Category: Market Action

Market Action

January 7, 2015

Buy on dips? Not if you’re a central banker!

The total amount of reserves held in euros fell 8.1 percent in the third quarter, more than the currency’s 7.8 percent decline in the period against the dollar, according to the most recent figures from the International Monetary Fund. The last two times the euro depreciated 7 percent or more in a quarter, 2011 and 2010, holdings declined much less.

The data suggest reserve managers are passing up the chance to buy euros while they’re cheap, removing a key pillar of support. In August, European Central Bank President Mario Draghi cited the drop in central banks’ euro holdings as a factor that would help weaken the exchange rate and ultimately boost the region’s faltering economy.
…
The ECB has experimented with negative interest rates on deposits in an attempt to draw money out of safe government debt and into the broader economy. Yields on two-year notes in Germany, the Netherlands and France are all below zero on speculation the ECB is losing the battle against deflation.

Negative yields on twos? Well … consider inflation:

The inflation rate in the euro area fell below zero for the first time in more than five years, bolstering the case for more European Central Bank stimulus.

Prices dropped 0.2 percent in December, the European Union’s statistics office in Luxembourg said today. That’s the lowest rate since September 2009. Economists in a Bloomberg survey predicted a decline of 0.1 percent. Unemployment held at 11.5 percent in November, Eurostat said in a separate report.
…
Joblessness in Italy rose to a record 13.4 percent in November, separate data showed. German unemployment, calculated under a national measure, fell to 6.5 percent in December, the lowest in more than two decades.

Here’s another idiotic regulation story:

Each year a bank wins the mandate to convert about 3.4 billion euros ($4.1 billion) of subsidies to sterling. The rate they use has less to do with free-market economics than self-interest, according to four traders and salespeople interviewed by Bloomberg News who said their goal was to make the most money they could for their firms to the detriment of their clients.
…
The EU requires the U.K. government to exchange the currency at the European Central Bank benchmark rate on the last trading day of September. The price, set at 1:15 p.m. in London, is derived from a snapshot of trades and is supposed to be an independent measure of the value of currencies. It’s anything but, the traders said.

When London-based Barclays Plc (BARC) won the job for 2011, the first thing its foreign-exchange desk did was to place bets with its own money that the euro would fall against the pound, knowing that the transaction would move the market lower, said one trader with direct knowledge of the deal who asked not to be identified because he still works in banking.
…
Salespeople at Barclays, the world’s third-biggest currency dealer, also told their best customers, including some of the largest hedge funds, that the bank would be selling euros in the expectation the clients would adopt the same trading strategy, turbocharging efforts to push the exchange rate lower, the former employees said.

Well, of course they did. What would anybody with half a brain do? Just think of it … all these high-frequency trading firms spend millions to extract very short-term market movement predictions from the order book, so in order to avoid HFT, the European Union basically announces that Euros will be sold for Sterling in big size at the price determined in a specific way at a specific time.

I haven’t yet been able to figure out a more brain-dead method of trading. Just why the EU insists on conversion at all is a mystery to me, but if they do insist on conversion, surely it could be handled better … ‘exchange it however you like between this time on this date and that time on that date. Open market operations, an auction, whatever. A single auction will still experience disadvantageous price moves in the market during the run up to it … JUST LIKE BONDS. JUST LIKE STOCKS. JUST LIKE EVERY OTHER DAMN THING ON THE MARKET. You really don’t need to be very sophisticated to be able to work this out and observe it for yourself. Are strawberries cheaper in December or June?

But even when aware that they’re being (quite rightfully) penalized for telegraphing their trades, the bureaucrats still insist on using arbitrary quotations:

The U.K. now has the option of exchanging currency using an average of all ECB fixes in September, which will make it harder for banks to rig the rate.

It all fits in with the “Prevention” self-regulatory focus discussed yesterday. If a trader was given the job of conversion, he might underperform some benchmark, whatever it was … so the bureaucrats conclude that paying a fee to convert at that benchmark is a better idea. Then they cannot be criticized for allowing underperformance – even though a large conversion at a small benchmark is a really, really stupid and expensive way to trade, the costs are invisible.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 57bp, FixedResets up 13bp and DeemedRetractibles gaining 3bp. The Performance Highlights table is again quite lengthy, this time heavily skewed towards winners. Volume was very low.

PerpetualDiscounts now yield 5.02%, equivalent to 6.53% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 3.9% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 265bp, a significant widening from the 245bp reported December 24.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

based on Implied Volatility Theory only
are relative only to other FixedResets from the same issuer
assume constant GOC-5 yield
assume constant Implied Volatility
assume constant spread

Here’s TRP:

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So according to this, TRP.PR.A, bid at 21.31, is $1.26 cheap, but it has already reset (at +192). TRP.PR.C, bid at 21.02 and resetting at +154bp on 2016-1-30 is $0.98 rich.

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MFC.PR.F continues to be on the line defined by its peers. Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

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There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.42 and appears to be $0.84 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.11 and appears to be $0.88 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.81, looks $1.06 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.23, looks $1.07 expensive and resets 2019-3-1

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Pairs equivalence is all over the map.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.1280 %	2,539.9
FixedFloater	4.35 %	3.58 %	23,734	18.16	1	0.8776 %	4,018.7
Floater	2.98 %	3.09 %	59,190	19.52	4	0.1280 %	2,700.1
OpRet	4.05 %	1.64 %	98,048	0.44	1	0.0000 %	2,752.0
SplitShare	4.26 %	4.18 %	37,861	4.05	5	0.2848 %	3,208.8
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0000 %	2,516.4
Perpetual-Premium	5.45 %	-3.16 %	61,743	0.09	19	0.2680 %	2,494.2
Perpetual-Discount	5.15 %	5.02 %	106,092	15.39	16	0.5714 %	2,694.7
FixedReset	4.18 %	3.48 %	209,987	16.72	77	0.1253 %	2,555.3
Deemed-Retractible	4.95 %	-0.32 %	95,504	0.14	39	0.0346 %	2,619.5
FloatingReset	2.67 %	1.93 %	60,669	3.41	7	0.2589 %	2,491.0

Performance Highlights
Issue	Index	Change	Notes
HSE.PR.A	FixedReset	-1.33 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 20.72 Evaluated at bid price : 20.72 Bid-YTW : 3.74 %
BNS.PR.Z	FixedReset	-1.02 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.34 Bid-YTW : 3.18 %
GWO.PR.G	Deemed-Retractible	1.00 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2015-02-06 Maturity Price : 25.00 Evaluated at bid price : 25.21 Bid-YTW : -3.75 %
IFC.PR.C	FixedReset	1.02 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.87 Bid-YTW : 2.20 %
CU.PR.F	Perpetual-Discount	1.11 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 22.43 Evaluated at bid price : 22.80 Bid-YTW : 4.97 %
CGI.PR.D	SplitShare	1.16 %	YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2023-06-14 Maturity Price : 25.00 Evaluated at bid price : 26.15 Bid-YTW : 3.17 %
POW.PR.D	Perpetual-Discount	1.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 24.34 Evaluated at bid price : 24.65 Bid-YTW : 5.08 %
BAM.PF.D	Perpetual-Discount	1.26 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 22.21 Evaluated at bid price : 22.52 Bid-YTW : 5.47 %
PWF.PR.P	FixedReset	1.28 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 21.50 Evaluated at bid price : 21.50 Bid-YTW : 3.42 %
BAM.PF.C	Perpetual-Discount	1.32 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 21.93 Evaluated at bid price : 22.26 Bid-YTW : 5.47 %
SLF.PR.B	Deemed-Retractible	1.41 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.39 Bid-YTW : 5.16 %
ENB.PR.Y	FixedReset	1.53 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 22.00 Evaluated at bid price : 22.51 Bid-YTW : 4.15 %
CU.PR.G	Perpetual-Discount	1.56 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 22.44 Evaluated at bid price : 22.80 Bid-YTW : 4.97 %
ELF.PR.H	Perpetual-Premium	1.91 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-04-17 Maturity Price : 25.00 Evaluated at bid price : 25.60 Bid-YTW : 5.06 %
TRP.PR.B	FixedReset	3.10 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 17.95 Evaluated at bid price : 17.95 Bid-YTW : 3.60 %

Volume Highlights
Issue	Index	Shares Traded	Notes
TD.PF.C	FixedReset	272,890	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 23.16 Evaluated at bid price : 25.02 Bid-YTW : 3.46 %
BMO.PR.P	FixedReset	251,818	Scotia crossed 100,000 at 25.35. Desjardins crossed blocks of 100,000 and 50,000, both at 25.36. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-02-25 Maturity Price : 25.00 Evaluated at bid price : 25.35 Bid-YTW : -0.29 %
CM.PR.P	FixedReset	130,475	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 23.16 Evaluated at bid price : 25.00 Bid-YTW : 3.46 %
NA.PR.W	FixedReset	62,200	TD crossed 50,000 at 25.25. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 23.25 Evaluated at bid price : 25.31 Bid-YTW : 3.48 %
MFC.PR.K	FixedReset	47,398	TD crossed 43,200 at 25.35. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.25 Bid-YTW : 3.53 %
BMO.PR.L	Deemed-Retractible	45,278	RBC bought 10,000 from Scotia at 26.55 and another 10,000 from TD at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-02-06 Maturity Price : 25.75 Evaluated at bid price : 26.44 Bid-YTW : -17.73 %
There were 16 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
PWF.PR.A	Floater	Quote: 19.50 – 20.79 Spot Rate : 1.2900 Average : 1.0443 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 19.50 Evaluated at bid price : 19.50 Bid-YTW : 2.71 %
ELF.PR.G	Perpetual-Discount	Quote: 22.86 – 23.19 Spot Rate : 0.3300 Average : 0.1992 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 22.58 Evaluated at bid price : 22.86 Bid-YTW : 5.20 %
MFC.PR.B	Deemed-Retractible	Quote: 24.00 – 24.41 Spot Rate : 0.4100 Average : 0.3028 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.00 Bid-YTW : 5.23 %
ENB.PR.N	FixedReset	Quote: 23.75 – 24.09 Spot Rate : 0.3400 Average : 0.2365 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-07 Maturity Price : 22.75 Evaluated at bid price : 23.75 Bid-YTW : 4.12 %
GWO.PR.P	Deemed-Retractible	Quote: 25.96 – 26.25 Spot Rate : 0.2900 Average : 0.1968 YTW SCENARIO Maturity Type : Call Maturity Date : 2020-03-31 Maturity Price : 25.25 Evaluated at bid price : 25.96 Bid-YTW : 4.79 %
SLF.PR.D	Deemed-Retractible	Quote: 23.09 – 23.41 Spot Rate : 0.3200 Average : 0.2286 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.09 Bid-YTW : 5.49 %

Market Action

January 6, 2015

Nothing happened today except for the the usual decline in equities and related decline in government bond yields, so instead I will devote this post to the Dalhouse Dental Disaster.

For those of you unfamiliar with the news, the basic story is that a group of male Dalhousie dental students started a private group on Facebook, in which they made a lot of juvenile remarks about sex and women, and some that crossed the line into offensive territory, with a poll on which of their female peers should be ‘hate-fucked’. An informer took 70+ screenshots of this stuff and distributed it and it has now become a major talking point – to the point at which dental regulators are opining on the topic:

Also Tuesday, the Alberta Dental Association and College joined Ontario’s dental regulatory body to call on Dalhousie’s dentistry faculty to release the names of the 13 students who posted misogynist comments, “if and when they graduate.”

In a statement, the college said it is “profoundly disturbed about the alleged inappropriate behaviour of some dental students” at Dalhousie and expects dentists who want to practise in Alberta to supply evidence of their good character.

On Monday, the Royal College of Dental Surgeons of Ontario, which regulates 9,000 dentists, said it had asked Dalhousie for the names of the 13 men.

In a statement Tuesday, Dalhousie said “it will not be releasing the names of the individuals involved. The university has an obligation to protect the privacy and confidentiality of our students.”

Irwin Fefergrad, the college’s registrar, had warned that if Dalhousie does not provide the names, the College will ask each Dal graduate if they have been the subject of a university complaint or inquiry. “My members have been appalled and disgusted by the students. I’ve had more e-mails on this issue than I can remember on anything else,” he said.

The Provincial Dental Board of Nova Scotia has also said in a statement it will consider the outcome of the inquiries at Dalhousie in any decision to allow the students to practise.

The men have been suspended from clinical activities while an academic committee considers further penalties, such as academic suspension or expulsion.

Now, by me this is just craziness. The stuff was definitely puerile, but the fact that it’s gotten to the point that it’s career threatening is indicative of a hysterical over-reaction. Regrettably, I’ve seen only one column in the media that agrees with my view but even that went too far in advocating “serious consequences”.

I mean, really, why should the university – or any other authority – be involved at all? It strikes me as much more rational and natural that the women involved should tell the men what goofs they are, receive shamefaced apologies, and then everybody gets on with their lives.

But it is the regulatory involvement that fascinates me, because if juvenile sexual remarks made in supposed privacy are career threatening then basically everybody in the securities industry is about to get fired. So it occurred to me that all of this nonsense about rules and official involvement might be related to the increasing number of women in the workforce in general and in the regulatory industry in particular. My rationale for this is not dependent upon ‘women sticking up for each other’, but on my perception that women in general like process, rules and consequences. But does this perception make me a sexist pig?

I am relieved to state that as far as I can tell it does not. I discovered something called Regulatory Focus Theory:

Regulatory focus theory (RFT) is a goal pursuit theory[1] formulated by Columbia University psychology professor and researcher E. Tory Higgins regarding peoples’ perceptions in the decision making process. RFT examines the relationship between the motivation of a person and the way in which they go about achieving their goal.[2] RFT posits two separate and independent self-regulatory orientations: prevention and promotion (Higgins, 1997).

This psychological theory, like many others, is applied in communication, specifically in the subfields of nonverbal communication and persuasion.Chronic regulatory focus is measured using the Regulatory Focus Questionnaire (Higgins et al., 2001) or the Regulatory Strength measure. Momentary regulatory focus can be primed or induced.

To understand RFT, it is important to understand another of E. Tory Higgins’ theories, Regulatory Fit Theory. When a person believes that there is “fit”, they will involve themselves more in what they are doing and “feel right” about it.[3] Regulatory fit should not directly affect the hedonic occurrence of a thing or occasion, but should influence a person’s assurance in their reaction to the object or event.

Regulatory fit theory suggests that a match between orientation to a goal and the means used to approach that goal produces a state of regulatory fit that both creates a feeling of rightness about the goal pursuit and increases task engagement (Higgins, 2001, 2005). Regulatory fit intensifies responses, such as the value of a chosen object, persuasion, and job satisfaction (Kruglanski, Pierro, & Higgins, 2007).

