Category: Market Action

Just the bare bones again! Hopefully I’ll have caught up with all my overdue things in the near future!

PerpetualDiscounts now have a yield of 5.58%, equivalent to 7.25% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.05%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 320bp, unchanged from the March 30 figure.

Just bare bones again, I’m afraid!

We have a new investment proverb, courtesy of Steve Sosnick, an equity risk manager at Timber Hill, the market-making unit of Greenwich, Connecticut-based Interactive Brokers Group Inc., as reported by Bloomberg’s Joe Ciolli:

“Consensus trades like this, especially when they’re contrarian, often don’t pan out.”

Jobs, jobs, jobs!

Employment in the U.S. climbed and wages picked up in March, signs of labor-market durability in the face of lethargic global growth.

The 215,000 gain in payrolls followed a revised 245,000 February advance, a Labor Department report showed Friday. Average hourly earnings increased 0.3 percent from a month earlier, while the jobless rate crept up to 5 percent as more people entered the labor force.
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The labor force participation rate, which indicates the share of working-age people who are employed or looking for work, rose to 63 percent, the highest since March 2014.

Wage growth rebounded from a month earlier with average hourly earnings rising more than economists forecast after a 0.1 percent drop. The year-over-year increase was 2.3 percent.

I interrupt this financial services blog for a public service announcement.

You learn something new every day.

I had to get a prescription filled – just a tiny one, so tiny that they don’t make the proper pills for it, you have to take half a tablet every day.

The pharmacist gave me the pill bottle and said I had to cut the tablets in half.

As it turns out, that’s his damn job … not by law or regulation but, even better, by competition. But telling him that just got me a little back-talk and a lot of attitude.

If any of my buddies has been tasked by his pharmacist to do his own tablet-splitting: don’t. Go to a new pharmacist and ask if they’ll split the tablets for you when filling such a prescription and do it for free.

I have just found a new pharmacist and transferred over my prescriptions – which, it turns out, is ridiculously easy to do; totally standard and the new pharmacist does all the work. All you have to do, literally, is tell your new pharmacist to transfer the prescriptions over from the old one.

So anyway – there is rarely any genuine need to split your own tablets. But if you are unfortunate enough to do business with a shitty pharmacy, such as the Rexall at St. Clair and Yonge, you will simply be presented with your pills and instructed to cut them in half yourself. A shitty pharmacy, such as the Rexall at St. Clair and Yonge, will not offer to do it and will attempt to give the impression that it is routine for customers to do it themselves. A shitty pharmacy, such as the Rexall at St. Clair and Yonge, will give you attitude when you tell them to do it. I strongly suggest that nobody with a choice patronize a shitty pharmacy, such as the Rexall at St. Clair and Yonge.

For some drugs, there is an actual valid reason not to split tablets in advance – these drugs are air sensitive. For others, tablets should not be split at all – for instance, if they are coated for timed release. But most drugs supplied in 90-day lots can be split in advance without any problems at all. There’s plenty of choice of pharmacist! You don’t have to put up with laziness.

As for the market report, I regret to say it’s just bare bones again.

Yet another bare-bones effort!

It’s nice to see a little high-level push-back against civil forfeiture:

Q: What reforms would help fix the flaws in the law?

A: I’m working to draft bipartisan reforms to fix these flaws. For starters, the direct quid pro quo between asset forfeiture and funding should be eliminated. Law enforcement shouldn’t be relying on funds obtained from forfeiting the particular assets that they have seized or shift crime-fighting priorities based on financial considerations. In addition, real procedural reforms must be enacted for people whose assets are seized, including prompt timelines for government action and the ability to challenge the seizure promptly before a judge. And, individuals who cannot afford a lawyer to guide them through the system should be provided one. Part of addressing this problem lies in reversing the Supreme Court’s recent decision that allows the government to prevent people from showing that they need access to their seized funds to hire a lawyer. We also need to codify changes in the use of civil asset forfeiture in structuring cases, where small business owners like Iowa’s Carole Hinders get unfairly caught up in forfeiture for depositing money in a bank without any indication of any underlying crime. The government’s burden of proof for forfeiting assets needs to be raised.

It’s clear the current process isn’t working as Congress intended. It is time to end seizure for suspicion’s sake and enact reforms that will help restore the proper mission of asset forfeiture laws and rebuild credibility in our law enforcement agencies.

Market and Fed policy rate expectations are converging:

The Federal Reserve looks to have outsourced monetary policy to the financial markets — and that may not necessarily be bad.

