Category: Market Action

Jobs, jobs, jobs! And pay, too!

U.S. hiring picked up in January and wages rose at the fastest annual pace since the recession ended, as the economy’s steady move toward full employment extended into 2018.

Nonfarm payrolls rose 200,000 — compared with the median estimate of economists for a 180,000 increase — after an upwardly revised 160,000 advance, Labor Department figures showed Friday. The jobless rate held at 4.1 percent, matching the lowest since 2000, while average hourly earnings rose a more-than-expected 2.9 percent from a year earlier, the most since June 2009.

Naturally, the bond market reacted … and then stocks reacted to bonds:

The Dow Jones Industrial Average tumbled 666 points in the biggest plunge since June 2016, as the worsening bond rout stirred angst that the Federal Reserve will accelerate its rate-hike schedule.
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•The yield on 10-year Treasuries rose five basis points to 2.834 percent. It touched 2.8525 earlier.

I believe that this is the worst week containing a super blue blood moon for equities for over one hundred and fifty years, which is probably pretty significant. Worst of all, some investors had their mellow harshed:

Marijuana stocks tumbled Friday amid a wave of “panic-selling” and concern that companies that had seen ballooning share prices recently are now overvalued. The BI Canada Cannabis Index plunged as much as 19 percent, its biggest intraday drop on record, while the nation’s largest producers including Canopy Growth Corp. and Aurora Cannabis Inc. tumbled more than 40 percent from their January highs.

However, five-year Canadas finished the day at 2.13%, up 5bp, which should be good news for FixedResets unless it isn’t.

Huffing and puffing over NAFTA continues:

Canadian Prime Minister Justin Trudeau made some of his most aggressive comments to date on dealing with U.S. demands to rework the North American Free Trade Agreement, adding he still thinks he can get the right deal for his country.

“We aren’t going to take any old deal,” Trudeau said Friday at a town hall in Nanaimo, British Columbia. “Canada is willing to walk away from Nafta if the United States proposes a bad deal. We won’t be pushed around.”

His comments come days after U.S. President Donald Trump threatened to get tough on trade, though he didn’t single out Nafta, in his State of the Union address. The latest round of Nafta talks wrapped up in Montreal on Monday, with all sides saying there had been progress, while acknowledging significant gaps remain on some issues.

I have decided that I’m a big Taylor Swift fan. She’s awesome. Just consider her latest achievement:

As she prepared to hit the road to support her latest album, Reputation, Swift and Ticketmaster Entertainment Inc. concocted a strategy to neuter the scalpers. They used Ticketmaster’s Verified Fan program, which utilizes in-house technology to identify actual fans and determine which of them should have access to fan-only presale tickets, based on their devotion to Swift as measured by their willingness to buy albums, sign up for a newsletter, and watch her music videos. While prices in the presale were fairly low for most people, Swift and promoter AEG Presents raised the cost of all the tickets in the later general sale to make them less attractive to scalpers.

Imagine that! The problem was scalpers taking too big a slice of the pie … so she raised prices for her shows to capture the increment for herself. It’s incredible! Conventional wisdom, of course, is to whine that the gubmint oughtta do sumpin, with ‘run crying to mommy’ running a close second … but my heroine Taylor Swift thinks way, way, way out of the box. I think she should get at least two Nobel Prizes in Economics for this breakthrough.

PerpetualDiscounts now yield 5.27%, equivalent to 6.85% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.85%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 300bp, a slight (and perhaps spurious) widening from the 295bp reported January 31.

Tim Shufelt of the Globe penned a great piece on the stability risks posed by ETFs that included some great quotes from “Mark Kamstra, a professor of finance at York University’s Schulich School of Business, who specializes in the study of financial bubbles.”:

Mass redemptions from active funds could quickly reverse, however, if stock pickers start to reliably beat the market. “People chase returns, so if they see active investors doing great, they’ll plow back into them,” Mr. Kamstra said. Which is why it’s odd to hear active managers complain about ETFs skewing valuations, he said. If that’s actually happening, who better than a skilled stock picker to take advantage of those mispricings. “If I were an active investor, I’d be loving that stuff. It makes for opportunities,” Mr. Kamstra said.

Yep. CPD and ZPR are my best friends. However, I was disappointed that the problem of differential liquidity was not discussed in the article – I quoted the following on August 22, 2014:

The WSJ points out:

While it’s important to look at how ETF shares are trading, the fund’s underlying holdings are really the heart of the liquidity issue, experts say.

One reason: Big investors known as “authorized participants” can swap a basket of the fund’s underlying holdings for ETF shares—or vice versa. This process helps arbitrage away significant gaps between the ETF’s share price and its NAV, the value of its underlying holdings. But when the underlying holdings are costly to trade and tough to obtain, authorized participants are less willing to round up that basket of securities. That means big gaps can develop between an ETF’s share price and its NAV.

