PrefBlog

It will be the end of an era in the Treasury market, with the last double digit coupon bond maturing:

The last Treasury bond with a coupon above 10 percent is older than some government-debt traders. It turns 30 tomorrow.

The bond was issued on Aug. 15, 1985, and is one of just five Treasury bonds left with coupons of 9 percent or higher. All of them mature in the next three years. And as the ranks of high-coupon government bonds have gotten smaller, so has the number of traders and analysts who were on Wall Street desks when high yields and worries about rising prices were the norm.

I still have fond memories of the Canada 10.25% of 2004-2-1 and the good old ‘Porsches’ … 9% March 1, 11. Nowadays, of course, that marks me as an old fogey.

Sesame Street is moving to HBO:

Sesame Workshop, the nonprofit group behind the children’s television program, has struck a five-year deal with HBO, the premium cable network, that will bring first-run episodes of “Sesame Street” exclusively to HBO and its streaming outlets starting in the fall.

The partnership, announced Thursday, will allow the financially challenged Sesame Workshop to significantly increase its production of “Sesame Street” episodes and other new programming. The group will produce 35 new “Sesame Street” episodes a year, up from the 18 it now produces. It will also create a spinoff series based on the “Sesame Street” Muppets along with another new educational series for children.

After nine months of appearing only on HBO, the shows will be available free on PBS, home to “Sesame Street” for the last 45 years.

Naturally, is some carping:

Yes, if we had the lavishly supported BBC-style system that the U.S. never had, PBS and the Corporation for Public Broadcasting might have been able to step in and feather Big Bird’s nest.
…
The Sesame Street is, practically, a good deal. But it is a deal nonetheless, over something that was once a given. It’s one more replacement of a public trust with a public-private arrangement, like a luxury developer given rights and tax breaks to build condos, in exchange for a certain percentage of affordable housing. It’s a deteriorating postal service vs. FedEx, the bus vs. Uber. Everyone still gets to visit Big Bird. Some people just have to use the poor door.

I’m happy to see the deal (and the other deal with Disney) – it helps support one of my long-term speculations, that increased globalization and technology would allow for the production of television with high production values. If you can get global revenue from a really superb show and, what’s more, make it long term global revenue then you can start to justify spending serious money on talent and production. It is, in fact, the BBC model. Sadly, we won’t see any of this money coming into Canada, or see any of our stories going out. Why produce quality, when you get the same government subsidy for garbage?

On August 11 I reported on the SEC takedown of a rather clever global hacking scheme. One of the prime suspects is:

[Vitaly] Korchevsky, 50, is one of nine people charged Tuesday by federal prosecutors and accused of being part of an alliance of hackers and traders who tapped corporate press releases before they became public and traded on the information. He was arrested at his home in Glen Mills, Pennsylvania, amid charges he helped to orchestrate a conspiracy regulators said netted $100 million.

The board of the Slavic Evangelical Baptist Church in Brookhaven, Pennsylvania, about 20 miles (32 kilometers) southwest of Philadelphia, said in a letter Thursday that Korchevsky is a “very respected and connected” member of the community who has served as senior pastor since the church was founded in 2003.

“We cannot comprehend or prevent any of these rumors and lies that have been manipulated over media channels where he has been tagged as a ’flight risk’ and simply plead to this honorable court to allow Rev. Korchevsky to get back to his family, his church and his community,” the church board members said.

Meanwhile, technology marches on – and, as usual, it is introduced with and exclusive focus on the 95% of the population that is honest, with no consideration for the other 5%:

“Keyless” car theft, which sees hackers target vulnerabilities in electronic locks and immobilizers, now accounts for 42 percent of stolen vehicles in London. BMWs and Range Rovers are particularly at-risk, police say, and can be in the hands of a technically minded criminal within 60 seconds.

Security researchers have now discovered a similar vulnerability in keyless vehicles made by several carmakers. The weakness – which affects the Radio-Frequency Identification (RFID) transponder chip used in immobilizers – was discovered in 2012, but carmakers sued the researchers to prevent them from publishing their findings.

This week the paper – by Roel Verdult and Baris Ege from Radboud University in the Netherlands and Flavio Garcia from the University of Birmingham, U.K. – is being presented at the USENIX security conference in Washington, D.C. The authors detail how the cryptography and authentication protocol used in the Megamos Crypto transponder can be targeted by malicious hackers looking to steal luxury vehicles.
…
In this case, however, researchers broke the transponder’s 96-bit cryptographic system, by listening in twice to the radio communication between the key and the transponder. This reduced the pool of potential secret key matches, and opened up the “brute force” option: running through 196,607 options of secret keys until they found the one that could start the car. It took less than half an hour.
…
The research team first took its findings to the manufacturer of the affected chip in February 2012 and then to Volkswagen in May 2013. The car-maker filed a lawsuit to block the publication of the paper – arguing that its vehicles would be placed at risk of theft – and was awarded an injunction in the U.K.’s High Court. Now, after lengthy negotiations, the paper is finally in the public domain – with just one sentence redacted.

