PrefBlog

Those who live by the sword…

Marko Dimitrijevic, the hedge fund manager who survived at least five emerging market debt crises, is closing his largest hedge fund after losing virtually all its money this week when the Swiss National Bank unexpectedly let the franc trade freely against the euro, according to a person familiar with the firm.

Everest Capital’s Global Fund had about $830 million in assets as of the end of December, according to a client report. The Miami-based firm, which specializes in emerging markets, still manages seven funds with about $2.2 billion in assets. The global fund, the firm’s oldest, was betting the Swiss franc would decline, said the person, who asked not to be named because the information is private.
…
Last year, the main fund rose 14.1 percent, driven by Chinese equities and bets against currencies, including a wager that the Swiss franc would fall after citizens rejected a referendum that would require the central bank to hold at least 20 percent of its assets in gold, the investor report said.

There may be a Chinese straw in the wind:

A missed $23 million interest payment by Kaisa Group Holdings Ltd. (1638) earlier this month puts it at risk of being the first Chinese real estate company to default on its dollar-denominated bonds. That may signal deeper risks for China’s already fragile and corruption-prone property market, which according to World Bank estimates accounts for about 16 percent of economic growth.
…
Kaisa’s woes began late last year when the government in Shenzhen, less than 25 kilometers (15.5 miles) from Hong Kong, blocked approvals of its property sales and new projects in the city. It’s also being probed over alleged links to Jiang Zunyu, the former security chief of Shenzhen who was taken into custody as part of a graft probe, two people familiar with the matter said last week, asking not to be named because the connection hasn’t been made public.
…
Concern is mounting that increasing financial stress among builders could spill over into a broader credit crisis in China. New-home prices fell in 65 of the 70 cities monitored in December and were unchanged in four, the National Bureau of Statistics said in a statement yesterday. Shenzhen recorded higher prices, the first city to see an increase in four months.
…
Some of Kaisa’s Chinese creditors, meanwhile, have asked a court to freeze the company’s assets. In a statement on Jan. 9, the developer said that “several bank accounts of the group” had been frozen.

It’s a reminder of the risks overseas bondholders face when Chinese companies run into trouble. China’s bankruptcy laws favor local creditors while offering fewer protections to foreign debt claims. Kaisa has a 30-day grace period to make its missed payment.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 13bp, FixedResets down 38bp and DeemedRetractibles off 9bp. A lengthy Performance Highlights table is dominated by losing FixedResets. Volume was below average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

• based on Implied Volatility Theory only
• are relative only to other FixedResets from the same issuer
• assume constant GOC-5 yield
• assume constant Implied Volatility
• assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 20.55, is $1.18 cheap, but it has already reset (at +192). TRP.PR.C, bid at 20.71 and resetting at +154bp on 2016-1-30 is $1.74 rich.

Click for Big

MFC.PR.F continues to be near the line defined by its peers, although it drifted up by a small amount today. Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.53 and appears to be $0.80 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.30 and appears to be $0.88 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.46, looks $1.11 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.36, looks $1.29 expensive and resets 2019-3-1

Click for Big

Pairs equivalence is all over the map, but the investment grade pairs (which are presumably more closely watched and easier to trade) do show a rising trend with increasing time to interconversio which, qualitatively speaking, is entirely reasonable.

And I now have my regular high speed connection back! They tell me that the power supply on my old modem blew. Of course, virtually everything about Bell Canada blows, but that’s another story…

News is starting to trickle in regarding casualties of the Swiss Franc move yesterday:

The Swiss National Bank’s abrupt move on Thursday to abandon its cap on the Swiss franc led to massive losses, and at least one insolvency, among retail foreign exchange brokers and trading houses across the globe.

Alpari UK

Online foreign exchange Broker Alpari UK said on Friday it had entered into insolvency after clients sustained losses on the Swiss franc. It said volatility and lack of liquidity had “resulted in the majority of clients sustaining losses which exceeded their account equity.”

