July 17, 2013

Bernanke used his Monetary Policy Report to clarify his ‘tapering’ comments:

I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course. On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly. On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions–which have tightened recently–were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer. Indeed, if needed, the Committee would be prepared to employ all of its tools, including an increase the pace of purchases for a time, to promote a return to maximum employment in a context of price stability.

Industrial Alliance is buying a conglomerator:

Consistent with its strategy to beef up its asset management arm, insurer Industrial Alliance is scooping up Jovian Capital, a holding company that owns stakes in a number of small asset managers, for $94-million. The deal adds roughly $7-billion of assets to the insurer’s existing $45-billion portfolio.

At first glance, Jovian may seem like a bit of an odd choice. The company hasn’t produced positive cash flow in the past few years, and it posted a $7.5-million loss from continuing operations in 2012.

Plus, last year some shareholders were outraged after Jovian’s management team cut themselves a $12-million compensation cheque amidst the weak performance. Shareholders wanted this cash for themselves.

Jovian is the sponsor of Jov Leon Frazer Preferred Equity fund, which has struggled since inception.

The Bank of Canada is maintaining the overnight rate at 1%:

Inflation has been low in recent months and is expected to remain subdued in the near term. The weakness in core inflation reflects persistent material excess capacity, heightened competitive pressures on retailers, relatively subdued wage increases, and some temporary sector-specific factors. Total CPI inflation has also been restrained by declining mortgage interest costs. As the economy gradually returns to full capacity and with inflation expectations well-anchored, both core and total CPI inflation are expected to return to 2 per cent around mid-2015.

Against this backdrop, the Bank has decided to maintain the target for the overnight rate at 1 per cent. As long as there is significant slack in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to evolve constructively, the considerable monetary policy stimulus currently in place will remain appropriate. Over time, as the normalization of these conditions unfolds, a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2 per cent inflation target.

TransAlta is taking drastic action:

TransAlta Corp., the worst-performing power generation stock in North America the past year, is betting a spinoff of its wind and hydroelectric power plants will increase the company’s value and help reverse two years of losses.

Canada’s largest publicly traded electricity generator gained 9.7 percent since the company said on June 26 it plans an initial public offering of some renewable energy assets. TransAlta has expanded its wind and hydro power capacity to about 25 percent from 15 percent in 2008 with developments in eastern Canada and parts of the U.S., even as power prices in its main markets of Alberta and Washington State declined.

“Investors are willing to pay more for renewables,” Jeremy Rosenfield, an analyst at Dejardins Capital Markets in Montreal, said by phone July 4.

The spinoff could help boost TransAlta’s shares to C$15.50 from C$14.54 at 4:05 p.m. in Toronto today, said Benjamin Pham, a BMO Capital Markets analyst, in a June 27 note. TransAlta’s renewable portfolio has been undervalued for years, he said.

“The structure of the spinoff is designed to permit TransAlta to retain control of its renewable energy fleet while unlocking value to the benefit of shareholders and to accelerate development and acquisition opportunities,” he said.

TransAlta is expected to raise C$200 million ($190 million) to C$250 million in the IPO when it closes in August, the company said in a statement. It will retain an 80 percent to 85 percent stake in the unit.

It hasn’t done their preferreds much good – TA.PR.D, TA.PR.F and TA.PR.H got whacked today. I have no idea why.

It looks like Parakeet Poluz has been given his script:

Stephen Poloz has spelled out what he expects to see from the economy before the Bank of Canada hikes interest rates, and the timeline appears to be a long one.

The new central bank governor sees holding the benchmark overnight rate at its current low level as long as there is significant excess capacity in the economy, the outlook for inflation remains muted, and households continue to get a better handle on their personal debts.

Also, the Conservatives have to get re-elected. That’s very important.

Interesting piece on the decline of the work ethic:

“Absenteeism is often explained around levels in workplace stress,” says Wolfgang Lehmann, a professor of sociology at the University of Western Ontario.

He partly attributes the rise in absenteeism, which has increased from 8 days lost per worker in 2000 to 9.3 days in 2011, to the stressful impact of layoffs, as well as the strain of caring for both children and elderly parents.

But that’s only part of a complex web of factors, and while it might seem obvious that sunny skies tempt workers to shirk their duties, it’s just another small piece of a puzzle that includes an employee’s gender, education level, and personal happiness.