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And in confirmation of my bias, there’s an interesting paper by Sassenberg, Brazy, Jonas and Shah titled When gender fits self-regulatory preferences: The impact of regulatory fit on gender-based ingroup favoritism, which is available here in full. It interests me more for the introductory literature review than for the specifics of the study:

Females are perceived to have less power than males. These differences in perceived power might render different self-regulatory strategies appropriate: women should (as member of other low power groups) care about security, whereas men should (as members of other high power groups) strive for accomplishment. These regulatory implications of gender provide the basis for regulatory fit between individuals’ gender and their regulatory focus. Higher fit should lead to stronger gender-based in group favoritism: Prevention focused females and promotion focused males were expected to show more ingroup favoritism than both genders in the respective other regulatory focus. According to the regulatory fit hypothesis this effect should occur for evaluative but not stereotype based ingroup favoritism. Three studies supported these hypotheses.
…
Regulatory focus theory (Higgins, 1997, 1998) distinguishes two motivational systems: promotion and prevention focus. These foci differ in their underlying needs(achievement in a promotion focus vs. security in a prevention focus) and in turn imply the pursuit of differing types of goals (ideals, wishes, and aspirations in a promotion focus vs. oughts, duties, and responsibilities in a prevention focus). Individuals in a promotion focus tend to think global and are primarily concerned with the absence and presence of positive outcomes. Individuals in a prevention focus strive to avoid errors, follow rules and are primarily concerned with the absence and presence of negative outcomes. Regulatory focus may vary between situations and between persons.
…
Nonetheless, we assume that the impact of regulatory focus and power on ingroup favoritism generalizes to gender, as females and males share the features of high and low power groups which provide the opportunity for experiencing regulatory fit. Sassenberg et al. (2007) argued that the crucial difference between high and low power groups is that high power groups are perceived to provide the opportunity to apply promotion strategies whereas low power groups are perceived to come with the necessity to apply prevention strategies. Such perceptions also exist for females and males. Gender roles and gender stereotypes indicate that females are(among other things) sensitive, caring, dependent, and submissive, which indicates that a security-oriented strategy is perceived as appropriate for them. Male roles and stereotypes include (among other things) the characteristics daring, competitive, ambitious, and persistent(Bem, 1974; Deaux & Lewis, 1983; Oswald & Lindstedt, 2006; Williams & Best, 1982),suggesting that an achievement-oriented strategy is perceived as appropriate for males. Hence, the roles, stereotypes, and the implied behavioral strategies ascribed to the genders suggest a regulatory fit between females and a prevention focus as well as males and a promotion focus. Therefore, we assume that the fit between regulatory focus and group power also occurs for the genders.

So my interpretation of all this is:

Women are disproportionately drawn towards regulatory work because it involves rulemaking and process
Therefore the culture of the regulatory bodies becomes more feminine – i.e., is more strongly tilted towards the ‘prevention focus’
Therefore more rules get invented and the power of the regulatory body increases

Let’s just hope that broader public regulation does not become as intrusive and vindictive as that exemplified by the Dalhousie dentist fiasco!

It was another poor day for the Canadian preferred share market, with PerpetualDiscounts off 5bp, FixedResets losing 28bp and DeemedRetractibles down 19bp. FixedResets and insurance DeemedRetractibles were prominent on the bad side of the lengthy Performance Highlights table. Volume was low.

Remember that all rich /cheap assessments are:

based on Implied Volatility Theory only
are relative only to other FixedResets from the same issuer
assume constant GOC-5 yield
assume constant Implied Volatility
assume constant spread

Here’s TRP:

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So according to this, TRP.PR.A, bid at 21.36, is $1.06 cheap, but it has already reset (at +192). TRP.PR.C, bid at 21.02 and resetting at +154bp on 2016-1-30 is $1.26 rich.

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There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.24 and appears to be $0.80 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.01 and appears to be $0.86 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.81, looks $1.04 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.26, looks $1.10 expensive and resets 2019-3-1

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Pairs equivalence is all over the map.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.6728 %	2,536.7
FixedFloater	4.39 %	3.62 %	23,825	18.10	1	0.0925 %	3,983.7
Floater	2.99 %	3.10 %	59,006	19.49	4	0.6728 %	2,696.6
OpRet	4.05 %	1.63 %	101,372	0.44	1	0.0395 %	2,752.0
SplitShare	4.27 %	4.18 %	35,681	4.05	5	-0.1426 %	3,199.7
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0395 %	2,516.4
Perpetual-Premium	5.43 %	-2.45 %	61,589	0.08	19	-0.0783 %	2,487.5
Perpetual-Discount	5.17 %	5.05 %	105,806	15.29	16	-0.0503 %	2,679.4
FixedReset	4.19 %	3.49 %	213,130	16.71	77	-0.2800 %	2,552.1
Deemed-Retractible	4.95 %	1.28 %	93,213	0.23	39	-0.1947 %	2,618.6
FloatingReset	2.68 %	1.92 %	60,496	3.41	7	-0.0067 %	2,484.5

Performance Highlights
Issue	Index	Change	Notes
SLF.PR.B	Deemed-Retractible	-2.51 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.05 Bid-YTW : 5.33 %
TRP.PR.B	FixedReset	-2.14 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 17.41 Evaluated at bid price : 17.41 Bid-YTW : 3.71 %
ENB.PR.Y	FixedReset	-1.90 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 21.77 Evaluated at bid price : 22.17 Bid-YTW : 4.23 %
SLF.PR.A	Deemed-Retractible	-1.84 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.06 Bid-YTW : 5.28 %
SLF.PR.C	Deemed-Retractible	-1.75 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.03 Bid-YTW : 5.52 %
ENB.PR.F	FixedReset	-1.68 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 22.63 Evaluated at bid price : 23.41 Bid-YTW : 4.06 %
MFC.PR.C	Deemed-Retractible	-1.60 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.37 Bid-YTW : 5.41 %
FTS.PR.F	Perpetual-Discount	-1.45 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 24.24 Evaluated at bid price : 24.49 Bid-YTW : 5.05 %
BNS.PR.Y	FixedReset	-1.41 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.71 Bid-YTW : 3.12 %
FTS.PR.H	FixedReset	-1.31 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 18.81 Evaluated at bid price : 18.81 Bid-YTW : 3.68 %
HSE.PR.A	FixedReset	-1.18 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 21.00 Evaluated at bid price : 21.00 Bid-YTW : 3.69 %
ENB.PR.B	FixedReset	-1.13 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 22.36 Evaluated at bid price : 22.76 Bid-YTW : 4.09 %
TRP.PR.D	FixedReset	-1.11 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 23.17 Evaluated at bid price : 24.86 Bid-YTW : 3.62 %
TRP.PR.C	FixedReset	-1.08 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 21.02 Evaluated at bid price : 21.02 Bid-YTW : 3.43 %
IAG.PR.A	Deemed-Retractible	1.10 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.96 Bid-YTW : 5.17 %
PWF.PR.A	Floater	1.30 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 19.50 Evaluated at bid price : 19.50 Bid-YTW : 2.71 %
PWF.PR.S	Perpetual-Discount	1.32 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 24.24 Evaluated at bid price : 24.65 Bid-YTW : 4.93 %

Volume Highlights
Issue	Index	Shares Traded	Notes
TD.PF.C	FixedReset	171,110	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 23.17 Evaluated at bid price : 25.03 Bid-YTW : 3.46 %
CM.PR.P	FixedReset	149,360	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 23.13 Evaluated at bid price : 24.93 Bid-YTW : 3.47 %
PVS.PR.D	SplitShare	44,850	National bought blocks of 10,000 and 25,000 from Scotia, both at 24.70. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2021-10-08 Maturity Price : 25.00 Evaluated at bid price : 24.65 Bid-YTW : 4.84 %
CU.PR.G	Perpetual-Discount	41,362	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 22.14 Evaluated at bid price : 22.45 Bid-YTW : 5.06 %
FTS.PR.M	FixedReset	40,662	Nesbitt crossed 33,200 at 25.60. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 23.34 Evaluated at bid price : 25.55 Bid-YTW : 3.63 %
FTS.PR.J	Perpetual-Discount	31,177	ITG bought 11,700 from Nesbitt at 24.25. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 23.92 Evaluated at bid price : 24.32 Bid-YTW : 4.92 %
There were 20 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
SLF.PR.A	Deemed-Retractible	Quote: 24.06 – 24.59 Spot Rate : 0.5300 Average : 0.3269 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.06 Bid-YTW : 5.28 %
NEW.PR.D	SplitShare	Quote: 32.11 – 33.00 Spot Rate : 0.8900 Average : 0.7339 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-06-26 Maturity Price : 32.07 Evaluated at bid price : 32.11 Bid-YTW : 4.18 %
SLF.PR.B	Deemed-Retractible	Quote: 24.05 – 24.48 Spot Rate : 0.4300 Average : 0.2742 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.05 Bid-YTW : 5.33 %
ENB.PR.Y	FixedReset	Quote: 22.17 – 22.60 Spot Rate : 0.4300 Average : 0.2860 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 21.77 Evaluated at bid price : 22.17 Bid-YTW : 4.23 %
BAM.PF.G	FixedReset	Quote: 25.65 – 26.00 Spot Rate : 0.3500 Average : 0.2282 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 23.33 Evaluated at bid price : 25.65 Bid-YTW : 3.97 %
ELF.PR.H	Perpetual-Premium	Quote: 25.12 – 25.56 Spot Rate : 0.4400 Average : 0.3349 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-06 Maturity Price : 24.65 Evaluated at bid price : 25.12 Bid-YTW : 5.48 %

Market Action

January 5, 2014

Kerr-rrash! Equities got hammered today and the damage is spreading:

Crude oil’s slide below $50 sent the Standard & Poor’s 500 Index (SPX) to its biggest drop since October, as selling spread from the energy industry amid concern that cuts in capital spending will hurt earnings.

Energy shares in the S&P 500 plunged 4 percent as West Texas Intermediate sank to the lowest since April 2009. Exxon Mobil Corp. lost 2.7 percent and Chevron Corp. retreated 4 percent. Caterpillar (CAT) Inc. declined 5.3 percent and an index of railroad stocks lost 3.2 percent on concern that the energy slump may hurt spending on capital equipment and crude transportation.

The S&P 500 dropped 1.8 percent to 2,020.58 for its first four-day losing streak since 2013. The gauge fell below its average price for the last 50 days. The Dow Jones Industrial Average retreated 331.34 points, or 1.9 percent, to 17,501.65. More than 7.1 billion shares changed hands on U.S. exchanges, 2.9 percent above the three-month average.

Canada, too:

Canadian stocks posted the steepest plunge since 2013, joining a global selloff, as banks and energy producers tumbled after oil prices slumped below $50 a barrel for the first time in five years amid concern over Greece.

MEG Energy Corp. and Legacy Oil & Gas (LEG) Inc. sank at least 19 percent as energy stocks fell 5.5 percent as a group. Toronto-Dominion Bank and National Bank of Canada slumped more than 2.3 percent as bank shares declined a fourth day. First Quantum Minerals Ltd. lost 8.3 percent with copper at a four-year low.

The Standard & Poor’s/TSX Composite Index (SPTSX) fell 360.95 points, or 2.5 percent, to 14,392.70 at 4 p.m. in Toronto, the biggest decline since June 2013. The benchmark equity gauge rose 7.4 percent in 2014.

Oil prices? Yes, oil prices:

Benchmark U.S. oil prices dropped below $50 a barrel for the first time since April 2009 as surging supply signaled that the global glut that drove crude into a bear market will persist.

West Texas Intermediate slid 5 percent in New York while Brent fell below $55 in London for the first time since May 2009. Russia’s output rose to a post-Soviet high while Iraq, the second-largest producer in OPEC, plans to boost crude exports to a record this month. The price drop accelerated as the dollar climbed against the euro amid investor concern Greece might leave the currency union

Oil is in a race with the Euro, the Loonie and the Ruble:

The euro weakened to an almost nine-year low versus the dollar amid investor concern Greece might leave the currency union and on speculation the European Central Bank has moved closer to large-scale sovereign-bond purchases.

A gauge of the dollar reached the strongest in nine years with the Federal Reserve moving toward raising interest rates. The yen gained to an eight-week high against the euro as a slide in Asian stocks boosted haven demand. The Russian ruble and Canadian dollar slipped as oil fell. Brazil’s real dropped after economists boosted inflation forecasts and cut growth estimates. Volatility jumped to the highest in more than a year.
…
The euro dropped 0.6 percent to $1.1933 as of 5 p.m. in New York after sliding to $1.1864, the least since March 2006. The shared currency fell 1.3 percent to 142.76 yen and earlier reached 142.30, lowest since Nov. 10. The dollar depreciated 0.7 percent to 119.64 yen.

The Bloomberg Dollar Spot Index (BCOM), which tracks the U.S. currency against 10 major peers, rose 0.2 percent to 1,143.40 and touched 1,146.49, the highest in data going back to 2005.

The Canadian preferred share market was also hit on the day, with PerpetualDiscounts off 12bp, FixedResets down 22bp and DeemedRetractibles losing 37bp. The performance highlights table is suitably lengthy, with insurance DeemedRetractibles prominent on the downside. Volume was extremely low.

Remember that all rich /cheap assessments are:

based on Implied Volatility Theory only
are relative only to other FixedResets from the same issuer
assume constant GOC-5 yield
assume constant Implied Volatility
assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 21.23, is $1.35 cheap, but it has already reset (at +192). TRP.PR.C, bid at 21.25 and resetting at +154bp on 2016-1-30 is $1.31 rich.