FXCM Inc
…
Global Brokers NZ Ltd

The New Zealand foreign exchange dealer was forced to close due to hefty losses incurred due to the SNB’s policy reversal. It said the franc’s move had wiped out the equity of most of its clients with franc positions and left it without the ability to meet minimum capital requirements of 1 million New Zealand dollars ($780,000). New Zealand’s regulator is seeking a status update on client funds from the broker.
…
Swissquote
…
OANDA
…
Saxo Bank
…
IG Group

… and at least one fund:

IG Group shares fell 4.4 percent yesterday. The U.K. spread-betting firm said the financial impact from the surge in the Swiss franc was partially dependent on its ability to recover client debts.

The market turmoil turned the $1.9 billion John Hancock Absolute Return Currency Fund into the biggest loser among U.S. peers. It tumbled 8.7 percent yesterday, the steepest drop on record and the most among more than 2,000 U.S.-domiciled funds tracked by Bloomberg with at least $1 billion under management. The fund had its second-biggest short position in the franc at the end of November, according to the latest fact sheet on John Hancock’s website.

The FXCM problem is attracting some notice:

FXCM Inc. (FXCM), the brokerage facing a shortfall of nearly a quarter-billion dollars after highly-leveraged investors made losing bets on the Swiss franc, pushed back against U.S. regulatory efforts that likely would have left it less vulnerable.

In 2010, the Commodity Futures Trading Commission sought to force individual investors trading currencies to give their broker 10 cents in capital to back every $1 in positions. The regulator failed to accomplish that amid pressure from New York -based FXCM and other brokers, meaning only 2 cents must be pledged.
…
The client losses are shining a spotlight on U.S. regulators’ oversight of retail currency trading and whether they stopped short of necessary curbs to protect customers. In contrast to other markets, investors buying stock with borrowed money must put up at least 50 percent of the purchase price under Federal Reserve rules. The CFTC will probably move to review past efforts to limit currency-trading risks, former officials say.

“Leverage is a big issue that CFTC probably will want to look at as well as increasing transparency and maybe the capital buffer,” Sharon Brown-Hruska, a former commissioner at the CFTC and vice president at the NERA Economic Consulting firm, said in a phone interview.
…
While FXCM announced the customer losses and possible breach of capital requirements Thursday, GAIN Capital Holdings Inc. (GCAP) said it generated a profit. GAIN said in a statement that it had reduced traders’ ability to use leverage last September for Euro-Swiss Franc trades.

We can only hope that the regulators are not able to use this fiasco as a cause celebre to destroy the retail FX market. I see no problem with a 2% margining requirement for FX … but it also seems to me that FXCM had absolutely no protection against a big move … a deep out-of-the-money call, for instance.

Even with Goldman’s exemplary conduct in hedging risk during the crunch as an example (as discussed on July 26, 2010), FXCM managed to screw things up. So the sharks smile:

Leucadia National Corp. gave FXCM Inc. a $300 million cash infusion, extending a lifeline to the currency brokerage hobbled by the Swiss central bank’s decision to let the franc trade freely against the euro.

Leucadia, which owns New York-based investment bank Jefferies Group, extended FXCM a two-year, $300 million senior secured term loan with an initial coupon of 10 percent, according to a statement Friday. The transaction allows FXCM, the largest U.S. retail foreign-exchange broker, to “continue normal operations,” according to the statement.

Shares of New York-based FXCM had tumbled as much as 92 percent to 98 cents Friday morning before they were halted. After the Leucadia deal was released, FXCM’s stock rebounded to $4.44 as of 5:40 p.m. New York time. That’s still down from the prior day’s closing price of $12.63

… and, just so we can keep up to date on an old story, Moody’s cut Russia to Baa3:

Moody’s lowered the country to Baa3, one step above junk, from Baa2. The credit grade matches those of Standard & Poor’s and Fitch Ratings. The rating, on par with India and Turkey, is on review for a further reduction, the ratings company said in a statement.

