October 5, 2007

Remember last month’s US jobs number? Don’t. It’s been revised upwards with an entirely solid number reported for September, which has been enthusiastically greeted by most economists, ( including JDH of Econbrowser) although Noriel Roubini sees the devil in the details. There was much the same thing in Canada. So, basically, bad news for bonds.

But in a reminder that, yes, sub-prime is really still a concern, both Merrill Lynch and Washington Mutual took big housing-related write-downs amidst reports of fire-sale liquidations and horrifying lack of quality in 2007-vintage sub-prime loans. Concern, yes; end of the world, no. For sure, $150-billion in sub-prime losses ($50-billion? $100-billion?) sounds like a very big number, but I’ll just take a moment to remind readers of Nortel’s market cap in 2000: almost $400-billion. So by all means, worry. But don’t try to tell me that this is an unprecedented disaster requiring extensive regulation. Accrued Interest has taken a look at contagion in non-RMBS asset-backed paper.

There’s entirely too much speculation that the credit crunch is over. Accrued Interest is concerned that the pendulum, having swung too far one way, will promply over-correct in the other direction. Panic, ecstasy … just another day in the markets. Those who wish to profit from panic without having access to institutional markets might wish to take a look at DG.UN, which was mentioned here on August 28 when it suspended redemptions (ABCP financing dried up). According to their September 26 Press Release:

its net asset value (“NAV”) per unit as at August 31, 2007 was $7.92 based on an indicative price received from a large international bank (the “Bank”) as of August 28, 2007.

The NAV on a particular date is equal to the aggregate value of the assets of the Trust, less the aggregate value of its liabilities (calculated in conformity with Generally Accepted Accounting Principles (GAAP)). The NAV does not reflect any eventual write-down resulting from the interruption of payments that MMAI is required to make to Global DIGIT under the swaps, nor does it reflect any potential impairment in the value of the assets of Global DIGIT from any eventual restructuring of MMAI debts, as it not possible at present to determine if, when and to what extent such payments to Global DIGIT under the swaps will resume or the effect of any eventual restructuring of any such MMAI debts.

So … there’s some warnings there and there could be legal problems and all sorts of things. But from what I could make out with a VERY brief look, the underlying credit was fine – it’s just liquidity that causes concern … and it’s quoted today on the TSX at 2.80-00, 8×23; so it seems to me it’s worth closer inspection by those willing to rip apart the books and make a few ‘phone calls prior to a decision.

The Economist has published a commentary on bank liquidity that echoes Dodge’s comments on the seemingly very high level of liquidity guarantees given by the banks. I suggest that one thing that be considered is a sliding scale of capital charges for liquidity guarantees: the charge is now a 10% CCF across the board; perhaps something like … “10% on the first capital-equivalent, 15% on the next, 20%…” might permit the market to operate efficiently while keeping the number of lines under control.

Brad Setser continues to worry about the USD, which has been a topic of some concern lately.

I added an ad to the recent reader inquiry; you don’t really need to do it all yourselves, you know! I’m willing to help!

The jobs numbers crushed bonds in both the US and Canada today.

It was an interesting day for prefs! The yield on PerpetualPremiums is finally back below PerpetualDiscounts, which is only sensible given the greater interest rate risk on the latter. Operating Retractibles and SplitShares have been virtually immune to the recent declines in perpetuals … this makes sense up to a point, but only up to that point.

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 4.67% 4.61% 801,880 16.03 1 0.0000% 1,043.7
Fixed-Floater 4.88% 4.76% 106,122 15.83 7 +0.1472% 1,037.8
Floater 4.49% 1.35% 76,979 10.70 3 +0.1101% 1,045.3
Op. Retract 4.86% 4.22% 78,850 3.35 15 +0.0146% 1,028.6
Split-Share 5.13% 4.78% 85,731 4.06 15 +0.0266% 1,048.0
Interest Bearing 6.32% 6.44% 55,585 3.64 4 +0.1296% 1,046.7
Perpetual-Premium 5.63% 5.28% 95,732 6.99 17 +0.1899% 1,020.0
Perpetual-Discount 5.33% 5.36% 208,578 14.90 45 -0.1066% 944.7
Major Price Changes
Issue Index Change Notes
ENB.PR.A PerpetualDiscount -1.5777% Now with a pre-tax bid-YTW of 5.71% based on a bid of 24.33 and a limitMaturity.
SLF.PR.D PerpetualDiscount -1.5741% Now with a pre-tax bid-YTW of 5.27% based on a bid of 21.26 and a limitMaturity.
TCA.PR.X PerpetualDiscount -1.4000% Now with a pre-tax bid-YTW of 5.60% based on a bid of 49.30 and a limitMaturity.
SLF.PR.E PerpetualDiscount -1.3755% Now with a pre-tax bid-YTW of 5.27% based on a bid of 21.50 and a limitMaturity.
RY.PR.A PerpetualDiscount -1.1132% Now with a pre-tax bid-YTW of 5.29% based on a bid of 21.32 and a limitMaturity.
PWF.PR.H PerpetualPremium (for now!) +1.0818% Now with a pre-tax bid-YTW of 5.79% based on a bid of 24.81 and a limitMaturity.
PWF.PR.J OpRet +1.1801% Now with a pre-tax bid-YTW of 4.07% based on a bid of 25.75 and a softMaturity 2013-7-30 at 25.00.
Volume Highlights
Issue Index Volume Notes
NTL.PR.F Scraps (would be ratchet, but there are credit concerns) 361,040  
EPP.PR.A Scraps (would be PerpetualDiscount but there are credit concerns) 196,050 Now with a pre-tax bid-YTW of 6.70% based on a bid of 18.28 and a limitMaturity.
BCE.PR.R FixFloat 53,000 Scotia crossed 50,000 at 24.67.
BCE.PR.C FixFloat 52,700 Nesbitt crossed two lots of 25,000 at 24.85 each.
BCE.PR.A FixFloat 51,010 Nesbitt crossed 50,000 at 24.81.
TD.PR.N OpRet 35,400 Nesbitt crossed 15,700 at 26.25, then another 15,000 at the same price. Now with a pre-tax bid-YTW of 3.98% based on a bid of 25.80 and a softMaturity 2014-1-30 at 25.00
GWO.PR.X OpRet 31,477 This one, in the “Volume Leaders”, again? Something’s up. Maybe. Scotia crossed 25,000 at 26.70. Now with a pre-tax bid-YTW of 3.42% based on a bid of 26.65 and a call 2009-10-30 at 26.00 … the after-tax equivalent interest yield is 4.79% … most corporate bonds will get you more than that.

There were four other index-included $25.00-equivalent issues trading over 10,000 shares today.

2 Responses to “October 5, 2007”

  1. […] I have previously speculated as to the adequacy of the 10% number, suggesting that: perhaps something like … “10% on the first capital-equivalent, 15% on the next, 20%…” might permit the market to operate efficiently while keeping the number of lines under control. […]

  2. […] More rules will not stop market booms, busts or outright fraud. They can – sometimes – mitigate and contain the effects; I have previously suggested that rules for the capital treatment of liquidity guarantees be reviewed with an eye to ensuring the banking system, as a whole, can withstand bigger shocks than this piddly little liquidity crisis. But there are far too many people around who rush to revise the rule book every time something bad happens. Life sucks. Get used to it. […]

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