April 18, 2011

Today the US got a wake-up call:

Standard & Poor’s put a “negative” outlook on the U.S. AAA credit rating, citing rising budget deficits and debt.

“We believe there is a material risk that U.S. policy makers might not reach an agreement on how to address medium-and long-term budgetary challenges by 2013,” New York-based S&P said in a report today. “If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”

The markets reacted immediately:

U.S. stocks sank the most in a month as Standard & Poor’s Ratings Service cut the nation’s long-term credit outlook to negative. Ten-year Treasuries erased earlier gains and the cost to protect corporate bonds from default climbed to the highest level this month.

The S&P 500 declined 1.5 percent to 1,300.24 at 9:58 a.m. in New York, its biggest drop since March 16. The yield on the 10-year Treasury note climbed three basis points to 3.44 percent after declining four basis points earlier. The dollar was up 1.1 percent at $1.4275 per euro. Gold for June delivery advanced 0.5 percent to $1,493.50 an ounce.

This is a prime example of why I want investible entities to have credit ratings. Not because I can’t come to any conclusions myself, not because I worship the credit rating agencies, but because when they alter their opinions it serves as a focal point for discussion.

However, the announcement did not prevent do-goodism:

The U.S. offered a $2.1 billion loan guarantee to help Solar Trust of America LLC build the world’s largest solar-energy generating station in Southern California.

The project will create 484 megawatts of electricity to be transported over an eight-mile transmission line near Blythe, California, about 230 miles (370 kilometers) east of Los Angeles, according to an Energy Department statement.

“This is the largest amount offered to a solar project through the loans program office,” Energy Secretary Steven Chu said today on a conference call.

Oh well … mere loan guarantees never cost any money, right? I couldn’t find any discussion of the relative cost of this plan – which is suggestive in itself – but a 2008 US Government Report put Natural Gas at $61.77 / Mwh, vs. $100.32 for Solar Thermal.

Remember CalPERS? The humongous pension fund that can’t be bothered to do its own credit analysis? Here’s how they assess investment managers:

In late May 2004, Alfred Villalobos hosted a meeting at his home in Nevada, a few miles from Lake Tahoe and the California border. Villalobos, a former member of the CalPERS Board of Administration and a former Deputy Mayor of the City of Los Angeles, was joined by David Snow, the Chairman and Chief Executive Officer of Medco Health Solutions, one of the nation’s largest pharmacy benefit management (“PBM”) companies, and Fred Buenrostro, who was the Chief Executive Officer of CalPERS – a public official – at the time. We will not discuss the reported details of the conversations between Buenrostro, Villalobos and Snow regarding the CalPERS PBM contract Medco had lost years earlier, in deference to law enforcement authority requests and as we understand that the independent directors of the Medco board are also reviewing these events.

Soon after the May 2004 meeting at the Villalobos home, Medco agreed to retain Villalobos as a consultant and pay him $4 million. Medco agreed to pay Villalobos and his firm even though, as we understand it, Villalobos had no prior PBM counseling experience, and even though Medco had already hired another consulting firm to assist it in securing the CalPERS contract.

Snow would return to the Villalobos home for another meeting in September 2004, when we understand that Buenrostro and Villalobos were joined by three long-time colleagues: Charles “Chuck” Valdes, Kurato Shimada and Robert “Bob” Carlson. The five men – Villalobos, Buenrostro, Valdes, Shimada and Carlson – had served together on the CalPERS Board ten years earlier, when Buenrostro served as a representative for other California state officials. Valdes, Shimada and Carlson were all public officials and still members of the Board in 2004, and were reportedly introduced to Snow as such at the meeting. There were apparently other meetings over the next year between Snow and some or all of the five men, including what appear to have been private meetings at a Sacramento hotel and another at Medco’s Las Vegas pharmacy facility. That November, Buenrostro would also allow Villalobos to host Buenrostro’s wedding at the Villalobos home and reportedly pay for the new couple’s related expenses.