Click for Big

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.35 and appears to be $0.87 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.16 and appears to be $0.98 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 19.06, looks $0.98 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.32, looks $1.04 expensive and resets 2019-3-1

Click for Big

Pairs equivalence is all over the map.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.2296 %	2,519.7
FixedFloater	4.39 %	3.63 %	24,737	18.09	1	0.0000 %	3,980.1
Floater	3.01 %	3.11 %	59,692	19.48	4	0.2296 %	2,678.6
OpRet	4.05 %	1.71 %	102,942	0.45	1	-0.0395 %	2,750.9
SplitShare	4.27 %	4.09 %	34,694	3.65	5	-0.0158 %	3,204.3
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0395 %	2,515.4
Perpetual-Premium	5.43 %	-4.95 %	62,467	0.08	19	-0.1317 %	2,489.5
Perpetual-Discount	5.16 %	5.03 %	105,253	15.31	16	-0.1189 %	2,680.7
FixedReset	4.17 %	3.49 %	214,503	16.72	77	-0.2156 %	2,559.3
Deemed-Retractible	4.93 %	1.04 %	94,024	0.14	39	-0.3705 %	2,623.7
FloatingReset	2.68 %	1.89 %	60,675	3.40	7	-0.8766 %	2,484.7

Performance Highlights
Issue	Index	Change	Notes
TRP.PR.F	FloatingReset	-5.22 %	Not really all that real, since the low for the day was 22.01, with transaction prices falling on the basis of 7,200 shares sold in the last half hour. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 3.31 %
HSE.PR.A	FixedReset	-2.12 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 3.64 %
GWO.PR.H	Deemed-Retractible	-2.09 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.33 Bid-YTW : 5.24 %
FTS.PR.J	Perpetual-Discount	-2.02 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 23.87 Evaluated at bid price : 24.27 Bid-YTW : 4.93 %
SLF.PR.E	Deemed-Retractible	-1.80 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.46 Bid-YTW : 5.34 %
ENB.PR.B	FixedReset	-1.67 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 22.53 Evaluated at bid price : 23.02 Bid-YTW : 4.04 %
SLF.PR.A	Deemed-Retractible	-1.57 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.51 Bid-YTW : 5.04 %
SLF.PR.D	Deemed-Retractible	-1.47 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.41 Bid-YTW : 5.31 %
SLF.PR.C	Deemed-Retractible	-1.39 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.44 Bid-YTW : 5.29 %
MFC.PR.B	Deemed-Retractible	-1.35 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.16 Bid-YTW : 5.14 %
GWO.PR.I	Deemed-Retractible	-1.34 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.55 Bid-YTW : 5.29 %
POW.PR.D	Perpetual-Discount	-1.33 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 24.16 Evaluated at bid price : 24.41 Bid-YTW : 5.13 %
TRP.PR.C	FixedReset	-1.16 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 3.39 %
PWF.PR.T	FixedReset	-1.14 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-01-31 Maturity Price : 25.00 Evaluated at bid price : 26.11 Bid-YTW : 3.24 %
ENB.PR.P	FixedReset	-1.10 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 22.54 Evaluated at bid price : 23.38 Bid-YTW : 4.07 %
MFC.PR.C	Deemed-Retractible	-1.08 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.75 Bid-YTW : 5.20 %
ELF.PR.H	Perpetual-Premium	-1.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 24.63 Evaluated at bid price : 25.10 Bid-YTW : 5.48 %
PWF.PR.L	Perpetual-Premium	-1.02 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 24.85 Evaluated at bid price : 25.17 Bid-YTW : 5.14 %
PWF.PR.A	Floater	1.21 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 19.25 Evaluated at bid price : 19.25 Bid-YTW : 2.75 %
GWO.PR.P	Deemed-Retractible	1.28 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2020-03-31 Maturity Price : 25.25 Evaluated at bid price : 26.11 Bid-YTW : 4.65 %
TRP.PR.A	FixedReset	1.48 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 21.23 Evaluated at bid price : 21.23 Bid-YTW : 3.80 %

Volume Highlights
Issue	Index	Shares Traded	Notes
FTS.PR.M	FixedReset	152,325	RBC crossed blocks of 96,100 and 50,000, both at 25.60. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 23.34 Evaluated at bid price : 25.54 Bid-YTW : 3.63 %
TRP.PR.A	FixedReset	133,454	Nesbitt crossed 114,000 at 21.04. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 21.23 Evaluated at bid price : 21.23 Bid-YTW : 3.80 %
TD.PF.C	FixedReset	116,740	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 23.15 Evaluated at bid price : 24.97 Bid-YTW : 3.47 %
TRP.PR.F	FloatingReset	73,755	Recent exchange from TRP.PR.A. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 3.31 %
CU.PR.F	Perpetual-Discount	52,620	RBC crossed 50,000 at 22.55. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 22.19 Evaluated at bid price : 22.51 Bid-YTW : 5.04 %
CM.PR.P	FixedReset	50,675	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 23.14 Evaluated at bid price : 24.95 Bid-YTW : 3.47 %
There were 7 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
TRP.PR.F	FloatingReset	Quote: 21.25 – 22.30 Spot Rate : 1.0500 Average : 0.6756 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 3.31 %
GWO.PR.I	Deemed-Retractible	Quote: 23.55 – 24.00 Spot Rate : 0.4500 Average : 0.2863 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.55 Bid-YTW : 5.29 %
GWO.PR.H	Deemed-Retractible	Quote: 24.33 – 24.80 Spot Rate : 0.4700 Average : 0.3367 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.33 Bid-YTW : 5.24 %
IAG.PR.A	Deemed-Retractible	Quote: 23.70 – 24.18 Spot Rate : 0.4800 Average : 0.3496 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.70 Bid-YTW : 5.31 %
FTS.PR.J	Perpetual-Discount	Quote: 24.27 – 24.65 Spot Rate : 0.3800 Average : 0.2612 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 23.87 Evaluated at bid price : 24.27 Bid-YTW : 4.93 %
CU.PR.F	Perpetual-Discount	Quote: 22.51 – 22.90 Spot Rate : 0.3900 Average : 0.2749 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-05 Maturity Price : 22.19 Evaluated at bid price : 22.51 Bid-YTW : 5.04 %

Market Action

January 2, 2015

The loonie got out of the wrong side of bed this year:

The loonie plunged to a level not seen in more than five years Friday amid a strengthening U.S. greenback and weaker crude oil prices.

The Canadian dollar ended the day down 1.18 cents at 85.02 cents (U.S.), The last time it closed below this level was on May 15, 2009.

The currency finished 2014 down about 8 per cent or 7.8 cents against the American currency compared with where it began the year.

It’s in a race with oil:

Oil dropped to the lowest in more than five and a half years amid growing supply from Russia and Iraq and signs of manufacturing weakness in Europe and China.

Futures capped a sixth weekly loss in New York and London. Oil output in Russia and Iraq surged to the highest levels in decades in December, according to data from both countries’ governments. Euro-area factory output expanded less than initially estimated in December. A manufacturing gauge in China, the world’s second-largest oil consumer, fell to the weakest level in 18 months, government data showed yesterday.

Prices slumped 46 percent in New York in 2014, the steepest drop in six years and second-worst since trading began in 1983, as U.S. producers and the Organization of Petroleum Exporting Countries ceded no ground in their battle for market share. OPEC pumped above its quota for a seventh month in December even as U.S. output expanded to the highest in more than three decades, according to data compiled by Bloomberg.

What I need is a gimmick:

So-called “smart beta” funds, the fastest-growing segment of the exchange-traded fund market, are sold as index funds but are actively – sometimes frenetically – traded portfolios that can whipsaw investors and often fail to deliver the outsized returns their issuers promote.

Over the last one- and three-year periods, they have on average lagged their plain-vanilla counterparts in almost every highly competitive category, according to an analysis performed for Reuters by ETF.com, a research firm. Along the way, many have turned over their portfolios two and three times a year and undershot their own specialized benchmarks by significant margins.

Yet they have become a magnet for investor dollars, pulling in 60 cents of every dollar flowing to ETFs over the last two years, according to Morningstar.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 8bp, FixedResets down 10bp and DeemedRetractibles off 2bp. The modest numbers masked an impressive amount of volatility, but volume was virtually non-existent.

Remember that all rich /cheap assessments are:

based on Implied Volatility Theory only
are relative only to other FixedResets from the same issuer
assume constant GOC-5 yield
assume constant Implied Volatility
assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 21.20, is $1.17 cheap (despite today’s impressive performance), but it has already reset (at +192). TRP.PR.C, bid at 21.11 and resetting at +154bp on 2016-1-30 is $1.37 rich.

Click for Big

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.21 and appears to be $0.87 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.10 and appears to be $0.98 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 19.30, looks $0.93 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.29, looks $0.89 expensive and resets 2019-3-1

Click for Big

Pairs equivalence is all over the map, but is better than yesterday and will probably converge as volumes increase in the new year.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.1294 %	2,513.9
FixedFloater	0.00 %	0.00 %	0	0.00	1	0.1294 %	3,980.1
Floater	3.02 %	3.12 %	61,889	19.46	4	0.1294 %	2,672.5
OpRet	4.05 %	1.68 %	102,319	0.46	1	0.0000 %	2,752.0
SplitShare	4.27 %	4.12 %	32,850	3.66	5	-0.1421 %	3,204.8
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0000 %	2,516.4
Perpetual-Premium	5.43 %	-5.54 %	63,048	0.08	19	-0.0226 %	2,492.8
Perpetual-Discount	5.17 %	5.03 %	106,390	15.32	16	0.0795 %	2,683.9
FixedReset	4.17 %	3.57 %	222,956	8.41	77	-0.1027 %	2,564.8
Deemed-Retractible	4.92 %	0.53 %	93,980	0.16	39	-0.0157 %	2,633.5
FloatingReset	2.64 %	1.86 %	58,814	3.40	7	0.2097 %	2,506.7

Performance Highlights
Issue	Index	Change	Notes
MFC.PR.F	FixedReset	-2.82 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.72 Bid-YTW : 4.71 %
TRP.PR.C	FixedReset	-1.81 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-02 Maturity Price : 21.11 Evaluated at bid price : 21.11 Bid-YTW : 3.56 %
MFC.PR.L	FixedReset	-1.76 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.05 Bid-YTW : 3.73 %
CU.PR.D	Perpetual-Discount	-1.44 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-02 Maturity Price : 24.14 Evaluated at bid price : 24.56 Bid-YTW : 5.02 %
CU.PR.E	Perpetual-Discount	-1.20 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-02 Maturity Price : 24.18 Evaluated at bid price : 24.60 Bid-YTW : 5.01 %
FTS.PR.J	Perpetual-Discount	-1.05 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-02 Maturity Price : 24.10 Evaluated at bid price : 24.51 Bid-YTW : 4.88 %
BAM.PF.C	Perpetual-Discount	1.02 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-02 Maturity Price : 21.56 Evaluated at bid price : 21.86 Bid-YTW : 5.57 %
FTS.PR.H	FixedReset	1.10 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-02 Maturity Price : 19.30 Evaluated at bid price : 19.30 Bid-YTW : 3.76 %
HSE.PR.A	FixedReset	1.22 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-02 Maturity Price : 21.35 Evaluated at bid price : 21.65 Bid-YTW : 3.69 %
BAM.PR.M	Perpetual-Discount	1.73 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-02 Maturity Price : 21.44 Evaluated at bid price : 21.76 Bid-YTW : 5.48 %
MFC.PR.C	Deemed-Retractible	1.95 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.01 Bid-YTW : 5.06 %
BAM.PR.N	Perpetual-Discount	1.96 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-02 Maturity Price : 21.85 Evaluated at bid price : 21.85 Bid-YTW : 5.47 %
TRP.PR.A	FixedReset	2.66 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-02 Maturity Price : 21.20 Evaluated at bid price : 21.20 Bid-YTW : 3.92 %

Volume Highlights
Issue	Index	Shares Traded	Notes
TRP.PR.F	FloatingReset	29,650	Recent exchange from TRP.PR.A. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-02 Maturity Price : 22.10 Evaluated at bid price : 22.36 Bid-YTW : 3.11 %
BAM.PF.D	Perpetual-Discount	23,825	ITG (who?) bought 14,300 from CIBC at 22.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-02 Maturity Price : 21.75 Evaluated at bid price : 22.03 Bid-YTW : 5.59 %
TD.PF.C	FixedReset	22,840	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-02 Maturity Price : 23.14 Evaluated at bid price : 24.95 Bid-YTW : 3.57 %
BAM.PF.G	FixedReset	15,415	YTW SCENARIO Maturity Type : Call Maturity Date : 2020-06-30 Maturity Price : 25.00 Evaluated at bid price : 25.56 Bid-YTW : 4.07 %
BNS.PR.M	Deemed-Retractible	14,075	YTW SCENARIO Maturity Type : Call Maturity Date : 2015-02-01 Maturity Price : 25.50 Evaluated at bid price : 25.87 Bid-YTW : -16.79 %
BNS.PR.L	Deemed-Retractible	10,476	YTW SCENARIO Maturity Type : Call Maturity Date : 2015-02-01 Maturity Price : 25.50 Evaluated at bid price : 25.86 Bid-YTW : -16.36 %
There were 0 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
TD.PR.T	FloatingReset	Quote: 25.49 – 26.53 Spot Rate : 1.0400 Average : 0.5655 YTW SCENARIO Maturity Type : Call Maturity Date : 2018-07-31 Maturity Price : 25.00 Evaluated at bid price : 25.49 Bid-YTW : 1.86 %
MFC.PR.F	FixedReset	Quote: 21.72 – 22.40 Spot Rate : 0.6800 Average : 0.4444 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.72 Bid-YTW : 4.71 %
MFC.PR.L	FixedReset	Quote: 25.05 – 25.60 Spot Rate : 0.5500 Average : 0.3612 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.05 Bid-YTW : 3.73 %
TRP.PR.C	FixedReset	Quote: 21.11 – 21.69 Spot Rate : 0.5800 Average : 0.4198 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-02 Maturity Price : 21.11 Evaluated at bid price : 21.11 Bid-YTW : 3.56 %
ELF.PR.G	Perpetual-Discount	Quote: 22.75 – 23.13 Spot Rate : 0.3800 Average : 0.2524 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-01-02 Maturity Price : 22.46 Evaluated at bid price : 22.75 Bid-YTW : 5.22 %
CGI.PR.D	SplitShare	Quote: 25.75 – 26.15 Spot Rate : 0.4000 Average : 0.2761 YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2023-06-14 Maturity Price : 25.00 Evaluated at bid price : 25.75 Bid-YTW : 3.38 %

Market Action

December 31, 2014

Nothing happened today.

The Canadian preferred share market closed the year on a very strong note, with PerpetualDiscounts winning 52bp, FixedResets up 42bp and DeemedRetractibles gaining 23bp. The Performance Highlights Table is suitably enormous, with a large complement of winners from the credit-nervous ENB. Volume was tiny.

Remember that all rich /cheap assessments are:

based on Implied Volatility Theory only
are relative only to other FixedResets from the same issuer
assume constant GOC-5 yield
assume constant Implied Volatility
assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 20.65, is $1.67 cheap, but it has already reset (at +192). TRP.PR.C, bid at 21.50 and resetting at +154bp on 2016-1-30 is $1.79 rich.

Click for Big

Today’s fine performance (+2.01%!) has brought MFC.PR.F back to the line defined by its peers. Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.16 and appears to be $0.81 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.25 and appears to be $1.11 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 19.09, looks $1.05 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.42, looks $1.03 expensive and resets 2019-3-1

Click for Big

Pairs equivalence is all over the map, but will probably converge as volumes increase in the new year.

And that’s it for another year!

