November 14, 2007

I must say, my respect for Arthur Levitt continues to decline – his Credit Rating Agency recommendations did not impress and now he is quoted in a manner which makes it appear he doesn’t understand investing:

The Florida agency that manages about $50 billion of short-term investments for the state, school districts and local governments holds $2.2 billion of debt that was cut below investment grade.

“It’s really disgraceful,” Levitt said. “I think what’s really bad about this is that the state has called for investments to be prudent and careful but clearly the custodians of this fund were reaching, they were trying to get maximum yield.”

Four percent of a portfolio goes bad (and I’ll bet a nickel that recovery handsomely exceeds 90%) and that is sufficient for Levitt to use words like “disgraceful”? This does not do a service to anyone. Four percent does not sound reckless to me; it sounds diversified – especially since there are four different vehicles involved. If Mr. Levitt wishes all public pension funds to be invested in guaranteed-no-default T-bills exclusively, he should say so, instead of gleefully crying “I told you so! Or, at least, I could have told you so if you’d asked me!” after the events.

The Prudent Man Rule goes both ways, Mr. Levitt. A Prudent Man will take Prudent Risks to increase return. Sometimes, Mr. Levitt, taking a risk will lose money. That’s why they’re called Risks, Mr. Levitt. There is nothing in Mr. Levitt’s remarks to indicate that the managers of the portfolio violated their mandate.

In somewhat related news, Naked Capitalism informs us that a GE Cash Management Fund has Broken the Buck. This is not a Money Market Fund, as regulatorially defined, but an enhanced yield fund – in addition to bailing out its MMF, Bank of America also bailed out its “institutional cash fund, which isn’t technically a money fund.” I have written an article, which I hope will be published shortly, on this general topic.

I’m a much bigger fan of Dallas Fed President Richard Fisher. He sounds much more reasonable when discussing a Central Banker’s favourite topic:

But he says rising food and energy prices are the big concern, creating “a risk of a more pernicious pass-through effect than we saw in the recent price increases of underlying commodities.”

The spread between food price inflation and core inflation hasn’t been so large in a quarter century, Mr. Fisher says. And energy prices are rising due to strong demand and trading activity. “All this gives me a sense of discomfort on the headline inflation front, and it is a reminder that the balance of risks is not skewed unilaterally toward slower growth.”

“You might say the credit markets have gone from the ridiculous to the subprime; the subprime and related derivatives market is the focus of angst, but the ridiculous practice of the suspension of reason in valuing all asset classes appears to be in remission, if not over,” he says.

While we’re on the topic of the Fed … explicit inflation targetting, the subject of some speculation November 12, has not been adopted. Meanwhile, Paul De Grauwe weighs in with an essay advocating:

  • Asset-price targetting by Central Banks (a recurring theme discussed at the Jackson Hole conference and reported here August 31)
  • Central Bank “regulation of all institutions that create credit and liquidity”.

His justification for the second point is:

During the last few years, a significant part of liquidity and credit creation has occurred outside the banking system. Hedge funds and special conduits have been borrowing short and lending long, and as a result, have created credit and liquidity on a massive scale, thereby circumventing the supervisory and regulatory framework. As long as this liquidity creation was not affecting banks, it was not a source of concern for the central bank. However, banks were heavily implicated. Thus, the central bank was implicitly extending its liquidity insurance to institutions outside the regulatory framework. It is unreasonable for a central bank to insure activities of agents over which it has no oversight, very much as it would be unreasonable for an insurance company selling fire insurance not to check whether the insured persons take sufficient precautions against the outbreak of fire.

I don’t buy it. Regular readers will remember that while I am all in favour of a very strong financial system, I am also a big fan of an unregulated “country bank” sector where innovation is king … a junior league where risks are taken and products are developed. While the existence of such a sector should not be allowed to endanger the core banking system, this policy objective does not require stringent regulation of the sector. What it requires is stringent regulation of the banking system’s exposure to this sector – readers with memories going back to October 15 will remember that I suspect that such exposure has not been stringent enough; the risk-weighted assets deemed to be on the banks’ balance sheets through such exposures should simply be weighted more highly.