On October 18, 2005, the nine-member Health Benefits Committee of the CalPERS Board convened at a regularly scheduled meeting to interview finalists and to recommend to the full CalPERS Board the award of the PBM contract. Buenrostro attended as CalPERS CEO and was joined by Board members Valdes, Carlson and Shimada. Snow spoke on behalf of Medco, whom the CalPERS staff had already ranked as first choice among the candidates. Although it is unclear how it happened, Medco apparently obtained an internal copy of the Health Benefits Committee’s background documents. Health Benefits Committee members Valdes and Carlson voted in favor of awarding the contract to Medco, with Valdes making the motion to recommend the award of the PBM contract to Medco. That motion passed and Medco was awarded the contract. (Years later, as has been publicly reported, Valdes would invoke his Fifth Amendment right against self-incrimination when government attorneys questioned him about the PBM contract.) Notably, Board member Shimada also attended the Committee meeting and asked a number of questions of the candidates, even though he was not a Health Benefits Committee member. While there, Shimada asked that his questions be reflected in the official record, along with unspecified others that he said he had planned to ask but that had already been posed by the members of the Health Benefits Committee.

Medco apparently had a check cut for hand-delivery that same day – a $1 million payment to Villalobos, the final installment of the initial $4 million agreement. Thereafter, Medco would pay Villalobos a $20,000 monthly retainer, reportedly until sometime in 2009 when Villalobos’ placement agent activities relating to investment managers came under public scrutiny.

They’re not alone. This is an ongoing scandal in the US.

Some shops aren’t just buying gold – they’re buying physical gold:

Dallas hedge-fund manager J. Kyle Bass helped advise the University of Texas Investment Management Co. on taking delivery of 6,643 gold bars, worth $987 million on April 15, now stored in a bank warehouse in New York.

Bass, who made $500 million with 2006 bets on a U.S. subprime-mortgage market collapse, said managers of the endowment, known as UTIMCO, sought board approval to convert its gold investments into bullion this year. A board member, Bass, 41, said he was asked to help with that process.

The Texas fund’s $19.9 billion in assets ranked it behind only Harvard University’s endowment as of August, according to the National Association of College and University Business Officers. Last year, UTIMCO added about $500 million in gold investments to an existing stake, said Bruce Zimmerman, the endowment’s chief executive officer. The fund’s managers sought to take delivery of bullion to protect against demand for the metal overwhelming supply, according to Bass.

Open interest in gold futures and options traded on the Comex typically exceeds supplies held in its warehouses. If the holders of just 5 percent of those contracts opted to take delivery of the metal, there wouldn’t be enough to cover the demand, Bass said.

The Finns are kicking about paying for Greece:

Finland’s euro-skeptic bloc is poised to form a government with the pro-Europe National Coalition led by Finance Minister Jyrki Katainen after voters used yesterday’s election to protest against funding bailouts.

The True Finns, whose leader Timo Soini says taxpayers shouldn’t have helped rescue Greece or Ireland, jumped almost 15 points to 19 percent, the Justice Ministry said. Katainen’s National Coalition won 20.4 percent to become Finland’s biggest party for the first time. Prime Minister Mari Kiviniemi’s Center Party got 15.8 percent and the Social Democrats, which also opposed bailouts for Greece and Ireland, won 19.1 percent. Kiviniemi will lead her party in opposition after its “huge defeat,” she told broadcaster YLE.

“They could not leave the True Finns out of government after this landslide,” said Tuomo Martikainen, professor emeritus in political science at the University of Helsinki, by phone. “It would be making a mockery of democracy.”

Perhaps Mr. Martikainen should consult our own What-Debt? about the construction of coalitions in a democracy!

