Category: Market Action

Schwab is eliminating brokerage commissions:

Discount brokerage Charles Schwab Corp said on Tuesday it is eliminating commissions for online trading of stocks, ETFs and options listed on U.S. or Canadian exchanges.

Schwab’s latest move is likely to have a knock-on effect across the sector, forcing rivals to follow suit and eliminate commissions, experts warned.
…
The decision marks an inflection point for online brokers, as newer, nimbler rivals such as Menlo Park, California-based startup brokerage Robinhood have been capturing market share in recent years by offering commission-free stock trades.

The firms are able to offer the free trading by selling their customers’ orders to so-called wholesale market makers, such as Citadel Securities and Virtu Financial, which aim to make a profit on the spread between the bid and the offer on the shares.
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“Stocks commissions long ago stopped being a primary revenue item for Schwab, dropping to 8 per cent of revenues last year and currently under 5 per cent. Net interest income from customer deposits and asset management fees are far more important,” added [director of financial institutions research at Argus Research Stephen] Biggar in an email to Reuters.

Schwab made $139 million from selling its customers’ orders in 2018, up 22 per cent from the previous year, according to a regulatory filing.

TD Ameritrade was paid $458 million for customer orders in its last fiscal year, up from $320 million the year before, according to a filing.

Asset Management fees? Yes, Schwab offers ETFs and mutual funds.

Investors will be pleased to remember that there isn’t much chance of such a thing happening here. Why should the bank-owned market-makers pay the bank-owned brokerages for order flow? They get it already! Why should they use asset management to subsidize commission trading? They’ve got it already! Thank you, securities regulators and Competition Bureau for the fine job you’ve done over the years.

Meanwhile, some distraction from impeachment proceedings has been found necessary:

As I predicted, Jay Powell and the Federal Reserve have allowed the Dollar to get so strong, especially relative to ALL other currencies, that our manufacturers are being negatively affected. Fed Rate too high. They are their own worst enemies, they don’t have a clue. Pathetic!

Due to other commitments, the Market Action report for September 27 may be delayed a bit, maybe ’til Monday.

PerpetualDiscounts now yield 5.55%, equivalent to 7.22% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.31%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has vigorously bounced to 390bp from the 375bp reported September 18.

I admired Jody Wilson-Raybould and her stand on principle regarding SNC-Lavalin and its legal problems.

Not because I think Trudeau and the rest of Cabinet did much wrong, though! It should be clear that in government, the boss can say something like ‘Gee, you know, it sure would be nice if such-and-such a decision was made on this issue”, and the next day, like magic, a memo appears on his desk to the effect that a completely independent assessment of the issue, based solely on the evidence, has resulted in a decision of such-and-such. This happens most of the time in private industry, too.

In politics, you’re continually subject to testing. Are you loyal? We know you disagree with us on this issue, but you’re going to vote with us, aren’t you, buddy? Right? Every single vote, whether in Parliament or committee represents a test and if the party should decide that War Is Peace, Freedom Is Slavery, and Ignorance Is Strength, well then, stick your hand up. Trudeau’s mistake was that he gave the nod-and-wink to somebody who hadn’t been sufficiently tested for such a senior position, given that she was first elected in 2015. He thought she was a normal cabinet minister:

I grew so rich that I was sent
By a pocket borough into Parliament.
I always voted at my party’s call,
And I never thought of thinking for myself at all.
….
I thought so little, they rewarded me
By making me the Ruler of the Queen’s Navee!

So anyway, I decided to donate some money to her campaign … just in an attempt to give the next guy placed in the position she was in a little backbone. And what do I find?

Thank you to everyone who has donated to the 2019 Campaign to Re-Elect Jody Wilson-Raybould. With your support for a different way of doing politics and your generosity we have now exceeded our fundraising targets and will no longer be accepting monetary contributions.

I’m astonished.

Jane Philpott still needs money, though!

A nice piece in the Globe today about Canada’s rentier economy:

We have to think about what most people rely on nowadays to support themselves and secure their futures. And the answer is assets – housing assets in particular. It’s no longer our salaries or incomes, nor even our pensions. Rather, Canada has become an asset-based economy in which it’s now a viable choice to buy a house far above your income threshold and sit tight – renting out rooms to pay the mortgage you can’t afford on your own income alone – waiting for its value to appreciate.

But there are perils to relying on this sort of economy for our future. An asset-based economy is underpinned by continuous asset price inflation alongside the suppression of income inflation, meaning a rising debt-to-income ratio is built in.

Another example of the asset based nature of our economy is the banks.

The banks now basically control the entire Canadian financial system – rather than simply being an important part of it – with their oligopoly protected from foreign competition by legislation and, to a slightly lesser extent, from new domestic competition by regulation.

A huge chunk of the Toronto Stock Exchange index is comprised of banks. with over 35% of the S&P/TSX 60 index being financial players; compared to less than 15% of the S&P 500.

And, I suggest, any attempt to introduce any real competition to the Canadian financial system – loosening Bank Act restrictions of foreign ownership and restricting bank encroachment on asset management and insurance – would be met by howls of outrage from the rent-seekers who invest in them.

And it appears that Mohamed A. El-Erian is as concerned as I am (see September 20) about the Fed response to the repo blip (from his Facebook page):

The longer this continues, and it will for now, the more it will be seen by investors as (pick your term):

• stealth QE,
• QE lite,
• backdoor QE,
• etc….

The big question is whether, for markets conditioned and empowered to believe they can force the hands of the Federal Reserve, this will be seen as a prelude to the formal resumption of a QE program.