Nice lawsuit from the carmakers. Too bad they didn’t spend the money on, you know, security. It would be interesting to read the High Court judgement and I’d poke around for it if it wasn’t PrefLetter weekend. I can see granting a six month injunction … but a permanent injunction seems counterproductive – just another opportunity for lazy Executive Vice Presidents to put off actual work.

It was a mixed day for the Canadian preferred share index, with PerpetualDiscounts gaining 16bp, FixedResets off 21bp and DeemedRetractibles up 19bp. There were no notable patterns in the Performance Highlights table. 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

TRP.PR.B, which resets 2020-6-30 at +128, is bid at 13.16 to be $0.36 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.76 cheap at its bid price of 13.82.

Click for Big

Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 24.48 to be 0.29 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.40 to be $0.20 cheap.

Click for Big

The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 17.40 to be $1.27 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.70 and appears to be $1.40 rich.

Click for Big

FTS.PR.M, with a spread of +248bp, and bid at 23.04, looks $0.50 expensive and resets 2019-12-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 20.07 and is $0.63 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.32%, with no outliers. There are three junk outliers below -1.00% and one above +1.00%.

Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

Politics in the UK may soon get interesting again:

Former U.K. Prime Minister Tony Blair warned that the Labour Party faces “annihilation” if it elects anti-austerity, pro-renationalization lawmaker Jeremy Corbyn as its new leader.

The electorate will punish the party in the 2020 U.K. election for its “self-indulgence” if the bookmakers and pollsters are right and Corbyn wins the party leadership when the result is announced on Sept. 12, Blair said in an article for the Guardian newspaper published Thursday.

“It doesn’t matter whether you’re on the left, right or center of the party, whether you used to support me or hate me. But please understand the danger we are in,” Blair wrote. “The party is walking eyes shut, arms outstretched, over the cliff’s edge to the jagged rocks below. This is not a moment to refrain from disturbing the serenity of the walk on the basis it causes ‘disunity.’ It is a moment for a rugby tackle if that were possible.”

Speaking of the UK, what’s the best way to fight street gangs? Get the kids to believe they can earn a place in the system:

As a teenager, Yasar Ugur spent his time hanging about on east London streets getting into gang fights. Now he’s up before dawn to work on a construction site after a Berkeley Group Holdings Plc project gave him a fresh start.

“This has got a future,” said Ugur, who is now 21 and a trainee site manager for London’s biggest homebuilder. “I’m still young and this is the way I’m going to progress in life.”

Ugur is one of 13 young people hired by the company through its Street Elite program, started in 2012 to address a chronic skills shortage in the construction industry. Almost 1 million building workers will be needed within 10 years in the U.K. as demand for new homes increases and older employees retire, consulting firm EC Harris estimates.

The programme smacks a bit of mollycoddling, with a derisory promise – but the reported end-result seems pretty good:

More than 200 people have completed the Street Elite program, with 80 percent going on to education, training or employment. The project uses sports coaching to prepare participants for work, by mentoring and training them to instruct children in government housing projects. Everybody who completes the nine-month program is offering a two-week internship at Berkeley.

There’s been a bit of a pause, but I’m pleased to see more drone news:

[Nova Scotia-based] Sky Squirrel deploys small drones equipped with infrared cameras to cruise the skies over vineyards, sending back images that help growers monitor for moisture level, disease, rot, insect damage and general crop health – all things that contribute to the quality of the grapes and the resulting wine.
…
In comparison, the company’s drone technology takes as many as 500 images during a single flight. “Our clients send the images to us via the cloud and we combine them into a map,” says van der Put. “Then we use a specialized image algorithm that allows us to assess crop health.” With the help of GPS positioning on their mobile devices, farmers, “can see where they are currently in the field and correlate that with the analysis” to pinpoint areas of concern, van der Put says.

The result: One client managed to reduce his water usage by a third. And the system has proven 97 per cent effective at detecting diseases like Flavesence Dorée – which mainly affects European vineyards. It also picks up leafroll – a disease that can devastate vineyards, wiping out 30 to 50 per cent of the crop.

