November 20, 2007

I do apologize … many things came up today, so you’ll just have to do your own literature review.

PerpetualDiscounts didn’t go down today!

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 4.81% 4.81% 141,286 15.78 2 -0.1224% 1,045.2
Fixed-Floater 4.87% 4.85% 84,046 15.75 8 +0.0158% 1,044.5
Floater 4.61% 4.65% 60,679 16.04 3 +0.5426% 1,019.7
Op. Retract 4.86% 2.66% 77,191 3.46 16 -0.0549% 1,033.3
Split-Share 5.35% 5.84% 89,330 4.12 15 -0.3884% 1,012.9
Interest Bearing 6.29% 6.56% 63,891 3.51 4 -0.3029% 1,051.7
Perpetual-Premium 5.86% 5.56% 82,527 7.09 11 -0.1332% 1,006.0
Perpetual-Discount 5.60% 5.64% 335,175 14.43 55 +0.1104% 904.1
Major Price Changes
Issue Index Change Notes
PIC.PR.A SplitShare -5.4125% Whoosh! It traded 10,558 shares in a range of 15.00-26, and then the bids disappeared, with Nesbitt taking out the last bids at about 3:30. Asset coverage of 1.6+:1 as of November 15, according to Mulvihill. Now with a pre-tax bid-YTW of 7.64% based on a bid of 14.33 and a hardMaturity 2010-11-1 at 15.00.
BAM.PR.M PerpetualDiscount -2.9491% Amazingly, it now has the same quote as the virtually identical BAM.PR.M. I know one assiduous reader who will be quite pleased with this symmetry! Now with a pre-tax bid-YTW of 6.69% based on a bid of 18.10 and a limitMaturity.
FTU.PR.A SplitShare -1.9355% Asset coverage of just over 1.8:1 according to the company. Now with a pre-tax bid-YTW of 7.50% based on a bid of 9.12 and a hardMaturity 2012-12-1 at 10.00.
ELF.PR.G PerpetualDiscount -1.3889% Now with a pre-tax bid-YTW of 6.79% based on a bid of 17.75 and a limitMaturity.
NA.PR.K PerpetualDiscount -1.2605% Now with a pre-tax bid-YTW of 6.27% based on a bid of 23.50 and a limitMaturity.
FFN.PR.A SplitShare -1.0967% Asset coverage of 2.3:1 as of November 15, according to the company. Now with a pre-tax bid-YTW of 5.47% based on a bid of 9.92 and a hardMaturity 2014-12-1 at 10.00.
BAM.PR.N PerpetualDiscount +1.0045% Yes! That is indeed a “+” sign in front of a BAM.PR.N return! Now with a pre-tax bid-YTW of 6.69% based on a bid of 18.10 and a limitMaturity. See BAM.PR.M, above.
POW.PR.B PerpetualDiscount +1.0292% Now with a pre-tax bid-YTW of 5.74% based on a bid of 23.56 and a limitMaturity.
POW.PR.D PerpetualDiscount +1.0550% Now with a pre-tax bid-YTW of 5.75% based on a bid of 22.03 and a limitMaturity.
BNA.PR.A SplitShare +1.3598% Ex-Dividend today. Asset coverage of just under 4.0:1 as of October 31 according to the company. Now with a pre-tax bid-YTW of 6.18% based on a bid of 25.00 and a hardMaturity 2010-9-30 at 25.00. Compare with BNA.PR.B at 6.20% (23.00 bid, 2016-3-25 maturity) and BNA.PR.C 7.89% (18.55 bid, 2019-1-10 maturity).
CM.PR.H PerpetualDiscount +1.3636% Now with a pre-tax bid-YTW of 5.43% based on a bid of 22.30 and a limitMaturity.
ELF.PR.F PerpetualDiscount +1.5625% Now with a pre-tax bid-YTW of 6.90% based on a bid of 19.50 and a limitMaturity.
BAM.PR.B Floater +1.6522%  
HSB.PR.D PerpetualDiscount +1.7352% Now with a pre-tax bid-YTW of 5.70% based on a bid of 22.28 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
GWO.PR.I PerpetualDiscount 284,750 Scotia bought 34,000 from Nesbitt at 20.20. Now with a pre-tax bid-YTW of 5.69% based on a bid of 20.10 and a limitMaturity.
IQW.PR.C Scraps (would be OpRet but there are rather pressing and urgent credit concerns) 144,000 The company had to scrap a financing today, perhaps because investors kept throwing up. Now with a pre-tax bid-YTW of 138.67% (annualized) based on a bid of 19.00 and a softMaturity 2008-2-29. Note that the soft maturity will entail some risk to the exerciser, since the common will be received and have to be exchanged. On the other hand, if you want Quebecor common – or hold some already – and you’re happy with that, it could be quite attractive. Unfortunately, it cannot be easily arbitraged, since if you short the common now, it might quintuple (hah!) between now and the time the conversion price gets set. But something must work … hmm … buy the prefs at $19, you’ll get $26 worth of common at the February price … OK! Buy the prefs at $19, short the common, buy a call on the common at 36% over current price … I think that works, and I suspect it has a good chance of profit. But check my work first!
SLF.PR.D PerpetualDiscount 87,243 Now with a pre-tax bid-YTW of 5.53% based on a bid of 20.11 and a limitMaturity.
RY.PR.D PerpetualDiscount 81,745 Now with a pre-tax bid-YTW of 5.51% based on a bid of 20.56 and a limitMaturity.
TD.PR.P PerpetualDiscount 80,475 Now with a pre-tax bid-YTW of 5.48% based on a bid of 24.15 and a limitMaturity.
MFC.PR.C PerpetualDiscount 78,600 Nesbitt crossed 51,000 at 21.00. Now with a pre-tax bid-YTW of 5.36% based on a bid of 21.00 and a limitMaturity.