One place to watch out for these premiums and discounts is in bond ETFs, especially those focused on areas like corporate investment-grade and high-yield, or “junk,” bonds. The iShares iBoxx $ High Yield Corporate Bond Fund closed within 0.5% of NAV on only four days in the fourth quarter, iShares says, and traded at a premium as large as 2.1% in that period.
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When underlying holdings are traded less frequently, or not at all, an ETF’s returns also may diverge from the benchmark it is designed to track. That became an issue for some bond ETFs recently as the Federal Reserve bought up large quantities of agency bonds and mortgage-backed securities, essentially removing them from the market. Vanguard Group recently changed some of its bond index funds and ETFs to benchmarks that exclude these securities purchased by the Fed.

The biggest test of bond-ETF liquidity may be yet to come. So far investors have poured money into these products, and many bond ETFs are trading at significant premiums to NAV. But if investors reverse course and stampede out, the trading could get ugly, experts say. Given the relative illiquidity of many of the underlying bonds, the ETFs could start trading at significant discounts to NAV.

“When everybody tries to get out, it’s going to be a debacle,” says Scott Freeze, president of Street One Financial.

Don’t get me wrong – I think ETFs serve a great purpose and particularly recommend them for retail bond investors. But when you have a liquidity inversion – the ETF being more liquid than all (or even just some) of the underlying assets put together – you face huge problems in that ETF cash flows can overwhelm the cash market, which will lead to galloping, self-reinforcing price trends.

Does anybody remember the financial crisis? A big part of the problem was the AAA tranches of sub-prime-mortgage-backed securities. There wasn’t really anything much wrong with the AAA tranches – the junk and mezzanine debt got whacked, but the all that happened to (most!) AAA tranches was a downgrade or two (which is why the politicians like to talk about downgrades when criticizing the banks, not actual defaults). But the downgrades caused selling pressure … and nobody wanted to buy … and the world fell apart. And the same think can happen again if you have billion-dollar cash-flows in a million-dollar market.

So, how about the industry reactions to the Pacific trade deal, eh?:

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which Trade Minister François-Philippe Champagne announced on Tuesday, will benefit Canada’s agricultural sector, chiefly beef and pork producers, which are being granted market access to the once-sheltered Japanese market – access that rivals in Australia already enjoy.

But Canada’s dairy farmers, the head of the country’s largest private-sector union and a major portion of the Canadian auto industry say the new deal makes major concessions to foreign competitors that will cost jobs in Canada without yielding sufficient reciprocal benefits.
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Key sectors of the auto industry in Canada oppose the new agreement.
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Auto-parts makers say the TPP would open them up to more intense competition from low-cost countries such as Vietnam and Malaysia. The Detroit Three auto makers say it will eliminate tariffs on Japan-made vehicles entering the Canadian market while not removing existing non-tariff barriers in Japan.

So confident exporters love it and coddled parasites hate it? I like this deal already!

Clare O’Hara of the Globe continues the whitewashing of the Canadian discount brokerages negligence:

Online discount brokerages at Canada’s Big Six banks are continuing to see a surge in trading volumes and new account openings amid the investor frenzy centred on cannabis and cryptocurrency-related stocks.

The increased activity has been testing the limits of what some of the brokerages can handle during peak periods in the North American trading day.

Royal Bank of Canada’s RBC Direct Investing experienced outages on Tuesday morning that blocked some investors from accessing their online trading accounts for approximately an hour.

Meanwhile, Toronto-Dominion Bank has had to postpone a new online system for opening accounts, forcing investors to visit branches in person and endure at least a one-week waiting period.
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Officials for other online brokerages at Bank of Montreal, National Bank of Canada, Canadian Imperial Bank of Commerce and Bank of Nova Scotia have all confirmed they also have been seeing higher-than-normal trading volumes.

For some of them, account opening requests have been running more than three times the average rates of 2017.
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Scotiabank confirmed it has seen an increase of account openings of more than three times the daily average of last year, as well as almost double the trading volume than expected for this month.

BMO InvestorLine has seen its traffic volume increase steadily each month since September; since November, it has a 26-per-cent increase in new accounts, according to the bank.

I don’t give a rat’s putootie about “double the trading volume expected for this month.” I have two questions instead: How was the expectation developed? And mainly, how does that expectation compare with what might be reasonably expected during an actual market break?

I also don’t give a rat’s putootie about account openings of “three times the average rates of 2017”. 2017 was a nothing year. Nothing significant happened. Who cares about 2017? What might the account opening rate be during an actual market break?

These clowns have had a mild stress test and failed miserably.

Well, here’s one way to compete in the financial industry:

When Edward Jones broker Paul Betenbaugh in California wanted to exact revenge on a rival, he went too far. He impersonated the competitor and posted ads on the Internet that solicited men for sexual encounters, according to a Tuesday order from the Financial Industry Regulatory Authority. The ads included the other broker’s business cell phone number, resulting in a number of unwanted calls and text messages, Finra said.

PerpetualDiscounts now yield 5.24%, equivalent to 6.81% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 385bp, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 295bp, a significant narrowing from the 305bp reported January 17.