US regulators might not be able to achieve the dream of eliminating the bond market entirely, but they can make incompetence less of a handicap:

The U.S. is expanding an investigation into deceptive sales practices by bond traders even though the first major conviction in the area could be overturned.

Aided by technology that’s allowing unprecedented scrutiny of trades, the Securities and Exchange Commission is looking beyond 10 cases it’s been developing with U.S. prosecutors to examine other instances of bankers potentially lying to clients and booking improper round-trip transactions, said two people with knowledge of the matter. Some criminal charges from the first batch of probes may come as early as next month, another person said.

Going after bond traders, and in the case of the Justice Department, trying to put some of them behind bars, represents the government’s most aggressive effort yet to root out wrongdoing in the opaque world of complex debt securities. The investigations include a focus on bonds tied to mortgages and corporate loans, markets where pricing data is scarce so bank traders have an edge in marking up assets to charge higher fees.
…
Litvak’s deception allowed him to sell mortgage bonds at inflated prices, bilking customers out of $2 million, U.S. prosecutors successfully argued during his trial. Litvak’s lawyers said it didn’t matter that he misrepresented the markup as long as his sophisticated buyers — consisting of hedge funds and money managers — paid what they felt was an appropriate price.

In July 2014, Litvak was sentenced to two years in prison. A three-judge panel is expected to make a decision on his appeal in the coming months.

So how about them corporate bond spreads, eh?:

The last time investors in the $11 trillion corporate-bond market were so risk-averse, it was 2013 and the Federal Reserve’s move to unwind its crisis-era stimulus had triggered what became known as the “taper tantrum.”

A little more selling and the market will be at its worst since the fourth quarter of 2012, when the world was still recovering from Europe’s sovereign debt crisis.

The extra yield investors worldwide demand to own corporate bonds instead of government securities has climbed to 2.34 percentage points, according to Bank of America Merrill Lynch index data. That’s right around the peak in June 2013, and just 0.04 percentage point from levels last reached in November 2012.

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And it’s always interesting to see what market timers have to say:

The bond market’s best and brightest keep walking back their bets on how fast Treasury yields will rise.

Even with the Federal Reserve poised to begin raising interest rates for the first time in almost a decade, economists at the world’s biggest bond shops now say they don’t see benchmark yields reaching 3 percent until the fourth quarter of next year, according to a Bloomberg News survey. As recently as December they were calling for Treasury 10-year yields to top 3 percent by year-end.

Bond gurus continue to cut their expectations for how high yields will go amid signs of global economic malaise and persistently weak inflation. China’s devaluation of the yuan this week is the latest development to boost the allure of U.S. government bonds and drag Treasury yields lower, complicating Fed Chair Janet Yellen’s efforts to boost rates.

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It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts up 11bp, FixedResets off 28bp and DeemedRetractibles gaining 1bp. TRP issues were again notable on the down side of the Performance Highlights table, joined today by ENB issues. 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

TRP.PR.B, which resets 2020-6-30 at +128, is bid at 13.21 to be $0.44 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.80 cheap at its bid price of 13.75.

Click for Big

Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 24.75 to be 0.45 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.49 to be $0.35 cheap.

Click for Big

The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.Z, resetting at +296bp on 2017-12-31, bid at 21.82 to be $1.13 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.75 and appears to be $1.36 rich.

Click for Big

FTS.PR.M, with a spread of +248bp, and bid at 23.35, looks $0.38 expensive and resets 2019-12-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 20.17 and is $0.75 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.27%, with no outliers. There are one junk outliers below -1.00% and one above +1.00%.

Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

Today’s parable illustrates the adage that you should never trust a stockbroker:

The Securities and Exchange Commission today announced that ITG Inc. and its affiliate AlterNet Securities have agreed to pay $20.3 million to settle charges that they operated a secret trading desk and misused the confidential trading information of dark pool subscribers.

An SEC investigation found that despite telling the public that it was an “agency-only” broker whose interests don’t conflict with its customers, ITG operated an undisclosed proprietary trading desk known as “Project Omega” for more than a year. While ITG claimed to protect the confidentiality of its dark pool subscribers’ trading information, during an eight-month period Project Omega accessed live feeds of order and execution information of its subscribers and used it to implement high-frequency algorithmic trading strategies, including one in which it traded against subscribers in ITG’s dark pool called POSIT.