Regardless of occupation or demographics, two factors that drive absenteeism are good benefits and bad management, according to Howard Seiden, an expert on workplace absenteeism at the University of Toronto.

“It’s not just a gender thing, or an age thing – it’s an unhappiness thing,” Dr. Seiden says. “People who aren’t happy and don’t like their jobs look for reasons not to come to work.”

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts up 23bp, FixedResets off 4bp and DeemedRetractibles down 9bp. Volatility was average – CU issues did well. Volume was high.

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

Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)
Median
YTW
Median
Average
Trading
Value
Median
Mod Dur
(YTW)
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 0.0647 % 2,583.0
FixedFloater 4.19 % 3.48 % 39,412 18.44 1 0.1769 % 3,959.1
Floater 2.72 % 2.91 % 89,085 19.96 4 0.0647 % 2,788.9
OpRet 4.59 % 0.89 % 73,082 0.69 3 0.4097 % 2,628.1
SplitShare 4.66 % 4.40 % 61,243 3.93 6 0.0860 % 2,973.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.4097 % 2,403.1
Perpetual-Premium 5.60 % 4.45 % 99,746 0.77 12 -0.1417 % 2,290.3
Perpetual-Discount 5.31 % 5.30 % 138,701 14.84 26 0.2278 % 2,423.5
FixedReset 4.96 % 3.52 % 237,115 3.62 83 -0.0357 % 2,482.3
Deemed-Retractible 5.04 % 4.48 % 189,468 6.90 43 -0.0852 % 2,391.6
Performance Highlights
Issue Index Change Notes
ELF.PR.H Perpetual-Premium -1.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-07-17
Maturity Price : 24.49
Evaluated at bid price : 24.90
Bid-YTW : 5.54 %
TRP.PR.B FixedReset -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-07-17
Maturity Price : 22.94
Evaluated at bid price : 23.29
Bid-YTW : 3.31 %
CU.PR.F Perpetual-Discount 1.71 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-07-17
Maturity Price : 22.86
Evaluated at bid price : 23.25
Bid-YTW : 4.88 %
CIU.PR.A Perpetual-Discount 1.73 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-07-17
Maturity Price : 22.61
Evaluated at bid price : 22.91
Bid-YTW : 5.07 %
CU.PR.G Perpetual-Discount 2.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-07-17
Maturity Price : 23.05
Evaluated at bid price : 23.46
Bid-YTW : 4.85 %
Volume Highlights
Issue Index Shares
Traded
Notes
BAM.PR.R FixedReset 203,755 Added to TXPR.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-07-17
Maturity Price : 23.71
Evaluated at bid price : 26.05
Bid-YTW : 3.92 %
BNS.PR.P FixedReset 176,332 It’s Strong Pair, BNS.PR.A, was added to TXPR, but it’s difficult to rationalize causation.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-04-25
Maturity Price : 25.00
Evaluated at bid price : 24.64
Bid-YTW : 3.66 %
BAM.PR.M Perpetual-Discount 111,870 Added to TXPR.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-07-17
Maturity Price : 22.08
Evaluated at bid price : 22.08
Bid-YTW : 5.43 %
SLF.PR.I FixedReset 82,590 Scotia crossed blocks of 36,000 and 25,000, both at 25.65.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.62
Bid-YTW : 3.56 %
TD.PR.P Deemed-Retractible 81,378 Added to TXPR.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-08-16
Maturity Price : 26.00
Evaluated at bid price : 26.06
Bid-YTW : -0.12 %
CM.PR.M FixedReset 76,209 Added to TXPR.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-31
Maturity Price : 25.00
Evaluated at bid price : 26.04
Bid-YTW : 2.22 %
There were 56 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
TRI.PR.B Floater Quote: 23.50 – 24.50
Spot Rate : 1.0000
Average : 0.6312

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-07-17
Maturity Price : 23.20
Evaluated at bid price : 23.50
Bid-YTW : 2.21 %

GWO.PR.R Deemed-Retractible Quote: 23.97 – 24.28
Spot Rate : 0.3100
Average : 0.1881

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.97
Bid-YTW : 5.34 %

BNS.PR.O Deemed-Retractible Quote: 25.76 – 26.14
Spot Rate : 0.3800
Average : 0.2752