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	-0.4579 %	2,510.7
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.4579 %	3,974.9
Floater	3.02 %	3.09 %	63,986	19.48	4	-0.4579 %	2,669.0
OpRet	4.41 %	-1.83 %	23,195	0.08	2	0.0000 %	2,752.0
SplitShare	4.26 %	4.04 %	34,192	3.67	5	0.0626 %	3,209.3
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0000 %	2,516.4
Perpetual-Premium	5.44 %	-4.91 %	65,647	0.09	20	0.1942 %	2,493.3
Perpetual-Discount	5.14 %	5.04 %	107,501	15.32	15	0.5221 %	2,681.8
FixedReset	4.17 %	3.57 %	231,565	8.46	77	0.4168 %	2,567.4
Deemed-Retractible	4.94 %	-1.38 %	91,140	0.09	40	0.2297 %	2,633.9
FloatingReset	2.63 %	-3.31 %	61,235	0.08	6	-1.9589 %	2,501.4

Performance Highlights
Issue	Index	Change	Notes
IAG.PR.A	Deemed-Retractible	-1.25 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.65 Bid-YTW : 5.33 %
PWF.PR.A	Floater	-1.25 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 19.01 Evaluated at bid price : 19.01 Bid-YTW : 2.78 %
ENB.PR.N	FixedReset	1.01 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 22.88 Evaluated at bid price : 24.04 Bid-YTW : 4.16 %
ENB.PR.D	FixedReset	1.07 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 22.71 Evaluated at bid price : 23.52 Bid-YTW : 4.03 %
GWO.PR.H	Deemed-Retractible	1.11 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.62 Bid-YTW : 5.07 %
POW.PR.G	Perpetual-Premium	1.11 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-04-15 Maturity Price : 25.50 Evaluated at bid price : 26.44 Bid-YTW : 4.51 %
PWF.PR.T	FixedReset	1.15 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-01-31 Maturity Price : 25.00 Evaluated at bid price : 26.40 Bid-YTW : 2.93 %
ENB.PR.P	FixedReset	1.16 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 22.66 Evaluated at bid price : 23.62 Bid-YTW : 4.12 %
TRP.PR.B	FixedReset	1.24 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 17.92 Evaluated at bid price : 17.92 Bid-YTW : 3.79 %
RY.PR.L	FixedReset	1.26 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-02-24 Maturity Price : 25.00 Evaluated at bid price : 26.54 Bid-YTW : 2.80 %
ENB.PR.F	FixedReset	1.27 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 22.85 Evaluated at bid price : 23.85 Bid-YTW : 4.08 %
BAM.PF.B	FixedReset	1.28 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-03-31 Maturity Price : 25.00 Evaluated at bid price : 25.35 Bid-YTW : 3.86 %
SLF.PR.D	Deemed-Retractible	1.32 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.79 Bid-YTW : 5.10 %
ENB.PF.C	FixedReset	1.32 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 22.97 Evaluated at bid price : 24.50 Bid-YTW : 4.16 %
MFC.PR.L	FixedReset	1.39 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-06-19 Maturity Price : 25.00 Evaluated at bid price : 25.50 Bid-YTW : 3.46 %
GWO.PR.P	Deemed-Retractible	1.40 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2020-03-31 Maturity Price : 25.25 Evaluated at bid price : 26.01 Bid-YTW : 4.72 %
BAM.PF.D	Perpetual-Discount	1.43 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 21.65 Evaluated at bid price : 21.99 Bid-YTW : 5.59 %
ENB.PR.J	FixedReset	1.45 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 23.07 Evaluated at bid price : 24.55 Bid-YTW : 4.07 %
SLF.PR.E	Deemed-Retractible	1.49 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.90 Bid-YTW : 5.09 %
CU.PR.E	Perpetual-Discount	1.55 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 24.47 Evaluated at bid price : 24.90 Bid-YTW : 4.95 %
CU.PR.D	Perpetual-Discount	1.80 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 24.49 Evaluated at bid price : 24.92 Bid-YTW : 4.95 %
ENB.PR.T	FixedReset	1.82 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 22.58 Evaluated at bid price : 23.50 Bid-YTW : 4.15 %
ENB.PF.A	FixedReset	1.91 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 23.03 Evaluated at bid price : 24.60 Bid-YTW : 4.15 %
MFC.PR.F	FixedReset	2.01 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.35 Bid-YTW : 4.37 %
FTS.PR.J	Perpetual-Discount	2.14 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 24.35 Evaluated at bid price : 24.77 Bid-YTW : 4.82 %
TRP.PR.C	FixedReset	2.33 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 21.50 Evaluated at bid price : 21.50 Bid-YTW : 3.49 %

Volume Highlights
Issue	Index	Shares Traded	Notes
CM.PR.P	FixedReset	100,450	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 23.13 Evaluated at bid price : 24.93 Bid-YTW : 3.57 %
FTS.PR.J	Perpetual-Discount	41,518	ITG (who?) bought blocks of 19,400 and 19,100 from Nesbitt, both at 24.80. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 24.35 Evaluated at bid price : 24.77 Bid-YTW : 4.82 %
TRP.PR.F	FloatingReset	37,025	Newly exchanged from TRP.PR.A. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 22.00 Evaluated at bid price : 22.26 Bid-YTW : 3.11 %
MFC.PR.L	FixedReset	32,700	Nesbitt crossed 31,700 at 25.50. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-06-19 Maturity Price : 25.00 Evaluated at bid price : 25.50 Bid-YTW : 3.46 %
TD.PF.C	FixedReset	32,025	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 23.14 Evaluated at bid price : 24.95 Bid-YTW : 3.57 %
ENB.PF.E	FixedReset	13,700	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 22.98 Evaluated at bid price : 24.56 Bid-YTW : 4.16 %
There were 0 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
PVS.PR.C	SplitShare	Quote: 25.65 – 30.00 Spot Rate : 4.3500 Average : 2.3280 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2017-12-10 Maturity Price : 25.00 Evaluated at bid price : 25.65 Bid-YTW : 4.04 %
PWF.PR.A	Floater	Quote: 19.01 – 20.00 Spot Rate : 0.9900 Average : 0.7269 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 19.01 Evaluated at bid price : 19.01 Bid-YTW : 2.78 %
BAM.PR.N	Perpetual-Discount	Quote: 21.43 – 22.02 Spot Rate : 0.5900 Average : 0.4210 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 21.43 Evaluated at bid price : 21.43 Bid-YTW : 5.58 %
TRP.PR.E	FixedReset	Quote: 25.21 – 25.74 Spot Rate : 0.5300 Average : 0.4173 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 23.24 Evaluated at bid price : 25.21 Bid-YTW : 3.69 %
CU.PR.C	FixedReset	Quote: 25.87 – 26.60 Spot Rate : 0.7300 Average : 0.6227 YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-01 Maturity Price : 25.00 Evaluated at bid price : 25.87 Bid-YTW : 2.66 %
ENB.PR.Y	FixedReset	Quote: 22.46 – 22.82 Spot Rate : 0.3600 Average : 0.2564 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-31 Maturity Price : 21.97 Evaluated at bid price : 22.46 Bid-YTW : 4.27 %

Market Action

December 30, 2014

Kevin Carmichael of the Centre for International Governance Innovation writes a piece in the Globe titled Canada’s monetary authority lacks American commitment to transparency:

The Bank of Canada believes transcripts and minutes would degrade the quality of debate by making policy makers conscious of an external audience. There also is a belief that since the Governing Council exists by convention, and that it is the governor who is responsible for monetary policy under the Bank of Canada Act, an official record of the policy committee’s meetings is unnecessary. “There are no votes; instead, the Governing Council works toward a consensus viewpoint,” Rebeca Ryall, a media relations officer at the Bank of Canada, said in an e-mail. “This process allows for a frank discussion where Governing Council members are free to challenge one another and push the boundaries of the debate in order to arrive at a decision they are all comfortable with.”

In other words, the members of Governing Council are such pathetic little twerps they will burst into tears if they are contradicted in public. Though I will admit there are other possibilities: the meetings either don’t happen at all, or are closely supervised by a few functionaries from the Ministry of Finance casually wielding rubber hoses.

Mr. Carmichael’s article references a paper by Kevin Warsh titled Transparency and the Bank of England’s Monetary Policy Committee which includes the following three charts:

Click For Big

I will be pleased to concede that the scoring is highly subjective and I will also cheerfully admit that it will be very difficult to prove to a determined skeptic that transparency is a good proxy or predictor for quality of the Bank’s decisions or the effectiveness of its implementation of policy.

After all, the main reason for transparency is to improve the public’s confidence in, and ability to predict the future course of, the process. If, for instance, one section of the minutes, released after three weeks, were to include the statement “If housing prices go up any more we’re gonna have to kick some ass (growls of approbation)“, then I suggest that would probably count as pretty good jawboning and result in very good transmission of monetary policy – particularly should housing prices go up, followed by a 50bp hike in policy rates at the next meeting.

And, given that the Bank of Canada is out of step with its peers (ranking just above the bottom on the current scoring, whereas in 1998 it ranked just below the top), I suggest that the onus of explanation for the variance from international trends is now with the Bank. If they’ve got a better reason for secrecy than cowardice and total lack of intellectual talent, let’s hear it.

Anyway, Assiduous Readers will recognize this as a long-term PrefBlog gripe, last voiced October 30, 2014, when the CDHowe Institute advocated the publication of minutes with particular emphasis on disclosure of dissenting views.

A reliable source advises me that 12,501,577 shares (of 22-million outstanding, or 57%) of TRP.PR.A have been converted to TRP.PR.F, its corresponding FloatingReset. I can’t confirm this on the company site, SEDAR, or the TSX site as yet, but will issue a full post when the company decides to let its investors know what’s going on.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 5bp, FixedResets gaining 15bp and DeemedRetractibles flat. Volatility continued to be both high and dominated by familiar issues, with ENB issues prominent on the upside, continuing a recovery from the probably credit induced downturn experienced earlier this month. Volume was many adjectives low.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 20.58, is $1.36 cheap, but it has already reset (at +192). TRP.PR.C, bid at 20.35 and resetting at +154bp on 2016-1-30 is $0.98 rich.

Click for Big

MFC.PR.F has wandered off into its own little cheap world again, bid at 21.30 to be $0.50 cheap according to the calculation. It resets 2016-6-19 at +141bp. Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 20.99 and appears to be $0.72 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.00 and appears to be $1.10 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.95, looks $1.16 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.40, looks $1.17 expensive and resets 2019-3-1

Click for Big

The average break-even rate has declined from 1.80%-2.00% at the time recent conversion decisions were made to a current very wide range of (mostly) 1.50%-1.70%. This decline means that the estimated profit on TRP.PR.A conversion has declined from $0.48 to a mere $0.16 (at the lower end of the range, 1.50%).

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.2439 %	2,522.2
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.2439 %	3,993.2
Floater	3.01 %	3.09 %	64,530	19.48	4	0.2439 %	2,681.3
OpRet	4.41 %	-2.45 %	23,304	0.08	2	0.0000 %	2,752.0
SplitShare	4.26 %	3.82 %	35,583	3.67	5	0.1600 %	3,207.3
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0000 %	2,516.4
Perpetual-Premium	5.45 %	-4.62 %	67,395	0.08	20	-0.0118 %	2,488.5
Perpetual-Discount	5.17 %	5.06 %	107,827	15.32	15	-0.0538 %	2,667.9
FixedReset	4.20 %	3.59 %	239,893	8.34	77	0.1462 %	2,556.8
Deemed-Retractible	4.95 %	0.27 %	91,755	0.16	40	-0.0010 %	2,627.9
FloatingReset	2.55 %	1.89 %	63,753	3.41	5	0.2435 %	2,551.4

Performance Highlights
Issue	Index	Change	Notes
MFC.PR.F	FixedReset	-1.97 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.91 Bid-YTW : 4.61 %
FTS.PR.J	Perpetual-Discount	-1.90 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 23.85 Evaluated at bid price : 24.25 Bid-YTW : 4.93 %
GWO.PR.H	Deemed-Retractible	-1.42 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.35 Bid-YTW : 5.21 %
GWO.PR.P	Deemed-Retractible	-1.35 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.65 Bid-YTW : 5.10 %
TRP.PR.E	FixedReset	-1.33 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 23.24 Evaluated at bid price : 25.21 Bid-YTW : 3.69 %
CU.PR.D	Perpetual-Discount	-1.21 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 24.06 Evaluated at bid price : 24.48 Bid-YTW : 5.04 %
RY.PR.L	FixedReset	-1.17 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-02-24 Maturity Price : 25.00 Evaluated at bid price : 26.21 Bid-YTW : 3.13 %
ENB.PF.G	FixedReset	1.02 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 23.00 Evaluated at bid price : 24.65 Bid-YTW : 4.16 %
MFC.PR.C	Deemed-Retractible	1.03 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.58 Bid-YTW : 5.28 %
ENB.PR.Y	FixedReset	1.03 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 21.97 Evaluated at bid price : 22.46 Bid-YTW : 4.27 %
HSE.PR.A	FixedReset	1.13 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 21.54 Evaluated at bid price : 21.54 Bid-YTW : 3.74 %
MFC.PR.B	Deemed-Retractible	1.17 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.30 Bid-YTW : 5.06 %
ENB.PR.J	FixedReset	1.17 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 22.93 Evaluated at bid price : 24.20 Bid-YTW : 4.15 %
BAM.PR.M	Perpetual-Discount	1.17 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 21.55 Evaluated at bid price : 21.55 Bid-YTW : 5.55 %
BAM.PF.C	Perpetual-Discount	1.18 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 21.44 Evaluated at bid price : 21.44 Bid-YTW : 5.70 %
IAG.PR.A	Deemed-Retractible	1.23 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.95 Bid-YTW : 5.17 %
ENB.PF.E	FixedReset	1.24 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 22.92 Evaluated at bid price : 24.40 Bid-YTW : 4.20 %
ELF.PR.F	Perpetual-Discount	1.33 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 24.64 Evaluated at bid price : 24.90 Bid-YTW : 5.33 %
ENB.PF.C	FixedReset	1.38 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 22.84 Evaluated at bid price : 24.18 Bid-YTW : 4.23 %
ENB.PR.P	FixedReset	1.39 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 22.52 Evaluated at bid price : 23.35 Bid-YTW : 4.18 %
ENB.PR.D	FixedReset	1.44 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 22.58 Evaluated at bid price : 23.27 Bid-YTW : 4.08 %
ENB.PR.T	FixedReset	1.45 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 22.36 Evaluated at bid price : 23.08 Bid-YTW : 4.24 %
ENB.PR.N	FixedReset	1.62 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 22.77 Evaluated at bid price : 23.80 Bid-YTW : 4.21 %
ENB.PR.B	FixedReset	1.72 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 22.58 Evaluated at bid price : 23.11 Bid-YTW : 4.14 %
GWO.PR.R	Deemed-Retractible	1.81 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.74 Bid-YTW : 4.96 %
ENB.PR.F	FixedReset	2.17 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 22.70 Evaluated at bid price : 23.55 Bid-YTW : 4.15 %
TRP.PR.B	FixedReset	2.67 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 17.70 Evaluated at bid price : 17.70 Bid-YTW : 3.84 %
TRP.PR.C	FixedReset	4.37 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 21.01 Evaluated at bid price : 21.01 Bid-YTW : 3.57 %

