |
| There were 37 other index-included issues trading in excess of 10,000 shares. | |||