January 10, 2008

Accrued Interest compares a list of the top ten corporate bond issuers (by weight) with the top ten components of the S&P 500 (by weight) and speculates that the apparent divergence between the stock and bond markets (referred to yesterday) is not so strange after all … or, at least, has something to tell us in and of itself:

Perhaps the kinds of companies who are large bond issuers are struggling in the stock market as well. Perhaps the kinds of companies which are keeping the stock averages afloat are not big bond issuers: XOM, MSFT, PG, etc.

We may be looking at a sort of weird recession coming up. One where layoffs aren’t as bad as some past recessions, but consumer spending drops substantially anyway, because of credit availability. I could see such a recession not being terribly bad for stocks. But financials are right on the forefront of these problems. If that’s how it plays out, then the financial-laden corporate bond indices will at best stay wide for a while, even if the stock market improves.

There are reports that Citigroup and Merrill are going cap in hand to foreigners, begging for equity infusions – which could run afoul of protectionists in Congress (and, depending on what happens, perhaps the White House). It will be fascinating to watch this play out over the next few years … we are seeing an increase in Canadian rhetoric over the matter, despite the fact that Canadian investment in the US is booming.

Brad Setser discusses the matter and comes up with a rather startling statistic:

The most money the IMF ever lent to the emerging world in a quarter?

$13.7b – in the third quarter of 2001 (Turkey and Argentina … )

Capital infusions from emerging market governments to US and European banks smarting from losses on US mortgages in q4? $28.4b, by my count.

Years of fiscal profligacy in the US are now having their effect. And the mutterings of further fiscal profligacy from the White House are forecast to have negligible effect anyway:

If stimulus is required, better policy instruments are available — foremost monetary policy. Tweaking tax policy is also a distraction from the serious long-term fiscal issues facing the nation: a persistent budget deficit of 1-1/2% of GDP, the expiration of the Bush tax cuts, and a long-term fix to the Alternative Minimum Tax, plus the looming cost of the retirement of the baby boom generation.

My obsession with preferred shares makes me a rather biased observer … but I think that the US has to decide on a long term tax policy with respect to dividends. I reported the discussion of taxes in the WaMu preferred issue on December 13 … it is a mystery to me how the US, the country whose business is business, have ended up having such a basic investment consideration as the tax treatment of dividends as a polarizing political issue.

We’re not talking a piddly little difference like ‘either a rate of 17% or a rate of 20%’ here … we’re talking 35% (Democrats) and 15% (Republicans). This is sheer craziness, but I’m not holding my breath for rationality in an election year.

Some degree of normalcy is returning to the credit markets – as indicated by the amount of US commercial paper outstanding, anyway! ABCP outstanding is up $5-billion, while foreign financial is up $16-billion.

Bernanke gave a speech today and had a few interesting things to say:

One of the many unfortunate consequences of these events, which may be with us for some time, is on the availability of credit for nonprime borrowers. Ample evidence suggests that responsible nonprime lending can be beneficial and safe for the borrower as well as profitable for the lender. For example, even as delinquencies on subprime ARMs have soared, loss rates on subprime mortgages with fixed interest rates, though somewhat higher recently, remain in their historical range. Some lenders, including some who have worked closely with nonprofit groups with strong roots in low-to-moderate-income communities, have been able to foster homeownership in those communities while experiencing exceptionally low rates of default. Unfortunately, at this point, the market is not discriminating to any significant degree between good and bad nonprime loans, and few new loans are being made.

… however, one sentence of his six page speech attracted a lot of attention:

Based on that evaluation, and consistent with our dual mandate, we stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.

That, together with reports that Bank of America might buy Countrywide outright, lit a fire under the markets:

Countrywide climbed the most in at least 25 years after the Wall Street Journal reported Bank of America Corp. is in advanced talks to acquire the biggest U.S. mortgage company. JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. led financial firms to the biggest rally in a month as traders increased bets that the Fed will reduce its benchmark lending rate by a half point this month.