There were very disparate returns in the Canadian preferred share market today, with PerpetualDiscounts gaining 37bp, FixedResets losing 4bp and DeemedRetractibles getting whacked for 26bp. Volatility was fair, with five entries in the Performance Highlights table. Volume was on the light side.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.0357 % 2,409.5
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.0357 % 3,623.8
Floater 2.50 % 2.27 % 37,762 21.55 4 0.0357 % 2,601.6
OpRet 4.91 % 3.04 % 56,181 2.08 8 0.0963 % 2,417.0
SplitShare 5.20 % -1.54 % 96,938 0.65 6 0.1050 % 2,496.2
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0963 % 2,210.1
Perpetual-Premium 5.80 % 5.71 % 120,730 1.15 8 -0.0398 % 2,047.5
Perpetual-Discount 5.58 % 5.66 % 127,387 14.40 16 0.3727 % 2,121.4
FixedReset 5.17 % 3.48 % 206,969 2.93 57 -0.0385 % 2,291.0
Deemed-Retractible 5.28 % 5.30 % 309,674 8.16 53 -0.2621 % 2,070.5
Performance Highlights
Issue Index Change Notes
IAG.PR.F Deemed-Retractible -1.42 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.05
Bid-YTW : 5.95 %
MFC.PR.D FixedReset -1.05 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.24
Bid-YTW : 3.88 %
MFC.PR.C Deemed-Retractible -1.05 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.76
Bid-YTW : 6.83 %
POW.PR.D Perpetual-Discount 1.17 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-04-18
Maturity Price : 22.38
Evaluated at bid price : 22.56
Bid-YTW : 5.57 %
FTS.PR.F Perpetual-Discount 1.73 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-04-18
Maturity Price : 23.28
Evaluated at bid price : 23.50
Bid-YTW : 5.28 %
Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.E Deemed-Retractible 113,892 Desjardins crossed 100,000 at 23.75.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.66
Bid-YTW : 5.27 %
MFC.PR.F FixedReset 98,880 Anonymous bought 17,900 from HSBC t 25.00; Nesbitt crossed 55,000 at 25.08.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.96
Bid-YTW : 4.16 %
CM.PR.G Deemed-Retractible 59,357 RBC crossed 42,400 at 24.90.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.95
Bid-YTW : 5.44 %
MFC.PR.D FixedReset 41,847 Nesbitt crossed 31,300 at 27.50.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.24
Bid-YTW : 3.88 %
BNS.PR.N Deemed-Retractible 37,738 Desjardins crossed 25,000 at 25.07.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-02-26
Maturity Price : 25.00
Evaluated at bid price : 25.11
Bid-YTW : 5.16 %
CM.PR.I Deemed-Retractible 32,033 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.63
Bid-YTW : 5.39 %
There were 25 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BAM.PR.P FixedReset Quote: 27.51 – 28.00
Spot Rate : 0.4900
Average : 0.2842

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-30
Maturity Price : 25.00
Evaluated at bid price : 27.51
Bid-YTW : 4.05 %

MFC.PR.D FixedReset Quote: 27.24 – 27.59
Spot Rate : 0.3500
Average : 0.2197

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 27.24
Bid-YTW : 3.88 %

IAG.PR.F Deemed-Retractible Quote: 25.05 – 25.48
Spot Rate : 0.4300
Average : 0.3149

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.05
Bid-YTW : 5.95 %

CIU.PR.A Perpetual-Discount Quote: 22.58 – 22.95
Spot Rate : 0.3700
Average : 0.2852

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-04-18
Maturity Price : 22.43
Evaluated at bid price : 22.58
Bid-YTW : 5.16 %

TDS.PR.C SplitShare Quote: 10.50 – 10.80
Spot Rate : 0.3000
Average : 0.2214

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2011-12-15
Maturity Price : 10.00
Evaluated at bid price : 10.50
Bid-YTW : -1.54 %

CM.PR.J Deemed-Retractible Quote: 23.31 – 23.60
Spot Rate : 0.2900
Average : 0.2116

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.31
Bid-YTW : 5.34 %

One Response to “April 18, 2011”

  1. […] mentioned a classic example of how investment managers are hired on April 18, 2011. The CalPERS story continues: The former chief executive of the California Public Employees’ […]

Leave a Reply

You must be logged in to post a comment.