February 26, 2008

Nobody must ever get hurt in the field of finance! This has been confirmed by all the political attention paid to states and municipalities now that their auction rate securities are paying high yields:

Gregoire, Corzine and Spitzer joined other governors Feb. 24 in forming a group that will “produce something that gets us out of the problem, but most importantly produce something for Congress” to deter a future borrowing squeeze, Gregoire, a Democrat, said during a National Governors Association meeting in Washington yesterday…

“A lot of governors really hadn’t anticipated that,” Gregoire told reporters in Washington. The group, which plans to meet soon, hasn’t discussed specific solutions, she said

Some people may also be upset that the Fed has no direct power over mortgage rates:

When Bernanke faces Congress tomorrow and Feb. 28, he will be questioned about why long-term bond yields are moving in the opposite direction to the Fed funds rate, said Credit Suisse Group Chief Economist Neal Soss. Lower fixed mortgage rates would avert foreclosures and give consumers more money to spend, said Diane Swonk, chief economist of Mesirow Financial Inc. in Chicago.

“Chairman Bernanke is caught in a tug-of-war between growth and inflation,” said Swonk, who is a member of the Congressional Budget Office’s panel of economic advisers. “Inflation is still a threat and that influences the mortgage-bond investors who ultimately set the fixed rates.”

All the above is probably just political grand-standing in an election year, but boy! Does this kind of thing ever irritate me!

The always reliable Willem Buiter, with Anne Sibert, highlights an interesting plank in Barack Obama’s presidential platform:

on 2 Aug 2007, along with Senators Dick Durbin and Sherrod Brown and Representative Jan Schakowsky, Obama introduced the yet unpassed Patriot Employer Act. On 13 February 2008, he stopped in Janesville, Wisconsin to give a speech extolling this accomplishment.

The legislation would provide a tax credit equal to one percent of taxable income to employers who fulfill the following conditions:

  • First, employers must not decrease their ratio of full-time workers in the United States to full-time workers outside the United States and they must maintain corporate headquarters in the United States if the company has ever been headquartered there. 
  • Second, they must pay a minimum hourly wage sufficient to keep a family of three out of poverty: at least $7.80 per hour. 
  • Third, they must provide a defined benefit retirement plan or a defined contribution retirement plan that fully matches at least five percent of each worker’s contribution. 
  • Fourth, they must pay at least sixty percent of each worker’s health care premiums. 
  • Fifth, they must pay the difference between a worker’s regular salary and military salary and continue the health insurance for all National Guard and Reserve employees who are called for active duty. 
  • Sixth, they must maintain neutrality in employee organising campaigns. 

Sen. Barack Obama’s proposal is reactionary, populist, xenophobic and just plain silly. It is time for him to stop pandering and to show the world that hope and reason are not mutually exclusive. 

There was some interesting news on the regulatory front today, with respect to hedge funds front-running PIPEs:

Since October, judges in three cases rejected the U.S. Securities and Exchange Commission’s argument that closing out short positions with shares bought in private offerings is illegal. The SEC sued hedge-fund managers that engaged in the transactions.

PIPEs offer a chance to make a guaranteed profit because the stock is sold for less than market prices. The average discount was 12 percent last year, according to PlacementTracker.

In a typical scenario the SEC has targeted, a hedge-fund manager learned of a PIPE through a placement agent and shorted the company’s stock before the offer was announced. The fund bought the equity at a discount in the private sale to cover the short position.

The SEC lost its argument that the entire transaction was completed when the short position was created. The insider- trading claim is based on the SEC’s accusation that the hedge funds used confidential information to trade before the PIPE was disclosed.

The accused managers argue in part they didn’t have nonpublic information or agree to forgo trading before the PIPEs were announced.

Robert A. Berlacher, 53, on Feb. 15 asked a judge in Philadelphia to dismiss the insider-trading accusations in a case involving buying and selling Radyne Comstream Inc., now Radyne Corp., in 2004. Berlacher’s lawyer, Perrie M. Weiner of DLA Piper in Los Angeles, said knowledge of a PIPE isn’t the “material nonpublic information” required to show insider trading.

My sympathies are entirely with the SEC on this matter. It may possibly be that the hedge fund managers are taking advantage of a loophole and should not be punished … but in such a case, the loophole must be plugged. If I’m considering placing an order to buy XYZ Corp. at $50.00, then I consider XYZ’s plans to issue more shares – and dilute my holdings – at $45.00 to be material.

I can see that with such private placements, the company may have a legitimate interest in keeping the plans quiet … but sizes and prices should not be negotiated with other players unless those players have entered a short-term stand-still and confidentiality agreement.

I’m uncomfortable with this method of financing, anyway. Let’s see more exchange offerings and rights issues!