Volume Highlights
Issue	Index	Shares Traded	Notes
CM.PR.P	FixedReset	129,200	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 23.11 Evaluated at bid price : 24.86 Bid-YTW : 3.58 %
TD.PF.C	FixedReset	79,440	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 23.13 Evaluated at bid price : 24.92 Bid-YTW : 3.58 %
BAM.PF.C	Perpetual-Discount	17,755	RBC crossed 10,000 at 21.45. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 21.44 Evaluated at bid price : 21.44 Bid-YTW : 5.70 %
TRP.PR.C	FixedReset	15,100	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 21.01 Evaluated at bid price : 21.01 Bid-YTW : 3.57 %
HSE.PR.C	FixedReset	14,300	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.26 Bid-YTW : 4.35 %
BMO.PR.J	Deemed-Retractible	12,170	YTW SCENARIO Maturity Type : Call Maturity Date : 2015-02-25 Maturity Price : 25.25 Evaluated at bid price : 25.75 Bid-YTW : -5.34 %
There were 6 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
GWO.PR.H	Deemed-Retractible	Quote: 24.35 – 24.95 Spot Rate : 0.6000 Average : 0.3944 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.35 Bid-YTW : 5.21 %
FTS.PR.J	Perpetual-Discount	Quote: 24.25 – 24.80 Spot Rate : 0.5500 Average : 0.3638 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 23.85 Evaluated at bid price : 24.25 Bid-YTW : 4.93 %
MFC.PR.F	FixedReset	Quote: 21.91 – 22.38 Spot Rate : 0.4700 Average : 0.3026 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.91 Bid-YTW : 4.61 %
GWO.PR.P	Deemed-Retractible	Quote: 25.65 – 26.10 Spot Rate : 0.4500 Average : 0.2936 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.65 Bid-YTW : 5.10 %
RY.PR.L	FixedReset	Quote: 26.21 – 26.55 Spot Rate : 0.3400 Average : 0.2103 YTW SCENARIO Maturity Type : Call Maturity Date : 2019-02-24 Maturity Price : 25.00 Evaluated at bid price : 26.21 Bid-YTW : 3.13 %
CU.PR.D	Perpetual-Discount	Quote: 24.48 – 24.90 Spot Rate : 0.4200 Average : 0.2929 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-30 Maturity Price : 24.06 Evaluated at bid price : 24.48 Bid-YTW : 5.04 %

Market Action

December 29, 2014

With all the idiotically mandated bonus deferrals, we’re going to see a lot more of this:

Bank of America Corp. maliciously fired a distressed-debt banker to deprive her of a bonus, a Hong Kong judge ruled, awarding Sunny Tadjudin $500,000 after a seven-year legal battle.

Tadjudin’s manager, John Liptak, was determined to fire her despite her improvement in a performance plan, and his malice can be attributed to the bank, High Court Judge Anthony To said in a 141-page ruling issued yesterday. Still, Tadjudin will receive only a fraction of the amount she requested.

Tadjudin, 51, who worked for the bank’s Asian distressed-debt trading group, had sought bonuses totaling $3.7 million after being fired in 2007 following what she said were irrational and arbitrary performance ratings. To ruled against her claims for higher 2005 and 2006 bonuses than she received.

In Canada, of course, we have the example of Scotiabank and David Berry. There is some speculation he will get his due:

How much, if any, of Bank of Nova Scotia’s $55 million legal charge is related to Dave Berry’s $100 million law suit?

Two days back the Bank of Nova Scotia surprised the markets with news that it would be taking a series of charges in the fourth quarter of its recently completed fiscal year. In all there were $451 million of pre-tax charges, which converts to $341 million on an after tax-basis.

One item has attracted particular attention: “Thirdly, the Bank expects to record a legal charge of approximately $55 million related to certain ongoing legal claims in multiple business lines.”

Could that item be related to the $100 million lawsuit filed by David Berry, the bank’s former head of preferred share trading who was terminated more than nine years ago? Berry’s lawsuit – which is slated to trial next year – alleges wrongful dismissal.

The suit also alleges that his termination – at the time he was the highest paid employee at the bank earning a percentage of the profits made by his group – “was the result of blame-shifting, corporate self interest or greed on the part of Scotia Capital and its inadequate internal compliance, training and education procedures.”

It certainly would be nice if those sleaze-bags and ignoramuses at Scotia did the right thing … even ten years later and after umpteen hearings.

The Greek Tragedy is being revived, but there is much less excitement this time:

Investor reaction to the Greek parliament’s failure to pick a president traced the familiar north-south divide. Greek stocks and bonds plunged and markets were buffeted in Italy, Portugal and Spain, while funds flowed into Germany, Europe’s biggest economy and hard-money bastion.

Yet look closer and Italy, the euro zone’s second most-indebted country after Greece, is nowhere near a fiscal calamity. Ten-year borrowing costs are hovering around 2 percent, compared to over 7 percent at the height of the crisis. Bond holders are charging Italy 144 basis points more than Germany to borrow, a far cry from 553 basis points in November 2011.
…
There were echoes of 2012 in Europe’s political reaction. Back then, German Finance Minister Wolfgang Schaeuble said “we cannot force Greece” to press on with the budget cuts needed to stay in the euro zone, while a German then on the ECB board, Joerg Asmussen, said there was “no alternative” to austerity.

Schaeuble reprised that line in a statement yesterday, saying that tough reforms in Greece were bearing fruit and “they are without any alternative.” Germany will support Greece on its path of reform, he said, though “if Greece chooses a different way, it will become difficult.”
…
When Greece hurtled toward bankruptcy in early 2010, the European Union had no way of helping countries in need. When Greece toyed with quitting the euro in late 2011, and held a stalemated election in May 2012 before Samaras put together a unity government after a second election six weeks later, it had only a temporary bailout fund.

Now, it has a full-time aid fund in the 500 billion-euro European Stability Mechanism and a central bank tiptoeing — amid opposition from Germany — toward large-scale bond purchases. It also boasts success stories: Ireland, Portugal and Spain have been weaned off financial aid.

The risk is less a splintering of the 18-nation euro zone – – it will become 19 on Jan. 1 when Lithuania joins — than a protracted phase of subpar economic growth that leaves a generation scarred by unemployment and tempted by political extremism, especially in the south.

The trend in robo-advising is getting a boost:

But Wealthsimple, a Toronto startup, is taking the concept [of on-line investing] in precisely the opposite direction. It’s using the Internet as a way to offer up investing that’s not only cheap to manage, but algorithmically steady, safe, and predictable.
…
The ten-person firm’s idea is to use technology both to cut out the costs of offering traditional investment advice, and to be more agile in automatically managing portfolios. New customers fill out a questionnaire, and are then paired with a certified investment advisor, who works remotely and is available by text, phone, or video chat. (The firm’s one concession to startup trendiness is its insistence on calling its advisors “wealth concierges.”)

The operation is, as far as I can tell, an ETF allocator:

We charge an annual management fee of 0.35-0.50% of assets depending on your account balance. That’s approximately ⅓ the cost of typical advisors in Canada. The only other fee you incur is the very low fee embedded in the investment products in your portfolio (averages is 0.25%) and currency conversion. We have negotiated preferred pricing on both ETF prices and currency of more than 50% and passed along all of those savings to our clients.

Wealthsimple’s management fee covers transactions, rebalancing, advice, and account administration.

Well, it’s bound to come at some point – particularly if trailer fees get banned – but it remains to be seen whether there’s a mass-market comprised of people who don’t mind actually cutting a cheque for their advice. I admit to being a little suspicious of their market timing aspirations:

While we don’t believe in picking stocks or timing the market, we do believe in a thoughtful approach to risks. In the context of the current market environment, there are two primary risks we consider:
•Interest rates
•Market volatility

For the past 30 years, bond investors have been well rewarded as interest rates steadily declined to historic lows (when interest rates go down, bond prices go up). Looking forward, interest rates cannot get much lower. But what will they do?

Interest rate uncertainty carries lots of risk for bond investors. As a result, we use alternatives to bonds wherever possible. For example, we use real estate and dividend stocks which generate income like bonds, but are not as linked to interest rates. We also use a real estate product that is specifically designed to minimize the risk of interest rate uncertainty.

Which brings to mind the question of whether BRICS is actually an asset class or not:

While Chinese and Indian benchmark equity indexes have surged an average 40 percent this year, Russian and Brazilian gauges posted a mean drop of 4.2 percent. The annual divergence is on pace for the biggest since economist Jim O’Neill coined the term in 2001, leaving the combined market capitalization of Chinese and Indian equities $5.2 trillion larger than that of Russia and Brazil, according to data compiled by Bloomberg.
…
At the time BRIC was coined it was useful to describe the broad and increasing importance of the four largest emerging-market economies, but it was never suitable as an investing concept,” Mark Gordon-James, a senior investment manager at Aberdeen Asset Management, which managed $526 billion at the end of September, said in an interview on Dec. 18 from London.

But worry not! The marketers will soon find another bandwagon!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 8bp, FixedResets rocketing up 55bp and DeemedRetractibles off 7bp. The Performance Highlights table is suitably lengthy, notable for a high proportion of FixedReset winners, particularly in the names that were hit hard in the early part of the month – ENB, TRP & HSE. But all this was on volume that was pathetically, horribly, awfully, grossly, incredibly low.

Remember that all rich /cheap assessments are:

based on Implied Volatility Theory only
are relative only to other FixedResets from the same issuer
assume constant GOC-5 yield
assume constant Implied Volatility
assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 20.58, is $1.36 cheap, but it has already reset (at +192). TRP.PR.D, bid at 25.34 and resetting at +238bp on 2019-4-30 is $0.34 rich and TRP.PR.E, bid at 25.55 and resetting at +235bp on 2019-10-30 (two months prior to the next TRP.PR.A reset), is $0.75 rich.

Click for Big

There is an excellent fit to theory for the MFC issues, but Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.00 and appears to be $0.84 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.25 and appears to be $1.19 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.95, looks $1.15 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.40, looks $1.12 expensive and resets 2019-3-1

Click for Big

The average break-even rate has declined from 1.80%-2.00% at the time recent conversion decisions were made to a current very wide range of (mostly) 1.40%-1.80%. This decline means that the estimated profit on TRP.PR.A conversion has declined from $0.48 to a mere $0.06 (at the lower end of the range, 1.40%).

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	-0.0717 %	2,516.1
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.0717 %	3,983.5
Floater	3.01 %	3.11 %	65,003	19.44	4	-0.0717 %	2,674.8
OpRet	4.41 %	-2.14 %	23,257	0.08	2	0.0784 %	2,752.0
SplitShare	4.27 %	4.04 %	35,851	3.68	5	0.0991 %	3,202.2
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0784 %	2,516.4
Perpetual-Premium	5.45 %	-3.90 %	69,028	0.08	20	0.2034 %	2,488.8
Perpetual-Discount	5.16 %	5.04 %	110,633	15.34	15	0.0760 %	2,669.3
FixedReset	4.21 %	3.58 %	243,931	8.37	77	0.5527 %	2,553.0
Deemed-Retractible	4.95 %	0.70 %	92,530	0.16	40	-0.0660 %	2,627.9
FloatingReset	2.56 %	1.93 %	63,553	3.41	5	-0.0785 %	2,545.2

Performance Highlights
Issue	Index	Change	Notes
GWO.PR.R	Deemed-Retractible	-1.70 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.30 Bid-YTW : 5.19 %
MFC.PR.B	Deemed-Retractible	-1.36 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.02 Bid-YTW : 5.20 %
MFC.PR.C	Deemed-Retractible	-1.35 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.34 Bid-YTW : 5.41 %
PWF.PR.A	Floater	-1.28 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 19.25 Evaluated at bid price : 19.25 Bid-YTW : 2.75 %
POW.PR.D	Perpetual-Discount	-1.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 24.05 Evaluated at bid price : 24.30 Bid-YTW : 5.15 %
ENB.PR.D	FixedReset	1.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 22.38 Evaluated at bid price : 22.94 Bid-YTW : 4.15 %
GWO.PR.N	FixedReset	1.06 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.92 Bid-YTW : 4.88 %
ENB.PR.Y	FixedReset	1.18 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 21.81 Evaluated at bid price : 22.23 Bid-YTW : 4.32 %
ENB.PF.A	FixedReset	1.21 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 22.89 Evaluated at bid price : 24.25 Bid-YTW : 4.22 %
ENB.PF.G	FixedReset	1.29 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 22.91 Evaluated at bid price : 24.40 Bid-YTW : 4.21 %
ENB.PR.T	FixedReset	1.29 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 22.16 Evaluated at bid price : 22.75 Bid-YTW : 4.31 %
TRP.PR.B	FixedReset	1.29 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 17.24 Evaluated at bid price : 17.24 Bid-YTW : 3.94 %
ELF.PR.G	Perpetual-Discount	1.30 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 22.57 Evaluated at bid price : 22.86 Bid-YTW : 5.19 %
ENB.PR.N	FixedReset	1.34 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 22.58 Evaluated at bid price : 23.42 Bid-YTW : 4.30 %
PWF.PR.P	FixedReset	1.38 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 21.30 Evaluated at bid price : 21.30 Bid-YTW : 3.66 %
MFC.PR.L	FixedReset	1.40 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-06-19 Maturity Price : 25.00 Evaluated at bid price : 25.40 Bid-YTW : 3.56 %
ENB.PF.E	FixedReset	1.47 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 22.80 Evaluated at bid price : 24.10 Bid-YTW : 4.26 %
IFC.PR.A	FixedReset	1.57 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.60 Bid-YTW : 4.70 %
ENB.PR.F	FixedReset	1.59 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 22.42 Evaluated at bid price : 23.05 Bid-YTW : 4.26 %
ENB.PR.H	FixedReset	1.59 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 21.11 Evaluated at bid price : 21.11 Bid-YTW : 4.32 %
BAM.PF.D	Perpetual-Discount	1.65 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 21.24 Evaluated at bid price : 21.52 Bid-YTW : 5.71 %
ENB.PR.B	FixedReset	1.66 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 22.33 Evaluated at bid price : 22.72 Bid-YTW : 4.22 %
TRP.PR.C	FixedReset	1.77 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 20.13 Evaluated at bid price : 20.13 Bid-YTW : 3.73 %
TRP.PR.D	FixedReset	1.91 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-04-30 Maturity Price : 25.00 Evaluated at bid price : 25.34 Bid-YTW : 3.58 %
MFC.PR.F	FixedReset	2.01 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.35 Bid-YTW : 4.37 %
TRP.PR.E	FixedReset	2.04 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 23.35 Evaluated at bid price : 25.55 Bid-YTW : 3.62 %
ENB.PR.P	FixedReset	2.04 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 22.35 Evaluated at bid price : 23.03 Bid-YTW : 4.25 %
TRP.PR.A	FixedReset	2.29 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 20.58 Evaluated at bid price : 20.58 Bid-YTW : 4.06 %
HSE.PR.A	FixedReset	4.36 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 21.30 Evaluated at bid price : 21.30 Bid-YTW : 3.78 %

