October 5, 2012

The US jobs number was OK:

The unemployment rate in the U.S. unexpectedly fell to 7.8 percent in September, the lowest since President Barack Obama took office in January 2009, as employers took on more part-time workers.

The economy added 114,000 workers last month after a revised 142,000 gain in August that was more than initially estimated, Labor Department figures showed today in Washington. The jobless rate dropped from 8.1 percent, and hourly earnings climbed more than forecast.

Unfortunately, it’s being politicized:

Jack Welch, writing on his Twitter account, said the Obama administration manipulated U.S. employment data for political gain by showing a drop in the jobless rate.

“Unbelievable jobs numbers..these Chicago guys will do anything..can’t debate so change numbers,” the former General Electric Co. (GE) chief executive officer said in a message posted immediately after the U.S. Labor Department reported that the unemployment rate fell to 7.8 percent last month, the lowest since President Barack Obama took office in January 2009.

It might be worth having a congressional inquiry into the integrity of the numbers although I suggest that somebody of stature should simply declare ‘show me the evidence or shut up’. The US jobs number much more important than silly old LIBOR. Welch has been challenged, but hasn’t put up:

During a television interview last night, when CNBC host Larry Kudlow said it was unrealistic to allege the White House tampered with the data, Welch tempered his words.

“Let’s hope that’s totally correct, Larry,” Welch said. Still, he said, “This election is too important for one number that might be corrected next month to determine the election. I want to see a real debate about this number.”

David Berman of the Globe points out that inflation numbers are also a favourite bugbear of conspiracy theorists.

Roger Lowenstein, an outside director of the Sequoia Fund, writes an op-ed diatribe against High Frequency Trading in the New York Times titled A Speed Limit for the Stock Market (hat tip: Financial Webring Forum). He starts off by revealing his prejudice:

Some 50 percent to 70 percent of all trading is done by “traders” who live in server parks, are nourished by direct current and speak only in binary pulses.

This can be taken as a slam against computer geeks who didn’t go to the right school and aren’t seen at the charity dinners; or it can just be taken as an implication that nobody thought about the process, nobody wrote the algorithms, nobody’s putting up any capital: HFT was air-dropped on the world by Martian invaders.

He lauds the highly suspect SEC report and links to another article titled In Calls for Market Reform, Multiple Voices which provides just a tiny hint of what really happened in the Flash Crash:

Maureen O’Hara, a professor at Cornell University, said at a conference Wednesday that technological advances had made it cheaper for ordinary investors to buy and sell stocks. But she noted that this progress created problems that industry participants had only started to recognize, like the increased the instability of the market.

Assiduous Readers with good memories will remember Maureen O’Hara: she wants to sell her technical analysis for big bucks, a process that will be facilitated by embedding the concept in regulation.

It seems clear to me that the concepts of “cheaper for ordinary investors to buy and sell stocks” and “instability of the market” have a very large causation component. It was the highly touted retail “Stop-Loss Order”, which continues to be vigorously promoted by the brokerage houses, that turned a sharp decline into a rout in the Flash Crash.

Anyway, back to Lowenstein:

The reason that market squares like me harp on the long term isn’t because we’re technologically illiterate. It’s because, again, society relies on the market to allocate capital. If market signals are based on algorithms that become outmoded in a nanosecond, we end up with empty factories and useless investment.

How much effort do high-speed traders devote to analyzing the future prospects of Apple? Precisely none. Their aim is only to exploit tiny price discrepancies that disappear in milliseconds.

This conjunction of paragraphs is totally devoid in logic. On the one hand, he says that HFT exists to “exploit tiny price discrepencies that disappear in milliseconds” and on the other hand he wants to blame them for misallocation of capital. Make up your mind, Mr. Lowenstein! Are the effects major or minor? How is the success of a new issue related to the HFT activity?

In fact, HFT serves to promote capital formation by speeding the rate at which supply and demand reach equilibrium. Market signals become more accurate, not less so.

Lowenstein concludes with:

But the better way to discourage this excessive, short-term market myopia is to take a page from anti-tobacco efforts: let high taxes discourage the antisocial behavior.

We already encourage long-term investing by taxing capital gains on investments held for more than a year at a rate of just 15 percent — in contrast to short-term capital gains, which are assessed at much higher rates. We could simply fine-tune that incentive even more. Intraday trades should be taxed at 50 percent. And “investments” that mature in 60 seconds should be regarded as, in effect, electronic errors — with any profit going to the government. This will greatly reduce high-speed trading and divert its remaining gains to the public.

If one wished to destroy market liquidity, one would do precisely that. I presume there would be an exemption for highly regulated market makers employed by large brokerages, who would then be free to jack up their spreads, unhindered by computer geeks intent on eating their lunch.

I see that BMO-InvestorLine is now offering Recognia’s Value Analyzer™:

Provided by Recognia, an industry leader in actionable investment research, Value Analyzer is designed to help BMO InvestorLine clients with:
• Becoming more proficient in value investing;
• Validating ideas using value analysis that classifies the value of the stock based on key value investing metrics;
• Gaining access to a list of pre-screened value investment ideas which are updated daily and organized by industry sector; and
• Utilizing value-based investing industry research to monitor favourite stocks and identify undervalued stocks.