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-04-26
Maturity Price : 25.00
Evaluated at bid price : 25.76
Bid-YTW : 4.67 %

FTS.PR.E OpRet Quote: 25.90 – 26.30
Spot Rate : 0.4000
Average : 0.3241

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-01
Maturity Price : 25.50
Evaluated at bid price : 25.90
Bid-YTW : 3.71 %

CIU.PR.C FixedReset Quote: 24.36 – 24.87
Spot Rate : 0.5100
Average : 0.4409

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-07-17
Maturity Price : 23.15
Evaluated at bid price : 24.36
Bid-YTW : 3.20 %

IAG.PR.F Deemed-Retractible Quote: 25.80 – 26.09
Spot Rate : 0.2900
Average : 0.2288

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2019-03-31
Maturity Price : 25.00
Evaluated at bid price : 25.80
Bid-YTW : 5.34 %

7 Responses to “July 17, 2013”

  1. nervousone says:

    Good afternoon!

    I’ve moved this comment from the previous thread only because my finger’s getting sore from scrolling down there all the time! Here’s your summary then:

    “i) Determine your portfolio objectives and
    ii) Select an asset allocation that has the best probability to achieve those objectives, based on the long-term characteristics of those assets, while
    iii) covering off as many of the downside risks as you can.”

    I know that investors who continually focus on market timing makes you crazy (so I’ll save the possible argument in support of market timing . . . for now!). I will add that your first two items are pretty sound; the third one is a killer, though.

    The unfortunate thing about downside risks these days is that so many of them are totally media-created, generally irrelevant, and always panic-inducing & short-seller stimulating. For example, will the possibility of tapering in October 2013 vs. February 2014 affect Bank of Montreal’s quarterly profit estimate? Not a bit, but if Bernanke steps up to the mike, and makes a comment along those lines, BMO (and pretty much every other equity issue of size) loses a couple percentage points instantly. Bonds and most commodities will tank as well. You mention above that TA’s prefs are under pressure . . . I suspect that, on a daily basis, many prefs are slipping simply because of “pre-mature tapering fear” parranoia.

    Beyond that, these media items always come out of left field, and cannot possibly be predicted. So I guess you’re right after all . . . how can you time the market, if you cannot time media blasts, Bernanke speeches, or “geo-political events”?!

  2. jiHymas says:

    I’ve moved this comment from the previous thread only because my finger’s getting sore from scrolling down there all the time!

    nervousone is referring to the comments on July 10.

    The unfortunate thing about downside risks these days is that so many of them are totally media-created, generally irrelevant, and always panic-inducing & short-seller stimulating.

    This would be an example of pricing risk. Pricing risk is not a big issue for an investor with a long-term outlook, but can be a factor in the asset allocation decision making process.

    Suppose, for instance, that an investor is basically saving for retirement twenty years hence, but also may want to buy a house some time in the short term. Pricing risk is not a worry for the retirement savings part, so the indicated asset class for that chunk is equities. However, pricing risk is a worry if he wants to take out $200,000 for his down-payment, so the indicated asset class for that chunk is short-term bonds.

    This is, of course, a highly simplified example, but that’s the general idea.

  3. nervousone says:

    Very well, good basic investing 101 . . . but say, for example the investor in your example took out a proportionate position (in his retirement portfolio) in gold earlier this year when the price was in the $1600 range . . . in two trading days after some concentrated media-induced end of the world chatter, that went into the $1400’s, and then after a follow-up ben bernanke babble barrage, it went down into the $1200’s where it’s resided ever since.

    Then the “professionals” step in with assorted predictions of gold going below $1000/oz in the near future, and any recovery in this commodity has just moved from mid-term to long-term, to maybe not. Pricing risk has just become a very real worry even for the long-term retirement savings part of the portfolio. Any Canadian-based gold stock the investor bought pre-calamity has now lost 25 – 50% of its value, give or take, and he may never get it back above water.

    James, what I’m saying here, is that pricing risk is no longer a temporary kind of thing. “Buy and hold” was once a good strategy to iron out the rough spots, but I think, if you’re not willing to at least consider “market timing” in the investment decision-making process, any investor, amateur or professional, is now capable of inflicting fatal wounds with very little effort or fault of his own.