Volume Highlights
Issue	Index	Shares Traded	Notes
TD.PF.C	FixedReset	59,200	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 23.14 Evaluated at bid price : 24.95 Bid-YTW : 3.57 %
CM.PR.P	FixedReset	28,300	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 23.12 Evaluated at bid price : 24.89 Bid-YTW : 3.58 %
BMO.PR.T	FixedReset	22,200	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 23.26 Evaluated at bid price : 25.23 Bid-YTW : 3.55 %
MFC.PR.F	FixedReset	19,700	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.35 Bid-YTW : 4.37 %
TD.PF.A	FixedReset	16,895	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 23.33 Evaluated at bid price : 25.51 Bid-YTW : 3.51 %
TD.PF.B	FixedReset	14,440	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 23.32 Evaluated at bid price : 25.41 Bid-YTW : 3.53 %
There were 1 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
TD.PR.R	Deemed-Retractible	Quote: 26.21 – 26.84 Spot Rate : 0.6300 Average : 0.3819 YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-28 Maturity Price : 25.75 Evaluated at bid price : 26.21 Bid-YTW : -5.46 %
MFC.PR.B	Deemed-Retractible	Quote: 24.02 – 24.60 Spot Rate : 0.5800 Average : 0.3506 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.02 Bid-YTW : 5.20 %
GWO.PR.R	Deemed-Retractible	Quote: 24.30 – 24.82 Spot Rate : 0.5200 Average : 0.3365 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.30 Bid-YTW : 5.19 %
MFC.PR.C	Deemed-Retractible	Quote: 23.34 – 23.79 Spot Rate : 0.4500 Average : 0.3131 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.34 Bid-YTW : 5.41 %
RY.PR.F	Deemed-Retractible	Quote: 25.67 – 26.04 Spot Rate : 0.3700 Average : 0.2388 YTW SCENARIO Maturity Type : Call Maturity Date : 2015-05-24 Maturity Price : 25.25 Evaluated at bid price : 25.67 Bid-YTW : 1.27 %
ENB.PR.J	FixedReset	Quote: 23.92 – 24.30 Spot Rate : 0.3800 Average : 0.2515 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-29 Maturity Price : 22.80 Evaluated at bid price : 23.92 Bid-YTW : 4.21 %

Market Action

December 24, 2014

S&P has Russia on Watch-Negative:

S&P said in its statement that there’s at least a 50 percent chance that Russia’s rating will be lowered to junk within 90 days as it put the country on negative credit watch. Moody’s Investors Service and Fitch Ratings rank Russia one step higher than S&P, which lowered its rating one level in April to BBB-.

The move “stems from what we view as a rapid deterioration of Russia’s monetary flexibility and the impact of the weakening economy on its financial system,” S&P said. The ratings company expects to conclude its review in mid-January. The ruble held its gains after the S&P announcement yesterday, suggesting investors have already priced in the possibility of credit downgrades.
…
Gross domestic product may shrink as much as 4.7 percent next year, the most since 2009, should a “stress scenario” eventuate where oil averages $60 a barrel, the central bank said Dec. 15. Net capital outflows may have more than doubled this year to $134 billion.

In October, Moody’s cut Russia’s credit rating by one level to its second-lowest investment grade, citing concerns over the impact of sanctions on the economy. The continued erosion of Russia’s foreign-exchange reserves because of capital flight, low oil prices and borrowers’ lack of access to credit were also cited by Moody’s.

Christmas came early for Canadian preferred share investors, the market rocketed upwards with PerpetualDiscounts winning 70bp, FixedResets gained 37bp and DeemedRetractibles were up 50bp in a session that was foreshortened so that members of the highest paid profession on earth could stand around complaining about the inferior work ethic of minimum wage waiters and shop clerks. The Performance Highlights table is suitably gigantic; volume, however, was quite low.

PerpetualDiscounts now yield 5.05%, equivalent to 6.56% interest at the standard equivalency 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 245bp, a very sharp narrowing from the 270bp reported December 17.

Remember that all rich /cheap assessments are:

based on Implied Volatility Theory only
are relative only to other FixedResets from the same issuer
assume constant GOC-5 yield
assume constant Implied Volatility
assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 20.12, is $1.59 cheap, but it has already reset (at +192). TRP.PR.D, bid at 25.11 and resetting at +238bp on 2019-4-30 is $0.43 rich and TRP.PR.E, bid at 25.30 and resetting at +235bp on 2019-10-30 (two months prior to the next TRP.PR.A reset), is $0.82 rich.

Click for Big

There is an excellent fit to theory for the MFC issues, but Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is far too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 20.83 after another day of excellent performance and appears to be $0.82 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.19 and appears to be $1.24 rich.

It will be noticed that due to price changes in issues other than BAM.PR.X, this issue gained over a point and yet became cheaper to the rest; additionally, it seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.77, looks $1.24 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.15, looks $1.04 expensive and resets 2019-3-1

Click for Big

The average break-even rate has declined from 1.80%-2.00% at the time recent conversion decisions were made to a current cluster of (mostly) 1.50%-1.65%. This decline means that the estimated profit on TRP.PR.A conversion has declined from $0.48 to a mere $0.16 (at the lower end of the range, 1.50%).

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	-0.1574 %	2,517.9
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.1574 %	3,986.3
Floater	3.01 %	3.12 %	65,755	19.42	4	-0.1574 %	2,676.7
OpRet	4.41 %	-3.39 %	24,220	0.08	2	-0.0196 %	2,749.9
SplitShare	4.28 %	4.08 %	35,850	3.69	5	0.0713 %	3,199.0
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0196 %	2,514.5
Perpetual-Premium	5.44 %	-3.29 %	71,137	0.08	20	0.1610 %	2,483.7
Perpetual-Discount	5.16 %	5.05 %	109,250	15.38	15	0.6970 %	2,667.3
FixedReset	4.23 %	3.58 %	245,785	8.58	77	0.3659 %	2,539.0
Deemed-Retractible	4.95 %	-0.68 %	96,125	0.11	40	0.4981 %	2,629.6
FloatingReset	2.56 %	1.92 %	63,660	3.43	5	0.4177 %	2,547.2

Performance Highlights
Issue	Index	Change	Notes
SLF.PR.G	FixedReset	-2.02 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.36 Bid-YTW : 4.67 %
PWF.PR.P	FixedReset	-1.22 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 21.01 Evaluated at bid price : 21.01 Bid-YTW : 3.68 %
BAM.PR.K	Floater	-1.01 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 16.66 Evaluated at bid price : 16.66 Bid-YTW : 3.15 %
IAG.PR.A	Deemed-Retractible	-1.00 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.71 Bid-YTW : 5.28 %
BAM.PR.N	Perpetual-Discount	1.04 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 21.42 Evaluated at bid price : 21.42 Bid-YTW : 5.58 %
ENB.PR.J	FixedReset	1.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 22.72 Evaluated at bid price : 23.75 Bid-YTW : 4.22 %
BAM.PF.F	FixedReset	1.07 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.60 Bid-YTW : 3.95 %
GWO.PR.L	Deemed-Retractible	1.09 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-30 Maturity Price : 26.00 Evaluated at bid price : 26.08 Bid-YTW : 1.37 %
BAM.PR.X	FixedReset	1.12 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 20.83 Evaluated at bid price : 20.83 Bid-YTW : 4.04 %
RY.PR.L	FixedReset	1.14 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-02-24 Maturity Price : 25.00 Evaluated at bid price : 26.53 Bid-YTW : 2.80 %
ENB.PF.C	FixedReset	1.19 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 22.67 Evaluated at bid price : 23.78 Bid-YTW : 4.29 %
BAM.PF.B	FixedReset	1.20 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 23.32 Evaluated at bid price : 25.30 Bid-YTW : 3.87 %
IAG.PR.G	FixedReset	1.22 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-30 Maturity Price : 25.00 Evaluated at bid price : 26.52 Bid-YTW : 1.79 %
MFC.PR.B	Deemed-Retractible	1.29 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.35 Bid-YTW : 5.02 %
GWO.PR.P	Deemed-Retractible	1.29 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2020-03-31 Maturity Price : 25.25 Evaluated at bid price : 25.88 Bid-YTW : 4.81 %
SLF.PR.A	Deemed-Retractible	1.44 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.67 Bid-YTW : 4.93 %
PWF.PR.R	Perpetual-Premium	1.44 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-04-30 Maturity Price : 25.00 Evaluated at bid price : 26.02 Bid-YTW : 4.92 %
SLF.PR.D	Deemed-Retractible	1.64 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.56 Bid-YTW : 5.21 %
SLF.PR.E	Deemed-Retractible	1.68 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.64 Bid-YTW : 5.22 %
SLF.PR.C	Deemed-Retractible	1.72 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.65 Bid-YTW : 5.16 %
GWO.PR.G	Deemed-Retractible	1.72 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-23 Maturity Price : 25.00 Evaluated at bid price : 25.38 Bid-YTW : -13.88 %
GWO.PR.R	Deemed-Retractible	1.85 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.72 Bid-YTW : 4.96 %
CU.PR.D	Perpetual-Discount	2.02 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 24.34 Evaluated at bid price : 24.77 Bid-YTW : 4.97 %
CU.PR.E	Perpetual-Discount	2.02 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 24.33 Evaluated at bid price : 24.76 Bid-YTW : 4.97 %
BAM.PR.T	FixedReset	2.02 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 23.40 Evaluated at bid price : 24.69 Bid-YTW : 3.74 %
TRP.PR.C	FixedReset	2.04 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 20.05 Evaluated at bid price : 20.05 Bid-YTW : 3.78 %
GWO.PR.I	Deemed-Retractible	2.06 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.75 Bid-YTW : 5.16 %
MFC.PR.F	FixedReset	2.14 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.91 Bid-YTW : 4.57 %
HSE.PR.A	FixedReset	2.31 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 20.41 Evaluated at bid price : 20.41 Bid-YTW : 3.91 %
FTS.PR.J	Perpetual-Discount	2.44 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 24.32 Evaluated at bid price : 24.74 Bid-YTW : 4.82 %

Volume Highlights
Issue	Index	Shares Traded	Notes
TD.PF.C	FixedReset	63,650	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 23.13 Evaluated at bid price : 24.92 Bid-YTW : 3.55 %
MFC.PR.A	OpRet	52,800	Scotia crossed 50,000 at 25.31. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-06-19 Maturity Price : 25.00 Evaluated at bid price : 25.27 Bid-YTW : 2.01 %
CM.PR.E	Perpetual-Premium	28,773	Called for Redemption effective 2015-1-31. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-23 Maturity Price : 25.00 Evaluated at bid price : 24.98 Bid-YTW : -0.33 %
TRP.PR.A	FixedReset	27,895	Resets to 3.266% effective Dec 31. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 20.12 Evaluated at bid price : 20.12 Bid-YTW : 4.11 %
IAG.PR.E	Deemed-Retractible	26,000	Called for redemption effective 2014-12-31. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-12-31 Maturity Price : 25.75 Evaluated at bid price : 25.99 Bid-YTW : 4.80 %
CM.PR.P	FixedReset	25,588	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 23.12 Evaluated at bid price : 24.90 Bid-YTW : 3.55 %
There were 15 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
BAM.PF.E	FixedReset	Quote: 25.15 – 26.15 Spot Rate : 1.0000 Average : 0.5936 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 23.19 Evaluated at bid price : 25.15 Bid-YTW : 3.90 %
POW.PR.B	Perpetual-Premium	Quote: 25.02 – 25.39 Spot Rate : 0.3700 Average : 0.2475 YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-23 Maturity Price : 25.00 Evaluated at bid price : 25.02 Bid-YTW : 0.45 %
HSE.PR.C	FixedReset	Quote: 25.36 – 25.69 Spot Rate : 0.3300 Average : 0.2261 YTW SCENARIO Maturity Type : Call Maturity Date : 2019-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.36 Bid-YTW : 4.24 %
PVS.PR.D	SplitShare	Quote: 24.35 – 24.63 Spot Rate : 0.2800 Average : 0.1848 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2021-10-08 Maturity Price : 25.00 Evaluated at bid price : 24.35 Bid-YTW : 5.02 %
TRP.PR.A	FixedReset	Quote: 20.12 – 20.48 Spot Rate : 0.3600 Average : 0.2666 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-24 Maturity Price : 20.12 Evaluated at bid price : 20.12 Bid-YTW : 4.11 %
POW.PR.A	Perpetual-Premium	Quote: 25.17 – 25.49 Spot Rate : 0.3200 Average : 0.2289 YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-23 Maturity Price : 25.00 Evaluated at bid price : 25.17 Bid-YTW : -6.65 %

Market Action

December 23, 2014

On December 19 my attention was drawn to a parallel between the Suez Crisis in 1956 and the current Ukraine Crisis. The Chinese provide a counter-parallel, assuming that’s a word:

China is stepping up its role as the lender of last resort to some of the world’s most financially strapped countries.

Chinese officials signaled on the weekend they are willing to expand a $24 billion currency swap program to help Russia weather the worst economic crisis since the 1998 default. China has provided $2.3 billion in funds to Argentina since October as part of a currency swap, and last month it lent $4 billion to Venezuela, whose reserves cover just two years of debt payments.

By lending to nations shut out of overseas capital markets, Chinese President Xi Jinping is bolstering the country’s influence in the global economy and cutting into the International Monetary Fund’s status as the go-to financier for governments in financial distress. While the IMF tends to demand reforms aimed at stabilizing a country’s economy in exchange for loans, analysts speculate that China’s terms are more focused on securing its interests in the resource-rich countries.

Today’s PrefBlog Movie Of The Week is:

Ukraine opened a criminal probe after several gold bars at the central bank’s storage in the southern city of Odessa turned to be painted lead.

“The management of the central bank’s branch in Odessa asked us to investigate fraud by their employee,” Volodymyr Shablienko, head of the Odessa police’s press office, said by phone today. “We are conducting a forensic audit now.”

A central bank employee passed lead bars covered with golden paint to the storage unit, registering them as gold, the Vesti newspaper reported today, citing an unidentified person with knowledge of the matter in Odessa’s police department.

Speaking of Russian, how about them banks, eh?:

After arresting a decline in the ruble, Russia is now trying to avert a banking crisis.

Lawmakers rushed legislation through the lower house of parliament today allowing the Deposit Insurance Agency to buy stakes in banks before they face bankruptcy proceedings to keep the system stable. While the ruble strengthened for a third day as the government told state-run exporters to sell foreign currency, it’s still down 30 percent in three months. Standard & Poor’s said today it may cut Russia’s credit rating to junk in part because of concern about the banking system.
…
The central bank put National Bank Trust, the country’s 15th-biggest based on retail deposits, under the control of the Deposit Insurance Agency yesterday. An investor will soon be selected to carry out the 30 billion-ruble ($550 million) rescue, the Bank of Russia said.