Fed Chair Janet Yellen told the Economic Club of New York on Tuesday that policy makers had scaled back the number of interest rate increases they expect to carry out this year after investors did the same.

She argued that the downgrading of rate expectations in the market had led to lower bond yields, providing the economy with needed support in the face of weaker growth overseas. The Fed then followed suit this month by reducing its anticipated rate hikes in 2016 to two from four quarter-percentage point moves projected in December.

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PerpetualDiscounts now yield 5.63%, equivalent to 7.32% interest at the standard conversion factor of 1.3x. Long corporates now yield about 4.1%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 320bp, unchanged from the figure reported March 23.

My old buddy Bing Li is now the proud co-author of a book, Multi-Asset Investing: A Practitioner’s Framework:

Despite the accepted fact that a substantial part of the risk and return of any portfolio comes from asset allocation, we find today that the majority of investment professionals worldwide are focused on security selection. Multi-Asset Investing: A Practitioner’s Framework questions this basic structure of the investment process and investment industry.

• •Who says we have to separate alpha and beta?
• •Are the traditional definitions for risk and risk premium relevant in a multi-asset class world?
• •Do portfolios cater for the ‘real risks’ in their investment processes?
• •Does the whole Emerging Markets demarcation make sense for investing?
• •Why do active Asian managers perform much poorer compared to developed market managers?
• •Can you distinguish how much of a strategy’s performance comes from skill rather than luck?
• •Does having a performance fee for your manager create alignment or misalignment?
• •Why is the asset management transitioning from multi-asset strategies to multi-asset solutions?

These and many other questions are asked, and suggestions provided as potential solutions. Having worked together for fifteen years, the authors’ present implementable solutions which have helped them successfully manage large asset pools.

And Yellen has made a major speech:

Federal Reserve Chair Janet Yellen spelled out on Tuesday what she means by data dependence, asserting her leadership of the U.S. central bank with a clear message that interest rates will be raised at a cautious pace.

In one of her most detailed policy discussions this year, Yellen gave investors a list of conditions they need to watch for future rate hikes. Here they are:

• •Foreign economies and their financial markets need to stabilize.
• •The dollar can’t appreciate further. That would depress inflation and exports, and hurt U.S. manufacturing.
• •Commodity prices need to stabilize to help foreign producers find a better footing for growth.
• •The housing sector needs to make a larger contribution to U.S. output.
• •Inflation is a two-sided risk: Yellen is skeptical that the recent rise in core inflation, which strips out food and energy, “will prove durable.” She is watching closely.

It would be interesting, to say the least, if real-estate were to become a tradeable commodity:

Canadian house prices climbed 27 per cent over the five years from February, 2011, to February, 2016, according to the Teranet-National Bank Composite House Price index. But many foreign buyers are seeing price declines, after currency conversion (see chart below).

The currencies of China, the United States and Switzerland have gained so much against the Canadian dollar that they have outrun the increase in Canadian house prices. As a result, the citizens of these countries can buy at a lower price than in 2011: For the Chinese and Americans, it is nearly 10 per cent less; for the Swiss, it is 5 per cent less.

In most other countries, currencies rose less than Canadian house prices. Some, like the

British pound, came up just a bit short – leaving a small price increase of 2.6 per cent. Others were further behind.

Another bare-bones report, I’m afraid! Geez, I hate the first quarter of the year!

It’s nice to see University of Toronto as a major partner in a new advance in energy storage:

Now, a group of researchers led by Professor Ted Sargent at the University of Toronto’s Faculty of Applied Science & Engineering may have a solution inspired by nature.

The team has designed the most efficient catalyst for storing energy in chemical form, by splitting water into hydrogen and oxygen, just like plants do during photosynthesis. Oxygen is released harmlessly into the atmosphere, and hydrogen, as H2, can be converted back into energy using hydrogen fuel cells.
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You may have seen the popular high-school science demonstration where the teacher splits water into its component elements, hydrogen and oxygen, by running electricity through it. Today this requires so much electrical input that it’s impractical to store energy this way — too great proportion of the energy generated is lost in the process of storing it.

This new catalyst facilitates the oxygen-evolution portion of the chemical reaction, making the conversion from H2O into O2 and H2 more energy-efficient than ever before. The intrinsic efficiency of the new catalyst material is over three times more efficient than the best state-of-the-art catalyst.

