PrefBlog

I have another barrage of links for you today, so brace yourselves.

First, the obligatory Canadian news: Peter MacKay is no longer the Minister in Charge of Signing Agreements and is now the Minister in Charge of Shooting Off. What his dog thinks of the change was not disclosed.

BCE has filed its proxy statement and disclosed that financing for the takeover is coming from Citigroup, Deutsche Bank, The Royal Bank of Scotland and the Toronto-Dominion Bank. Now, it’s very nice to have financing committments, but they don’t necessarily mean anything. The Sallie Mae takeover is in trouble, with the borrowing buyers attempting to use an escape clause and the salivating sellers trying to slam it shut. Years of litigation ahead on that one, I’ll bet.

One of the financing consortium, Citigroup was in the news today.

Citigroup Inc., the biggest U.S. bank by assets, may forfeit as much as $1 billion of third- quarter profit because of the credit crunch in mortgages and high-yield debt, according to analysts at Sanford C. Bernstein & Co. LLC.
…
“The key question is how the market absorbs deals coming in September, when spreads may widen out to July levels or worse, or may renormalize, with spreads coming in to June levels,” the analysts wrote.

Mason and Howard said mark-to-market losses on leveraged loans in July could have been 15 percent to 20 percent. Lending spreads have tightened so far in August, they said.

Citigroup is the third-ranked provider of leveraged loans in the U.S. this year, behind JPMorgan Chase & Co. and Bank of America Corp., according to data compiled by Bloomberg.

Conventree is claiming that back-up liquidity providers for its commercial paper programme are refusing to provide back-up liquidity … lawsuits ahead there!

European Central Bank intervention eased off amid hopes that conditions are adjusting. Robert Eisenbeis thinks the ECB was too easy on the market.

It is being argued that central banks should actually make markets in instruments that have suddenly become illiquid … I don’t buy it. That’s the private sector’s job … central banks, as I said yesterday, can and should ensure that the biggest, best capitalized financial market intermediaries can make their decisions without having to get particularly nervous about their financing.

I also don’t buy recommendations that the ceiling on mortgage insurance be increased. The maximum mortgage that the agencies can buy is USD 417,000. Sorry! Anybody who’s taking out a mortgage in excess of USD 417,000 doesn’t need government help, implicit or otherwise. Insuring or providing loans of that size to individuals should be strictly private sector.

There was a comment reported by Bloomberg:

“Something that’s triple-A clearly shouldn’t be this volatile,” David Watts, an analyst at bond research firm CreditSights Inc. in London, said.

It may be that the Bloomberg reporter wrote the story to imply deprecation of the AAA ratings, but I hope the explanation for that remark is that he was deprecating the market. I agree with the other guy:

Ratings are “a measure of risk on a buy-and-hold basis and say nothing about the pricing volatility of an investment,” said Gareth Levington, a senior analyst at Moody’s in London. “The market level isn’t hugely relevant for the rating.”

Now for the really interesting stuff: Fed Funds. Truly one of the wildest and interesting sectors of the market, but not usually. Today Fed Funds Futures for the current month closed at 94.96, indicating that the market feels the average rate on Fed Funds for August will be 5.04%. Given that the Fed Funds target rate is 5.25%, this seems very strange indeed. But there are rumours that an emergency cut is imminent and there are more than just rumours. Federal Reserve Data indicates that the actual average rate so far in August has been about 5.17%; on 8/10 the Effective Rate was 4.68% and on 8/13 the ER was 4.81%. On both those days, the low for the day was 0%. So roll that up and smoke it … the interventions have had some effect! I found another primer on how this works, for those who are interested.

Potential cuts in the Fed Funds rate got a boost from mild US Inflation data which is projected by many to come inside the Fed’s comfort zone. Exports are up, which is logical since emerging nations are the only ones who have any money.

Sub-prime is even affecting national currencies … the Kiwi/Yen carry trade is losing popularity and funds are pouring into the US dollar.

With all this going on, Walmart’s profit warning ushered in every-day discounts on US Equities and financials led the crap-out in Canada.

There was continued flight to quality and curve-steepening in both Treasuries and Canadas. US Investment-Grade corporates narrowed in a little.

A lot of lower grade credits in the preferred share market got hit today: WN.PR.D, -3.49%; DW.PR.A, -2.46%; WN.PR.C, -1.72%; DC.PR.A, -1.55%; YPG.PR.B, -1.53%; STR.E, -1.35%; IQW.PR.D, -1.19%. This illustrates my theme of minimizing exposure to the Pfd-3-type credits!

Just for fun, I’ll update my recent comparable list:

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

This entry was posted on Tuesday, August 14th, 2007 at 9:58 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.