“The severe — and likely to be sustained — oil price shock, alongside Russian borrowers’ highly restricted international market access due to ongoing sanctions, is undermining economic fundamentals and increasing financial stresses on both the public and private sectors,” Moody’s said in a report

Holy smokaramaville, it was a hot day for the Canadian preferred share market! PerpetualDiscounts won 61bp, FixedResets gained 21bp and DeemedRetractibles were up 46bp. The Performance Highlights table is enormous, with a great many low-spread FixedResets on the bad side, with the good side containing Straight Perpetuals of all flavours and a fair smattering of high-spread FixedResets. Volume was very high.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

• based on Implied Volatility Theory only
• are relative only to other FixedResets from the same issuer
• assume constant GOC-5 yield
• assume constant Implied Volatility
• assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 20.45, is $1.29 cheap, but it has already reset (at +192). TRP.PR.C, bid at 20.35 and resetting at +154bp on 2016-1-30 is $1.36 rich.

Click for Big

MFC.PR.F continues to be near the line defined by its peers, although it drifted up by a small amount today. Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.56 and appears to be $0.89 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.59 and appears to be $0.97 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.75, looks $0.89 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.35, looks $1.22 expensive and resets 2019-3-1

Click for Big

Pairs equivalence is all over the map.

And, yeah, Bell claims there’s no network problem in Toronto, but I am still forced to use my ‘phone as a Wi-Fi hotspot. But don’t worry! Our beloved government will continue to protect us from the evils of American competition, so nobody will lose his job over this fiasco.

I’m spending $25 a day on cell phone data charges. I wonder if Bell will give me a refund.

There’s some disinflationary news from India:

Reserve Bank of India Governor Raghuram Rajan cut interest rates in an unscheduled review to revive growth in Asia’s third-largest economy after inflation eased. Stocks, bonds and the rupee surged.

Rajan lowered the benchmark repurchase rate to 7.75 percent from 8 percent, he said in a statement today, the first reduction since May 2013. Consumer-price inflation will probably be below the central bank’s target of 6 percent by January 2016, he said.
…
Rajan has focused on quelling inflation since taking office in September 2013, and today’s move signals confidence that price pressures will remain under control. It sets India on a different path from Brazil and Russia, which raised rates in December to tame inflation and support their currencies.

And here’s a new twist to currency wars:

At 9:30 a.m. today, trading floors across the City of London erupted.

Outbursts of obscenities and confusion followed the Swiss central bank’s surprise decision to abolish its three-year-old policy of capping the Swiss franc against the euro, according to traders in London’s financial district. The U-turn sent the franc as much as 41 percent up against the euro, the biggest gain on record, a move that one trader estimated may cause billions of dollars of losses for banks and their customers.
…
As the franc spiked, investors said they found themselves unable to trade it amid a lack of price quotes.

“There was a good hour when euro-swiss was untradeable,” said Chris Morrison, London-based head of strategy at Omni Macro Fund, a hedge fund which oversees $550 million. “Clearly there was no liquidity.”

Forex.com, a currency-trading website, said it halted services briefly “until we get confirmation from our liquidity providers that we can get Swissie liquidity.” Dealing resumed at about 10:30 a.m. London time.
…
Anthony Peters, a broker at Swiss Investment Corp., said firms that were selling options tied to the Swiss franc may be among today’s losers. They would have lost money as volatility surged.

“Selling puts or vol on the franc was deemed to be SNB guaranteed money for old rope,” he wrote in a note to clients today. “There will be some very red faces around as it begins to transpire who should not have been playing that game.”

Sometimes we have to leave Never-Never Land:

“The decision has been a surprise for markets — you can’t do it in any other way,” SNB President Jordan told reporters in Zurich today. “We came to conclusion that it’s not a sustainable policy.”

The change comes just one week before ECB policy makers meet to discuss new stimulus, including quantitative easing, a move that may add to pressure on the franc against the euro.

The SNB spent billions defending the cap after introducing it in September 2011. Jordan said today it may intervene again.

“The SNB doesn’t see any future any more for their floor with the strong U.S. dollar and the QE ahead at the ECB,” said Alessandro Bee, strategist at Bank J Safra Sarasin AG in Zurich.

I tip my hat to those who followed the example of George Soros and decided that the CHF/EUR rate was unsustainable. Sometimes the politicians and bureaucrats just need to be TOLD!