ITG agreed to admit wrongdoing and pay disgorgement of $2,081,034 (the total proprietary revenues generated by Project Omega) plus prejudgment interest of $256,532 and a penalty of $18 million that is the SEC’s largest to date against an alternative trading system.
…
According to the SEC’s order instituting a settled administrative proceeding:

• • Project Omega traded a total of approximately 1.3 billion shares, including approximately 262 million shares with unsuspecting subscribers in ITG’s own dark pool.
• • Project Omega employed an algorithmic trading strategy called the “Facilitation Strategy” in which it executed trades based on a live feed of information concerning orders that its sell-side subscribers sent to ITG’s algorithms for handling.
• • Project Omega accessed the feed by connecting to a software utility that was used by ITG’s sales and support teams. As a result, Project Omega had a real-time view of subscriber orders being placed through ITG’s algorithms.
• • From April to December 2010, the Facilitation Strategy was designed to detect open orders of sell-side subscribers being handled by ITG. Based on that information, Project Omega opened positions in displayed markets on the same side of the market as the detected orders, and then closed these positions in POSIT by trading against the detected orders. By employing this strategy, Project Omega sought to capture the full “bid-ask spread” between the National Best Bid and Offer (NBBO).
• • Project Omega had access to the identities of POSIT subscribers and used this information to identify sell-side subscribers and trade with them in the dark pool in connection with the Facilitation Strategy.
• • To earn the full “bid-ask spread” in connection with the Facilitation Strategy, Project Omega needed the subscribers with which it traded in POSIT to be configured to trade “aggressively” so that the subscribers would “cross the spread” to trade with Project Omega. Project Omega took steps to ensure that the sell-side subscribers were configured to trade aggressively in POSIT.
• • Project Omega’s other primary strategy called the “Heatmap Strategy” involved trading on markets other than POSIT based on a live feed of confidential information relating to customer executions in other dark pools. Based on customer executions, Project Omega’s Heatmap algorithm was designed to open positions in specific securities in displayed markets at the bid or the offer and then close them at midpoint or better in the external dark pools where customers had received midpoint executions. The goal of this strategy was to earn a “half spread” or better based on knowledge of ITG customers’ executions.

My Christ. Front-running with a vengeance ITG’s press release states, in part:

ITG is an independent execution broker and research provider that partners with global portfolio managers and traders to provide unique data-driven insights throughout the investment process.

ITG was once recommended to me by an influential and knowledgeable guy as having good algorithms that I could use for accounts held in third-party custody; I never had any need for them, but tucked away the information for potential use. Well, I’ve scratched out that memo. I hope they get sued for bazillions (having admitted wrongdoing!), go bankrupt and have all members of management starve to death on the streets. But we’ll see.

Brookfield Asset Management has announced:

it has received approval from the Toronto Stock Exchange (“TSX”) for its proposed normal course issuer bid to purchase up to 10% of the public float of each series of the company’s outstanding Class A Preference Shares, excluding the Series 14 Class A Preference Shares, that are listed on the TSX (the “Preferred Shares”). Purchases under the bid will be made through the facilities of the TSX. The period of the normal course issuer bid will extend from August 12, 2015 to August 11, 2016, or an earlier date should Brookfield complete its purchases. Brookfield will pay the market price at the time of acquisition for any Preferred Shares purchased. All Preferred Shares acquired by Brookfield under this bid will be cancelled. Brookfield has not repurchased any Preferred Shares in the past 12 months.

Under the normal course issuer bid, Brookfield is authorized to repurchase each respective series of the Preferred Shares as follows: … [list of all preferred shares, with data on daily and total maximal purchases]

This press release, which was brought to my attention by Assiduous Reader Louisprefs, follows the June 23 announcement of a NCIB by BRF and the June 29 follow-up to this announcing an automatic purchase plan with its designated broker. As it turns out, this NCIB was real (they’re usually just cheerleading) and I’ll post about the results soon.

CU Inc., proud issuer of CIU.PR.A and CIU.PR.C was confirmed at Pfd-2(high) by DBRS:

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Debentures & Medium Term Notes rating of CU Inc. (CUI or the Company) at A (high), Commercial Paper rating at R-1 (low), and Cumulative Preferred Shares rating at Pfd-2 (high). All trends are Stable. The confirmation reflects DBRS’s expectation that (1) the quality of transmission and distribution regulatory regimes in Alberta, which has shown signs of deterioration in 2015, will remain reasonable for the current rating category; (2) CUI’s diversification across different energy segments will continue to support the stability of earnings and cash flow; and (3) overall key credit metrics will remain within the “A” rating category despite the continued large capital expenditure (capex) program over the next two years. The debt-to-cash flow ratio, which is currently at the lower end of the “A” rating range, is expected to improve gradually over the next three years.
…
With the downshifting of Alberta’s economy and expected completion of the “big build” associated with electric transmission infrastructure over the next two years, capex will likely further normalize, while earnings and cash flow will benefit from a higher rate base. As a result, DBRS expects free cash flow before dividends to become positive in 2017, and the cash flow-to-debt ratio to gradually recover to around historical levels (15%) more consistent with the current rating category. The rating assumes excess cash, which is not required to maintain the regulatory capital structure, will flow up to its parent company, Canadian Utilities Limited (rated “A” by DBRS).