Trust, once part of exiled former oil tycoon Mikhail Khodorkovsky’s business empire, had a capital hole of tens of billions of rubles and lost more than 3 billion rubles in retail deposits last week, central bank Deputy Governor Mikhail Sukhov said yesterday. Bank of Russia’s press service confirmed his comments, earlier reported by the Interfax newswire.

And the Dow Jones Industrial Average is also pretty interesting:

The Dow Jones Industrial Average rose 5.6 percent over the past five days for the biggest rally since 2011, climbing to 18,024.17 yesterday, as the central bank pledged patience in raising interest rates while data showed the economy roared the most in the third quarter since 2003. A measure of expected volatility in the Dow has fallen the most in three years during the recent rally.
…
The Dow closed at a six-month low on Oct. 16 before rallying more than 1,882 points, or 12 percent, to top 18,000. The Chicago Board Options Exchange Dow Jones Industrial Average (INDU) Volatility Index, a measure of demand for options on the blue-chip stocks gauge, has bounced back after two jumps of more than 70 percent since September.

The industrial average has risen about 175 percent during the bull market that began in March 2009, propelled by better-than-estimated corporate results and three rounds of Fed bond purchases. The Standard & Poor’s 500 Index has more than tripled in that time. It rose 0.2 percent yesterday to finish at an all-time high.

The press might get interested in credit ratings again; e.g., Bloomberg:

One large company and four smaller firms didn’t follow their own methodologies in determining ratings, the SEC said in its report on Nationally Recognized Statistical Rating Organizations, or NRSROs.

After reviewing e-mails of one of the larger raters, the regulator determined that business and market-share conditions influenced the substance of its criteria. Employees on the business side of this rater worked in a concerted effort to change the criteria to appease an industry trade group, the SEC said.

OK, so let’s look at the relevant section in the actual staff report, titled 2014 SUMMARY REPORT OF COMMISSION STAFF’S EXAMINATIONS OF EACH NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION:

The Staff’s review of one larger NRSRO’s revisions to one of its rating criteria, including extensive review of its emails, suggests that this NRSRO’s business and market-share concerns influenced the substance of the criteria. Some of this NRSRO’s business personnel engaged in a concerted effort to address concerns raised by a trade association about this NRSRO’s contemplated revisions to the criteria report, and this criteria report was changed in a manner that addressed the business personnel’s concerns and was advantageous to the trade group. Also, documentation to support this change was lacking. The Staff recommended that this NRSRO enforce its policies and procedures and internal controls to separate the analytical process from commercial influence and ensure that the analytic justification of its criteria is adequately recorded and maintained. The Staff also recommended that this NRSRO’s Board retain an independent auditor, to be approved by OCR, to conduct a review of the development of the criteria and provide a written report summarizing the review to this NRSRO’s Board and compliance group as well as OCR.

It’s very difficult to see anything to be upset about here. First, the external body being dealt with was a trade group, not an individual company, which alleviates at least some of the automatic concerns right away (to a degree that can only be determined once we know how the trade group functions, for starters). Second, SEC Staff are shocked and horrified that the changes sought by the trade group are advantageous to the trade group. Well, yeah. Does anybody really expect anything else? Third, the criteria were changed in a manner that addressed the business personnel’s concerns … OK. Were the business personnel’s concerns grounded or ungrounded? Fourth, the documentation to support this change was lacking. Well, I can let you guys in on a little secret about regulatory paperwork: it’s always lacking. God and all his angels could not maintain records that would survive a determined fault-finding mission by regulators; not while doing any work of substance, anyway.

So the summary sounds bad, and the raw material hints that maybe something could be bad, but there’s nothing of real substance in this finding. However, look for it to be quoted as unequivocal damnation in debates to come.

Fortis Inc., proud issuer of FTS.PR.E, FTS.PR.F, FTS.PR.G, FTS.PR.H, FTS.PR.J, FTS.PR.K and FTS.PR.M, was confirmed at Pfd-2(low) by DBRS and removed from ‘Review-Developing’:

DBRS Limited (DBRS) has today removed the A (low) Issuer Rating, A (low) Unsecured Debentures and Pfd-2 (low) Preferred Shares ratings of Fortis Inc. (Fortis, the Parent or the Company) from Under Review with Developing Implications and has confirmed the ratings as listed above with Stable trends. This action follows the completion of the Company’s acquisition of UNS Energy Corporation (UNS) (the Acquisition) and the conversion of $1.8 billion of convertible debentures into common equity in late October 2014.
…
In DBRS’s view, the overall business risk profile of Fortis’ investment portfolio should remain in the A (low) range following the completion of the Acquisition.

Fortis’ financing of the USD 2.5 billion Acquisition was consistent with DBRS’s expectation. Fortis issued $1.8 billion in convertible debentures, approximately $600 million in preferred shares and the remaining portion in debt. Most of the convertible debentures were converted into common equity in late October 2014. As a result, the financial risk profile on a non-consolidated basis remains consistent with DBRS’s expectation, with all pro forma non-consolidated credit ratios improving from 2013. Fortis’ non-consolidated debt in the capital structure would remain within DBRS’s 20% guideline for holding company notching while all other key credit metrics would solidly remain within the current rating range.

FTS has been on Review-Developing for over a year.

The Canadian preferred share market was on wheels today, with PerpetualDiscounts up 33bp, FixedResets winning 47bp and DeemedRetractibles gaining 18bp. The Performance Highlights table is suitably enormous, with only one loser; led on the upside by the low-reset insurance issues that had the stuffing kicked out of them in the first week of the month. Volume was above average.

Remember that all rich /cheap assessments are:

based on Implied Volatility Theory only
are relative only to other FixedResets from the same issuer
assume constant GOC-5 yield
assume constant Implied Volatility
assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 20.30, is $1.41 cheap, but it has already reset (at +192). TRP.PR.D, bid at 25.11 and resetting at +238bp on 2019-4-30 is $0.43 rich and TRP.PR.E, bid at 25.27 and resetting at +235bp on 2019-10-30, is $0.79 rich.

This particular calculation is fascinating because it is apparent that – disregarding the TRP.PR.A outlier – the slope of the line used to calculate implied volatility is negative. I can’t remember seeing one of those since the Credit Crunch!

Click for Big

The impressive performance of MFC.PR.F brought it back to consistency with the curve defined by the higher reset issues today, but the Implied Volatility continues to be a conundrum. It is far too high if we consider that NVCC rules will never apply to these issues; it is far too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 20.60 after superb performance today and appears to be $0.76 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.08 and appears to be $1.36 rich.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.78, looks $1.18 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 24.94, looks $0.96 expensive and resets 2019-3-1

Click for Big

The average break-even rate has declined from 1.80%-2.00% at the time recent conversion decisions were made to a current cluster of (mostly) 1.55%-1.60%. This decline means that the estimated profit on TRP.PR.A conversion has declined from $0.48 to a mere $0.21 (at the lower end of the range, 1.55%).

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	2.5690 %	2,521.9
FixedFloater	0.00 %	0.00 %	0	0.00	0	2.5690 %	3,992.6
Floater	3.01 %	3.11 %	66,751	19.44	4	2.5690 %	2,680.9
OpRet	4.41 %	-3.08 %	25,222	0.08	2	0.0588 %	2,750.4
SplitShare	4.28 %	4.08 %	37,327	3.69	5	0.1490 %	3,196.8
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0588 %	2,515.0
Perpetual-Premium	5.45 %	-0.21 %	71,880	0.08	20	0.1291 %	2,479.8
Perpetual-Discount	5.20 %	5.08 %	110,410	15.31	15	0.3281 %	2,648.8
FixedReset	4.24 %	3.63 %	247,985	16.45	77	0.4734 %	2,529.7
Deemed-Retractible	4.97 %	1.04 %	96,558	0.27	40	0.1766 %	2,616.6
FloatingReset	2.57 %	2.11 %	63,812	3.50	5	0.0079 %	2,536.6

Performance Highlights
Issue	Index	Change	Notes
FTS.PR.J	Perpetual-Discount	-1.02 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 23.76 Evaluated at bid price : 24.15 Bid-YTW : 4.94 %
BAM.PR.T	FixedReset	1.00 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 23.19 Evaluated at bid price : 24.20 Bid-YTW : 3.84 %
MFC.PR.B	Deemed-Retractible	1.01 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.04 Bid-YTW : 5.18 %
BAM.PF.B	FixedReset	1.01 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 23.22 Evaluated at bid price : 25.00 Bid-YTW : 3.93 %
BNS.PR.P	FixedReset	1.01 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2018-04-25 Maturity Price : 25.00 Evaluated at bid price : 25.91 Bid-YTW : 2.37 %
CU.PR.C	FixedReset	1.06 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-01 Maturity Price : 25.00 Evaluated at bid price : 25.80 Bid-YTW : 2.75 %
MFC.PR.C	Deemed-Retractible	1.12 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.45 Bid-YTW : 5.34 %
TRP.PR.A	FixedReset	1.15 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 20.30 Evaluated at bid price : 20.30 Bid-YTW : 4.07 %
FTS.PR.F	Perpetual-Discount	1.22 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 24.53 Evaluated at bid price : 24.80 Bid-YTW : 4.97 %
PWF.PR.P	FixedReset	1.29 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 21.27 Evaluated at bid price : 21.27 Bid-YTW : 3.63 %
BAM.PR.Z	FixedReset	1.38 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2017-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.65 Bid-YTW : 3.86 %
IAG.PR.A	Deemed-Retractible	1.61 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.95 Bid-YTW : 5.15 %
CU.PR.E	Perpetual-Discount	1.76 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 23.87 Evaluated at bid price : 24.27 Bid-YTW : 5.08 %
BAM.PR.C	Floater	1.76 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 16.74 Evaluated at bid price : 16.74 Bid-YTW : 3.13 %
GWO.PR.H	Deemed-Retractible	1.77 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.68 Bid-YTW : 5.03 %
BAM.PR.K	Floater	2.50 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 16.83 Evaluated at bid price : 16.83 Bid-YTW : 3.11 %
TRP.PR.C	FixedReset	2.61 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 19.65 Evaluated at bid price : 19.65 Bid-YTW : 3.86 %
BAM.PR.X	FixedReset	2.64 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 20.60 Evaluated at bid price : 20.60 Bid-YTW : 4.08 %
PWF.PR.A	Floater	2.90 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 19.50 Evaluated at bid price : 19.50 Bid-YTW : 2.71 %
BAM.PR.B	Floater	3.07 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 16.80 Evaluated at bid price : 16.80 Bid-YTW : 3.12 %
SLF.PR.G	FixedReset	3.07 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.80 Bid-YTW : 4.43 %
MFC.PR.F	FixedReset	4.48 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.45 Bid-YTW : 4.82 %
GWO.PR.N	FixedReset	5.47 %	A real move. All trades after 3:18pm were higher than the “last” 20.83 bid; and these amounted to 3300 shares. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.83 Bid-YTW : 4.89 %

Volume Highlights
Issue	Index	Shares Traded	Notes
CM.PR.E	Perpetual-Premium	192,259	Called for redemption effective January 31 YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-22 Maturity Price : 25.00 Evaluated at bid price : 24.97 Bid-YTW : -0.03 %
TD.PF.C	FixedReset	110,049	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 23.10 Evaluated at bid price : 24.85 Bid-YTW : 3.56 %
CM.PR.P	FixedReset	92,894	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 23.11 Evaluated at bid price : 24.86 Bid-YTW : 3.55 %
BMO.PR.W	FixedReset	83,585	RBC crossed 64,800 at 25.07. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 23.22 Evaluated at bid price : 25.15 Bid-YTW : 3.50 %
RY.PR.H	FixedReset	72,465	RBC crossed 62,000 at 25.50. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 23.32 Evaluated at bid price : 25.41 Bid-YTW : 3.50 %
RY.PR.Z	FixedReset	54,366	RBC crossed 50,000 at 25.55. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 23.38 Evaluated at bid price : 25.55 Bid-YTW : 3.46 %
There were 37 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
ENB.PR.Y	FixedReset	Quote: 21.96 – 22.49 Spot Rate : 0.5300 Average : 0.3295 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 21.62 Evaluated at bid price : 21.96 Bid-YTW : 4.35 %
ELF.PR.H	Perpetual-Premium	Quote: 25.44 – 26.00 Spot Rate : 0.5600 Average : 0.3923 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 24.97 Evaluated at bid price : 25.44 Bid-YTW : 5.48 %
CU.PR.D	Perpetual-Discount	Quote: 24.28 – 24.75 Spot Rate : 0.4700 Average : 0.3026 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 23.88 Evaluated at bid price : 24.28 Bid-YTW : 5.07 %
GWO.PR.L	Deemed-Retractible	Quote: 25.80 – 26.20 Spot Rate : 0.4000 Average : 0.2399 YTW SCENARIO Maturity Type : Call Maturity Date : 2018-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.80 Bid-YTW : 4.77 %
FTS.PR.J	Perpetual-Discount	Quote: 24.15 – 24.75 Spot Rate : 0.6000 Average : 0.4517 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-23 Maturity Price : 23.76 Evaluated at bid price : 24.15 Bid-YTW : 4.94 %
NEW.PR.D	SplitShare	Quote: 32.41 – 33.41 Spot Rate : 1.0000 Average : 0.8572 YTW SCENARIO Maturity Type : Call Maturity Date : 2015-06-26 Maturity Price : 32.07 Evaluated at bid price : 32.41 Bid-YTW : 2.04 %

Market Action

December 22, 2014

Matt Levine of Bloomberg points out the obvious flaws in paying informers:

Anyway $56 million for 14 water damaged houses! That’s a cool $4 million per house. Buys a lot of slab re-pouring. DealBook has more stories of whistle-blowers getting great gobs of money out of the Bank of America settlements — some $170 million to four whistle-blowers, out of Bank of America’s vast $16.65 billion mortgage settlement from August.

It is possible to overdo the talk of incentives in banking compensation, but, I mean, that’s quite an incentive. Appraising some homes properly will get you, let’s say, fired by your crooked bosses. 3 Appraising those homes improperly will get you, let’s say, a nice bonus. But appraising them improperly and then calling the FBI will get you a whopping great $56 million.

There are more signs that US real estate continues to normalize:

There’s an undersupply of single-family houses and apartments to rent for the first time since 2001, according to an analysis by Frank Nothaft, chief economist at mortgage buyer Freddie Mac, based on available inventory and historic vacancy rates. The deficit in the third quarter was about 350,000, the most in records dating back 14 years.

