Category: Market Action

Remember how I said on August 26 that:

But eventually (probably after the Fed Rate has struggled carefully and cautiously to 1% and above) there will be a series of hikes, bang, bang, bang, bang, that will result in a very nasty environment for bonds.

Well, here’s a different view:

Some at the U.S. central bank may still be too optimistic about how high interest rates can rise in the longer run, based on new Federal Reserve Bank of San Francisco research.

San Francisco Fed economist Kevin Lansing started with a simple premise: estimates of the inflation-adjusted neutral interest rate — the one that neither stokes nor slows growth — track pretty well with the U.S. Congressional Budget Office’s four-quarter growth rate of potential GDP estimates. Looking at the CBO’s projections for the next decade, he predicts “a very gradual rise” in the neutral rate, referred to as r-star in standard economic models, from near-zero in 2016 to about 1 percent in 2026.

“If the long-run value of r-star is indeed only around 1 percent or less, then the process of normalizing the federal funds rate may end up being more gradual than the midpoint paths implied,” Lansing wrote. He notes that excluding high and low outliers, officials at the middle of the Fed’s June projection see a longer-run real rate of 1.15 percent.

But don’t be too quick to write of growth! There’s a new growth industry in Germany:

German savers are leaving the security of savings banks for what many now consider an even safer place to park their cash: home safes.

For years, Germans kept socking money away in savings accounts despite plunging interest rates. Savers deemed the accounts secure, and they still offered easy cash access. But recently, many have lost faith.

“It doesn’t pay to keep money in the bank, and on top of that you’re being taxed on it,” said Uwe Wiese, an 82-year-old pensioner who recently bought a home safe to stash roughly €53,000 ($59,344), including part of his company pension that he took as a payout.

Interest rates’ plunge into negative territory is now accelerating demand for impregnable metal boxes.

Burg-Waechter KG, Germany’s biggest safe manufacturer, posted a 25% jump in sales of home safes in the first half of this year compared with the year earlier, said sales chief Dietmar Schake, citing “significantly higher demand for safes by private individuals, mainly in Germany.”

And don’t forget drones!

Before some cutting-edge online retailer can use a drone to drop granola bars on your doorstep, a railroad born when Abe Lincoln was in Congress will first have to iron out the kinks.

BNSF Railway Co. is flying drones as far as 150 miles (240 kilometers) along the New Mexico desert to inspect tracks, helping the Federal Aviation Administration develop rules for operating unmanned aircraft beyond the pilot’s line of sight. That’s an essential step for expanding use to such commercial endeavors as deliveries by Amazon.com Inc. and other companies.
…
BNSF, owned by Buffett’s Berkshire Hathaway Inc., is particularly suited for the task. The railroad operates 32,500 miles of track crisscrossing sparsely populated areas along a well-defined right of way, which eases planning. Communications towers that are part of a safety system for trains can be used to help guide drones.

The railroad also has a compelling business case. The Latitude HQ-40 drone that Graetz supervises has a six-foot wingspan and is equipped with cameras that when paired with special software can potentially detect track anomalies more quickly, possibly preventing derailments. The flights, from just outside of Playas, New Mexico, lay the groundwork for drone inspections of other fixed infrastructure, such as pipelines and power lines.

The British aren’t satisfied with the calibre of their secret policemen:

Once again, the British government has decided that US technology companies should shoulder more responsibility for preventing terrorism.

Facebook, Twitter and YouTube are ‘the lifeblood of Daesh’ and are ‘consciously failing’ to prevent the spread of terrorist material, a panel of lawmakers said today, adding that they are ‘hiding behind their supranational legal status’.

In its report, parliament’s home affairs committee accuses the companies of passing the buck when it comes to cracking down on propaganda online.

“They must accept that the hundreds of millions in revenues generated from billions of people using their products needs to be accompanied by a greater sense of responsibility and ownership for the impact that extremist material on their sites is having,” it reads.

The MPs are calling for the web firms to move far more quickly to close down infringing accounts – or give a good reason why not. It also wants them to second staff to work within the Metropolitan Police’s counter-terrorism internet referral unit (CITRU).

But the American Secret Police are very active:

Lorne Wald thought he had run into a technical glitch on a Friday night in early August when PayPal halted his attempts to purchase two books. The 60-year-old retired IT worker in Mount Royal, Que., has had a PayPal Inc. account since the online payment platform came to Canada in late 1990s and has never had any trouble buying things online.

But Mr. Wald’s transaction hit a roadblock when an error message warned that he had violated PayPal’s “terms of use” when he tried to buy The New Persian Kitchen, a cookbook by Louisa Shafia, and The House of God, a satirical novel about Beth Israel hospital in Boston – from Canadian online bookseller BookOutlet.ca.