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 5bp, FixedResets gaining 17bp and DeemedRetractibles up 25bp. TRP issues are again notable in the bad part of the Performance Highlights table, while ENB FixedResets occupy a more desirable neighborhood. Volume was very low.

PerpetualDiscounts now yield 5.44%, equivalent to 7.07% 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 small (and perhaps spurious) widening from the 305bp reported August 5.

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

TRP.PR.B, which resets 2020-6-30 at +128, is bid at 13.75 to be $0.76 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.79 cheap at its bid price of 14.02.

Click for Big

Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 24.84 to be 0.59 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.32 to be $0.48 cheap.

Click for Big

The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.Z, resetting at +296bp on 2017-12-31, bid at 21.85 to be $1.12 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.75 and appears to be $1.28 rich.

Click for Big

FTS.PR.M, with a spread of +248bp, and bid at 23.35, looks $0.38 expensive and resets 2019-12-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 20.09 and is $0.83 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.30%, with no outliers. There is one junk outlier below -1.00% and one above +1.00%.

Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

The SEC took down a major trading operation today:

While the SEC has uncovered and successfully litigated hacking and trading schemes in the past, today’s international case is unprecedented in terms of the scope of the hacking at issue; the number of traders involved; the number of securities unlawfully traded; and the amount of profits generated. Over the course of 5 years, the 32 defendants named in this complaint are charged with carrying out a brazen scheme to steal non-public earnings information for hundreds of publicly traded companies, and then placing thousands of trades through a network of U.S. and overseas traders located in the Russian Federation, Ukraine, Malta, Cyprus, France, New York, Pennsylvania and Georgia—geographies electronically connected by this illicit network.

According to the complaint, these traders located across the globe executed thousands of illicit trades on the basis of this material, nonpublic information, concealing their scheme by spreading the transactions across multiple accounts held in the names of many individuals and entities. And, the traders were market savvy, using equities, options and contracts-for-differences to maximize their profits.

Two Ukrainian hackers are charged with spearheading the scheme, Ivan Turchynov and Okelsandr Ieremenko. Along with the 30 other defendants, they are collectively alleged to have made more than $100 million in illegal profits by trading based on pre-release corporate earnings announcements stolen from multiple newswire services. We charged these defendants in a complaint unsealed today with multiple securities fraud violations, seeking disgorgement and penalties, and we obtained an asset freeze against the overseas traders, which secured at least $20 million of the defendants’ ill-gotten gains. And the SEC’s investigation continues.

Ontario has released some more details of the Ontario Retirement Pension Plan:

Employers and employees who participate in a comparable pension plan will not be required to participate in the ORPP.
…
There are considerable differences between DB and DC pension plans. For example, DC plans do not require employer matching. They also do not allow for the pooled longevity and investment risk that provide people the assurance they will not outlive their savings, and protect them from market volatility.

Actuarial analysis has been conducted to place a value on these differences, and determine a contribution rate that would be able to reliably deliver the same level of retirement income replacement as the ORPP. For this reason, to be considered comparable, a DC plan must:

• •Have a minimum annual contribution rate of 8 per cent
• •Require at least 50 per cent matching of the minimum rate from employers.

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Holy Smokes, but they don’t like DC plans, do they? Eight percent contribution rate? Craziness. And nobody in their right mind will start a DB plan.

Oil got whacked today:

Crude closed at the lowest level in more than six years in New York as OPEC production climbed while China’s devaluation of the yuan bolstered concern that the world’s second-biggest economy will slow.

West Texas Intermediate futures tumbled 4.2 percent. The Organization of Petroleum Exporting Countries raised output by 100,700 barrels a day to 31.5 million last month, the most since June 2012, the group said in its monthly report, citing external sources. The Chinese move may curb demand as import costs rise.
…
WTI for September delivery fell $1.88 to $43.08 a barrel on the New York Mercantile Exchange. It was the lowest settlement since March 2009. The contract touched $42.69, the lowest intraday price since March 18.

… and emerging market currencies were whacked in the fallout from the Yuan devaluation reported yesterday:

China’s devaluation will spark another wave of declines, said David Woo, Bank of America Corp.’s head of rates and foreign-exchange research in New York. The Asian nation is vital to the global economy, accounting for about 27 percent of growth.