It looks like Canada is off Target:

Target Corp. (TGT) will walk away from Canada less than two years after opening stores there, putting an end to a mismanaged expansion that racked up billions in losses.

The Canadian division, which employs 17,600 people, is seeking court approval to begin liquidation, the Minneapolis-based retailer said today in a statement. Dismantling operations north of the border will lead to a $5.4 billion writedown this quarter, though it will boost profit by next year, Target said.

Fixing the Canada unit, which had amassed more than $2 billion in operating losses since 2011, has been a top priority for Chief Executive Officer Brian Cornell. After taking the reins in August, he spent a portion of his early days at the company touring operations in the country. The woes plaguing the chain’s 133 stores there ranged from empty shelves to prices being higher than at locations in the U.S.

“We were unable to find a realistic scenario that would get Target Canada to profitability until at least 2021,” Cornell said today. “This was a very difficult decision, but it was the right decision for our company.”

DBRS comments:

DBRS therefore believes that Target’s decision to wind down its Canadian business is more reflective of the Company’s inability to achieve its own strategic, operational and financial milestones within this market rather than any indication of broader weakening of the Canadian retail sector.
…
This event, however, has no effect on ratings in the retail sector at the present time because DBRS believes that the business risk profile of the overall sector should remain within its current bandwidth over the near to medium term. This outlook is based on DBRS’s:
— view that new competition will emerge (including the impact of growing online retailing) and that the trend toward equilibrium in the sector will continue after this temporary reduction in competition;
— and concern about Canadian consumers becoming more challenged because of high debt levels as well as potentially higher interest rates and lower residential real estate prices in the future.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 23bp, FixedResets off 12bp and DeemedRetractibles gaining 4bp. The Performance Highlights table is lengthy yet again, dominated by low-spread FixedReset losers as the Canada 5-Year yield dropped to an incredible 1.02%. Will we go below 1%? Place yer bets, gents, place yer bets! Volume was low.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

• based on Implied Volatility Theory only
• are relative only to other FixedResets from the same issuer
• assume constant GOC-5 yield
• assume constant Implied Volatility
• assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 21.53, is $0.69 cheap, but it has already reset (at +192). TRP.PR.C, bid at 20.48 and resetting at +154bp on 2016-1-30 is $1.09 rich.

Click for Big

MFC.PR.F continues to be on the line defined by its peers. Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.12 and appears to be $0.87 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.18 and appears to be $0.89 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.75, looks $0.79 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.20, looks $1.08 expensive and resets 2019-3-1

Click for Big

Pairs equivalence is all over the map.

And, yeah, Bell is still having network problems, and I am still using my ‘phone as a Wi-Fi hotspot. But don’t worry! Our beloved government will continue to protect us from the evils of American competition, so nobody will lose his job over this fiasco.

I’m spending $25 a day on cell phone data charges. I wonder if Bell will give me a refund.

Yessir, one has to admire all those hard-nosed market timers who positioned themselves for “rising interest rates”:

Treasury 30-year bonds yields are tumbling to record lows as the collapse in oil and commodity prices smothers inflation and hampers global economic growth.

Global sovereign yields fell to records in the U.K., France, Canada and Japan as a report showed retail sales in the U.S. slumped in December by the most in almost a year, reflecting a broad-based retreat that may prompt economists to cut growth forecasts. The slide prompted traders to push back expectations for the timing of the first Federal Reserve interest-rate increase into December less than a month after speculating that rates could rise as soon as April.
…
Even at the record low yield of 2.39 percent reached today, 30-year Treasuries are attractive to global investors looking at negative returns on the sovereign debt of nations including German with the European Central Bank expected to add to its bond-buying program as policy makers seek to avert deflation.

The Treasury sold $13 billion of 30-year bonds at an auction-record-low yield of 2.430 percent.

Thirty-year bond yields dropped five basis points, or 0.05 percentage point, to 2.45 percent as of 2:31 p.m. in New York, according to Bloomberg Bond Trader data. The momentum that caused the previous record low of 2.44 percent set on July 26, 2012, to be eclipsed is being driven by the following factors.

