Slow News Day
This morning appears to be a slow news day after all the April Fools jokes of yesterday, perhaps the largest being the 3.59% rally for the day. As I predicted fairly close to the top in the fall that smart money was selling into the rallies, I doubt that few buying yesterday will end up happy with their purchases.
Canada has to come out of this mess better than the US. Constrast Canada's central bank on buying risky assets compared to the US:
The Bank of Canada laid out conditions yesterday for accepting bank-sponsored asset-backed commercial paper as collateral for loans to banks that need to raise short-term money.
Bank-sponsored paper is, for the most part, still trading, unlike the non-bank sector of the market, which is frozen and in the midst of a restructuring led by Purdy Crawford.
Nonetheless, the conditions for the loans are designed to keep the Bank of Canada from accepting any risky assets, a marked departure from the moves the U.S. Federal Reserve Board is making in the United States as it tries to solve the problems in the financial system.
Under the new rules, the Bank of Canada will only accept ABCP that has:
The highest-possible rating from two credit ratings companies.
Almost no exposure to "securitized" or repackaged assets.
Backup liquidity credit lines that have few restrictions on payouts.
A high degree of disclosure about underlying assets"
Canada also has a pretty good record on saying no to all the sectors demanding the government do something for them at everyone else's expense. The biggest problem I see is that taxes have been reduced to what I think will prove to be unsustainable levels. We were used to our taxes, so why not let well enough alone? It is so much easier and cheaper to leave it alone rather than have to raise taxes again later.
I am not sure why some are thinking the US dollar is going to get stronger. I see little foundation behind it, just smoke, mirrors and good talkers.
Best reading this morning was Mish on the Lehman equity offering. I especially like the piece he took from Minyanville:
"Lehman (LEH) is announcing a $3 billion convertible preferred to 'institutional investors'. In other words, retail will never get their hands on the paper and it is likely a way for LEH to pay back some clients with a cheap deal.
If everything is so rosy, and just a few months back, LEH announced it was going to buy 100,000,000 shares at around $65 a share (stock it never bought) then why would it dilute itself at $37?
Because it has to.
Expect more of this folks. Lots of it."
Which reminds me, I have the portfolio I set up of companies, dwotbuybacks, that had done these buy backs that I entered straight from an ETF that had a purpose of buying only stocks with large buybacks. It is doing dismal. I think it was at 3.47 last week when I checked it. I also did a bit more looking at some of the stocks in there and at this point even though this looks like it was a bad idea on caps, I think it is more an issue of timing than theory. Out of the first 60 companies I looked at they were already down way in excess of what the market was down.
The other part of my theory is that companies doing these buybacks have been loading on the debt to do so. That is what I was seeing in the companies that I had looked at closely, but I never checked out whether the companies in the ETF had taken on debt to do the buy backs. I can't see how buying your shares, even without debt, a few years into a bull run, is ever a good idea for your shareholders. I can only see buybacks benefitting shareholders in a bear market, and only if they can be done without debt. So, executives sell into a buyback and get filthy rich at the expense of investors while the investors cheer the short term rally.
I expect interest rates to eventually reset to reflect risk, and that is already happening to a certain degree. Didn't Lehman just pay around 7% to raise capital and aren't 30 year mortgages still less than that rate? Just looking at that alone is scary. Muncipalities are finding they have to refinance for 1-3% more right now despite the lowering of rates by the fed. Debt reset has to happen across the market and it has to hit these companies that did buybacks with debt.
I am willing to bet if anything, right now "smart debt" is doing their best to get into financing all debt long term, even if today they are paying 1-3% more than they were paying just 6 months ago.