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

9 Responses to “November 20, 2007”

  1. prefhound says:

    Assiduous Reader Closes Out BAM.PR.N/M Position.

    As James has anticipated, BAM.PR.M has fallen to the same price as PR.N, so I closed my Nov 2 arbitrage trade today. Net profit after costs was 1.00 per share or about $300 per hour. The spread between these nearly identical prefs built up in about 3 weeks from zero to $1, then evaporated in about the same time.

    Now, if only some bids for more than 400 shares would appear on the BNA.PR.B, then I could short it to buy BNA.PR.C in another arbitrage play. A spread of about $2.00 is fair for current distressed conditions, but the market is showing more like $4-5. In this case, the spread has risen (exponentially) from $1 over a much longer 5 month period, so I anticipate having to hold the position for 3-6 months before rational relative pricing returns.

    Meanwhile — keep up the good work and thank you James!

  2. prefhound says:

    Well, here we are, 45 minutes later with a bid of $15 on the BNA.PR.B. Now there is an example of the evaporation of liquidity! Wonder if it will get filled….

  3. jiHymas says:

    Total craziness. At 1:30 pm, I’m seeing BNA.PR.B at 20.96-22.50. Last trade 22.50, down 0.85 on the day so far.

    The tragedy of this is … the yield becomes competitive with BNA.PR.C AT THE BID, another buck-fifty-plus away.

  4. kaspu says:

    Other than craziness,at some point there has to be a reason for this. Or is it simply a matter of liquidity drying up? Perhaps tax loss selling? Or just hopeless naivite on the part of rational investors looking for reasonable yield at reasonable spreads at reasonable risks?

  5. jiHymas says:

    kaspu – there is no meaningful answer to your question. Nothing I say can be tested.

    I don’t think it’s tax loss selling. A rational tax-loss selling programme would simply be swaps within the asset class, having no effect on overall prices (although individual issue moves could be exaggerated). What we are seeing is an overall downward move.

    My best guess is that it’s simply momentum. I don’t have an indicator that directly relates the seasoning of issues to their spreads, but I there are a couple of indicators that I suspect are acting as proxies in the analysis. In the spring (and for the past year), these proxies indicated that recent issues were expensive; there is now an indication that recent issues are cheap.