• GLOBAL SLOWDOWN THREAT …
• LOW INFLATION …
• RELATIVE RETURNS…
• FED TIMING …

Larry Berman of the Globe passes on chief markets economist at Capital Economics John Higgins’ reasons, one of which was missed in the above:

Two, financial institutions are adapting to stricter regulations regarding leverage and assets, creating more demand for safe government bonds.

JPMorgan’s Jamie Dimon is complaining about the regulatory three-ring circus:

Jamie Dimon, grappling with multibillion-dollar legal costs and rising capital requirements at JPMorgan Chase & Co. (JPM), said overlapping efforts by U.S. regulators place banks “under assault.”

“We have five or six regulators or people coming after us on every different issue,” Dimon, 58, said today on a call with reporters after New York-based JPMorgan reported fourth-quarter results. “It’s a hard thing to deal with.”

JPMorgan, the largest U.S. bank by assets, posted a drop in fourth-quarter profit amid $990 million of legal expenses, about double what some analysts predicted. The legal costs, mostly tied to probes into currency rate-rigging, follow even bigger payments in 2013 related to mortgage bonds sold before the 2008 crisis by JPMorgan and firms it acquired.
…
Dimon, who was lauded during the crisis for JPMorgan’s role in buying Bear Stearns Cos. and Washington Mutual Inc.’s banking operations, has criticized the government for penalizing JPMorgan for those firms’ actions.
…
“In the old days, you dealt with one regulator when you had an issue, maybe two,” said Dimon, 58. “Now it’s five or six. It makes it very difficult and very complicated. You all should ask the question about how American that is. And how fair that is. And how complex that is for companies.”

Another hilarious spoofing case in US markets:

And then there is Aleksander Milrud, who allegedly built his spoofing robot out of lots of human traders in China and Korea and maybe elsewhere. Milrud was charged with spoofing today by federal prosecutors and the Securities and Exchange Commission, making him by my count only the second person to be charged with criminal spoofing. The claim is that Milrud recruited lots of traders in China and Korea, and then assigned them to spoof stocks from two accounts each. In the “dirty” account, a trader would enter lots of spoof orders to move the market. In the “clean” account, he’d enter a few orders the other way, to take advantage of the market move. The connections between those accounts, and between them and Milrud, were then further obscured by a series of tubes or whatever. 2 The traders could move fast because “Milrud worked with a gaming software company to develop ‘hot keys’ that allowed his traders to quickly place and cancel multiple orders via their computers with only a few strokes of their keyboards.” Because the next best thing to being an algorithm is being a human with a really fancy keyboard.

I see no reason that spoofing should be a crime. To the extent that it causes additional limit orders to be on the board, spoofing is good! I’m not concerned about the spoofees, because they’re just traders, playing a traders’ games. A fundamental investor can only be helped by spoofing.

One argument that can be made in favour of outlawing spoofing is that the ‘bad’ orders will drive out the ‘good’ – i.e., that legitimate speculative market makers will exit the market because they don’t understand it any more. I’m not so sure that this will be the case; I haven’t seen any evidence to support this view, although if may very well be that lots exists.

It was another poor day for the Canadian preferred share market, with PerpetualDiscounts down 7bp, FixedResets losing 22bp and DeemedRetractibles off 3bp. There is another lengthy Performance Highlights table, dominated by losing FixedResets. Volume was low.

PerpetualDiscounts now yield 5.00%, equivalent to 6.50% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.85% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 265bp, unchanged from January 7.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

• based on Implied Volatility Theory only
• are relative only to other FixedResets from the same issuer
• assume constant GOC-5 yield
• assume constant Implied Volatility
• assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 21.23, is $0.92 cheap, but it has already reset (at +192). TRP.PR.C, bid at 20.47 and resetting at +154bp on 2016-1-30 is $1.08 rich.

Click for Big

MFC.PR.F continues to be on the line defined by its peers. Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.53 and appears to be $0.88 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.30 and appears to be $0.89 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.80, looks $0.85 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.24, looks $1.16 expensive and resets 2019-3-1

Click for Big

Pairs equivalence is all over the map.