This is somewhat different from what their product brief states:

For the on-line broker, Value Analyzer provides daily investment ideas to drive trading volumes. Furthermore, Value Analyzer empowers investors with the confidence to take control of their investments. This in turn enables them to make more trades and enhances their loyalty to the broker and their services.

As is usual, neither company provides any information regarding performance.

I confess to puzzlement regarding DBRS’ upgrade of DPS.UN to STA-2(low):

On August 26, 2010, DBRS assigned a stability rating of STA-3 (high) to the Units issued by the Trust in accordance with the new methodology for rating structured income funds, published in May 2010. The rating was mainly based on the strong credit quality of the Trust’s preferred share portfolio and the limited flexibility of the Administrator to invest in riskier assets. The shortfall in portfolio income relative to the distribution paid out to the Trust’s unitholders is the main constraint to the rating. Other constraints to the rating include the interest rate risk of the Portfolio and the capital losses that may result from underlying securities being called for redemption by their respective issuers.

The current weighted-average yield of the Portfolio is approximately 4.93%. The Trust had previously been making quarterly distributions to the Unitholders equal to $0.30 per unit, yielding 4.80% per annum on the unit issue price of $25, but the Trust announced a change in the distribution rate from $0.30 per unit to $0.25 per share (yielding 4.00% per annum on the Unit issue price of $25) on September 26, 2011, effective with the distribution paid on January 13, 2012. The amount of the distribution and the net asset value (NAV) of the Portfolio may vary in accordance with the credit profile of each of the Portfolio’s underlying securities, prevailing interest rates and rate change expectations, and any losses or gains on rebalancing the Portfolio. As a result of the decreased distribution rate, the Trust’s net income can now cover approximately 93% of the distributions paid out to the unitholders (compared to 78% based on the original distribution rate). The rating of the Units is being upgraded to STA-2 (low) primarily due to the increased distribution coverage ratio, as well as the continued strength in the credit quality and diversification of the Trust’s Portfolio.

According to the DBRS Methodology:

A stability rating provides an opinion on both the stability and sustainability of a structured income fund’s cash distributions per unit. In other words, the rating reflects the fund’s ability to generate sufficient cash to pay out a stable level of distributions on a per unit basis over the longer term.

STA-2 Very good stability and sustainability of distributions per unit

Closed-end funds typically offer unitholders a stated distribution on the unit issue price, which is a crucial component in the marketing of the prospective offering. The stated distribution can typically be changed by the fund manager during the life of the fund for any reason without the approval of unitholders. As a result, analysis of the stability of the stated distribution is a key consideration for potential investors who want to know the likelihood of the manager being able to maintain the distribution over the long term. DBRS provides an independent opinion on the long-term stability of the distribution.

Open-end funds and ETFs normally do not have a stated distribution; net income is paid to investors each payment period. In such cases, a DBRS rating evaluates the general stability of the income paid out by the fund. Regardless of whether a distribution is stated, the same concept of stability is applicable. At any point in time, investors in the fund will want to know the likelihood that the fund’s assets will continue to generate income at historical or greater levels over the long term.

Preferred shares carry a number of features (aside from the credit quality of the company) that affect the stability of the distribution, including retraction ability and the ability of the company to call the shares for redemption, among others. These factors are considered by DBRS in its rating analysis. For example, the ability of a company to redeem a higher-yielding preferred share before the termination date of the fund will be a risk in a low interest rate environment. If a significant portion of the portfolio is exposed to similar risk, it may have a negative impact on the DBRS stability rating assigned to the fund.

DPS.UN reports:

Current monthly distribution of $0.2500 per unit

but a quick check of the recent distributions reveals that it’s actually $0.25 quarterly, or $1.00 p.a. on a NAV of 21.075, or 4.74%. MAPF only manages 4.624% and that’s with a decidedly non-index-like portfolio. DBRS notes that [DPS.UN] Trust’s net income can now cover approximately 93% of the distributions paid out to the unitholders so one may assume that the yield, defined as the Trust’s net income, is 4.41%.

Given a very brief review of the June 30 portfolio highlights, I find it very hard to believe that the yield, defined as the weighted-average YTW of the portfolio, is anywhere close to 4.41%. This suggests a review in PrefLetter

DBRS also updated its report on Innergex, proud issuer of INE.PR.A:

DBRS has today updated the report for Innergex Renewable Energy Inc. (Innergex or the Company), in relation to the rating action on August 9, 2012, when the trends on Innergex’s ratings were changed to Negative from Stable. Going forward, this is an unsolicited rating based on public information.

The trend change reflected a continuing decline in Innergex’s financial risk profile, driven by three main factors: (1) continued growth has put pressure on the balance sheet, due to increasing amounts of capital expenditure; (2) high dividend payouts are expected to continue decreasing Innergex’s equity base, limiting its ability to assume higher debt levels at the holding company level to support its growth strategy; and (3) growth has gradually caused increases in the usage and size of the corporate revolving credit facility, increasing leverage at the holding company level.

