{"id":1722,"date":"2008-01-22T23:15:25","date_gmt":"2008-01-23T03:15:25","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=1722"},"modified":"2008-01-22T23:15:25","modified_gmt":"2008-01-23T03:15:25","slug":"january-22-2008","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=1722","title":{"rendered":"January 22, 2008"},"content":{"rendered":"

Shock and awe in the markets today as the Fed cut 75bp to 3.5%<\/a> and the Bank of Canada cut 25bp to 4.0%<\/a>. James Hamilton at Econbrowser<\/em> labels the Fed\u00a0move an attempt to mitigate damage<\/a>:<\/p>\n

\n

a 75-basis-point cut can not prevent a recession, if one is indeed already under way, any more than the 50-basis-point cut in April 2001 prevented that downturn. But, while many members of the public may believe in the Fed’s omnipotence, I doubt that members of the FOMC share that illusion. I expect that Bernanke instead simply intends to do what he can to mitigate the damage.My bottom line? I believe the FOMC cast its vote today with those who declare that a recession has already begun.<\/p>\n<\/blockquote>\n

But even after this massive move, many market players are calling for more<\/a>, e.g.:<\/p>\n

\n

The Fed will cut rates again at next week\u2019s meeting by either [a quarter of half percentage point]. The Fed has been unwilling to disappoint the market and fed funds futures are leaning very strongly toward a half-point cut next week. However, we disagree with the Fed over the longer-term outlook for inflation \u2014 to us, events have a strong stagflationary feel about them. \u2013Bear Stearns<\/p>\n<\/blockquote>\n

Bloomberg has some interesting colour regarding the Bond Insurer Implosion<\/a>:<\/p>\n

\n

The first to fall was ACA Capital Holdings Inc., whose ACA Financial Guaranty Corp. unit guaranteed $26.6 billion of CDOs backed by subprime mortgages, according to S&P. The New York- based firm was founded in 1997 by H. Russell Fraser, a one-time chairman of Fitch, to insure municipal bonds that triple-A rated insurers wouldn’t cover.
\n…<\/strong>
\n“I knew that if they played with fire long enough, they were going to get burned,” says Fraser, 66.<\/p>\n

He left the company in 2001 over a dispute with the board about insuring CDOs, he says. Back then, it was debt of Enron Corp. and WorldCom Inc. — companies that later filed the two largest bankruptcies in U.S. history — that was being shoveled into CDOs.<\/p>\n<\/blockquote>\n

‘But’ roars the crowd, ‘We’re not interested in ancient history! Can we go back to sleep yet?’ Not according to Moody’s<\/a>!:<\/p>\n

\n

Moody’s placed under review for possible downgrade BAC’s senior debt, rated Aa1, and Bank of America N.A.’s financial strength, rated A, on January 11, 2008, when the company announced its planned Countrywide acquisition. The bank’s Aaa deposit ratings and all Prime-1 short-term ratings are not under review.<\/p>\n

“The rating review is focused on BAC’s capital position, which is further stressed by a barely profitable fourth quarter and the payment of substantial dividends”, said Rosemarie Conforte, Moody’s Senior Vice President. Moody’s said continued CDO write-downs and increased credit provisions severely affected BAC’s earnings performance during the fourth quarter 2007. Ms. Conforte added, “Bank and holding company liquidity are soundly managed and any capital-raising initiatives would be evaluated during the rating process.”<\/p>\n<\/blockquote>\n

All in all, it was a pretty interesting day in the financial markets. James Hamilton at Econbrowser<\/em> took a look after the close and pointed out that 10-year Treasuries yield less than 3.50%<\/a> and:<\/p>\n

\n

All of which invites the question, What’s left for the Fed to do at their regular meeting still scheduled for next week? Futures market participants, whom we left on Friday in the belief that a 75-basis-point cut by the end of January was more likely than a 50-basis-point cut, roared out of the box today, bidding the February fed funds futures contract up to 96.95, implying an expected fed funds rate of 3.05%. That sounds like an additional 50-basis-point cut at the meeting coming up next week, or, if not, a good chance of another intermeeting move in February.<\/p>\n<\/blockquote>\n

I’m appalled, frankly. If the Fed is trying to inflate its way out of the credit crunch, the yield curve should be WAY steeper than it is now … let’s say inflation becomes a large-but-not-disastrous 3% … and\u00a0we want 2% real-yield on 10-years (at least! 2% is skimpy) … my calculator must be broken, I get an answer that’s nowhere near 3.5%. Where are the bond vigilantes<\/a> when you need them?<\/p>\n

