PrefBlog

The strength of US institutions was on display again today, as the New York Fed published a blog post titled Will New Steel Tariffs Protect U.S. Jobs?:

We argue that the new tariffs are likely to lead to a net loss in U.S. employment, at least in the short to medium run.
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Research on markup adjustments more generally shows that a 10 percent increase in competitor prices leads to a 5 percent increase in domestic prices. With a 25 percent tax on imported steel, local steel producers can increase their markups and prices, and still stay competitive relative to foreign-produced inputs. This is the so-called protection that tariffs confer.

However, firms that are dependent on steel and aluminum inputs—both importers and non-importers—will face higher prices. Downstream domestic producers will have to increase their prices or reduce markups, which makes them uncompetitive relative to competing imports. Similarly, U.S. exporters that need steel or steel-related inputs will face higher input costs and will have to either increase export prices or reduce their profit margins. These effects could lead to lower employment in these steel-intensive industries and possibly plant shut downs. Researchers estimate that the number of jobs in steel-intensive industries, which they define as industries with steel inputs of at least 5 percent of total, is around 2 million—for example, manufacturers of auto parts, motorcycles, and household appliances.

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I can’t imagine either Poluz or Carney authorizing the publication of anything like that! Canada is poorly served by its bootlicking class.

The 10-Year Treasury yield increased by 4bp today, which some blame on the commodity markets:

The recent weeks of sanctions, tariff dust-ups and tight oil supplies that jolted commodities prices higher have now got equities and Treasuries investors on the run, according to Weeden & Co.

Unlike in February, when optimism over global growth sent Treasury yields higher, this time it’s the price pressure from rising metals, Weeden’s Michael Purves wrote in a note to investors Thursday.

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Five year Canada yields were higher as well, closing at 2.16% … this should have been good news for FixedResets but, perversely, they got hit today along with everything else.

PerpetualDiscounts now yield 5.41%, equivalent to 7.03% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.95%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 310bp, a slight (and perhaps spurious) narrowing from the 315bp reported April 11.

The Ontario Securities Commission has announced:

The Canadian Securities Administrators (CSA) today published for comment CSA Staff Notice 61-303 and Request for Comment Soliciting Dealer Arrangements. The notice outlines regulatory issues raised by soliciting dealer arrangements and seeks input on the practice, which generally involves an issuer paying a dealer to successfully solicit securities from a securityholder in connection with corporate transactions.

The actual notice asks:

3. Are soliciting dealer arrangement fees typically only paid in respect of votes “for” management’s recommendations? Is that appropriate in all circumstances? Is there a reason to distinguish proxy contests in this regard?
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5. Do you think that the potential conflict of interest on the part of an investment dealer or a dealing representative can be effectively managed?

a. If so, what steps should an investment dealer take to appropriately manage or avoid the conflict of interest? What steps should a dealing representative take, beyond disclosure, to appropriately manage or avoid the conflict of interest?

b. Does the answer differ depending on whether the transaction is

i. a take-over bid tender,

ii. a securityholder vote in relation to a merger or acquisition transaction,

iii. a securityholder vote to amend the terms of a security, or

iv. a securityholder vote in the context of a proxy contest?

c. In the context of a securityholder vote in relation to a merger and acquisition transaction, does the answer to #5 differ depending on whether the fee is contingent on the securityholder voting in favour of the transaction and/or the transaction being approved?

d. In the context of a proxy contest, does the answer to #5 differ if the fee is contingent on the securityholder voting in favour of management’s nominees and/or management’s nominees being elected?

e. What type of communication and disclosure by investment dealers and dealing representatives should be made to the securityholder respecting the existence of a soliciting dealer arrangement?

6. Do you think that there are circumstances in which it would never be appropriate for an investment dealer to enter into a soliciting dealer arrangement? If so, please discuss what such circumstances would be.

7. Are soliciting dealer fees paid to investment dealers and/or dealing representatives in connection with securities held in managed accounts? If so, in what circumstances?

8. How can investment dealers and dealing representatives participating in a soliciting dealer arrangement in respect of a proxy contest ensure compliance with the proxy solicitation rules?

9. Are investment dealers and/or dealing representatives involved in proxy contests where a proxy solicitation firm has been retained?

10. Do you believe that an investment dealer or a dealing representative has a responsibility to encourage its client to respond to proxy solicitations, rights offerings, take-over bids or other corporate transactions such as conversion of convertible securities?

Steven M. Harris, Jennifer F. Longhurst and Gilles R. Comeau of DAVIES WARD PHILLIPS & VINEBERG LLP have issued a bulletin titled CSA Reviewing and Seeking Comments on Soliciting Dealer Arrangements in Proxy Contests and Corporate Transactions in which they provide a little background. Naturally, the emphasis is on proxy contests, in which the legal fees are higher than in ‘change of terms’ solicitations.