Considering Innergex’s business risk profile and the structural protections of non-recourse, project-financing strategy, DBRS views deconsolidated leverage (i.e., debt at the holding company level) of approximately 30% and consolidated leverage of 60% appropriate for maintaining an investment-grade rating. The Company needs to manage its debt-to-capital ratio on both a consolidated and deconsolidated basis in a way that provides the financial flexibility required for growth and consistent execution of project-level borrowing. A lack of material improvement in leverage (both on a consolidated and non-consolidated basis) could warrant a downgrade to the ratings in the near future.

It was a modestly good day for the Canadian preferred share market, with PerpetualPremiums winning 10bp, FixedResets up 6bp and DeemedRetractibles gaining 2bp. Volatility was negligible. Volume was low.

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 -0.2284 % 2,439.8
FixedFloater 4.30 % 3.68 % 34,794 17.89 1 0.4089 % 3,703.5
Floater 3.01 % 3.01 % 54,194 19.73 3 -0.2284 % 2,634.3
OpRet 4.64 % 1.37 % 60,223 0.64 4 -0.3719 % 2,559.0
SplitShare 5.43 % 4.96 % 72,668 4.54 3 0.2515 % 2,826.1
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.3719 % 2,339.9
Perpetual-Premium 5.29 % 2.27 % 91,606 0.38 27 0.1005 % 2,302.0
Perpetual-Discount 4.99 % 4.86 % 54,565 15.51 4 0.3690 % 2,592.0
FixedReset 4.98 % 2.98 % 185,762 3.87 73 0.0562 % 2,437.2
Deemed-Retractible 4.94 % 3.30 % 120,783 1.04 46 0.0212 % 2,378.6
Performance Highlights
Issue Index Change Notes
Maturity Type : Call
Maturity Date : 2013-06-01
Maturity Price : 25.75
Evaluated at bid price : 26.46
Bid-YTW : 1.23 %
Volume Highlights
Issue Index Shares
BAM.PR.X FixedReset 87,223 RBC crossed 82,000 at 25.15.
Maturity Type : Limit Maturity
Maturity Date : 2042-10-05
Maturity Price : 23.22
Evaluated at bid price : 25.13
Bid-YTW : 3.24 %
TD.PR.E FixedReset 63,000 Anonymous sold 25,000 to Scotia at 26.55 and 10,500 to TD at the same price.
Maturity Type : Call
Maturity Date : 2014-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.54
Bid-YTW : 1.95 %
MFC.PR.H FixedReset 48,275 RBC crossed 39,300 at 25.84.
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 25.80
Bid-YTW : 3.88 %
BMO.PR.J Deemed-Retractible 43,582 TD crossed 30,000 at 26.10.
Maturity Type : Call
Maturity Date : 2013-02-25
Maturity Price : 25.75
Evaluated at bid price : 26.05
Bid-YTW : 2.62 %
ENB.PR.P FixedReset 37,248 Recent new issue.
Maturity Type : Limit Maturity
Maturity Date : 2042-10-05
Maturity Price : 23.14
Evaluated at bid price : 25.14
Bid-YTW : 3.70 %
ENB.PR.N FixedReset 34,305 TD crossed 25,000 at 25.36.
Maturity Type : Limit Maturity
Maturity Date : 2042-10-05
Maturity Price : 23.21
Evaluated at bid price : 25.35
Bid-YTW : 3.80 %
There were 22 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
FTS.PR.E OpRet Quote: 26.46 – 26.95
Spot Rate : 0.4900
Average : 0.2783

Maturity Type : Call
Maturity Date : 2013-06-01
Maturity Price : 25.75
Evaluated at bid price : 26.46
Bid-YTW : 1.23 %

PWF.PR.L Perpetual-Premium Quote: 25.40 – 25.75
Spot Rate : 0.3500
Average : 0.2310

Maturity Type : Call
Maturity Date : 2014-10-31
Maturity Price : 25.25
Evaluated at bid price : 25.40
Bid-YTW : 4.59 %

BAM.PR.T FixedReset Quote: 25.15 – 25.58
Spot Rate : 0.4300
Average : 0.3459

Maturity Type : Limit Maturity
Maturity Date : 2042-10-05
Maturity Price : 23.25
Evaluated at bid price : 25.15
Bid-YTW : 3.64 %

PWF.PR.O Perpetual-Premium Quote: 26.36 – 26.63
Spot Rate : 0.2700
Average : 0.1946

Maturity Type : Call
Maturity Date : 2016-10-31
Maturity Price : 25.50
Evaluated at bid price : 26.36
Bid-YTW : 4.69 %

CM.PR.K FixedReset Quote: 26.23 – 26.50
Spot Rate : 0.2700
Average : 0.2014

Maturity Type : Call
Maturity Date : 2014-07-31
Maturity Price : 25.00
Evaluated at bid price : 26.23
Bid-YTW : 2.39 %

PWF.PR.F Perpetual-Premium Quote: 25.03 – 25.25
Spot Rate : 0.2200
Average : 0.1586

Maturity Type : Call
Maturity Date : 2012-11-04
Maturity Price : 25.00
Evaluated at bid price : 25.03
Bid-YTW : -0.76 %

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