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The recent US repo-market disruption continues to attract attention:

The Federal Reserve plans to pour cash into the U.S. banking system through early October in a bid to avert another market disruption, but analysts see the need for the central bank to come up with longer-term fixes.
…
Repo rates hit 10 per cent on Tuesday, propelling other short-term rates sharply higher.

Analysts blamed huge cash demand to pay for quarterly corporate taxes and the prior week’s US$78-billion worth of coupon-bearing Treasury supply for the market ruction.

They also attributed the decline of excess reserves, to about US$1.4-trillion from US$2.3-trillion in 2017, to the Fed’s reduction of its bond holdings.
…
Since Tuesday, the Fed has held four rounds of repo operations, with banks and dealers borrowing from the central banks with their Treasuries and other bonds as collateral.

On Friday, the New York Fed, which implements the central bank’s market actions, said it will conduct more repo operations into October.
…
While repo operations are expected to provide a temporary patch, analysts said the Fed needs to offer more permanent solutions.

“The underlying conditions that gave rise to the funding stress are still in place,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.

Other analysts said policy-makers should consider launching a standing repo facility and/or increasing purchases of Treasuries.

I don’t think much of the proposed solutions in the final quoted paragraph. Both represent the Fed printing money.

The rationale behind the current bloated balance sheet of the Fed is that we are continuing to recover from the Credit Crunch. There was a huge shock to the system, so the Fed boosted the money supply, fine, I get it. But making this monetary expansion permanent – or even hinting that it could be permanent – looks like an open invitation to galloping inflation.

Look at the stresses that caused the episode! Tax payments and a big Treasury auction! Not at all unusual and totally forseeable. And yet the repo rate spiked to 10%.

Either the Fed screwed up by implementing ‘quantitative tightening’ too rapidly, or the financial system has become addicted to having all that cheap cash around. The first is an easy fix, the second is a little scary …. beating an addiction usually results in pain, as Canadian mortgage borrowers found out in 1981.

And through it all, Canadians are keeping up with the Joneses in the traditional way:

Canadian homeowners who accessed their home equity through a loan or refinancing helped fuel household spending in recent years, according to research by staff at the Bank of Canada.
…
In 2017, the researchers found Canadian homeowners extracted $89-billion in home equity through these two methods, with more money – $49-billion – coming through HELOCs.

Borrowers used that money to pay for big-ticket items, such as cars and furniture, or to fund renovations, among other things, according to the research, which suggests this “has likely contributed materially” to this kind of spending in Canada in recent years.

The researchers found that by the end of 2017, this equity extraction could have added two per cent to consumer spending on durables and semidurables (goods that include cars and furniture), as well as 11 per cent to renovation spending.

The report found that translated into a 0.5-per-cent impact on the GDP level.

The source paper is titled Home Equity Extraction and Household Spending in Canada, by Anson T. Y. Ho, Mikael Khan, Monica Mow and Brian Peterson.

Update, 2019-9-25, referred to in comments: From the report Combatting Money Laundering in BC Real Estate:

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… and from a blog (I couldn’t find an actual Bank of Canada chart with this information, but this chart looks right):

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So, the Fed cut by a quarter:

Information received since the Federal Open Market Committee met in July indicates that the labor market remains strong and that economic activity has been rising at a moderate rate. Job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Although household spending has been rising at a strong pace, business fixed investment and exports have weakened. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In light of the implications of global developments for the economic outlook as well as muted inflation pressures, the Committee decided to lower the target range for the federal funds rate to 1-3/4 to 2 percent. This action supports the Committee’s view that sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective are the most likely outcomes, but uncertainties about this outlook remain. As the Committee contemplates the future path of the target range for the federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair, John C. Williams, Vice Chair; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Charles L. Evans; and Randal K. Quarles. Voting against the action were James Bullard, who preferred at this meeting to lower the target range for the federal funds rate to 1-1/2 to 1-3/4 percent; and Esther L. George and Eric S. Rosengren, who preferred to maintain the target range at 2 percent to 2-1/4 percent.

The voting was interesting, with two hawks and one dove dissenting, which underscores the uncertainty that prevails globally. Of course, there’s there’s one guy who’s never uncertain:

“Jay Powell and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!,” Mr. Trump said in a tweet shortly after the Fed’s announcement, referring to Jerome H. Powell, the Fed Chair.

Equities fell initially, and then:

But stocks reversed their slide during Powell’s news conference following the policy decision, during which he said the Fed is closely monitoring economic data, trade and global growth risks, but did not see imminent recession, or think the central bank would cut rates to negative territory.
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U.S. Treasury yields dipped following Powell’s remarks.

Benchmark 10-year notes last rose 7/32 in price to yield 1.7909%, from 1.814% late on Tuesday. The 30-year bond last rose 23/32 in price to yield 2.2471%, from 2.28% late on Tuesday.

The dollar strengthened following the Fed’s rate cut. The dollar index rose 0.28%, with the euro down 0.36% to $1.1031.

And in the frozen north:

The Canadian dollar weakened to a two-week low against its U.S. counterpart on Wednesday as oil prices fell and after the U.S. Federal Reserve was less dovish than some investors had anticipated.
…
Canadian government bond prices were higher across a flatter
yield curve. The two-year rose 2.5 Canadian cents to yield 1.598% and the 10-year was up 15 Canadian cents to yield 1.433%.

The 10-year yield touched its lowest intraday since Sept. 12 at 1.409%.

PerpetualDiscounts now yield 5.57%, equivalent to 7.24% interest at the standard equivalency factor of 1.3x. Long corporates now yield 3.48%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has plunged to 375bp from the 415bp reported September 11.