Somebody, somewhere, is saying that US real-estate is a major deflationary force. Let’s hope they’re right … but until I see some convincing analysis, I’m gonna agree with Bear Stearns, quoted above.<\/p>\n

Those who have read my most recently publicized article When Will Preferreds Recover<\/a> will remember that March-November 2007 marked the greatest peak-to-trough decline in the BMOCM-50 Preferred Share Index going back to at least 1993-12-31. Such readers will doubtless be interested to note that, as of today, the calculated NAV for CPD<\/a> now shows a decline of 1.06% for January to date, vs. a gain of 1.14% in December<\/a>. In other words, we are now within a whisker of deepening the trough. Have a nice day!<\/p>\n

Mind you, though, the PerpetualDiscount index now has a weighted average bid-yield-to-worst of 5.63% … with interest-equivalency of 1.4x, that’s the equivalent of 7.88% interest, compared to the Long Corporate Yield<\/a> of about 5.75% … so the spread to bonds still looks pretty good! The Bank of Canada<\/a> has the long Canada benchmark at 4.06% (!!), so spread-to-long-Canadas is a whopping 3.82%, a noticable increase from the high point shown in Chart 4 of my latest masterpiece<\/a>.<\/p>\n

By and large, preferreds ignored the excitement of the wider financial markets and just did their own thing … with a certain amount of weakness! Volume picked up a bit, to the low side of normal<\/p>\n