Bear Stearns has ruthlessly prettied-up its balance sheet:

Bear Stearns Cos., after posting its biggest earnings decline in more than a decade, reduced subprime holdings by 50 percent in the past two months, limiting writedowns in the fourth quarter to $1.2 billion.

Bear Stearns is regaining hedge fund customers that defected amid the credit rout in the third quarter, Molinaro said.

Hedge fund balances are “coming back” to the firm’s prime brokerage unit, and have steadied in the current quarter, he said. The business is “on pace for a record year.”

I say “prettied up” rather than “improved” because I have no way of knowing whether the sale of sub-prime assets actually improved their financial condition or not. However, if you have assets held at $100 on the balance sheet with a “fair value” (whatever that means) of $90 and a market price of $80 that are being valued by investors in your company (and your customers!) at $50 … well, taking one consideration with another, you’re better off gritting your teeth and selling them at the lousy $80 price, which is $10 cheap. It pretties up the balance sheet.

Remember BCE? Geez, it’s been a long time since I’ve discussed BCE. There was a rather interesting story today about Cerberus and United Rentals:

“This deal was expected to close sometime this week,” wrote Stephen Volkmann, an analyst with J.P. Morgan Securities Inc. in New York. “The banks were struggling with selling the associated debt offering.”

The takeover agreement includes a $100 million termination fee that Cerberus, founded by former Drexel Burnham Lambert Inc. trader Stephen Feinberg, would be required to pay unless it can show that there was “material adverse change” in United Rentals financial condition.

Cerberus told United Rentals there had been no such change, according to the statement. Cerberus has commitments from its banks to finance the transaction through bridge facilities, United Rentals said, adding it believes the banks stand ready to fulfill their contractual obligations.

“It’s a combination of the financing being more expensive and they must also think the business is not as attractive,” said Steven Kaplan, a professor at the University of Chicago Graduate School of Business who studies private equity. “Paying $100 million is a better outcome than doing a deal that’s not going to work.”

I continue to have no opinion regarding whether the BCE/Teachers deal will actually be consumated – there’s simply no information available on which to base an opinion and things may change a lot between now and the last minute. But if it comes to the point at which the consortium believes it has a choice between losing $1-billion quickly or $10-billion slowly … I’ll bet a nickel I can tell you which way they’ll jump.

OK, let’s step back a bit and discuss a funny thing on the Internet I’ve seen today!

Canada Newswire has very strict terms of use, but I can’t link to them. I can only link to “CNW Group Home Page” as per their terms of use:

Unless you have a written agreement in effect with CNW Group which states otherwise, you may only provide a hypertext link to the CNW Group Web site on another Web site, provided that (a) the link is a text-only link clearly marked “CNW Group Home Page”; (b) the link “points” to (i.e. links the user directly to) the URL and not to other pages within the CNW Group Web site; (c) the appearance, position and other aspects of the link is not such as to damage or dilute the goodwill associated with CNW Group’s name and trade-marks; (d) the appearance, position and other aspects of the link does not create the false appearance that an entity is associated with or sponsored by any of us; (e) the link, when activated by a user, displays CNW Group Web site full-screen and not within a “frame” on the linked Web site; and (f) CNW Group reserves the right to revoke its consent to the link at any time in its sole discretion. [Emphasis added – JH]

Now, turn to any random press release. They invite you to use four different web cross-referencing techniques to link to a particular press release.

Well … I thought it was funny!

Indices will be delayed. Prices have been updated, but I’m having some kind of strange server problem, probably related to database size … buy you don’t want to know about that! I will update in the near future.