And, yeah, Bell is still having network problems, and I am still using my ‘phone as a Wi-Fi hotspot. But don’t worry! Our beloved government will continue to protect us from the evils of American competition, so nobody will lose his job over this fiasco.

So today the Prime Minister’s Office admitted the oil price drop is bad via one of its flunkies:

The plunge in oil prices is “on the whole” a negative for Canada’s economy and may delay its return to full potential, Bank of Canada Deputy Governor Tim Lane said.

“We will closely monitor its broader impacts on growth and the delay it may cause to the economy’s return to its production potential,” Lane said in a speech today in Madison, Wisconsin.

Economists are interpreting his remarks as confirmation the central bank will hold off raising interest rates for the time being. Governor Stephen Poloz and fellow members of the bank’s governing council will publish their next rate decision on Jan. 21, along with a quarterly policy report that will provide a detailed impact analysis of falling oil prices.
…
Canada’s dollar rose 0.2 percent to C$1.1953 per U.S. dollar at 3:58 p.m. Toronto time. It has depreciated by more than 10 percent in the last six months, as the price of benchmark crude oil has plunged 54 percent. A depreciating currency makes Canadian goods cheaper to foreign customers.

“Despite the mitigating factors I enumerated, lower oil prices are likely, on the whole, to be bad for Canada,” Lane said. “Estimating the magnitude of that overall impact requires carefully analyzing the interplay between the various effects as they work through the economy.”

Suncor agreed:

Suncor Energy Inc. (SU), Canada’s largest oil company, said it will cut 1,000 jobs, lower its 2015 capital budget by about 13 percent and delay projects to weather collapsing prices.

The company will spend C$1 billion ($836 million) less this year than originally forecast in November, following Canadian Natural Resources Ltd. (CNQ) in revising its budget lower this week. Suncor also plans to reduce operating expenses by C$600 million to C$800 million in two years, according to a company statement today.

So what do you do when you have too much oil?

Refiners, tankage firms and traders that invested in oil storage capacity are benefiting as the slump in crude to below $45 a barrel deepened what’s called contango, a relatively rare situation where prices for oil delivery later this year are higher than current prices. Vitol Group, Mercuria Energy Group Ltd. and Gunvor Group Ltd. are among the commodity houses poised to profit by storing oil and petroleum products to sell in the future.

“There is significant storage demand from traders wanting to cash in on that specific opportunity,” Martijn den Drijver, an analyst at SNS Securities in Amsterdam, said in an interview.

Mercuria, the fourth-largest independent oil trader, owns about 40 million barrels of storage in locations from Texas, South Africa and China to Belgium and the Netherlands, according to its website. The firm is looking primarily at its land-based storage facilities to play the contango, said Matt Lauer, a spokesman for the company with major trading operations in Geneva. Mercuria hasn’t moved to secure any floating storage in tankers at sea

I mentioned the Caisse’s intention to build transit in Quebec yesterday. DBRS is sanguine, but assumes independence:

DBRS Limited (DBRS) today notes that the Caisse de dép?t et placement du Québec (the Caisse) has entered into an agreement with the Government of Québec (the Government) to execute major infrastructure projects in the province. This new agreement is consistent with the Caisse’s strategy to grow its private market holdings, particularly infrastructure investments, amid the current low interest rate environment. Further, it allows the Caisse to capitalize on its unique understanding of the Québec market and address growing infrastructure needs in the province. Additionally, the Caisse’s current Québec concentration levels will not be affected. DBRS notes that the agreement is of a commercial nature, and importantly, the independence of the Caisse is a key feature and is by no means compromised by this agreement. This move has no implications on DBRS’s current ratings of the Caisse or its financing subsidiary, CDP Financial Inc.
…
Operationalization of the agreement will be dependent upon the introduction of legislative amendments, which is expected in the coming months. The new legislation will allow for the creation of the new infrastructure subsidiary, CDPQ Infra. Also, it will expand the Caisse’s current practice of merely investing in infrastructure projects, to accommodate the new business model, which will include project planning, development, construction and operation. Once established, it is expected that over time CDPQ Infra will expand its mandate to build, finance and operate infrastructure projects globally.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 8bp, FixedResets down 55bp and DeemedRetractibles off 2bp. The Performance Highlights table is suitably lengthy with quite a few FixedReset losers and one solitary winner – a PerpetualDiscount. Volume was very low.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