\n\n\n\n\n\n\n\n\n\n\n\n
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<\/strong><\/td>\n<\/tr>\n
Index<\/td>\nMean Current Yield (at bid)<\/td>\nMean YTW<\/td>\nMean Average Trading Value<\/td>\nMean Mod Dur (YTW)<\/td>\nIssues<\/td>\nDay’s Perf.<\/td>\nIndex Value<\/td>\n<\/tr>\n
Ratchet<\/td>\n5.53%<\/td>\n5.57%<\/td>\n56,200<\/td>\n14.56<\/td>\n2<\/td>\n-1.6297%<\/td>\n1,059.5<\/td>\n<\/tr>\n
Fixed-Floater<\/td>\n5.05%<\/td>\n5.60%<\/td>\n77,093<\/td>\n14.72<\/td>\n9<\/td>\n+0.1302%<\/td>\n1,013.3<\/td>\n<\/tr>\n
Floater<\/td>\n5.26%<\/td>\n5.30%<\/td>\n88,528<\/td>\n15.00<\/td>\n3<\/td>\n+0.3870%<\/td>\n838.4<\/td>\n<\/tr>\n
Op. Retract<\/td>\n4.86%<\/td>\n3.76%<\/td>\n85,409<\/td>\n3.14<\/td>\n15<\/td>\n-0.1716%<\/td>\n1,037.7<\/td>\n<\/tr>\n
Split-Share<\/td>\n5.37%<\/td>\n5.83%<\/td>\n101,261<\/td>\n4.25<\/td>\n15<\/td>\n+0.2469%<\/td>\n1,022.0<\/td>\n<\/tr>\n
Interest Bearing<\/td>\n6.33%<\/td>\n6.75%<\/td>\n62,303<\/td>\n3.62<\/td>\n4<\/td>\n-0.2683%<\/td>\n1,065.0<\/td>\n<\/tr>\n
Perpetual-Premium<\/td>\n5.83%<\/td>\n5.67%<\/td>\n64,676<\/td>\n7.20<\/td>\n12<\/td>\n-0.2275%<\/td>\n1,013.0<\/td>\n<\/tr>\n
Perpetual-Discount<\/td>\n5.63%<\/td>\n5.63%<\/td>\n322,967<\/td>\n14.47<\/td>\n54<\/td>\n+0.0403%<\/td>\n917.1<\/td>\n<\/tr>\n<\/table>\n<\/div>\n
\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Major Price Changes<\/strong><\/td>\n<\/tr>\n
Issue<\/td>\nIndex<\/td>\nChange<\/td>\nNotes<\/td>\n<\/tr>\n
BCE.PR.B<\/td>\nRatchet<\/td>\n-3.2653%<\/td>\nClosed at 23.70-49, 5×6. Hasn’t anybody shot the market-maker<\/a> yet? He deserves it<\/a>.<\/td>\n<\/tr>\n
TD.PR.O<\/td>\nPerpetualDiscount<\/td>\n-2.3758%<\/td>\nNow with a pre-tax bid-YTW of 5.38% based on a bid of 22.60 and a limitMaturity<\/a>.<\/td>\n<\/tr>\n
MFC.PR.A<\/td>\nOpRet<\/td>\n-2.1343%<\/td>\nNow with a pre-tax bid-YTW of 4.05% based on a bid of 25.22 and a softMaturity<\/a> 2015-12-18 at 25.00.<\/td>\n<\/tr>\n
PWF.PR.F<\/td>\nPerpetualDiscount<\/td>\n-1.7954%<\/td>\nNow with a pre-tax bid-YTW of 5.59% based on a bid of 23.52 and a limitMaturity.<\/td>\n<\/tr>\n
HSB.PR.C<\/td>\nPerpetualDiscount<\/td>\n-1.5418%<\/td>\nNow with a pre-tax bid-YTW of 5.76% based on a bid of 22.35 and a limitMaturity.<\/td>\n<\/tr>\n
CU.PR.B<\/td>\nPerpetualPremium<\/td>\n-1.4886%<\/td>\nNow with a pre-tax bid-YTW of 5.43% based on a bid of 25.81 and a call 2012-7-1 at 25.00.<\/td>\n<\/tr>\n
ENB.PR.A<\/td>\nPerpetualDiscount<\/td>\n-1.4141%<\/td>\nNow with a pre-tax bid-YTW of 5.72% based on a bid of 24.40 and a limitMaturity.<\/td>\n<\/tr>\n
MST.PR.A<\/td>\nInterestBearing<\/td>\n-1.2720%<\/td>\nAsset coverage of just under 1.9:1 according to Sentry Select<\/a>. Now with a pre-tax bid-YTW of 6.07% based on a bid of 10.09 and a hardMaturity<\/a> 2009-9-30 at 10.00.<\/td>\n<\/tr>\n
W.PR.H<\/td>\nPerpetualDiscount<\/td>\n-1.2500%<\/td>\nNow with a pre-tax bid-YTW of 5.79% based on a bid of 23.70 and a limitMaturity.<\/td>\n<\/tr>\n
BCE.PR.C<\/td>\nFixFloat<\/td>\n-1.1532%<\/td>\n\u00a0<\/td>\n<\/tr>\n
BCE.PR.A<\/td>\nFixFloat<\/td>\n-1.1532%<\/td>\n\u00a0<\/td>\n<\/tr>\n
RY.PR.F<\/td>\nPerpetualDiscount<\/td>\n-1.0162%<\/td>\nNow with a pre-tax bid-YTW of 5.47% based on a bid of 20.36 and a limitMaturity.<\/td>\n<\/tr>\n
FTU.PR.A<\/td>\nSplitShare<\/td>\n+1.0811%<\/td>\nAsset coverage of just under 1.6:1 as of January 15, according to the company<\/a>. Now with a pre-tax bid-YTW of 6.97% based on a bid of 9.35 and a hardMaturity 2012-12-1 at 10.00. It’s certainly trading as if it’s lost investment grade status<\/a>!<\/td>\n<\/tr>\n
RY.PR.E<\/td>\nPerpetualDiscount<\/td>\n+1.1065%<\/td>\nNow with a pre-tax bid-YTW of 5.40% based on a bid of 22.75 and a limitMaturity.<\/td>\n<\/tr>\n
CIU.PR.A<\/td>\nPerpetualDiscount<\/td>\n+1.1702%<\/td>\nNow with a pre-tax bid-YTW of 5.64% based on a bid of 20.75 and a limitMaturity.<\/td>\n<\/tr>\n