When he contacted the company’s customer service, he was informed by a representative that “the payment was pending clearance by OFAC [the U.S. Office of Foreign Asset Control].” He asked if he could simply cancel the purchase, and was told no, it would have to be adjudicated by PayPal’s compliance team. “It sort of creeped me out,” Mr. Wald says. “If they are going to try to crack down on crime that’s all very noble, but then it’s in your face; and this is a $20 transaction.”

There was some moderately hawkish Fed chatter today:

Federal Reserve Chair Janet Yellen still has faith.

On Friday she expressed confidence that tighter labor markets over time will push inflation back to the central bank’s 2 percent goal, setting up a rate hike this year — possibly as soon as next month — if jobs data remain strong. That view breaks with a minority group of Fed officials who are more pessimistic about the relationship between labor markets and prices.
…
Ending two months of public silence about her views, Yellen cited “continued solid performance of the labor market” and said the “case for an increase in the federal funds rate has strengthened in recent months” in her speech Friday to central bankers and economists in Jackson Hole, Wyoming.

Stocks initially rose after Yellen’s remarks, only to decline after Stanley Fischer, the Fed’s vice chairman, reiterated in an interview on CNBC that the possibility exists for two rate increases this year, starting as soon as September.

Yellen’s remarks also signaled she didn’t need to see actual inflation rising toward 2 percent to raise interest rates. She said inflation would reach their 2 percent target “over the next couple of years,” and emphasized that gradual, timely moves were required “to achieve and sustain employment and inflation near our statutory objectives.”

So for what it’s worth – and remember, you’re reading this for free – I think that for the next year or so Fed hikes will be of the ‘one and done’ variety, rather than the steady increase variety. But eventually (probably after the Fed Rate has struggled carefully and cautiously to 1% and above) there will be a series of hikes, bang, bang, bang, bang, that will result in a very nasty environment for bonds.

Assiduous Readers will remember my rants about risk; risk is not something dumb, like “monthly volatility of portfolio value” (which, by the way, implicitly assumes that the critical consideration is Preservation of Capital); risk is the chance that a portfolio will not meet its objectives and hence cause the portfolio holder to revise his lifestyle downward from the expected level. I was pleased to find an essay today on this topic by Jean L.P. Brunel, titled Goals-Based Wealth Management in Practice:

Wealth management processes have not always been responsive to individual clients’ priorities and modes of thinking. A model is presented and evaluated that uses goals-based wealth management concepts to generate module-built portfolios, each of which is driven by a client’s expressed goals. This model allows for a high degree of flexibility and responsiveness to client needs with a practical level of standardization.

I can’t say I’m a fan of the module-based approach to implementation, however:

GenSpring uses four sets of goals-focused modules in creating portfolios:
1. Tax aware with nontraditional strategies,
2. Tax agnostic with nontraditional strategies,
3. Tax aware with only traditional strategies, and
4. Tax agnostic with only traditional strategies.

Goals-Focused Modules. Each of the four sets consists of nine modules that address all the categories of a client family’s needs. The modules are contiguous, but each module must be sufficiently different to distinguish it from the others. Each module must also be optimal within the constraints created by inevitable trade-offs while leaving room for flexibility.

Who woulda thunk it? Fiduciary rules have some drawbacks:

As brokers lay plans to satisfy new federal rules governing their relationships with retirement savers, one thing is becoming clear: Some clients will see their investment options diminished or face the prospect of higher fees.

Brokerage Edward Jones, anticipating the fiduciary rule that will require brokers to put the interests of retirement savers ahead of their own, said on Wednesday that it would stop offering mutual funds and exchange-traded funds in retirement accounts that charge investors a commission. The move makes the St. Louis firm the first big player to disclose detailed plans on retirement accounts that charge a commission.

Retirement savers could be forced to make decisions in the months ahead as other firms determine how they plan to operate under the Obama administration’s new rule, which starts to take effect in April. The rule doesn’t extend to nonretirement accounts.

I’ve heard that regulators everywhere are calling their kindergarten teachers and asking why everybody doesn’t just play nicely.

Spectra Energy has announced:

Westcoast Energy Inc. (the “Corporation”) announced today that it has entered into an agreement with a syndicate of underwriters co-led by TD Securities Inc. and CIBC Capital Markets. The underwriters have agreed to buy 8 million Cumulative 5-Year Minimum Rate Reset Redeemable First Preferred Shares, Series 12 (the “Series 12 First Preferred Shares”) at a price of $25.00 per share for aggregate gross proceeds of $200,000,000. The proceeds are expected to be used to fund capital expenditures and for general corporate purposes.

The Corporation has granted the underwriters an option to purchase up to 2 million additional Series 12 First Preferred Shares at the offering price, exercisable until 48 hours prior to closing, which, if fully exercised, would increase the total gross proceeds of the Series 12 First Preferred Share offering to $250,000,000.

