Category: Market Action

There’s a couple of preferred share lawsuits brewing:

Both client groups allege that throughout 2017 and the first half of 2018, Mr. Liu recommended a new investment strategy that “assured safety” of their principal and provided “reasonable” investment returns.

Shortly after, clients allege they were instead placed in a high-risk strategy that involved short-selling bonds – particularly Canadian government bonds – to purchase long positions in preferred shares, many of which had variable rates or rates that reset based on interest rate movement.

According to court documents, Mr. Liu further advised the clients to begin trading on margin – investing using borrowed money – in order to purchase a larger amount of preferred shares. In some instances, clients allege Mr. Liu engaged in this strategy without informing them or seeking their permission.

None of the clients were told it was “a high-risk, speculative strategy” that was inconsistent with their low-risk investment objectives, the suit alleges.

Shorting governments is similar in investment characteristics to taking a mortgage … see this comment and my answer which refers back to this old comment and my answer. One of the risks I didn’t mention was price risk – the risk that the market values of the two sides of the position could move against you. Unless something else goes wrong, this shouldn’t hurt a long-term investor … but what were the investors in this strategy told?

Eventually, we get down to the same old question: just what the hell does “risk” mean, anyway?

A bit more on the pandemic recovery:

One of the biggest, and perhaps unsurprising, divides is that of income. Lower-paid workers lost more jobs and more hours of work than those with higher pay, partly a reflection of the lockdown of the lower-wage services sector and the ability of higher paid professionals to work from home.

But the magnitude of that divide is revealing. For workers earning around minimum wage, paid $14 an hour or less, 23 per cent either lost their job by August or saw their hours cut by more than half. Workers in the middle of the wage scale, with an hourly rate between $25 and $28, fared better, with just 7 per cent unemployed or losing more than half of their hours.

But for the highest paid workers, the recession had come and gone by August. The top two income categories, those earning between $40 and $48 an hour, and more than $48, did experience a loss of jobs and hours worked in the early days of the pandemic. But they quickly rebounded from those relatively small losses, as the chart below indicates. For those earning $48 an hour or more, 4 per cent more were employed or worked more than in February, before the pandemic shut down the economy.

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TXPR closed at 579.36, down 0.85% on the day. Volume today was 2.88-million, very high in the context of the past thirty days.

CPD closed at 11.55, down 0.69% on the day. Volume was 50,155, below the median of the past 30 trading days.

ZPR closed at 9.12, down 0.76% on the day. Volume of 221,471 was near the median of the past 30 trading days.

Five-year Canada yields were down 2bp to 0.36% today.

Bank of Canada Governor Tiff Macklem has had some things to say:

In text prepared for a speech delivered via video-conference Thursday, Mr. Macklem said that the nature of the pandemic, and the close-contact sectors of the economy that remain the most strained, have meant disproportionate job losses for women, young Canadians and low-income workers, despite the strong rebound in employment since broad virus-containment measures were lifted.

While the federal government’s Canadian Emergency Response Benefit has done a good job replacing the lost incomes for these most-affected groups, he said, the risk is that many of these workers will suffer permanent job losses. That, he said, would not only hurt these individuals, but would threaten to weigh down the economy more generally.

CIBC finally got its press release announcing its LRCN issue out the door:

CIBC (TSX: CM) (NYSE: CM) today announced an offering of $750 million of 4.375% Limited Recourse Capital Notes Series 1 (Non-Viability Contingent Capital (NVCC)) (Subordinated Indebtedness) (the “LRCNs”). The LRCNs will be sold through a dealer syndicate led by CIBC Capital Markets.

The LRCNs will bear interest at a rate of 4.375% annually, payable semi-annually, for the initial period ending on, but excluding, October 28, 2025. Thereafter, the interest rate on the LRCNs will reset every five years at a rate equal to the prevailing 5-year Government of Canada Yield plus 4.000%. The LRCNs will mature on October 28, 2080. The expected closing date of the offering is September 16, 2020.

In connection with the issuance of the LRCNs, CIBC will issue Non-Cumulative 5-Year Fixed Rate Reset Class A Preferred Shares Series 53 (Non-Viability Contingent Capital (NVCC)) (the “Series 53 Shares”) to be held by Computershare Trust Company of Canada as trustee of a newly formed trust (the “Limited Recourse Trust”). In case of non-payment of interest on or principal of the LRCNs when due, the recourse of each LRCN holder will be limited to that holder’s proportionate share of the Limited Recourse Trust’s assets, which will consist of Series 53 Shares except in limited circumstances.