The new catalyst is made of abundant and low-cost metals tungsten, iron and cobalt, which are much less expensive than state-of-the-art catalysts based on precious metals. It showed no signs of degradation over more than 500 hours of continuous activity, unlike other efficient but short-lived catalysts. Their work was published online today in the leading journal Science.

The US 1 year break-even inflation rate is getting reasonable:

The Treasury market is signaling inflation expectations are rising, and one metric shows traders anticipate cost increases will reach Federal Reserve Chair Janet Yellen’s 2 percent target.

The difference between yields on one-year U.S. government securities and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, climbed to 2.11 percentage points Tuesday. The figure was the highest in two years.

Inflation expectations for the next decade rose to 1.67 percent this week, the highest level since August.

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‘Off-the-run’ junk names are getting harder to trade:

Traders are getting increasingly punished for trying to sell unpopular debt at the wrong time. The result has been a growing number of hedge-fund failures, increasing risk aversion by Wall Street traders and further cutbacks at big banks.

This all simply reinforces the lack of trading in less-common bonds and loans. At best, this spiral is inconvenient, especially for mutual funds and exchange-traded funds that rely on being able to sell assets to meet daily redemptions. At worst, it could set the stage for another credit seizure given the right catalyst — perhaps a sudden, unexpected corporate default or two, or the implosion of a relatively big mutual fund.

To give a feeling for just how inactive parts of the market have become, consider this: About 40 percent of the bonds in the $1.4 trillion U.S. junk-debt market didn’t trade at all in the first two months of this year, according to data compiled from Finra’s Trace and Bloomberg. While corporate-debt trading has generally increased by volume this year, more of the activity is concentrated in a fewer number of bonds.
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“The biggest issue that the market faces is that you have an increasing amount of participants that require daily liquidity in an asset class that really doesn’t offer daily liquidity any more,” said Michael Pohly, the portfolio manager at hedge fund Kingdon Credit.

That’s a little scary. The good news so far is that these trading woes haven’t yet triggered another credit crisis. The bad news is it’s only getting harder to transact in riskier debt, making the market increasingly fragile and prone to seizures going forward.

James Bullard contributes to the discussion of the Fed’s next move, standing with the hawks:

Federal Reserve Bank of St. Louis President James Bullard said policy makers should consider raising interest rates at their next meeting amid a broadly unchanged economic outlook and prospects of inflation and unemployment exceeding targets.

“You get another strong jobs report, it looks like labor markets are improving, you could probably make a case for moving in April,” Bullard said in a Bloomberg interview in New York Wednesday, in which he criticized the Fed’s practice of publishing officials’ projections on the path of interest rates. “I think we are going to end up overshooting on inflation” and the natural rate of unemployment, he said.

David Berman of the Globe loves high-spread FixedResets:

But there’s one cash-gusher that deserves a closer look: the high-yielding preferred shares that Canada’s big banks have been issuing over the past several months without much fanfare.

It’s time to take notice. These shares yield a dazzling 5.5 per cent, an eye-popping figure in an era during which the five-year Government of Canada bond yields just 0.7 per cent.
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Even if bond yields slide to a mere 0.2 per cent five years from now, you’ll get a 5-per-cent yield when the rate is reset. In other words, investors are insulated from low or falling interest rates, which is a nice touch when the Canadian economy is struggling and the Bank of Canada is in no hurry to raise its key rate.

There is one catch: The banks can redeem the shares after five years if they want to. Nonetheless, savvy institutional investors have been snapping up these new issues, and smaller investors can get a piece of the action as well.

While exchange-traded funds are a popular choice, direct ownership looks like a better option because it allows you to focus on the banks’ new-and-improved preferred shares and avoid the less attractive ones (and ETF fees).

National Bank has decided to guess the size of Chinese investment in Canadian real estate:

Buyers from China comprised about one-third of purchases of Vancouver’s hot housing market in 2015, according to “back of the envelope calculations” by National Bank of Canada.

Chinese investors spent about C$12.7 billion ($9.6 billion) on real estate in the western Canadian city in 2015, or 33 percent of its C$38.5 billion in total sales, according to a note by financial analyst Peter Routledge on Wednesday. In Toronto, they made up 14 percent of purchases, or about C$9 billion of the C$63 billion in deals. Routledge compiled the data by extrapolating from a Financial Times survey of 77 high-end buyers and data from the U.S. National Association of Realtors.

PerpetualDiscounts now yield 5.64%, equivalent to 7.33% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.15%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 320bp, a slight (and perhaps spurious) narrowing from the 325bp reported March 9.