Fed Fund futures were up slightly on the day, with the February contract implying 3.775% and the June contract implying 3.195% (derived from mid-afternoon prices). Note that the current rate is 4.25% and the next FOMC meeting is scheduled for Jan 29/30.

Not a bad day in the preferred market! PerpetualDiscounts continued their winning streak and there was a return good volume. Perhaps all the cowboys have come back from branding their funds, or whatever it is they do when not trading.

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 5.34% 5.35% 59,073 14.89 2 0.0000% 1,067.2
Fixed-Floater 4.95% 5.37% 71,523 15.03 9 +0.0515% 1,030.3
Floater 5.21% 5.25% 91,128 15.15 3 +1.1589% 845.0
Op. Retract 4.84% 2.44% 80,315 3.13 15 -0.0971% 1,039.9
Split-Share 5.25% 5.41% 102,616 4.32 15 +0.2407% 1,041.8
Interest Bearing 6.29% 6.25% 60,769 3.43 4 +0.2053% 1,071.6
Perpetual-Premium 5.77% 4.26% 65,398 4.97 12 +0.2706% 1,022.4
Perpetual-Discount 5.45% 5.47% 348,030 14.34 54 +0.1866% 940.7
Major Price Changes
Issue Index Change Notes
POW.PR.D PerpetualDiscount -4.1194% Now with a pre-tax bid-YTW of 5.50% based on a bid of 22.81 and a limitMaturity.
ELF.PR.G PerpetualDiscount -1.7588% Now with a pre-tax bid-YTW of 6.11% based on a bid of 19.55 and a limitMaturity.
W.PR.H PerpetualDiscount +1.0252% Now with a pre-tax bid-YTW of 5.79% based on a bid of 23.65 and a limitMaturity.
BNA.PR.B SplitShare +1.0782% Asset coverage of 3.6+:1 according to the company. Now with a pre-tax bid-YTW of 6.67% based on a bid of 22.50 and a hardMaturity 2016-3-25 at 25.00. Compare with BNA.PR.A (6.11% to 2010-9-30) and BNA.PR.C (6.79% to 2019-1-10).
GWO.PR.I PerpetualDiscount +1.1905% Now with a pre-tax bid-YTW of 5.34% based on a bid of 21.25 and a limitMaturity.
CM.PR.I PerpetualDiscount +1.4211% Now with a pre-tax bid-YTW of 5.51% based on a bid of 21.41 and a limitMaturity.
CIU.PR.A PerpetualDiscount +1.4627% Now with a pre-tax bid-YTW of 5.61% based on a bid of 20.81 and a limitMaturity.
HSB.PR.D PerpetualDiscount +1.6122% Now with a pre-tax bid-YTW of 5.40% based on a bid of 23.32 and a limitMaturity.
POW.PR.B PerpetualDiscount +2.4542% Now with a pre-tax bid-YTW of 5.45% based on a bid of 24.63 and a limitMaturity.
TOC.PR.B Floater +2.9601%  
Volume Highlights
Issue Index Volume Notes
IQW.PR.D Scraps (would be Ratchet, but there are credit concerns) 432,000 What is the status of the refinancing? Near or not a slam-dunk? The Shadow knows!
GWO.PR.X OpRet 173,038 Now with a pre-tax bid-YTW of 3.98% based on a bid of 26.10 and a softMaturity 2013-9-29 at 25.00.
BNS.PR.M PerpetualDiscount 151,825 Now with a pre-tax bid-YTW of 5.22% based on a bid of 21.56 and a limitMaturity.
NTL.PR.F Scraps (would be Ratchet, but there are credit concerns) 138,775  
TD.PR.P PerpetualDiscount 120,060 Scotia crossed 100,000 at 25.03. Now with a pre-tax bid-YTW of 5.24% based on a bid of 25.00 and a call 2016-12-1 at 25.00.
NSI.PR.D Scraps (would be OpRet, but there are (usually!) volume concerns) 100,800 Nesbitt crossed 100,000 at 27.00. Now with a pre-tax bid-YTW of 4.84% based on a bid of 26.75 and a call 2015-11-14 at 25.00.
FTS.PR.E Scraps (would be OpRet but there are credit concerns) 100,000 Nesbitt crossed 100,000 at 26.10. Now with a pre-tax bid-YTW of 4.38% based on a bid of 26.11 and a softMaturity 2016-8-31 at 25.00.
PIC.PR.A SplitShare 111,906 Asset coverage of just under 1.6:1 as of December 31, according to Mulvihill. Now with a pre-tax bid-YTW of 5.99% based on a bid of 15.09 and a hardMaturity 2010-11-1 at 15.00. WARNING! Has just gone ex-dividend for $0.215625!
BNS.PR.N PerpetualDiscount 44,380 Now with a pre-tax bid-YTW of 5.28% based on a bid of 24.89 and a limitMaturity.