CIBC may redeem the LRCNs during the period from September 28 to and including October 28, commencing in 2025 and every five years thereafter with the prior written approval of the Superintendent of Financial Institutions (Canada), in whole or in part on not less than 15 nor more than 60 days’ prior notice.

The net proceeds from this transaction will be used for general banking purposes of CIBC.

The Bank of Canada maintained its policy rates:

The Bank of Canada today maintained its target for the overnight rate at the effective lower bound of ¼ percent. The Bank Rate is correspondingly ½ percent and the deposit rate is ¼ percent. The Bank is also continuing its quantitative easing (QE) program, with large-scale asset purchases of at least $5 billion per week of Government of Canada bonds.

Both the global and Canadian economies are evolving broadly in line with the scenario in the July Monetary Policy Report (MPR), with activity bouncing back as countries lift containment measures. The Bank continues to expect this strong reopening phase to be followed by a protracted and uneven recuperation phase, which will be heavily reliant on policy support. The pace of the recovery remains highly dependent on the path of the COVID-19 pandemic and the evolution of social distancing measures required to contain its spread.

The rebound in the United States has been stronger than expected, while economic performance among emerging markets has been more mixed. Global financial conditions have remained accommodative. Although prices for some commodities have firmed, oil prices remain weak.

In Canada, real GDP fell by 11.5 percent (39 percent annualized) in the second quarter, resulting in a decline of just over 13 percent in the first half of the year, largely in line with the Bank’s July MPR central scenario. All components of aggregate demand weakened, as expected.

As the economy reopens, the bounce-back in activity in the third quarter looks to be faster than anticipated in July. Economic activity has been supported by government programs to replace incomes and subsidize wages. Core funding markets are functioning well, and this has led to a decline in the use of the Bank’s short-term liquidity programs. Monetary policy is working to support household spending and business investment by making borrowing more affordable.

Household spending rebounded sharply over the summer, with stronger-than-expected goods consumption and housing activity largely reflecting pent-up demand. There has also been a large but uneven rebound in employment. Exports are recovering in response to strengthening foreign demand, but are still well below pre-pandemic levels. Business confidence and investment remain subdued. While recent data during the reopening phase is encouraging, the Bank continues to expect the recuperation phase to be slow and choppy as the economy copes with ongoing uncertainty and structural challenges.

CPI inflation is close to zero, with downward pressure from energy prices and travel services, and is expected to remain well below target in the near term. Measures of core inflation are between 1.3 percent and 1.9 percent, reflecting the large degree of economic slack, with the core measure most influenced by services prices showing the weakest growth.

As the economy moves from reopening to recuperation, it will continue to require extraordinary monetary policy support. The Governing Council will hold the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. To reinforce this commitment and keep interest rates low across the yield curve, the Bank is continuing its large-scale asset purchase program at the current pace. This QE program will continue until the recovery is well underway and will be calibrated to provide the monetary policy stimulus needed to support the recovery and achieve the inflation objective.

BMO finally announced its LRCN issue which was discussed here yesterday:

Bank of Montreal (TSX:BMO, NYSE:BMO or the “Bank”) today announced the offering of C$1.25 billion of non-viability contingent capital (“NVCC”) Additional Tier 1 (AT1) Limited Recourse Capital Notes, Series 1 (the “LRCNs”).

The LRCNs will bear interest at a rate of 4.300 per cent annually, payable semi-annually, for the initial period ending November 26, 2025. Thereafter, the interest rate on the LRCNs will reset every five years at a rate equal to the prevailing 5-year Government of Canada Yield plus 3.938 per cent. The LRCNs will mature on November 26, 2080. The expected closing date of the offering is September 16, 2020.

Concurrently with the issuance of the LRCNs, the Bank will issue NVCC Non-Cumulative 5-Year Fixed Rate Reset First Preferred Shares, Series 48 (“Preferred Shares Series 48”) to be held by Computershare Trust Company of Canada as trustee for a newly formed trust (the “Limited Recourse Trust”). In case of non-payment of interest on or principal of the LRCNs when due, the recourse of each LRCN holder will be limited to that holder’s proportionate share of the Limited Recourse Trust’s assets, which will consist of Preferred Shares Series 48 except in limited circumstances.

The Notes may be redeemed at the option of the Bank, with the prior written approval of the Superintendent of Financial Institutions (Canada), in whole or in part, on not less than 15 nor more than 60 days’ prior notice, every five years during the period from October 26 to and including November 26, commencing in 2025.

Net proceeds from this transaction will be used for general banking purposes.