• based on Implied Volatility Theory only
• are relative only to other FixedResets from the same issuer
• assume constant GOC-5 yield
• assume constant Implied Volatility
• assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 21.66, is $1.12 cheap, but it has already reset (at +192). TRP.PR.C, bid at 21.00 and resetting at +154bp on 2016-1-30 is $1.39 rich.

Click for Big

MFC.PR.F continues to be on the line defined by its peers. Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.48 and appears to be $0.94 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.41 and appears to be $1.02 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.80, looks $0.96 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.26, looks $1.23 expensive and resets 2019-3-1

Click for Big

Pairs equivalence is all over the map.

And, yeah, Bell is still having network problems, and I am still using my ‘phone as a Wi-Fi hotspot. But don’t worry! Our beloved government will continue to protect us from the evils of American competition, so nobody will lose his job over this fiasco.

Assiduous Readers will remember that implementation of the National Securities Regulator has turned out to be an excuse for the creation of arbitrary government powers. Now some pension funds have joined the attack:

The Healthcare of Ontario Pension Plan (HOOPP), the Ontario Municipal Employees Retirement System (OMERS) and the Ontario Teachers’ Pension Plan Board submitted a joint comment letter in December to federal Finance Minister Joe Oliver urging officials to remove pension plans from the draft Capital Markets Stability Act, which is still under review and has not yet been adopted.

HOOPP chief executive officer Jim Keohane said in an interview the act gives the proposed new regulator unprecedented powers to order companies or funds under its control to do anything it deems necessary to prevent systemic risks in the financial system.

“This act, as it reads right now, gives this regulator unbelievable powers that no other regulator in the world has,” he said.

“It can prohibit or restrict any business activities that we undertake. It could force us not to trade securities. The regulator can at its discretion order us to do anything it deems necessary to address systemic risk. It’s completely open-ended,” Mr. Keohane said.

The Caisse is going to build transit in Quebec:

The Caisse de dépôt et placement du Québec is set to boost its bet on infrastructure under a new deal with Quebec that will see the pension fund take over financing and ownership of new public transit projects in the province.

The pension-fund manager, which has assets of $214-billion, has struck an agreement with Quebec’s Liberal government that will see it be the maître d’oeuvre, or project owner, for new transit projects in the French-speaking province. Details of the deal are scheduled to be made public at a news event in Montreal on Tuesday.

Sources familiar with the agreement described it as “a new way of financing and running public transportation infrastructure” for Quebec that will see the Caisse assume ownership over new transit assets and responsibility for building them. Essentially, the province is privatizing the plan for new public transportation projects but with an investor with which it has an established and privileged relationship.

It’s hard to make this out. Is it a plan for current workers to fund current retirees, by overcharging for services? Or is it a plan to pillage the fund by undercharging? All one can really say is that when Big Government jumps into bed with itself, it’s the public who gets screwed.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 10bp, FixedResets up 14bp and DeemedRetractibles gaining 5bp. There is a lengthy performance highlights table notable for BAM FixedResets on the good side. Volume was very low.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

• based on Implied Volatility Theory only
• are relative only to other FixedResets from the same issuer
• assume constant GOC-5 yield
• assume constant Implied Volatility
• assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 21.55, is $1.01 cheap, but it has already reset (at +192). TRP.PR.C, bid at 20.99 and resetting at +154bp on 2016-1-30 is $1.18 rich.

**************************************

Having reached this point in the report I lost my internet connection. There were “network problems” at Bell Highspeed and there are still problems. I have been working today using my cell phone as a Wi-Fi hotspot; not a very good substitute, but good enough. Since I don’t work for BCE, I am aware of the value of redundancy!

So this report is foreshortened. Sorry!

**************************************