March 6, 2012 Comments

Well, as you will have noticed markets were down today (DOW down 1.6%, Toronto down 1.8%). It’s been a number of months since we had those kind of days. Remember last August and September? These kind of days are pretty normal really and I don’t see anything to get too worried about.

With the lower prices I decided to do a little buying and added to my Toll Brothers position.

In part markets are now worried about how this Greek “voluntary” debt swap will work out. There seem to be at least three possibilities.

1. Over 90% of the bonds will be voluntarily swapped and Greece may decide not to force the others. In which case no official default has occurred and the Credit Default Swaps (insurance against default) would then perhaps not pay off. (This scenario seems very unlikely). The clever holders who do not swap may in that scenario collect fully on their bonds.

2. Between 75 and 90% of the bonds will be swapped and Greece will force the remainder to swap in which case the Credit Default Swaps will pay off (as they certainly should)

3. Less than 75% of the bonds will be swapped voluntarily and Greece will throw a fit and decide to simply and completely default on these bonds. The Credit Default Swaps will pay off. Various officials will moan and wail and we will probably get some kind of mini panic in the market. Bizarrely this will include another flight to the “quality” of U.S. bonds.

President Obama has announced another program for Americas to refinance to even lower interest rates at almost no cost or fee.  Americans can borrow at a rate that their bank must honor for 30 years but which the homeowner can pay off with virtually no penalty at any time. The main stream financial press in Canada will again fail to notice or question why in Canada we can only lock in for 5 to 10 years and we can face HUGE penalties to get out. Refinancing for lower rates is basically impossible once you are locked in. But, don’t worry. Ottawa is “on” this. Just this week they announced that banks in Canada will have to better disclose the that these huge penalties exist.  The main stream press will not bother to ask why the Americans get such a better deal. As polite Canadians we must be content with better disclosure. (And I am not suggesting that the banks “eat” the penalty, in the U.S. it is basically investors in mortgage backed securities that allow the easy pre-payment terms.)

Well, I expect more volatility in the markets before this week is over…


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