DBRS rated a CIBC LRCN Issue at BBB(high):

DBRS Limited (DBRS Morningstar) assigned a provisional rating of BBB (high) with a Stable trend to Canadian Imperial Bank of Commerce’s (CIBC or the Bank) NVCC Additional Tier 1 (AT1) Limited Recourse Capital Notes Series 1 (the Capital Notes). DBRS Morningstar assigned the rating equal to the Bank’s Intrinsic Assessment of AA (low) less four rating notches, which is consistent with DBRS Morningstar’s standard notching for capital instruments with contingent risks and its ratings for the Bank’s NVCC Preferred Shares. This is one notch below the rating of CIBC’s NVCC Subordinated Debt.

DBRS Morningstar notes that the Capital Notes were granted Tier 1 capital treatment by the Office of the Superintendent of Financial Institutions.

… while S&P rates them at BB+:

S&P Global Ratings today said it assigned its ‘BB+’ issue-level rating to Canadian Imperial Bank of Commerce’s (CIBC; A+/Stable/A-1) Canadian dollar-denominated Additional Tier I Limited Recourse Capital Notes. Under this structure, a trust has been established where the bank is the sole beneficiary. Investors of the notes will have recourse only to the assets held by the trust. At the same time, S&P Global Ratings assigned its ‘BB+’ issue-level rating to the bank’s preferred shares, which will reside in the trust.

In accordance with our criteria for hybrid and other capital instruments, the rating reflects our analysis of the proposed instrument, and our assessment of CIBC ‘a-‘ stand-alone credit profile (SACP).

And the National Bank issue announced September 1 (discussed September 2) has closed and its DBRS rating has finalized.

PerpetualDiscounts now yield 5.33%, equivalent to 6.93% interest at the standard equivalency factor of 1.3x. Long corporates now yield 2.97%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed sharply to 395bp from the 415bp reported September 2.

DBRS has assigned a provisional rating of BBB(high) to a new issue of BMO LRCNs:

DBRS Limited (DBRS Morningstar) assigned a provisional rating of BBB (high) with a Stable trend to Bank of Montreal’s (BMO or the Bank) NVCC Additional Tier 1 (AT1) Limited Recourse Capital Notes Series 1 (the Capital Notes). DBRS Morningstar assigned the rating equal to the Bank’s Intrinsic Assessment of AA (low) less four rating notches, which is consistent with DBRS Morningstar’s standard notching for capital instruments with contingent risks and its ratings for the Bank’s NVCC Preferred Shares. This is one notch below the rating of BMO’s NVCC Subordinated Debt.

DBRS Morningstar notes that the Office of the Superintendent of Financial Institutions granted Tier 1 capital treatment to the Capital Notes.

While S&P has them at BBB-:

S&P Global Ratings today said it assigned its ‘BBB-‘ issue-level rating to Bank of Montreal’s (BMO; A+/Stable/A-1) Canadian dollar-denominated Additional Tier I Structure Limited Recourse Capital Notes. Under this structure, a trust has been established where the bank is the sole beneficiary. Investors of the notes will have recourse only to the assets held by the trust. At the same time, S&P Global Ratings assigned its ‘BBB-‘ issue-level rating to the bank’s preferred shares, which will reside in the trust.

In accordance with our criteria for hybrid and other capital instruments, the rating reflects our analysis of the proposed instrument, and our assessment of BMO’s ‘a’ stand-alone credit profile (SACP).

I have not been able to find a press release announcing the new issue.

But Canadians sure are saving!

But the ones who may end up doing the most good for our economy are the people who added a stunning $127-billion to savings and chequing accounts and term deposits in the first half of the year.
…
Investor Economics, which provided the $127-billion figure, says the average amount of money flowing into savings, chequing and GIC accounts averaged $32-billion for the first half of 2017, 2018 and 2019. Those flows were considered to be fairly high until the pandemic scared people into maximizing their savings. “This year’s number is beyond anything we have seen,” Mr. Cardone said.

Another take on this trend comes from Statistics Canada, which tracks our national savings rate and has its eye on the pile of cash accumulated this year. The percentage of after-tax income going into savings has jumped from just 2 per cent to 3 per cent prepandemic to 28.2 per cent from April through June.

Jobs, jobs, jobs!

Canada added 245,800 jobs in August, a weaker pace than in previous months and a sign that hiring plans are shifting into a new phase.