Update, 2007-11-15

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% 4.83 161,323 15.77 2 +0.0204 1,046.2
Fixed-Floater 4.84% 4.81% 83,299 15.82 8 +0.2261% 1,050.3
Floater 4.53% 3.04% 62,023 10.53 3 -0.8453% 1,036.7
Op. Retract 4.87% 3.77% 78,182 3.32 16 +0.0133% 1,030.4
Split-Share 5.24% 5.32% 87,768 4.15 15 -0.1934% 1,031.2
Interest Bearing 6.27% 6.35% 62,656 3.52 4 +0.2290% 1,054.9
Perpetual-Premium 5.83% 5.22% 79,879 6.75 11 +0.0684% 1,011.5
Perpetual-Discount 5.57% 5.61% 323,701 14.24 55 -0.3470% 907.3
Major Price Changes
Issue Index Change Notes
ELF.PR.G PerpetualDiscount -3.5808% Very strange. There’s no news about EL Financial that I can see affecting credit and the common isn’t getting hit. Now with a pre-tax bid-YTW of 6.58% based on a bid of 18.31 and a limitMaturity.
POW.PR.D PerpetualDiscount -2.7342% Now with a pre-tax bid-YTW of 5.82% based on a bid of 21.70 and a limitMaturity.
GWO.PR.G PerpetualDiscount -2.3545% Now with a pre-tax bid-YTW of 5.78% based on a bid of 22.81 and a limitMaturity.
TD.PR.P PerpetualDiscount -2.0325% Inventory Blow-out. Now with a pre-tax bid-YTW of 5.49% based on a bid of 24.10 and a limitMaturity.
ELF.PR.F PerpetualDiscount -2.0188% Now with a pre-tax bid-YTW of 6.44% based on a bid of 20.87 and a limitMaturity.
HSB.PR.D PerpetualDiscount -1.5755% Now with a pre-tax bid-YTW of 5.64% based on a bid of 22.49 and a limitMaturity.
BAM.PR.B Floater -1.3333%  
GWO.PR.H PerpetualDiscount -1.2546% Now with a pre-tax bid-YTW of 5.80% based on a bid of 21.25 and a limitMaturity.
BAM.PR.K Floater -1.2490%  
FFN.PR.A SplitShare -1.0721% Asset coverage of just over 2.5:1 as of October 31, according to the company. Now with a pre-tax bid-YTW of 5.06% based on a bid of 10.15 and a hardMaturity 2014-12-1 at 10.00.
BNA.PR.C SplitShare -1.0178% Asset coverage of just over 3.8:1 as of July 31, according to the company. Now with a pre-tax bid-YTW of 7.47% based on a bid of 19.45 and a hardMaturity 2019-1-10 at 25.00.
SLF.PR.E PerpetualDiscount +1.2652% Now with a pre-tax bid-YTW of 5.49% based on a bid of 20.81 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
TD.PR.P PerpetualDiscount 819,021 See above
BNS.PR.N PerpetualDiscount 92,650 Now with a pre-tax bid-YTW of 5.44% based on a bid of 24.37 and a limitMaturity.
RY.PR.W PerpetualDiscount 68,640 Now with a pre-tax bid-YTW of 5.44% based on a bid of 22.61 and a limitMaturity.
MFC.PR.C PerpetualDiscount 63,000 Now with a pre-tax bid-YTW of 5.28% based on a bid of 21.60 and a limitMaturity.
CM.PR.R OpRet 53,600 Now with a pre-tax bid-YTW of 4.45% based on a bid of 25.80 and a softMaturity 2013-4-29 at 25.00.

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

2 Responses to “November 14, 2007”

  1. […] PrefBlog Canadian Preferred Shares – Data and Discussion « November 14, 2007 […]

  2. […] There’s more on the story about the Florida government money-market funds, which were briefly mentioned on November 14 (with friend Levitt labelling them “disgraceful”). Clients are pulling out their money: Florida local governments and school districts pulled $8 billion out of a state-run investment pool, or 30 percent of its assets, after learning that the money- market fund contained more than $700 million of defaulted debt. … The Florida pool, which was the largest of its kind in the U.S. at $27 billion before the recent spate of withdrawals, has invested $2 billion in SIVs and other subprime-tainted debt, state records show. Connecticut, Maine, Montana and King County, Washington, are among other governments holding similar investments, in smaller quantities. […]

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