“This will trigger competitive devaluation around the world that will start in Asia but definitely not end in Asia,” said Woo, who’s been predicting China would act since January.

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There are local repercussions as well:

The Canadian dollar closed at 76.31 cents (U.S), down 0.61 cents (U.S) from Monday’s close of 76.92 cents (U.S).
…
There is speculation that the much anticipated rate hike in September from the U.S. Federal reserve may be put on hold after China’s move to depreciate its currency

It was a mixed-negative day for the Canadian preferred market, with PerpetualDiscounts flat, FixedResets off 39bp and DeemedRetractibles gaining 4bp. TRP issues were notable on the unfortunate side of the Performance Highlights table. 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

TRP.PR.B, which resets 2020-6-30 at +128, is bid at 13.91 to be $0.81 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.82 cheap at its bid price of 14.10.

Click for Big

Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 24.50 to be 0.41 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.23 to be $0.41 cheap.

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The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.Z, resetting at +296bp on 2017-12-31, bid at 21.80 to be $1.26 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.71 and appears to be $1.20 rich.

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FTS.PR.H, with a spread of +145bp, and bid at 16.05, looks $0.56 expensive and resets 2020-6-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 19.93 and is $0.78 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.17%, with no outliers. There is one junk outlier below -1.00%.

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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

If you spend a lot of time arguing about Supply Management (I particularly enjoy trolling the comment sections of the Dairy Farmers’ of Ontario ads on Facebook) you will inevitably run up against the argument that US subsidies are higher than the effective subsidy supplied by quota. So I was pleased to find a paper by Peter Slade
and Getu Hailu of the University of Guelph titled Efficiency and Regulation: A Comparison of Dairy Farms in Ontario and New York State:

We study the efficiency of dairy farms operating under two different regulatory regimes. While neo-classical economic theory suggests that farms should maximize their efficiency regardless of their regulatory system, we find farms operating in a more regulated environment have, on average, a lower cost efficiency. In contrast to much of the previous literature on regulation and efficiency, we attribute the bulk of the difference in cost efficiency to the allocative decisions of farms. In particular, we find farms in the more regulated environment to be overcapitalized, and overly reliant on homegrown feed. To calculate efficiency we employ recent advancements in bootstrapped data envelopment analysis, and stochastic distance function estimation. We discuss the implications of these results for welfare and policy.

Fig. 1 Mean annual milk price in Ontario and New York (2000-2009)
Source: Authors’ calculations

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Fig. 2 Producer subsidy equivalent percentage for Canadian and United State dairy support programs (2000-2009)
Source: [OECD LINK]

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Figure 1 presents the farm-gate price of milk in Ontario and New York for the period 2000-2009. Throughout this period the price is significantly higher in Ontario than in New York. A simple price comparison is somewhat misleading however, as New York farms receive supports not captured in the price of milk. Figure 2 presents the producer subsidy equivalent percentage for the Canadian and US dairy industries. The producer subsidy equivalent percentage is calculated by the Organization for Economic Co-operation and Development. As its name suggests, this metric converts all government supports received by an average producer into a single \subsidy equivalent”, and divides this support by the total farm receipts. With the exception of 2001, Canadian farms enjoyed higher support than their American counterparts
between 2000 and 2009.

For aspiring FB Dairy Farmer Trolls, I also recommend the Ontario Dairy Farm Accounting Project, which demonstrates that small farms are less efficient than large ones (surprise, surpise) and has the advantage, from an advocacy perspective, of being published on the DFO’s own site and being one of the DFO’s own projects.

US education financing gets ever more ridiculous:

Laura Strong, a 29-year-old in suburban Chicago, owes $245,000 on student loans for the psychology Ph.D. she finished in 2013.
…
Strong pays about $100 a month on her federal loans, which she used to finance her graduate studies at Argosy University, a for-profit institution.
…
Income-based repayment was introduced under President Clinton, but the programs weren’t heavily promoted until late 2013, when the Obama administration began sending e-mails to borrowers, including Strong, telling them, “Your initial payment could be as low as $0 a month.” The number of people using these plans has quadrupled since 2012. About half of outstanding balances in the Department of Education’s Grad Plus loans, which finance advanced-degree studies, are in income-driven plans. Most borrowers in the programs have payments capped at 15 percent of income, with allowances for housing and other expenses. In December the Obama administration is expected to expand the number of borrowers eligible for a payment cap of 10 percent. In a July 27 speech at the University of Maryland’s Baltimore campus, Secretary of Education Arne Duncan said the plans protect people going into socially valuable but low-paying lines of work from crushing debt. “That’s good for them. That’s good for our economy. It’s good for our society,” he said.

