Well … there won’t be much today!

All my non-preferred-trading-and-carnage-watching time today was spent puzzling over Capital Tax … some bond investments are subject to capital tax and some other bond investments are not subject to capital tax. The difference is, ostensibly, to avoid double taxation; I suspect that the real goal is to

- raise money in a manner that will be invisible to Joe Lunchbucket
- provide employment for retired politicians

Friend Flaherty is, of course, too busy grandstanding with ATM fees, National Securities Regulators and the price of eggs & milk in Buffalo … no, scratch that, the price of eggs and milk in Buffalo SHOULD be cheaper than in Toronto, because otherwise farmers with quota might have to work for a living … the price of Harry Potter books in Buffalo to be worried about doing something useful. Like eliminating busy-work taxes that have economically negative effects.

Some readers might surmise that I’m not in the best of tempers. Some readers might win a kewpie doll if they can do it three times running.

So … just time for one snippet of interesting financial news … there’s an ABCP lawsuit announced:

A potential flood of lawsuits over asset-backed commercial paper could hit courts in the coming weeks after Aastra Technologies Ltd. (TSX: AAH.TO) became the first to launch a legal action against adviser HSBC Securities for exposing the IT company to the troubled investment vehicle.

Aastra’s press release states:

Finally, as previously announced during the quarter, the Company currently holds $13.7 million of non-bank owned asset-backed commercial papers for which, currently, there is no active market. Of these investments, $8.5 million is invested in Structured Investment Trust III and was not repaid to the Company when it became due on October 10th while $5.2 million invested in Lafayette Structured Credit Trust is not yet due until October 30th of this year.

As a result of the developments above, Aastra commenced legal proceedings today against its investment advisor, HSBC Securities (Canada) Inc. and one of its employees, in the Ontario Superior Court of Justice seeking damages relating to investment advice provided with respect to Aastra’s purchase of the Structured Investment Trust III asset-backed commercial paper.

On August 23, they stated:

As of August 23, 2007, Aastra had $13.7 million, or approximately 11% of its cash and short-term investment balances, invested in asset-backed commercial paper.

So … a couple of observations … most of which are really queries:

- HSBC Securities? So it’s a stockbroker they’re blaming? What was his Money-Market track record? I wonder how much due diligence they did before hiring him.
- Frankly, 11% of a money market portfolio in ABCP doesn’t sound all that actionable to me. It’s aggressive, sure, but it doesn’t sound all that reckless.
- Every time the market goes down a nickel, the OSC gets bagfulls of complaints. The favourite story I’ve heard is of a guy who got angry with his advisor during the Tech Boom (not the Wreck … the Boom). He had a portfolio and received a total of sixteen (if memory serves) recommendations. Fifteen of them made money. One of them lost a little bit. His portfolio did quite well. The client went completely berserk over the one unfortunate recommendation and made life miserable for everybody, for literally years, with complaints.
- Is Aastra serious about the lawsuit, or just grandstanding for their shareholders? If they’re serious, they’ll post all the court documents on their website; if they’re grandstanding, they’ll just send out the occasional press release.

*Prefhound* commented on yesterday’s post regarding current market conditions and – to my gratification – did not cast aspersions on my observation that perpetual/retractible spreads were starting to look awfully juicy! I had hoped to comment further on these spreads today, but as it is, I will set some homework for the blog’s readers (BOTH of them! That means you, too, Dad!).

In my article How Long is Forever?, I compared a perpetual with a retractible by:

- Calculating the total return of the retractible to the Retraction Date
- Determining what price the perpetual would be on that date to provide the same total return
- Determining what yield would give rise to that price
- Laughing

Recent events have increased yields of the retractibles to the point where they’re not completely stupid any more … and increased the term to their presumed retraction/redemption date to the point where meaningful comparisons can be made (if the YTW is just six months off, you’re basically comparing the perp to cash, which is silly). There’s even enough that we can choose pairs for which credit quality will cancel – or, at least, cancel as much as one can for a perp.

So, here’s your homework: What will be the perps’ yield on the retractibles’ end-date in order for the two total returns to the end-date to be equal?