The Series 12 First Preferred Shares will be issued to the public at a price of $25.00 per share and holders will be entitled to receive fixed cumulative preferential cash dividends, payable by quarterly instalments for an initial period of five years, as and when declared by the Board of Directors of the Corporation, at a rate of $1.30 per share per annum, to yield 5.20% annually. Thereafter, the dividend rate will reset every five years to the sum of the then current 5-Year Government of Canada Bond yield and 4.52%, provided that, in any event, such rate shall not be less than 5.20%. On October 15, 2021, and on October 15 of every fifth year thereafter, the Corporation may redeem the Series 12 First Preferred Shares in whole or in part at par.

Holders will have the right to elect to convert all or any of their Series 12 First Preferred Shares into an equal number of Cumulative Floating Rate Redeemable First Preferred Shares, Series 13 (the “Series 13 First Preferred Shares”) on October 15, 2021, and on October 15 of every fifth year thereafter. Holders of the Series 13 First Preferred Shares will be entitled to receive quarterly floating rate cumulative preferential cash dividends, as and when declared by the Board of Directors of the Corporation, equal to the sum of the then current 3-month Government of Canada Treasury Bill yield and 4.52%. On October 15, 2026, and on October 15 of every fifth year thereafter, the Corporation may redeem the Series 13 First Preferred Shares in whole or in part at par. On any other date after October 15, 2026, the Corporation may redeem the Series 13 First Preferred Shares in whole or in part by the payment of $25.50 for each share to be redeemed.

The offering is being made only in the provinces of Canada under the Corporation’s short form base shelf prospectus dated March 18, 2016, and a prospectus supplement to such short form prospectus. The closing date of the offering is expected to be on or about August 30, 2016.

This news release does not constitute an offer to sell securities, nor is it a solicitation of an offer to buy securities, in any jurisdiction. All sales will be made through registered securities dealers in jurisdictions where the offering has been qualified for distribution.

Westcoast Energy Inc. is an indirect subsidiary of Spectra Energy Corp.

They later announced:

that as a result of strong demand for its previously announced offering it has agreed to increase the size of the offering to 12 million Cumulative 5-Year Minimum Rate Reset Redeemable First Preferred Shares, Series 12 (the “Series 12 First Preferred Shares”) at a price of $25.00 per share for aggregate gross proceeds of $300,000,000. There will not be an underwriters’ option as was previously granted. The Series 12 Preferred Shares are being offered on a bought deal basis by a syndicate of underwriters co-led by TD Securities Inc. and CIBC Capital Markets.

The proceeds are expected to be used to fund capital expenditures and for general corporate purposes.

The offering is being made only in the provinces of Canada under the Corporation’s short form base shelf prospectus dated March 18, 2016, and a prospectus supplement to such short form prospectus. The closing date of the offering is expected to be on or about August 30, 2016.

This news release does not constitute an offer to sell securities, nor is it a solicitation of an offer to buy securities, in any jurisdiction. All sales will be made through registered securities dealers in jurisdictions where the offering has been qualified for distribution.

Westcoast Energy Inc. is an indirect subsidiary of Spectra Energy Corp.

This creates an interesting tension with W.PR.K, which is a FixedReset, 5.25%+426M525, that commenced 2015-12-15 after having been announced 2015-11-24, in that the new issue has a significantly higher spread but a slightly lower guarantee.

Hampton Creek, last discussed here on August 4 may have bought itself a world of trouble:

The U.S. Securities and Exchange Commission is looking into whether a San Francisco-based food technology startup broke the law by not disclosing that it was buying its own vegan mayonnaise from stores, which made the product appear to be more successful than it was, according to people familiar with the matter.

The agency is trying to determine whether Josh Tetrick’s Hampton Creek Inc. improperly recognized revenue from purchases made with company money, said the people, who asked not to be named because the matter isn’t public. The opening of an SEC inquiry into the buybacks is a preliminary step and doesn’t mean the company will face an enforcement action.

In drone news, Intel touts a drone platform:

Intel Corporation today announced its involvement in the development of multiple best-in-class unmanned aerial vehicles (UAVs), commonly called drones, showcasing how they interact with their environment, solve problems and thrill users by helping them explore and interact with their worlds unlike ever before.

Intel® Aero Platform for UAVs

Intel’s® Aero Platform is available today for developers to build their own drones. This purpose-built, UAV developer kit powered by an Intel® Atom™ quad-core processor combines compute, storage, communications and flexible I/O all in a form factor the size of a standard playing card. When matched with the optional Vision Accessory Kit, developers will have tremendous opportunities to launch sophisticated drone applications into the sky. Aero supports several “plug and play” options, including a flight controller with Dronecode PX4 software, Intel® RealSense™ technology for vision, AirMap SDK for airspace services, and will support LTE for communications. The Intel Aero Platform is available for pre-order now on click.intel.com – the Intel Aero compute board is $399, the Intel Aero Vision Accessory Kit is $149, and the Intel Aero Enclosure Kit is $69. A separate Intel Aero Platform Ready-to-Fly Drone will be available in Q4.