Critics say the plans are a hidden subsidy to well-off students and colleges, which can justify tuition increases by reassuring students that they may not have to repay their debt.

It’s a funny world when I don’t even understand what’s at issue in Google’s European anti-trust problems:

For example, when someone in a European city searched for the best restaurants, nearby dentists, or airplane flights, Google linked to its own maps and other services instead of displaying links to the best content from elsewhere on the Web.
…
On April 15, 2015, Almunia’s successor, Margrethe Vestager, a 47-year-old former finance minister from Denmark, approached the same Berlaymont podium in the same auditorium. “Dominant companies can’t abuse their dominant position to create advantage in related markets,” she said bluntly, formally accusing Google of exploiting its supremacy in general search to dominate the market for online product searches—the equivalent of an indictment, the very move that Almunia had sought to avoid through the private settlement at Davos.

That wasn’t all. Vestager (pronounced Vestayer) announced a new investigation into whether Google had abused its dominant position with the Android operating system for smartphones. She suggested other cases were possible, too—regarding Google’s expansion into the markets for local search, maps, images, travel, etc.

China has devalued the Yuan:

China devalued the yuan by the most in two decades, ending a de facto peg to the dollar that’s been in place since March and battered exports.

The People’s Bank of China cut its daily reference rate for the currency by a record 1.9 percent, triggering the yuan’s biggest one-day loss since China unified official and market exchange rates in January 1994. The change was a one-time adjustment, the central bank said in a statement, adding that it plans to keep the yuan stable at a “reasonable” level and will strengthen the market’s role in determining the fixing.
…
The PBOC had been supporting the yuan to deter capital outflows and encourage greater global usage as China pushes for official reserve status at the International Monetary Fund. The intervention contributed to a $300 billion slide in the nation’s foreign-exchange reserves over the last four quarters and made the yuan the best performer in emerging markets, eroding the competitiveness of Chinese exports.

The currency dropped 1.4 percent to 6.2980 per dollar as of 11:12 a.m. in Shanghai, and slid 1.6 percent in Hong Kong’s offshore trading. The onshore spot rate was 1.1 percent weaker than the reference rate of 6.2298, within the 2 percent limit allowed by the central bank.

It will be interesting to see how China’s neighbors and competitors react!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 4bp, FixedResets gaining 19bp and DeemedRetractibles down 12bp. The good side of the Performance Highlights table is comprised entirely of FixedResets, with a notable ENB contingent. 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:

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TRP.PR.B, which resets 2020-6-30 at +128, is bid at 13.96 to be $0.45 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.67 cheap at its bid price of 14.60.

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Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 24.62 to be 0.45 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.19 to be $0.49 cheap.

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The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 17.95 to be $1.11 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 17.29 and appears to be $1.44 rich.

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FTS.PR.H, with a spread of +145bp, and bid at 16.41, looks $0.43 expensive and resets 2020-6-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 20.13 and is $0.83 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.16%, with one outlier above 1.00%. There is one junk outlier below -1.00%.

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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

Jobs, jobs, jobs!

Employers added 215,000 jobs in July and the unemployment rate held at a seven-year low of 5.3 percent, a Labor Department report showed Friday in Washington. The gain in payrolls last month followed a 231,000 advance in June that was bigger than previously estimated.
…
While the data also showed a pickup in hours worked, average hourly earnings climbed a less-than-forecast 2.1 percent from a year earlier, indicating little momentum in wage growth.

Retail and professional business services led the industries adding to headcounts in July, followed by health care and leisure and hospitality. Manufacturing payrolls rose by the most in six months on gains among non-durable goods producers. More jobs were also added in construction.

The report also showed a jump in full-time employment, while the number of part-time workers declined.
…
The average work week for all employees increased 6 minutes to 34.6 hours. A longer workweek often amounts to greater take-home pay for many employees.

The labor force participation rate, which indicates the share of working-age people who are employed or looking for work, held at 62.6 percent.

Factories boosted payrolls by 15,000, the most since January. The gains were led by more hiring in the non-durables industries, including food, plastics and paper.

Retailers added almost 36,000 workers and employment in the health care and leisure industries each climbed by about 30,000 in July.

We have another hilarious example of the law of unintended consequences:

London’s swankiest neighborhoods of Knightsbridge and Belgravia are becoming no-go areas for even the wealthiest property investors.

They are being driven out by higher sales taxes introduced by Chancellor of the Exchequer George Osborne in December, which rise to as much as 12 percent of the cost of the most expensive homes.