Perpetual/Retractible Comparisons | ||||

Retractible | Pre-tax Bid YTW |
End-Date | Perpetual | Pre-tax Bid YTW |

GWO.PR.E | 4.78% | 2014-3-30 | GWO.PR.H | 5.73% |

PWF.PR.J | 4.47% | 2013-7-30 | PWF.PR.L | 5.90% |

MFC.PR.A | 3.97% | 2015-12-18 | MFC.PR.B | 5.37% |

BAM.PR.J | 4.90% | 2018-3-30 | BAM.PR.N | 6.38% |

TD.PR.N | 3.74% | 2014-1-30 | TD.PR.O | 5.47% |

I’ll try to get to this … but maybe somebody else will get there first! Just for fun, I’ll do a really quick back-of-the-envelope calculation for the PWF.PR.J / PWF.PR.L pair:

- L gets about 1.4% more yield annually than J
- For six years
- Total 8.4% more return
- Therefore can withstand 8.4% capital loss and still break even
- Current bid price of L is 21.67
- Less 8.4% is 19.94
- Dividend is $1.275
- Therefore, yield on 2013-7-30 can be 1.275 / 19.94 = 6.39% and still break even

Now, I’m not going to suggest that this calculation automatically shows that PWF.PR.L is a screaming buy for everybody. Hell, they were down 4.58% *today*! But I do wonder how many people have actually performed the calculation and decided they want the safety of the retractible anyway!

Total carnage for preferreds today – I can only imagine that people saw the Merrill Lynch downgrade and decided that

- All financials were at risk
- The preferreds as much as the common

The PerpetualDiscount index hit a new 18-month low and now has a total return of about negative nine percent for the 15-odd months since 2006-6-30. And, for the first time, the PerpetualPremium index has gone below the 1,000.00 starting figure. I should have stood in bed.

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 | 4.88% | 4.84% | 494,981 | 15.61 | 1 | 0.0000% | 1,043.7 |

Fixed-Floater | 4.89% | 4.80% | 101,535 | 15.78 | 7 | -0.0970% | 1,038.9 |

Floater | 4.52% | 4.54% | 68,595 | 16.29 | 3 | +0.0829% | 1,039.2 |

Op. Retract | 4.87% | 3.67% | 79,922 | 3.51 | 15 | -0.2283% | 1,027.0 |

Split-Share | 5.18% | 5.15% | 85,985 | 4.12 | 15 | -0.2619% | 1,040.8 |

Interest Bearing | 6.22% | 6.18% | 60,212 | 2.20 | 4 | -0.3652% | 1,063.7 |

Perpetual-Premium | 5.76% | 5.63% | 98,823 | 9.83 | 17 | -0.4358% | 997.8 |

Perpetual-Discount | 5.55% | 5.59% | 320,672 | 14.54 | 47 | -0.6785% | 909.5 |

Major Price Changes |
|||

Issue | Index | Change | Notes |

PWF.PR.L | PerpetualDiscount | -4.5795% | Now with a pre-tax bid-YTW of 5.90% based on a bid of 21.67 and a limitMaturity. |

BAM.PR.I | OpRet | -2.6707% | Now with a pre-tax bid-YTW of 5.21% based on a bid of 25.51 and a softMaturity 2013-12-30 at 25.00. |

ELF.PR.G | PerpetualDiscount | -2.6368% | Now with a pre-tax bid-YTW of 6.12% based on a bid of 19.57 and a limitMaturity. |

RY.PR.C | PerpetualDiscount | -2.6279% | Now with a pre-tax bid-YTW of 5.55% based on a bid of 20.75 and a limitMaturity. |

POW.PR.A | PerpetualDiscount | -2.5777% | Now with a pre-tax bid-YTW of 5.92% based on a bid of 23.81 and a limitMaturity. |

BAM.PR.N | PerpetualDiscount | -2.5323% | Now with a pre-tax bid-YTW of 6.38% based on a bid of 18.86 and a limitMaturity. Closed at 18.86-92, 1×5. The virtually identical BAM.PR.M (touted recently as a [very badly categorized] Distressed Preferred closed at 19.80-95, 7×4. So go figure. |

BSD.PR.A | InterestBearing | -2.1494% | Asset coverage of just under 1.8:1 as of October 19, according to Brookfield Funds. Now with a pre-tax bid-YTW of 6.93% (mostly as interest) based on a bid of 9.56 and a hardMaturity 2015-3-31 at 10.00. |

GWO.PR.H | PerpetualDiscount | -2.1043% | Now with a pre-tax bid-YTW of 5.73% based on a bid of 21.40 and a limitMaturity. |

GWO.PR.I | PerpetualDiscount | -1.7720% | Now with a pre-tax bid-YTW of 5.55% based on a bid of 20.51 and a limitMaturity. |