Yields on the Fed’s Term Auction Facility increased in the current auction to 3.08%. This auction was for $30-billion in term loans, from Feb 28 – March 27. It replaces funds awarded in the January 28 auction, which went for 3.123%. The Fed Funds contract for March is now trading at about 2.77%; as of Feb 25, both the target and the effective Fed Funds Rates were 3.00%. It would appear that a term premium has now crept into the auctions … I note that one month LIBOR is at 3.12%. So … I think the result, together with an entirely reasonable FDIC report, is pretty good sign. If the sky really were falling, then insolvent banks, shut out of the uncollateralized interbank market, would bid the TAF rate to the sky as they attempted to foist their worthless collateral on the dumb old Fed.

Reliable data is hard to come by, but preliminary indications are that the new Federal Budget is dividend hostile – not good news for prefs, but (based on historical experience with the trend in the other direction) probably not that bad, either. Fresh from flapping his yap about the need for efficiency (except in egg and dairy products), Our Glorious Finance Minister introduced yet another tax-assisted savings plan, which will be of interest to the few Canadians who have maxed out their RRSPs (which is to say: those who don’t need any specially targetted help anyway). It is not clear whether the line item for this deduction has been efficiently placed above or below the line where you claim your public transit fare deduction. There are things, Assiduous Readers, which man was not meant to know.

On the plus side, the government’s desire to spend every cent coming in and to bloat the size of the Income Tax Act makes deficits much more likely. This will increase the supply of government bonds and hence act to decrease Preferred/Government yield spreads.

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 5.54% 5.59% 39,260 14.5 2 -0.3702% 1,075.6
Fixed-Floater 4.98% 5.67% 71,013 14.69 7 +0.3445% 1,029.5
Floater 4.93% 5.00% 68,256 15.44 3 -0.0128% 856.9
Op. Retract 4.81% 1.98% 76,957 3.12 15 +0.0906% 1,048.5
Split-Share 5.26% 5.28% 97,587 4.06 15 +0.1714% 1,050.1
Interest Bearing 6.21% 6.38% 57,713 3.34 4 -0.1983% 1,085.9
Perpetual-Premium 5.70% 4.15% 338,488 4.37 16 +0.0127% 1,033.3
Perpetual-Discount 5.34% 5.38% 276,388 14.83 52 +0.0688% 962.8
Major Price Changes
Issue Index Change Notes
HSB.PR.D PerpetualDiscount -1.1725% Now with a pre-tax bid-YTW of 5.38% based on a bid of 23.60 and limitMaturity.
IAG.PR.A PerpetualDiscount +1.1810% Now with a pre-tax bid-YTW of 5.07% based on a bid of 22.63 and a limitMaturity. 
NA.PR.L PerpetualDiscount +1.3538% Now with a pre-tax bid-YTW of 5.44% based on a bid of 22.46 and a limitMaturity.
Volume Highlights
Issue Index Volume Notes
BNS.PR.M PerpetualDiscount 157,870 Nesbitt bought 145,000 from National Bank at 21.72. Now with a pre-tax bid-YTW of 5.23% based on a bid of 21.73 and limitMaturity.
BNS.PR.L PerpetualDiscount 99,305 BMO bought 41,800 from National Bank at 21.72, then crossed 50,000 at the same price. Now with a pre-tax bid-YTW of 5.22% based on a bid of 21.72 and a limitMaturity.
CM.PR.H PerpetualDiscount 64,500 Now with a pre-tax bid-YTW of 5.59% based on a bid of 21.66 and a limitMaturity.
BMO.PR.J PerpetualDiscount 56,660 National Bank bought 26,400 from Nesbitt at 21.60. Now with a pre-tax bid-YTW of 5.22% based on a bid of 21.60 and a limitMaturity.
LFE.PR.A SplitShare 106,720 CIBC crossed 101,800 for cash at 10.70 (ex-dividend date is 2/27, tomorrow). Asset coverage of 2.4:1 as of February 15, according to the company. Now with a pre-tax bid-YTW of 3.93% based on a bid of 10.61 and a hardMaturity 2012-12-1 at 10.00.

There were fourteen other index-included $25-pv-equivalent issues trading over 10,000 shares today.

One Response to “February 26, 2008”

  1. […] The Buiter/Sibert column on Barack Obama’s “Patriot Employer Act”, mentioned yesterday,  has drawn a lot of comment. Tanta at Calculated Risk has a very entertaining and devastating commentary about Lost Note Affidavits with respect to foreclosures, prompted by a story about legal maneuvering that caught my eye at the time, but went unremarked here. I’ve added some updates to the Crony Capitalism post and have made a little progress on Seniority of Bankers Acceptances. […]

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