The unemployment rate declined to 10.2 per cent from July’s 10.9 per cent, Statistics Canada said on Friday. With August’s gains, the labour market has now recouped about 64 per cent of the three million positions that were lost between February and April, when the COVID-19 pandemic forced widespread shutdowns to slow virus transmission.

The labour market added 953,000 jobs in June and 419,000 in July.
…
The August report continued to highlight disparities. Employment for low-wage employees (those who earned less than $16.03 an hour, or two-thirds of the 2019 median wage) stands at 87.4 per cent of pre-COVID levels. For all other employees, the recovery is nearly complete, with employment at 99.1 per cent of where it stood before the pandemic.

Statscan noted that nearly one-third of Southeast Asian and one-quarter of Black Canadians were in the low-wage bracket, compared with 15.9 per cent for the white population.
…
For a third consecutive month, employment rose by more for women (150,000) than men (96,000). That said, women suffered deeper job losses as the pandemic hit. As a result, employment for women aged 25 to 54 is down 4.4 per cent since February, compared to a 3.4-per-cent drop among men in the same age group.

So we have a new letter to worry about:

Worries of a K-shaped recovery are growing in the alphabet-obsessed economics profession. That would entail continued growth, but split sharply between industries and economic groups.

It’s a scenario where big-box retail and Wall Street banks benefit and mom-and-pop shops and restaurants and other service profession workers lag. Though not readily visible in GDP numbers for the next several quarters that will look gaudy in historical terms, the uneven benefits of the recovery pose longer-term risks for the national economic health.

Uh-huh. And guess which group makes the decisions about stimulus spending!

Meanwhile down south:

Employers continued to bring back furloughed workers last month, but at a far slower pace than in the spring, and millions of Americans remain out of work.

The U.S. economy added 1.4 million jobs in August, the Labor Department said Friday, down from 1.7 million in July and down sharply from the 4.8 million added in June. Payrolls are still more than 11 million jobs below their pre-pandemic level.

The unemployment rate fell to 8.4 percent, down significantly from 14.7 percent in April and 10.2 percent in July.

National Bank of Canada is issuing LRCNs:

it has entered into an agreement with a group of agents led by National Bank Financial Inc. for the issuance of $500 million of Limited Recourse Capital Notes, Series 1 (Non-viability Contingent Capital (NVCC)) (Subordinated Indebtedness) (the “Notes”).

The Notes will bear interest at a rate of 4.300% annually, payable semi-annually, for the initial period ending on but excluding November 15, 2025. Thereafter, the interest rate on the Notes will reset every five years at a rate equal to the prevailing 5-year Government of Canada Yield plus 3.943%. The Notes will mature on November 15, 2080.

Concurrently with the issuance of the Notes, National Bank will issue Non-Cumulative 5-Year Fixed Rate Reset First Preferred Shares, Series 44 (non-viability contingent capital (NVCC)) (the “Series 44 Preferred Shares”) to be held by Computershare Trust Company of Canada as trustee for a newly-formed trust (the “Limited Recourse Trust”). In case of non-payment of interest on or principal of the Notes when due, the recourse of each Note holder will be limited to that holder’s proportionate share of the Limited Recourse Trust’s assets, which will consist of Series 44 Preferred Shares except in limited circumstances.

National Bank may redeem the Notes during the period from October 15 to and including November 15, commencing in 2025 and every five years thereafter, only upon the redemption by National Bank of the Series 44 Preferred Shares held in the Limited Recourse Trust, in accordance with the terms of such shares and with the prior written approval of the Superintendent of Financial Institutions (Canada) (the “Superintendent”), in whole on not less than 15 nor more than 60 days’ prior notice.

The purpose of the sale of the Notes is to enlarge National Bank’s Tier 1 capital base with a view to optimizing National Bank’s capital structure within the parameters prescribed by the Superintendent for bank capital requirements. The net proceeds from the sale of the Notes will be added to National Bank’s general funds and will be utilized for general banking purposes. The expected closing date is on or about September 9, 2020. National Bank intends to file in Canada a prospectus supplement to its August 17, 2020 base shelf prospectus in respect of this issue.

This issue is rated BBB by DBRS:

DBRS Limited (DBRS Morningstar) assigned a provisional rating of BBB with a Stable trend to the National Bank of Canada’s (National or the Bank) NVCC Additional Tier 1 (AT1) Limited Recourse Capital Notes (the Capital Notes). DBRS Morningstar assigned the rating equal to the Bank’s Intrinsic Assessment of A (high) less four rating notches, which is consistent with DBRS Morningstar’s standard notching for capital instruments with contingent risks and its ratings for the Bank’s NVCC Preferred Shares. The provisional rating for the Capital Notes is one notch below the rating of National’s NVCC Subordinated Debt.