NA.PR.K | PerpetualPremium (for now!) | -1.5789% | Now with a pre-tax bid-YTW of 6.02% based on a bid of 24.31 and a limitMaturity. 6.02%? Interest-Equivalent of 8.4%? For a Pfd-1(low) BANK? National is not my favourite bank – their management has been severely criticized here in the past and may well be severely criticized in the future … but enough is enough, already! |

RY.PR.W | PerpetualDiscount | -1.5385% | Now with a pre-tax bid-YTW of 5.47% based on a bid of 22.40 and a limitMaturity. |

BMO.PR.H | PerpetualPremium (for now!) | -1.5145% | Now with a pre-tax bid-YTW of 5.36% based on a bid of 24.71 and a limitMaturity. |

GWO.PR.E | OpRet | -1.4961% | Now with a pre-tax bid-YTW of 4.78% based on a bid of 25.02 and a softMaturity 2014-3-30 at 25.00. |

PWF.PR.E | PerpetualPremium (for now!) | -1.4374% | Now with a pre-tax bid-YTW of 5.69% based on a bid of 24.00 and a limitMaturity. |

BNA.PR.C | SplitShare | -1.3488% | Asset coverage of 3.8+:1 as of 2007-7-31 according to the company. Now with a pre-tax bid-YTW of 6.37% based on a bid of 21.21 and a limitMaturity. |

PWF.PR.K | PerpetualDiscount | -1.2488% | Now with a pre-tax bid-YTW of 5.83% based on a bid of 21.35 and a limitMaturity. |

BAM.PR.M | PerpetualDiscount | -1.2469% | Now with a pre-tax bid-YTW of 6.07% based on a bid of 19.80 and a limitMaturity. See BAM.PR.N, above. |

IAG.PR.A | PerpetualDiscount | -1.1899% | Now with a pre-tax bid-YTW of 5.60% based on a bid of 20.76 and a limitMaturity. |

DFN.PR.A | SplitShare | -1.1696% | Now with a pre-tax bid-YTW of 5.10% based on a bid of 10.14 and a hardMaturity 2014-12-01 at 10.00. |

SLF.PR.E | PerpetualDiscount | -1.1489% | Now with a pre-tax bid-YTW of 5.51% based on a bid of 20.65 and a limitMaturity. |

PWF.PR.F | PerpetualDiscount | -1.1154% | Now with a pre-tax bid-YTW of 5.71% based on a bid of 23.05 and a limitMaturity. |

SLF.PR.B | PerpetualDiscount | -1.0643% | Now with a pre-tax bid-YTW of 5.43% based on a bid of 22.31 and a limitMaturity. |

CM.PR.H | PerpetualDiscount | +1.0000% | Now with a pre-tax bid-YTW of 5.69% based on a bid of 21.21 and a limitMaturity. |

RY.PR.G | PerpetualDiscount | +1.8537% | Now with a pre-tax bid-YTW of 5.39% based on a bid of 20.88 and a limitMaturity. |

Volume Highlights |
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Issue | Index | Volume | Notes |

CIU.PR.A | PerpetualDiscount | 143,180 | Nesbitt crossed 157,700 at 21.25. Now with a pre-tax bid-YTW of 5.51% based on a bid of 21.24 and a limitMaturity. |

PWF.PR.F | PerpetualDiscount | 106,330 | Desjardins crossed 100,000 at 23.05. Now with a pre-tax bid-YTW of 5.71% based on a bid of 23.05 and a limitMaturity. |

MFC.PR.C | PerpetualDiscount | 64,330 | Now with a pre-tax bid-YTW of 5.34% based on a bid of 21.33 and a limitMaturity. |

BNS.PR.L | PerpetualDiscount | 54,309 | Now with a pre-tax bid-YTW of 5.38% based on a bid of 21.02 and a limitMaturity. |

CM.PR.H | PerpetualDiscount | 47,230 | RBC crossed 17,200 at 21.25. Now with a pre-tax bid-YTW of 5.69% based on a bid of 21.21 and a limitMaturity. |

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

[…] A bit more news came out regarding the Aastra lawsuit mentioned yesterday. In a Globe story: Mr. Del Sorbo was an investment adviser to Aastra for about seven years, according to the lawsuit. During May and June, rising interest rates caused paper losses in the company’s bond and preferred share holdings. As a result, the company told Mr. Del Sorbo in June “that it wished to invest only in conservative, short-term, liquid securities with no exposure to interest rates and very low default risks,” the suit said. […]