My own views on sleaze fees has been made public for some time, most recently with respect to the aborted TransAlta preferred share exchange in early 2017. In a nutshell: it is grossly improper for a portfolio manager to accept payola for voting in a certain way but I see nothing wrong with a salesman collecting his little envelope for voting in a certain way (let’s just make sure that their business card says “salesman”, OK? and that there is no corporate overlap whatsoever between companies that employ salesmen paid by issuers and transaction charges and those which employ portfolio managers paid solely by clients). However, as has been discussed on PrefBlog far too often, there is a vast constituency of ha-ha “investor advocates” ho-ho who believe that paying salesmen commission is an affront to capitalism and should be banned. So there might be some who disagree with me regarding the propriety of salesmen getting their palms greased – it’s self-evident that if trailers are improper then so are solicitation fees.

Anyway … now it’s time for PrefLetter!

PerpetualDiscounts now yield 5.42%, equivalent to 7.05% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 3.9%, so the pre-tax interest-equivalent spread is now about 315bp, a slight (and perhaps spurious) narrowing from the 320bp reported April 4.

Well, so much for the pretense of independent and objective advice!

Toronto-Dominion Bank has taken unusual steps to discourage some clients from investing in the marijuana sector.

The bank is limiting the ways in which its advisers discuss the industry with clients, banning staff from recommending almost all marijuana firms and exchange-traded funds (ETFs), according to a recent internal e-mail viewed by The Globe and Mail. TD is also prohibiting portfolio managers from proactively adding most cannabis shares to certain client investment accounts – unless clients specifically instruct their adviser to do so.

As a result, the bank’s investment advisory channel – TD Wealth Private Investment Advice (PIA) – has put dozens of pot stocks and the four Canadian-listed cannabis ETFs onto its non-approved list of securities, leaving advisers with only three Canadian marijuana stocks to suggest.
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Investors who use the bank’s online discount brokerage – TD Direct Investing – can buy and sell pot stocks without issue, as those trades are self-directed.

The restrictions put on advisers who work at PIA appear to be driven out of concern of the legal risks the bank could face in the United States, where cannabis is legal in some states but illegal under federal law.

“This is an evolving issue with legal ramifications in the U.S. Therefore, we are restricting our advisers from counselling clients to acquire shares in certain cannabis-organizations with operations in the U.S.,” TD spokeswoman Emily Vear said in an e-mail.
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In the internal e-mail sent to TD advisers at the end of March, TD warned that cannabis companies “with U.S. touchpoints could create significant legal risks to [TD Wealth Private Investment Advice] due to the application of U.S. federal laws.” Last week, it wouldn’t explain what those risks are.

I’m sure that if I started tailoring my advice to reduce my company’s legal risk in a foreign country, I’d be getting an uncomfortable visit from the OSC! But don’t worry, regulation fans! I’m sure TD will be OK.

Jobs, jobs, jobs!

The Canadian economy added more jobs than expected last month, driven by hiring in construction and a recovery in full-time positions, data showed on Friday, though economists still expect the central bank to take its time raising interest rates again.

Canada created 32,300 jobs in March, Statistics Canada said, topping economists’ forecasts for an increase of 20,000. The unemployment rate held at 5.8 per cent, while the participation rate was unchanged at 65.5 per cent.

Average hourly wages were up 3.1 per cent from a year ago, matching February’s annual growth rate. Wages are a key measure being watched by the Bank of Canada, with policymakers still seeing slack in the labor market.

But the US was a bit softer than expected:

■ 103,000 jobs were added last month. Wall Street economists had expected an increase of about 185,000, according to Bloomberg.

■ The unemployment rate was 4.1 percent for the sixth straight month.

■ Average earnings rose by 8 cents an hour and are up 2.7 percent over the past year.

■ The Labor Department revised its estimate of February’s job growth upward, but January’s figure was revised sharply downward. The net result was a loss of 50,000 jobs relative to prior estimates.

Meanwhile there are soothing babblings about NAFTA:

Nafta talks have entered a new, intensive phase of discussions and will continue in the coming days, Canada’s foreign minister said after meeting with her U.S. and Mexican counterparts in Washington.

Chrystia Freeland, speaking to reporters Friday afternoon, said the tone of talks is positive and that the three countries are making progress. Canadian Prime Minister Justin Trudeau, speaking elsewhere the same day, said he hoped to get “positive news in the coming times” as talks continue.

And some less soothing babblings:

The Republican president’s renewed ramblings on trade dominated U.S. equity markets this week, with a tweet-induced swoon on Friday leaving the S&P 500 Index 1.4 percent lower than where it started on Monday. The gauge swung wildly, notching four moves of at least 1 percent in the five days, and the Cboe Volatility Index spiked above 20, nearly double its level for the past year.
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Trump’s impact on the market was on full display over the past five days. The week began with a 2.2 percent tumble after Trump battered Amazon.com Inc. on Twitter, exacerbating a selloff in megacap tech shares. It didn’t help that China put out a list of products it would target with retaliatory tariffs after the White House issued its own the night before.

A three-day rally of more than 3 percent followed, as White House officials insisted the trade bluster was a negotiating tactic. But Trump upended that notion late Thursday, ordering a review of even harsher tariffs that sparked a bookend rout.