DBRS Morningstar notes that the Office of the Superintendent of Financial Institutions granted Tier 1 capital treatment to the Capital Notes.

S&P has them at BB+:

The ‘BB+’ issue rating is four notches below NBC’s SACP, incorporating:

• A deduction of one notch, the minimum downward notching from the SACP under our criteria for subordinated debt, reflecting contractual subordination;
• A deduction of two additional notches, reflecting that the coupon payments are fully cancellable, at the issuer’s discretion; and
• A deduction of an additional notch to reflect that this subordinated note features a (mandatory) contingent conversion (non-viability contingent capital [NVCC]) trigger. Should a trigger event occur (as defined by the Office of the Superintendent of Financial Institutions’ [OSFI] guideline for Capital Adequacy Requirements), each preferred share held in the limited recourse trust will automatically and immediately be converted, without the holder’s consent, into a number of fully paid and freely tradable common shares of the bank, determined in accordance with a conversion formula.

This was probably the impetus behind yesterday’s market pop.

PerpetualDiscounts now yield 5.41%, equivalent to 7.03% interest at the standard equivalency factor of 1.3x. Long corporates now yield 2.89%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed slightly (and perhaps spuriously) to 415bp from the 420bp reported August 26.

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TXPR closed at 591.75, up 1.34% on the day. Volume today was 3.38-million, by far the second-highest of the past thirty days, behind only August 26.

CPD closed at 11.78, up 0.86% on the day. Volume was 147,303, very high in the context of the past 30 trading days.

ZPR closed at 9.32, up 1.08% on the day. Volume of 307,588 was the high in the context of the past 30 trading days.

Five-year Canada yields were down 3bp to 0.36% today.

Here’s what Britain is talking about by way of paying the coronavirus debt:

Treasury officials in Britain are pushing for tax hikes to plug holes blown in public finances by the coronavirus pandemic, two leading British newspapers said.

Such hikes will enable the Exchequer to raise at least £20-billion ($35-billion) a year, and some could be introduced in https://www.theglobeandmail.com/business/article-liberals-revised-covid-19-emergency-benefits-resemble-a-national/#commentsthe November budget, the Sunday Telegraph said.

The Sunday Times newspaper said officials were drawing up plans for a £30-billion “tax raid” on the wealthy, businesses, pensions and foreign aid.

In its budget, the government also plans to raise both capital gains tax and corporation tax, the Sunday Times added.

Finance Minister Rishi Sunak is considering a proposal to boost corporation tax to 24 per cent from 19 per cent, a move that would raise £12-billion next year, rising to £17-billion in 2023-24, the paper said.

I was infuriated by a recent article about the new coronavirus supports and their similarity to Guaranteed Annual Income:

According to the tenets of a guaranteed basic income program, all adults are eligible for government benefits that establish a floor for income, but those payments decline as earnings from wages rise. That gradual reduction, or clawback, means that the basic income benefit is eliminated entirely for higher earners.

Wrong, wrong, wrong!

A ‘clawback’ implies that there is a higher marginal rate on low earnings that is hidden from obvious view. This leads to such things as welfare recipients facing a marginal tax rate in excess of 50% on earnings which is often claimed to be a disincentive to work.

You want guaranteed basic income? Fine. Good. But it must work as follows:
i) Cut everybody a cheque for $X.
ii) This $X is included in taxable income
iii) Then tax the taxable income in the usual way.

The Bank of Canada has published its 2019 Cash Alternative Survey Results:

The role of cash in Canadians’ lives has been evolving, as innovations in digital payments have become more widely adopted over the past decade. The emergence of privately issued digital currencies has motivated many central banks to conduct research into central bank digital currencies (CBDCs). We contribute to the Bank of Canada’s research on CBDC by monitoring Canadians’ use of cash and their adoption of digital payment methods.

The Bank conducted the 2019 Cash Alternative Survey (CAS) in August and September 2019. The 2019 CAS asked respondents to report their cash holdings, adoption of cryptocurrencies, and views regarding the potential impact of cash disappearing from the Canadian economy.

We find that Canadians’ cash holdings remain stable, and cryptocurrency adoption remains limited and concentrated among few demographics. Looking ahead, we find few Canadians plan to stop using cash and a significant share report they would find the disappearance of cash problematic. We plan to conduct further iterations of the Cash Alternative Study to further analyze Canadians’ cash use, including their withdrawal and spending behaviour.