October 21, 2010

OSFI’s Jean-Claude Ménard, Chief Actuary, has given a presentation titled Actuarial Valuation of the Canada Pension Plan – Modeling Uncertainty and Properly Disclosing the Results. They’re estimating a real rate of return of 4.2%, but I would have liked to have seen more discussion of the valuation of private equity.

The BoC has released a working paper by Ali Dib titled Banks, Credit Market Frictions, and Business Cycles:

The author proposes a micro-founded framework that incorporates an active banking sector into a dynamic stochastic general-equilibrium model with a financial accelerator. He evaluates the role of the banking sector in the transmission and propagation of the real effects of aggregate shocks, and assesses the importance of financial shocks in U.S. business cycle fluctuations. The banking sector consists of two types of profit maximizing banks that offer different banking services and transact in an interbank market. Loans are produced using interbank borrowing and bank capital subject to a regulatory capital requirement. Banks have monopoly power, set nominal deposit and prime lending rates, choose their leverage ratio and their portfolio composition, and can endogenously default on a fraction of their interbank borrowing. Because it is costly to raise capital to satisfy the regulatory capital requirement, the banking sector attenuates the real effects of financial shocks, reduces macroeconomic volatilities, and helps stabilize the economy. The model also includes two unconventional monetary policies (quantitative and qualitative easing) that reduce the negative impacts of financial crises

Instinet has joined the crowd of SEC Flash Crash conclusion skeptics:

In our opinion, given the facts stated by both the SEC report and the CME, the sell order could not be the singular cause of the crash. However, the interconnection among markets, the order and the method with which it was executed likely served as a catalyst for the reduction in liquidity and the “erroneous” stock trades experienced seconds later.

Had the market been less fragile or the futures algorithm less aggressive, the HFT method of transferring risk into stocks by offsetting futures purchases with SPY sales would have helped absorb this E-mini futures sale and moved liquidity between asset classes.

Without circuit breakers in individual stocks and because the lateness of the day prevented market- wide circuit breakers from triggering, there was nothing to stem the tide of falling equity prices in these order-driven markets.

While we don’t think that the initial E-mini order should be attributed as the singular force creating the sell-off, it is worth noting that the first “lesson learned” cited by the report could be read as a warning against using algorithms that send orders based only on volume without price controls. An algorithm that adjusts its aggressiveness based on price level and/or has a price limit provides an important layer of intelligence and protection. More advanced logic to address message traffic and short term price movements may have allowed detection of the “hot potato” volume situation referenced in the report, where HFTs traded more volume than usual with each other and could have signalled abnormal market conditions. If the algorithms contributing to the problem on May 6th had been more sensitive to market conditions and aware of the type of volume being traded, they would likely not have been so aggressive.

There was a good piece in the Globe by former HSBC economist Dr. David E. Bond titled How dairy farmers milk Canada’s taxpayers:

Canada’s government sanctioned National Dairy Policy offers just such a deal, and results in a wealth transfer of more than $2.4-billion annually from consumers and food processors to diary farmers. That’s more than $175,000 for each dairy farmer.

Because of this policy, consumers pay 60 cents more in Canada than in the United States for a one-litre carton of whole milk and 94 cents more for a pound of butter.

A farmer once started railing against welfare recipients in my hearing … I told him that each farmer costs me as much as half a dozen welfare bums, but my number might have been a little low. I eagerly await the next baffled speech from Spend-Every-Penny (or his lap-dog), wondering why Canadian productivity isn’t any higher.

It was a day of mixed results on continued heavy volume in the Canadian preferred share market today, with PerpetualDiscounts gaining 12bp, while FixedResets lost 12bp. Volatility continued to be relatively low, with only two entries on the performance highlights table.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.0946 % 2,181.9
FixedFloater 0.00 % 0.00 % 0 0.00 0 0.0946 % 3,305.3
Floater 2.87 % 3.19 % 83,594 19.26 3 0.0946 % 2,355.8
OpRet 4.92 % 3.94 % 83,753 0.11 9 -0.1166 % 2,364.7
SplitShare 5.85 % -28.44 % 69,325 0.09 2 0.6086 % 2,407.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1166 % 2,162.3
Perpetual-Premium 5.71 % 5.11 % 143,522 4.82 19 0.0805 % 2,010.0
Perpetual-Discount 5.42 % 5.43 % 243,744 14.70 58 0.1246 % 2,011.5
FixedReset 5.27 % 3.10 % 345,842 3.26 47 -0.1243 % 2,270.5
Performance Highlights
Issue Index Change Notes
BAM.PR.P FixedReset -1.12 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-30
Maturity Price : 25.00
Evaluated at bid price : 27.41
Bid-YTW : 4.47 %
POW.PR.D Perpetual-Discount 1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-21
Maturity Price : 22.94
Evaluated at bid price : 23.15
Bid-YTW : 5.43 %
Volume Highlights
Issue Index Shares
TD.PR.A FixedReset 84,500 TD crossed 17,600 at 26.25; RBC crossed 20,000 at the same price. Then RBC crossed 26,900 at 26.25, while TD crossed 15,000 at the same price again.
Maturity Type : Call
Maturity Date : 2014-03-02
Maturity Price : 25.00
Evaluated at bid price : 26.25
Bid-YTW : 3.30 %
BMO.PR.P FixedReset 66,153 Scotia crossed 32,200 at 27.72, then sold 15,500 to RBC at the same price.
Maturity Type : Call
Maturity Date : 2015-03-27
Maturity Price : 25.00
Evaluated at bid price : 27.70
Bid-YTW : 2.94 %
RY.PR.E Perpetual-Discount 61,410 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-21
Maturity Price : 22.01
Evaluated at bid price : 22.13
Bid-YTW : 5.16 %
TD.PR.E FixedReset 46,535 TD crossed 37,600 at 27.75.
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 27.78
Bid-YTW : 2.95 %
CM.PR.I Perpetual-Discount 42,866 TD crossed 11,000 at 22.38.
Maturity Type : Limit Maturity
Maturity Date : 2040-10-21
Maturity Price : 22.21
Evaluated at bid price : 22.35
Bid-YTW : 5.27 %
BAM.PR.N Perpetual-Discount 42,415 CIBC crossed 25,000 at 20.50.
Maturity Type : Limit Maturity
Maturity Date : 2040-10-21
Maturity Price : 20.39
Evaluated at bid price : 20.39
Bid-YTW : 5.89 %
There were 45 other index-included issues trading in excess of 10,000 shares.

Leave a Reply

You must be logged in to post a comment.