    This is the part of the market that I believe is the most noticeably different now vs. ten years ago. Industry commentators, participants like Bernanke and his army of regional fed presidents, political incompetents, and the media in general are no longer reporting financial reality, they are actually creating it.

  4. jiHymas says:

    . Any Canadian-based gold stock the investor bought pre-calamity has now lost 25 – 50% of its value, give or take, and he may never get it back above water.

    Yep, that’s too bad; but part of investing is that some investments are not going to work out; some, in fact, will fail badly.

    And anybody who placed his entire portfolio on a single bet and saw it go bad doesn’t really get any more of my sympathy than a guy who mortgaged his house to put his whole wad on 23-Red in Vegas roulette.

    James, what I’m saying here, is that pricing risk is no longer a temporary kind of thing.

    Then you are wrong.

    Pricing risk is defined as a temporary kind of thing.

    What you are talking about is Long-Term Return Estimation Risk.

    I think, if you’re not willing to at least consider “market timing” in the investment decision-making process, any investor, amateur or professional, is now capable of inflicting fatal wounds with very little effort or fault of his own.

    The whole point of a rational investment plan is to reduce the potential for incurring fatal wounds The bigger your portfolio, the more downside risks you can address. Anybody who incurs a fatal wound is an idiot.

    If you think you can time the markets, go ahead. You don’t need my permission. I can’t stop you. I’ll tell you though, your long terms returns will probably suffer due to a high frequency of incurring transaction costs, and may become disastrous if you guess wrong. But there is some chance that you’ll get it right often enough that in twenty years you’ll be coming back here and telling me what a genius you are. Good luck!

  5. nervousone says:

    If I don’t “guess wrong”, and the “chance that I get it right often enough” goes in my favour, then in twenty years, I suppose I could admit to being lucky, more than being a genius! Also, a true genius would be smart enough to avoid making such a self-declaration, so I guess I will never put that label on myself under any circumstances!

    Anyway, I suppose the points you make are good ones. There’s no question that high frequency trading incurs transaction costs, not to mention potential swings in blood pressure.

    Do you at least agree with what I’ve said about artificial hype becoming a major factor in the markets? Investing for the long term, or frantically trying to time the markets, . . . this item really seems to have grown legs in recent times.

    Have a great weekend!

  6. jiHymas says:

    Do you at least agree with what I’ve said about artificial hype becoming a major factor in the markets? Investing for the long term, or frantically trying to time the markets, . . . this item really seems to have grown legs in recent times.

    There’s no question but that the democratization of the capital markets – in which everybody and his brother now owns shares – has led to more noise. 52% of Americans own equities, down from the peak of 65% in 2007 and in the low teens in the postwar era.

    This has turned investment advice from a high-end service into a consumer good, with all the fads and fashions this change brings. Every professional has to differentiate himself and many will say bizarre things just to get noticed.

    And, of course, the internet means that anybody can add his voice to the chorus – no need even to get past a reporter, you can self-publish your musings in a professional-looking format.

    I think it’s wonderful! More volatility means more opportunity to apply a long-term investment philosophy to short term stupid prices.

  7. nervousone says:

    Spot on as always! . . . No question, the bar chart jumps in perfect sync with the dawn of popularity of the “mutual fund”. The article you reference does not split out investors who own shares directly, as opposed to holdings in funds, pension vehicles, etc. I would guess once those vehicles are removed, the number of actual shareholders is back to the small numbers. But your analysis is quite clear, and unquestionable.

    I’m actually going beyond the “investment advisor” kind of noise with my concern. Think back on the Lehman thing, then the Greece thing, then the Fiscal Cliff thing, then China, then Tapering . . . etc, etc. Each of these were at their own media-defined window of relevance the only item of investment concern that mattered. And the markets traded on nothing but the hype specific to those items. Fundamentals of a particular company became a secondary story to the macro story of the day . . . and the company’s stock traded solely on the macro story. Even prefs, if you go back to the immediate post-Lehman era got tanked mainly because of the media-induced fear that all financial institutions were unstable. Remember all those bank prefs trading in the $15 – $18 range. Heck, I remember getting into some National Bank and Laurentian prefs in the $13 – $14 range.

    Don’t say it . . . “More volatility means more opportunity to apply a long-term investment philosophy to short term stupid prices.” . . . I hear you loud and clear on that, but it still amazes me how the market insists on trading on totally irrelevant issues!

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