RY.PR.D<\/td>\nPerpetualDiscount<\/td>\n+1.3035%<\/td>\nNow with a pre-tax bid-YTW of 5.41% based on a bid of 20.80 and a limitMaturity.<\/td>\n<\/tr>\n
GWO.PR.I<\/td>\nPerpetualDiscount<\/td>\n+1.4706%<\/td>\nNow with a pre-tax bid-YTW of 5.49% based on a bid of 20.70 and a limitMaturity.<\/td>\n<\/tr>\n
BMO.PR.J<\/td>\nPerpetualDiscount<\/td>\n+1.4742%<\/td>\nNow with a pre-tax bid-YTW of 5.54% based on a bid of 20.65 and a limitMaturity.<\/td>\n<\/tr>\n
BSD.PR.A<\/td>\nInterestBearing<\/td>\n+1.6216%<\/td>\nAsset coverage of just under 1.6:1 as of January 18, according to Brookfield Funds<\/a>. Now with a pre-tax bid-YTW of 7.25% (mostly as interest) based on a bid of 9.40 and a hardMaturity 2015-3-31 at 10.00.<\/td>\n<\/tr>\n
RY.PR.G<\/td>\nPerpetualDiscount<\/td>\n+1.8373%<\/td>\nNow with a pre-tax bid-YTW of 5.40% based on a bid of 20.85 and a limitMaturity.<\/td>\n<\/tr>\n
ELF.PR.F<\/td>\nPerpetualDiscount<\/td>\n+2.3902%<\/td>\nNow with a pre-tax bid-YTW of 6.37% based on a bid of 20.99 and a limitMaturity.<\/td>\n<\/tr>\n
WFS.PR.A<\/td>\nSplitShare<\/td>\n+2.5641%<\/td>\nAsset coverage of 1.8+:1 as of January 17, according to Mulvihill<\/a>. Now with a pre-tax bid-YTW of 5.39% based on a bid of 10.00 and a hardMaturity 2011-6-30 at 10.00.<\/td>\n<\/tr>\n
BAM.PR.M<\/td>\nPerpetualDiscount<\/td>\n+2.6490%<\/td>\nNow with a pre-tax bid-YTW of 6.47% based on a bid of 18.60 and a limitMaturity. Closed at 18.60-65, 5×2. The virtually identical BAM.PR.N closed at 17.75-99, 11×1. Explain THAT!<\/td>\n<\/tr>\n
BCE.PR.T<\/td>\nFixFloat<\/td>\n+3.2609%<\/td>\n\u00a0<\/td>\n<\/tr>\n<\/table>\n<\/div>\n
\n\n\n\n\n\n\n\n\n\n
Volume Highlights<\/strong><\/td>\n<\/tr>\n
Issue<\/td>\nIndex<\/td>\nVolume<\/td>\nNotes<\/td>\n<\/tr>\n
GWO.PR.X<\/td>\nOpRet<\/td>\n209,025<\/td>\nNesbitt crossed 200,000 at 26.40. Now with a pre-tax bid-YTW of 3.77% based on a bid of 26.41 and a softMaturity 2013-9-29.<\/td>\n<\/tr>\n
IQW.PR.D<\/td>\nScraps (would be ratchet, but there are credit concerns)<\/td>\n112,330<\/td>\nClosed at 0.41-44<\/td>\n<\/tr>\n
LBS.PR.A<\/td>\nSplitShare<\/td>\n130,109<\/td>\nDesjardins crossed 120,000 at 10.10. Asset coverage of 2.1+:1 as of January 17, according to Brompton Group<\/a>. Now with a pre-tax bid-YTW of 5.31% based on a bid of 10.00 and a hardMaturity 2013-11-29 at 10.00.<\/td>\n<\/tr>\n
BMO.PR.J<\/td>\nPerpetualDiscount<\/td>\n37,010<\/td>\nNow with a pre-tax bid-YTW of 5.54% based on a bid of 20.65 and a limitMaturity.<\/td>\n<\/tr>\n
SLF.PR.E<\/td>\nPerpetualDiscount<\/td>\n29,600<\/td>\nNow with a pre-tax bid-YTW of 5.55% based on a bid of 20.50 and a limitMaturity.<\/td>\n<\/tr>\n
MFC.PR.C<\/td>\nPerpetualDiscount<\/td>\n23,385<\/td>\nNow with a pre-tax bid-YTW of 5.37% based on a bid of 21.21 and a limitMaturity.<\/td>\n<\/tr>\n<\/table>\n<\/div>\n

There were twenty-one other index-included $25.00-equivalent issues trading over 10,000 shares today.\n<\/p>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

Shock and awe in the markets today as the Fed cut 75bp to 3.5% and the Bank of Canada cut 25bp to 4.0%. James Hamilton at Econbrowser labels the Fed\u00a0move an attempt to mitigate damage: …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[15],"tags":[],"class_list":["post-1722","post","type-post","status-publish","format-standard","hentry","category-market-action"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/1722","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1722"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/1722\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1722"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1722"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1722"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}