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

Update: Current Senate Majority Leader Harry Reid: The Bush Tax Plan Leaves the Middle Class Behind:

FICTION: Bush Says Uncertainty Over the Extension of His Tax Cuts Harms the Economy. “The prospect of higher taxes, the notion that there’s uncertainty in the tax code makes it difficult for small business owners and company executives to plan. How can you plan if you’re uncertain about what the future’s going to be when it comes to the tax code.” [5/3/06]


– FACT: Not True. Economists at the Federal Reserve considered whether the temporary nature of the tax cuts might be one reason they have not had much impact on stock market value, but found that companies with no dividends performed better than high-dividend companies during the period immediately following the announcement of the tax cuts and their passage. [Gravelle, Jane G., Congressional Research Service, “Dividend Tax Relief: Effects on Economic Recovery, Long-Term Growth, and the Stock Market,” 2/14/05.]

Mike Cosgrove, Investors Business Daily, Politics Point To Higher Tax On Dividends:

Equity investors seem comfortable with the idea that the existing tax rates on dividends, capital gains and earned income will stick around until at least the end of 2010 — their scheduled expiration date. The odds of that occurring are, at best, 50-50 at this point.

One side of the 50-50 is that all major Republican candidates support extending the present tax-rate structure past 2010. The other 50 is from all major Democratic candidates who have said they will not extend existing tax rates — meaning higher tax rates on earned income, capital gains and dividends for taxpayers.

Herbert Lash, Reuters via Yahoo Investors see trade, taxes as key in White House Race:

The top Republican candidates have endorsed extending President George W. Bush’s tax cuts, except Huckabee, who proposes eliminating federal income and payroll taxes and to replace them with a federal consumption tax at the retail level.


Giuliani, a former New York City mayor, has proposed cutting the corporate rate to 25 percent from 35 percent. McCain supports extending Bush’s tax cuts, although he voted against them in 2001 and 2003, saying they also did not include spending reductions.


Among Democrats, Edwards wants to increase the tax rate on long-term capital gains to 28 percent from 15 percent, and tax dividends as ordinary income. Obama favors a rate of between 20 percent and 28 percent on capital gains and dividends.


3 Responses to “January 10, 2008”

  1. […] … and quotes a Bernanke speech that caused market excitement on January 10 when everybody else quoted a different part. Prof. Hamilton draws attention to: Thus far, inflation expectations appear to have remained reasonably well anchored, and pressures on resource utilization have diminished a bit. However, any tendency of inflation expectations to become unmoored or for the Fed’s inflation-fighting credibility to be eroded could greatly complicate the task of sustaining price stability and reduce the central bank’s policy flexibility to counter shortfalls in growth in the future. Accordingly, in the months ahead we will be closely monitoring the inflation situation, particularly as regards inflation expectations. […]

  2. […] I should note that the story is referring to American preferred shares, not Canadian ones. While some American issues are eligible for preferential tax treatment, this is a major bone of political contention, as I noted on January 10 (and continued after the charts, in the “Update” section). Without tax advantages, prefs are simply deeply subordinated debt. […]

  3. […] for preferential tax treatment, this is a major bone of political contention, as I noted on January 10 (and continued after the charts, in the “Update” section). Without tax advantages, […]

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