Buying agent Camilla Dell says that her clients are spending an average of 2 million pounds ($3.1 million) less on each transaction this year and they’re more interested in cheaper areas such as Hackney and Shoreditch. That’s because an investor buying a 5 million-pound home pays almost 364,000 pounds more in tax than if they spent the same amount of money on 10 apartments costing 500,000 pounds each.
…
With investors now buying more homes in less expensive districts, prices below Osborne’s threshold are climbing and owner-occupiers, who should have benefited from his tax cuts, are being penalized, Dell said. The tax increases kick in at 937,000 pounds.

“The very buyers Osborne was setting out to help, he’s put at a disadvantage,” she said. “At the same time, sales at the higher end have frozen. It was a very, very bad move.”
…
Investors who buy multiple apartments for about 500,000 pounds in London typically receive a rental yield of 4 percent to 5 percent, compared with about 2 percent for a luxury home in London’s best districts, Morris said.

And, interestingly with respect to Supply Management and the TPP, there is a global oversupply of milk:

Just months after the European Union lifted caps on milk production, there’s too much of it and some farmers are going broke. EU prices have tumbled to a five-year low, compounded by a global surplus and shrinking demand that’s disrupted exports. China is cutting back purchases and Russia, once the largest buyer of EU butter and cheese, halted imports last year in retaliation for sanctions over its conflict with Ukraine.
…
An EU gauge tracking consumer prices for milk, cheese and eggs has dropped 2.1 percent from last year. Retail prices for whole milk in France fell 5.6 percent since last year, according to the latest government data from June.

With prices so low, there’s little incentive for European producers to increase supply, even after EU regulators in April ended a system that had capped production for 30 years. This year, the EU expects output to rise 1 percent to 161.4 million tons.

The removal of quotas marked a change to an open-market system. Before the limits, government purchases of surpluses were intended to aid farmers but instead led to overproduction.
…
The plunge in dairy costs helped push down a gauge of global food prices in July to the lowest since September 2009, the United Nations’ Food & Agriculture Organization said Thursday.

It’s nice to see Rob Ford fairly treated:

DBRS notes that the City’s operating fiscal discipline has improved notably in recent years, with nearly $1.0 billion in ongoing operational savings or efficiencies achieved from 2011 to 2014 through a comprehensive service review process and through negotiated provisions in collective agreements.

There’s more fuss at the SEC about the Pay-Ratio Disclosure Rule discussed August 5, with Piwowar adding to his remarks:

The pay ratio disclosure rulemaking has flaws throughout. I further enumerate a number of those defects below.

I. The Proposing Release did not provide sufficient notice under the Administrative Procedure Act.[2]
…
II. Once the Commission decided what objectives Section 953(b) was intended to accomplish, it failed to publicly disclose such understanding prior to adoption.
…
III. The Commission failed to consider what the quantitative effects of providing flexibility would be on the accuracy of the pay ratio. By not evaluating such quantitative effects, the Commission acted in an arbitrary and capricious manner when it limited the de minimis exclusion of non-U.S. employees to 5%.
…
IV. The Commission acted arbitrarily and capriciously when it defined “employee” to include contract workers only if they are employed by an unaffiliated third party.
…
V. The Commission’s economic analysis failed to consider academic studies as to whether the pay ratio might create pressure to increase CEO compensation.
…
VI. Use of the pay ratio for comparative purposes among companies may violate an investment adviser’s fiduciary duty under the Investment Advisers Act of 1940.[69]
…
VII. Conclusion

I have many objections to the pay ratio disclosure, as set forth in my remarks at the Commission’s open meeting and my comments above. Should the final rule become effective, I have one request for companies. Please keep track of your compliance costs and consider voluntarily disclosing that information alongside your pay ratio. The Commission and others should have an understanding of your actual compliance costs, and voluntary disclosures would make the likely incredibly high costs evident. But even then, be careful; such information must be “clearly identified, not misleading, and not presented with greater prominence than the required ratio.”[76]

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts winning 32bp, FixedResets up 5bp and DeemedRetractibles gaining 2bp. PerpetualDiscounts were notable on the good side of the Performance Highlights table. 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

TRP.PR.B, which resets 2020-6-30 at +128, is bid at 13.90 to be $0.44 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.84 cheap at its bid price of 14.50.

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Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 24.58 to be 0.46 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.09 to be $0.49 cheap.

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The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 18.05 to be $1.16 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 17.30 and appears to be $1.30 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 20.46, looks $0.54 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 19.98 and is $0.84 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.08%, with one outlier above 1.00%. There is one junk outlier below -1.00%.

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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?