Saturday, September 29, 2007

TED Spread

Brian Milner wrote a great article regarding a possible indicator of the next financial crisis:

When will the next financial crisis hit?
by Brian Milner
September 28, 2007 at 6:56 PM EDT

As the U.S. dollar plumbed new depths yesterday against the euro and other major currencies and woes stemming from the U.S. mortgage mess continued to mount, the question in the marketplace was not if, but when the next major financial crisis would hit.

To which we would add: Will we have enough warning to take cover from the coming storm? And what form should that shelter take?

It's certain that we can't rely on central bankers or other government officials to clue us in. Most are still reassuring the public that all is right with the world and that there will be little economic spillover from the turmoil in the credit and currency markets.

Two days after Bank of Canada governor David Dodge said that the beleaguered credit market was getting back to normal, the central bank showed that the situation is anything but normal when it poured nearly $1-billion into the money markets to stabilize rates.

Dealing with a separate credit issue, the European Central Bank had to provide another €3.9-billion in emergency lending to meet the borrowing needs of banks this week, which means they couldn't get the cash at a reasonable rate from other banks.

That's a bad sign, because if anyone knows whether a financial institution is harbouring buckets of bad mortgages and other junk among its supposedly high-quality assets, it's another bank.

There's a way for investors to measure this lack of confidence called the TED spread, which has largely fallen into neglect in recent years.

Mention this gauge of financial system health to a bunch of MBA students today and they are apt to look perplexed. Some may even wonder why you're talking about bed linens.

All of which upsets Donald Coxe to no end.

“It was my guiding light,” says the esteemed author and global portfolio strategist with BMO Financial Group. He credits it with keeping his job on Wall Street 20 years ago when he used it to correctly forecast the 1987 market crash.

And Mr. Coxe insists that it still has considerable value today, despite vast changes in the global financial system in recent years.

The TED spread originally was the difference between interest rates on three-month futures contracts for U.S. Treasuries and Eurodollars with identical expiration months. The higher the spread between T-bills and Eurodollar rates the greater the perceived risk of defaults. U.S. Treasuries are considered risk free, while Eurodollar rates reflect the risk that lenders won't get paid back.

The Chicago Mercantile Exchange dropped T-bill futures this past summer due to lack of interest, leaving dedicated TED followers to rely on the less precise comparison of cash bills to Libor (London inter-bank offered rate). But it still does the forecasting job, as the summer's events proved.

Before the credit crunch hit with full force, the TED spread was at a benign level of about 0.40 per cent. But it soared to a high of 2.40 in August, a level not seen since 1987 crash, and stood at 2.15 the day of the big meltdown. It soon fell back to the 1.30 level, before creeping back up. Yesterday, it clocked in at close to 1.45. So it comes as no surprise to the shrinking band of TED fans that central banks would still be facing crunch issues.

“If the banks aren't sure a bank can meet a claim, they stop advancing money to each other and the TED spread jumps,” Mr. Coxe says. “So it tells you when it is that the banks don't trust each other.”

The world of financial liquidity has changed dramatically in just a few short years. Today, there are other huge pools of international capital denominated in yen and euros, which, collectively, dwarf the eurodollar market for seekers of short-term capital. Neither existed during the last major credit crisis nearly a decade ago. Another twist is the ability of traders to move millions electronically into other currencies at blinding speeds.

But for all that, if the good old TED spread widens again beyond, say, 1.75, it's a safe bet that the system has yet to repair itself.

The TED is not going to be the only alarm bell that goes off if things spiral out of control. Others to watch include the Japanese yen strengthening, gold prices skyrocketing and U.S. financial stocks plummeting. But if the TED takes off, it will definitely be time to lower the lifeboats.

Thursday, September 27, 2007

One More Hiccup?

Came across this blog entry today:

One more hiccup before the rally
Leonard Zehr, today at 2:21 PM EDT

Ron Meisels’ charts are telling him to expect another market down leg that may be less severe than the August sell-off but could take some time to run its course. “Just in time for the usual start of the late- October/early-November year-end rally,” he writes.
The main reason for another swoon is that sentiment in mid-August never reached extreme proportions because after a couple of days, the consensus suggested it was just another buying opportunity. “Markets bottom on fear, not greed,” he warns.
When markets complete the latest negative wave, he predicts a new bull market could take flight, lasting through 2008 and possibly the first half of 2009.
His current sectoral reading has energy “selectively positive,” as stocks such as Canadian Natural Resources Ltd., Petro-Canada, Imperial Oil Ltd, EnCana Corp. and the more speculative Connacher Oil & Gas Ltd. have all held their ground, despite the August sell-off.
In materials, Barrick Gold Corp., Agrium Inc. and Teck Cominco Ltd. are “targeted significantly higher,” while insurers “look much better” than the banking sector.
Consumer staples are still a “major disappointment,” as Loblaw Cos. Ltd. and George Weston Ltd. are hitting multi-year lows, he adds.

I also have this feeling and will probably wait until November before dipping my toes in the market in a big way (unless some great deals come up). Unfortunately, I got out of my Chinese fertilizer plays way too early but I didn't fare too badly with my other recent sells of Agnico-Eagle and Rogers. We'll see how October shapes up...

Monday, September 24, 2007

"True" Yield

Leonard Zehr of The Globe and Mail posted the following article:

Going beyond dividend yield
Leonard Zehr, today at 8:50 AM EDT

Take the dividend yield and subtract the three-year compounded annual growth rate of shares outstanding. What you’re left with is “true yield,” which provides a “more comprehensive measure of how firms return capital to shareholders,” contends UBS strategist George Vasic.

By his reckoning, there are only nine stocks in the TSX composite index, with a dividend yield 1.5 per cent, a true yield of 3 per cent, no share dilution over the last three years, five consecutive dividend increases with growth of greater than 10 per cent and a payout ratio of less than 50 per cent.

They are: Methanex Corp., National Bank of Canada, Canadian National Railway Co., Manulife Financial Corp., Canadian Imperial Bank of Commerce, Bank of Montreal, Bank of Nova Scotia, Sun Life Financial Inc. and Royal Bank of Canada.

Friday, September 21, 2007


It finally happened! $1 CAD = $1 USD.

Tuesday, September 18, 2007

More Selling into Strength

Well, I did it again. I sold my shares in Hanfeng today.

As with my other recent transactions, I still believe Hanfeng is a great company but a ~40% rise in just over a month makes one wonder what the risk-reward ratio is at this time.

Had I been less occupied at work and quite honestly, had more guts, I would have made a killing in the past month with some of my stock picks as I had some extra cash available to invest. Oh well, another lesson learned: when markets are tumbling, be sure to put in stink bids to take advantage of that one day when everything collapses completely and bargains are abound.

Hopefully, I can re-establish a position at a lower price later this year.

Thursday, September 6, 2007

Selling into Strength

Continuing my recent theme of selling some of my holdings into strength and in the process, redefining my portfolio, I took advantage of today's gold rally to sell my Agnico-Eagle shares.

Agnico jumped 9.67% today as gold jumped 2% (according to Kitco). I still believe that Agnico is a great company and has excellent prospects going forward but it's another one of those stocks that has had a huge jump since hitting a low of $36.68 on August 16th; that almost 39% in three weeks!

By selling these shares, I have reduced my precious metals exposure. This might not be the brightest move as gold and silver tends to perform best at this time of year. That being said, I still hold Goldcorp and Silver Wheaton; both of which, had good days, as well today.

I intend to utilize the cash from this transaction to finance a future investment that will help diversify the assets in my stock portfolio.