PrefBlog

Worry over the fate of the USD continues to be a theme in the markets, and Menzie Chinn of Econbrowser has posted a review of the issues. I will admit, this post is notable mainly for its links to definitions and prior reviews of the issue, but these are good links. The 2005 post includes a link to a paper showing the futility of forecasting: it’s always gratifying to get some agreement with one’s prejudices! The examination of the interest-rate parity predictions are interesting, if only because I have seen it claimed – by a sophisticated retail investor – that carry trades are intrinsically unsound because interest-rate parity is guaranteed. Well … not in this world!

Accrued Interest reviewed the jobs numbers on the weekend, with a view to discussing the investment difference between “lawyers” and “detectives” – the former seeking evidence to support a particular view; the latter (greatly favoured) seeking to examine evidence to form a view.

What’s a good name for those, such as myself, who feel that the process is pointless because natural chaos will destroy any prediction as soon as it’s made? Weatherman, perhaps? I’m not going to predict a hurricane, but I will say that if there is a hurricane, you should have a good solid house; but if it’s sunny and pleasant, you’ll want nice windows; so build your house with the objective of surviving hurricanes with not too much damage while being able to enjoy the sunny times.

Perhaps this is stretching a metaphor too far! The markets can be outperformed, but you have to get your hands dirty and examine a wide variety of scenarios. And – assuming you are a rational investor and avoid the One Big Bet school of thought – you’re not going to double your money while everyone else goes broke, either! Ideally, you’ll outperform by a constant, small-but-worthwhile amount, irregardless of economic conditions.

The Northern Rock Saga continues:

Northern Rock, based in Newcastle, England, said in a statement today that money deposited after Sept. 19 will now be covered by the Bank of England, the U.K. Treasury and Financial Services Authority. The authorities previously only protected deposits made before then.

“This may make Northern Rock easier to sell,” said Philip Shaw, chief European economist at Investec Bank in London.
…
The case has been “damaging” for the reputation of the U.K., Financial Services Authority Chairman Callum McCarthy told the Treasury Select Committee of lawmakers today. Still, it was “impossible” to predict closure of the markets both for securitization and for short-term repurchase agreements, he said.

“We didn’t identify the probability of that happening,” McCarthy said. “No regulator anywhere around the world succeeded in predicting that.”

Sion Simon, a Labour Party member of the committee, said he had heard that relations between the FSA and the Bank of England were “poisonous” and compared McCarthy to a boxer.

“You are the Sugar Ray Leonard of the financial-services sector. You are a world-class ducker and diver.” Simon told McCarthy. “There was a run on the bank, the nation was a global laughing stock, and you say the provisions worked?”

Instead of saying ‘We didn’t predict it and neither did anybody else’, McCarthy should have blamed the credit rating agencies. That technique is working beautifully in North America!

Speaking of credit rating agencies, I see in the Globe today that State Street (among other Money-Market-Fund sponsors) is seeing a big uptick in business:

Executives at many small to mid-sized companies across Canada woke up in mid-August to find a portion of their supposedly liquid cash holdings were frozen, as a $30-billion segment of the asset-backed commercial paper market (ABCP) collapsed. Airline Transat A.T. Inc., for example, has $154-million of its $340-million in cash reserves stuck in a holding pattern.

“Corporate treasurers suddenly became aware that they face risks in their cash holdings, and they’re rushing to deal with these risks,” said Gregory Chrispin, president of State Street’s Canadian arm and former treasurer of Export Development Canada.

It is nice to see that some companies are taking my advice to stick to what they’re good at and pay for portfolio management. Whether or not there will be a surge of CFO replacements to accompany the sudden discovery that treasury departments have been speculating with shareholder assets remains to be seen! 

Treasuries drifted downwards, attributed to a ‘no-recession’ indication by the Fed, though today’s retail sales number provided no indication of a huge economic boom. Canadas fell, as a strong housing number decreased chances for a rate cut. US equities rose (no recession!) while Canadian equities were pretty quiet.

The news in the preferred share market today was that the TD New Issue and the closing of the BMO new issue combined to drive the PerpetualDiscount index to a new low. The prior low (since the temporary index was started, as of 2006-6-30, that is) was set on June 12, 2007. The four main indices since then have returned:

If we look at returns for CPD …

So, speculating on price movements in prefs has not been a jolly time for the past four months! Fortunately, the investments are paying the same income as they have done in the past, so income – which is the entire reason for investing in prefs, right? – is unaffected. Market timers may wish to kick themselves for getting it wrong, but an honest market timer is always kicking himself anyway, so there’s not much difference there.

It was nice to see some good volume in the pref market today, with a few good-sized crosses courtesy of Scotia.

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

This entry was posted on Tuesday, October 9th, 2007 at 10:14 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.