    If my interpretation of the behaviour of these proxies is correct, then an attempt to rationalized the behaviour is that issues were sold at issue to investors who didn’t understand their investment; once it started going down, they lost faith in it; so they sell; and momentum builds.

    You will note that the famous BNA.PR.C got thumped a long time before the more seasoned BNA.PR.B.

    It’s a guess. I do not have the tools available to test this theory in any kind of quantitative manner, and won’t until the next edition of HIMIPref … and even then, of course, there’s no guarantee that the results will be interpretable.

  6. kaspu says:

    I Know…I know…it’s just that this is the only place that I can kvetch about prefs. My wife, my kids, even my dog don’t want to hear anything more about the bloody things.

  7. prefhound says:

    Kaspu — You have just issued a contrarian Buy Signal. Nobody interested in Prefs you say — great news!

    Meanwhile, I have to take issue with James on tax loss selling, while agreeing 100% with his point about recent new issues tending to underperform on the downside. I think retail investors do like to take their losers near year end — egged on by advisors and the press. In my experience, some of them like to take tax losses even if they can’t use them (no offsetting gains in the past 1-3 years), and some of them will not want to stay in the same asset class (“too risky”).

    For my part, even though I could use some tax losses, I view tax loss selling as more of a buying opportunity than a selling opportunity for several reasons:

    1. Tax savings are WAY smaller than people think – and sometimes NEAGTIVE after costs.

    Actual Gross Savings = After-Tax Interest Rate X # of Years Investment Would Have Been Held X $ Size of the Loss X Marginal Tax Rate X 50% Inclusion Rate = 0.9% of the loss per year using a 4% after-tax interest rate.

    Actual Costs = Commissions + Bid-Ask Spread + Market Impact

    2. Studies show that worst performers at year-end are often the best performers (by 2-4%) early the next year. If one can’t stay in a nearly identical asset, missing this potential gain could far exceed any costs.

    3. If I like the stock/bond/pref, I may have no way of maintaining my exposure for the 30-day period before I can re-purchase (to avoid a superficial, non-deductible loss) – so might miss some upside if it is depressed.

    4. Not everybody could/should use capital losses.
    – Non-taxable investors (e.g. RRSP/RRIF and pension plans) are taxed on withdrawals, not investment experience.
    – Investors without net taxable gains in the past 3 years can’t immediately “use” the loss (it adds to cumulative losses for the future).
    – Investors in a low tax bracket this year who would be in a higher bracket in a few years (e.g. young people) might be better off waiting to crystallize losses (and to crystallize capital gains while still in low tax brackets – there is no “superficial gain” rule).

    So, I’m looking for prefs to rebound in early 2008 — perhaps by up to 75 bp. Things might even start to look up after mid-December.

    When Kaspu makes some money, his wife, kids and dog will be happy to talk to him again….

  8. jiHymas says:

    Malachite Fund has done some tax-loss selling in the past – swapping Bombardier issues at way below purchase price deferred a big whack of capital gains for a year.

    With respect to: some of them like to take tax losses even if they can’t use them (no offsetting gains in the past 1-3 years), and some of them will not want to stay in the same asset class (”too risky”). … I consider those to be two unrelated decisions, the first being the tax-loss selling, the second being asset-class reallocation.

    Whether or not Joe Retail considers the two decisions to be independent is something that I cannot say!

  9. realboomer says:

    James, can you explain why there is such a large difference in the YTW for Op. Retract versus Split Shares. Your market summary indicates Op. Retract have an average YTW of 2.66%, and Split-Shares have a YTW of 5.84%. It seems to me that Op. Retract and Split-Shares are essentially similar investments – both pay a fixed dividend and will be redeemed at par at some date in the future. In fact, I would think a Split Share issue should be preferable to an Op. Retract issue of the same credit quality, since the Split Shares dividends and unit values are protected to some extent by the Capital Shares. Am I missing something, or is the market just irrational for Split Shares?

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