The shortage is giving the upper hand to institutional investors who spent more than $25 billion since 2012 buying single-family homes to rent. While the market for apartments has been in favor of landlords for five years, owners of houses are now able to increase rents and reduce turnover to boost profits.
…
The U.S. rental-vacancy rate fell to 7.4 percent in the third quarter, according to Census Bureau data. The market is considered balanced, with neither landlords nor tenants having the upper hand when it comes to rents, at a vacancy rate of 8.2 percent, based on the average from 1994 through 2003, according to Freddie Mac (FMCC)’s Nothaft.

The housing surplus peaked at almost 2 million units, including 1.2 million rentals, in the third quarter of 2009, when foreclosures were soaring and years of speculative construction led to a glut of empty houses.

Geoffrey R. Dunbar writes a Working Paper for the BoC titled Demographics and the Demand for Currency:

I use data from the Bank of Canada’s Bank Note Distribution System and exploit a natural experiment offered by the timing of Easter in the Gregorian calendar to analyze the effects of demographic change for currency demand. I find that the main drivers of low-denomination bank note demand are merchants. Merchants and the youngest age group, aged 15-24, are also a significant source of demand for twenty-dollar bank notes and for the total dollar value of withdrawals. In contrast, increases in the demographic age groups 25-54 and 55 plus tend to lower bank note withdrawals. Finally, I find no evidence that employment status is related to bank note demand, but that there is a difference between the bank note demand of men aged 15-24 and women aged 15-24 increases in the share of women aged 15-24 lead to increases in bank note demand.

The last sentence provides great opportunity for salacious speculation! Regrettably:

Although it is interesting to conjecture reasons for the apparent difference in currency demand between young men and young women, the data available do not permit a causal investigation.

The BoC has also published a Working Paper by Sami Alpanda and Sarah Zubairy titled Addressing Household Indebtedness: Monetary, Fiscal or Macroprudential Policy?:

In this paper, we build a dynamic stochastic general-equilibrium model with housing and household debt, and compare the effectiveness of monetary policy, housing-related fiscal policy, and macroprudential regulations in reducing household indebtedness. The model features long-term fixed-rate borrowing and lending across two types of households, and differentiates between the flow and the stock of household debt. We use Bayesian methods to estimate parameters related to model dynamics, while level parameters are calibrated to match key ratios in the U.S. data. We find that monetary tightening is able to reduce the stock of real mortgage debt, but leads to an increase in the household debt-to-income ratio. Among the policy tools we consider, tightening in mortgage interest deduction and regulatory loan-to-value (LTV) are the most effective and least costly in reducing household debt, followed by increasing property taxes and monetary tightening. Although mortgage interest deduction is a broader tool than regulatory LTV, and therefore potentially more costly in terms of output loss, it is effective in reducing overall mortgage debt, since its direct reach also extends to home equity loans.

I don’t like the idea of macroprudential regulation as stated: reducing the maximum LTV is too prescriptive. I would much prefer adding a countercyclical element to the Risk Weighting of mortgages for banks in Canada – e.g., if mortgages on the balance sheet are within – say – 3% of the 10 year average, then everything is normal. But once they’re – say – 10% above the 10 year average, then the Risk Weight changes from 35% to 40%. There are also considerations of public welfare in play – when loans are easy to get, introducing a macroprudential policy that leans against high-LTV mortgages means that the marginal consumer is being told he can’t buy a house, but can buy a car. And what if the wise policy-makers are wrong?

Allison Schrager of Bloomberg reminds us of The Real Risk of Pension Plans: They Give Retirees False Security:

Retirement security is ending the year at an all-time low. The $1.1 trillion last-minute spending bill will allow trustees to cut benefits in multiemployer defined benefit pension plans. And while it affects a relatively small population, 10 million people at most, it opens the door for other employers to make similar cuts. Maybe that’s a long way off; maybe not. But the provision is a rude awakening: We may romanticize guaranteed retirement benefits and lament our 401(k) world, but pensions aren’t safe these days either.
…
It turns out that pension plan sponsors, and the politicians who oversee them, are just as fallible as workaday employees. We all prefer to spend more today and deal with the future when it comes. Pension plans have done this for years by promising generous benefits without a clear plan to pay for them. When pressed, they may simply raise their performance expectations or choose more risky investments in search of higher returns. Neither is a legitimate solution. In theory, regulators should keep pension plan sponsors in check. In practice, the rules regulators must enforce tend to indulge, or even encourage, risky behavior.

It was a nice day for US Equities:

The Standard & Poor’s 500 Index (SPX) increased 0.4 percent to 2,078.54 at 4 p.m. in New York, above its previous record close of 2,075.37 reached Dec. 5. The Dow Jones Industrial Average climbed 154.64 points, or 0.9 percent, to 17,959.44, also a closing record. The Russell 200 Index added 0.5 percent to the highest since July, while the Nasdaq Composite Index (CCMP) finished 10 points below a more than 14-year high.
…
The S&P 500 and Dow (INDU) climbed back to record levels after a slide in oil prices and a worsening of the financial crisis in Russia rippled through financial markets earlier this month, wiping more than $1 trillion from U.S. equity values in less than two weeks. The S&P 500 lost 5 percent in seven trading days through Dec. 16.

Today’s gains in the S&P 500 completed the fifth recovery this year from a decline of 4 percent or more, just 17 days after it started. In comparable drops beginning in January, April, July and September, the S&P 500 needed about a month to erase losses, data compiled by Bloomberg show.

This is the 50th time this year the S&P 500 has closed at an all-time high, while the Dow has done it 35 times. The S&P 500 reached records on 45 occasions in 2013, as the index recovered from the financial crisis to top its previous high from October 2007 for the first time

Canadian equities, not so much:

Canadian stocks declined, after posting the best week in five years, as commodity producers tumbled with the price of crude and metals.
…
The Standard & Poor’s/TSX Composite Index (SPTSX) fell 35.88 points, or 0.3 percent, to 14,432.38 at 4 p.m. in Toronto. Trading in the benchmark gauge’s stocks was 16 percent below the 30-day average. The index has lost 2.1 percent in December, paring its gains for the year to 6 percent.

Veresen Inc., proud issuer of VSN.PR.A and VSN.PR.C, has announced:

the formation of a new entity, Veresen Midstream Limited Partnership (“Veresen Midstream”), which will be owned equally by Veresen and affiliates of Kohlberg Kravis Roberts & Co. L.P. (“KKR”), a global investment firm. Veresen Midstream has entered into definitive agreements to acquire certain natural gas gathering and compression assets supporting Montney development in the Dawson area of northeastern British Columbia from Encana Corporation (“Encana”) and the Cutbank Ridge Partnership (“CRP”). CRP is a partnership between Encana and Cutbank Dawson Gas Resources Ltd., a subsidiary of Mitsubishi Corporation. Veresen Midstream has also agreed to undertake up to $5 billion of new midstream expansion for Encana and CRP in the Montney region under a 30-year fee-for-service arrangement. Veresen Midstream will be Veresen’s primary growth vehicle for its Canadian natural gas and natural gas liquids (“NGL”) midstream business.

Key Highlights

Establishes Veresen Midstream as a leading player in the core of the Montney, one of North America’s most prolific and competitive resource plays.
Requires no up-front funding from Veresen; Veresen Midstream will be funded initially through committed non-recourse debt and a cash equity contribution from KKR, while Veresen will fund its equity investment by contributing its Hythe/Steeprock assets.
Provides Veresen Midstream with a large multi-year capital program to construct contracted midstream infrastructure under favourable economic terms, and a powerful platform to pursue additional third-party growth opportunities.
Establishes a long-term, fee-for-service natural gas gathering, compression and processing agreement with Encana and CRP.
Cash flow neutral to Veresen in 2015; accretive as Veresen Midstream’s new capital projects are placed in-service.

DBRS comments:

DBRS expects that this agreement will have no material impact on the credit risk profile of Veresen. Based on its preliminary review, DBRS views the agreement as neutral for the business risk profile of the Company. The business risk profile of Veresen Midstream is supported by the Hythe/Steeprock firm’s long-term take-or-pay contract with Encana and the Dawson assets (current and future expansion) which are under long-term contract with CRP. Veresen would also modestly benefit from a more diversified portfolio of assets situated in the rich gas Montney basin, which is one of the most prolific gas plays actively targeted by major producers; however, this benefit could be offset by the significant financing requirements at Veresen Midstream, as DBRS notes that cash distributions will be available to Veresen after debt servicing at Veresen Midstream.

… and as for DBRS itself:

DBRS Ltd., the world’s fourth-largest credit rating company, has agreed to be acquired by the Carlyle Group (CG) and Warburg Pincus for about $500 million, according to people familiar with the sale.

The headquarters of closely held DBRS, which has offices in New York, Chicago and London, will stay in Toronto, and Walter Schroeder, the firm’s founder, will remain an investor, the companies said in a statement today.

“While our Canadian franchise and culture will continue to be at the core of DBRS’s operations, the breadth and depth of both Warburg Pincus and Carlyle’s international presence will be invaluable to DBRS,” Schroeder said in the statement.

Carlyle and Warburg were attracted to DBRS primarily because of its strong position in Canada and niche products like commercial mortgage-backed securities, which will provide steady cash flow as it looks to expand elsewhere in the U.S. and Europe, according to a person familiar with the matter.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 28bp, FixedResets off 8bp and DeemedRetractibles gaining 7bp. There is yet another lengthy list of performance highlights, with Brookfield issues prominent among the losers. Volume was average.

Remember that all rich /cheap assessments are:

based on Implied Volatility Theory only
are relative only to other FixedResets from the same issuer
assume constant GOC-5 yield
assume constant Implied Volatility
assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 20.07, is $1.50 cheap, but it has already reset (at +192). TRP.PR.D, bid at 25.10 and resetting at +238bp on 2019-4-30 is $0.09 rich and TRP.PR.E, bid at 25.20 and resetting at +235bp on 2019-10-30, is $0.79 rich.

Click for Big

Here, as has often been the case lately, it is apparent that

MFC.PR.F, resetting at 141bp on 2016-06-19 is in another world and distorting results again. It’s the only deep-discount issue, bid at 20.53 – everything else is above or near par
the slope determined by the higher-spread issues is unreasonably high if these are to be considered perpetual issues and unreasonably low if they are to be considered NVCC non-compliant issues

Click for Big

There continues to be extraordinary cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 20.07 and appears to be $0.86 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 24.86 and appears to be $1.43 rich.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.70, looks $1.07 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 24.91, looks $1.01 expensive and resets 2019-3-1

Click for Big

The average break-even rate has declined from 1.80%-2.00% at the time recent conversion decisions were made to a current range of (mostly) 1.55%-1.70%. This decline means that the estimated profit on TRP.PR.A conversion has declined from $0.48 to a mere $0.21 (at the lower end of the range, 1.55%).

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	-0.8443 %	2,458.7
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.8443 %	3,892.6
Floater	3.08 %	3.19 %	66,900	19.27	4	-0.8443 %	2,613.8
OpRet	4.41 %	-2.77 %	26,167	0.08	2	0.0000 %	2,748.8
SplitShare	4.29 %	4.09 %	38,865	3.69	5	0.4859 %	3,192.0
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0000 %	2,513.5
Perpetual-Premium	5.45 %	-0.26 %	74,524	0.08	20	0.0582 %	2,476.6
Perpetual-Discount	5.22 %	5.10 %	110,488	15.29	15	-0.2774 %	2,640.2
FixedReset	4.26 %	3.60 %	249,810	16.48	77	-0.0786 %	2,517.8
Deemed-Retractible	4.98 %	1.46 %	97,419	0.18	40	0.0745 %	2,612.0
FloatingReset	2.57 %	2.13 %	64,337	3.50	5	0.0394 %	2,536.4

Performance Highlights
Issue	Index	Change	Notes
BAM.PF.D	Perpetual-Discount	-3.31 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 21.01 Evaluated at bid price : 21.01 Bid-YTW : 5.86 %
BAM.PR.M	Perpetual-Discount	-1.72 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 21.16 Evaluated at bid price : 21.16 Bid-YTW : 5.64 %
BAM.PR.T	FixedReset	-1.64 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 23.08 Evaluated at bid price : 23.96 Bid-YTW : 3.88 %
TRP.PR.A	FixedReset	-1.62 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 20.07 Evaluated at bid price : 20.07 Bid-YTW : 4.12 %
BAM.PF.C	Perpetual-Discount	-1.54 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 21.13 Evaluated at bid price : 21.13 Bid-YTW : 5.77 %
BAM.PR.B	Floater	-1.51 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 16.30 Evaluated at bid price : 16.30 Bid-YTW : 3.22 %
ENB.PR.B	FixedReset	-1.38 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 21.95 Evaluated at bid price : 22.20 Bid-YTW : 4.30 %
BAM.PR.R	FixedReset	-1.35 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 23.67 Evaluated at bid price : 24.86 Bid-YTW : 3.74 %
POW.PR.G	Perpetual-Premium	-1.16 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-04-15 Maturity Price : 25.00 Evaluated at bid price : 25.95 Bid-YTW : 4.86 %
ENB.PR.P	FixedReset	-1.15 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 21.91 Evaluated at bid price : 22.34 Bid-YTW : 4.37 %
GWO.PR.N	FixedReset	-1.00 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.75 Bid-YTW : 5.52 %
HSE.PR.A	FixedReset	1.07 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 19.87 Evaluated at bid price : 19.87 Bid-YTW : 4.02 %
FTS.PR.J	Perpetual-Discount	1.62 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 24.00 Evaluated at bid price : 24.40 Bid-YTW : 4.89 %
CGI.PR.D	SplitShare	1.75 %	YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2023-06-14 Maturity Price : 25.00 Evaluated at bid price : 25.60 Bid-YTW : 3.45 %
SLF.PR.G	FixedReset	1.93 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.15 Bid-YTW : 4.79 %

Volume Highlights
Issue	Index	Shares Traded	Notes
TD.PF.C	FixedReset	115,130	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 23.11 Evaluated at bid price : 24.88 Bid-YTW : 3.56 %
CM.PR.P	FixedReset	80,195	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 23.08 Evaluated at bid price : 24.79 Bid-YTW : 3.57 %
IAG.PR.E	Deemed-Retractible	49,640	Called for redemption effective 2014-12-31. YTW SCENARIO Maturity Type : Call Maturity Date : 2015-12-31 Maturity Price : 25.75 Evaluated at bid price : 25.98 Bid-YTW : 4.81 %
MFC.PR.N	FixedReset	40,200	Recent new issue. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.92 Bid-YTW : 3.82 %
SLF.PR.G	FixedReset	38,668	Desjardins crossed 13,000 at 20.93. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.15 Bid-YTW : 4.79 %
TRP.PR.B	FixedReset	31,904	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 17.16 Evaluated at bid price : 17.16 Bid-YTW : 3.91 %
There were 32 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
BAM.PF.D	Perpetual-Discount	Quote: 21.01 – 21.64 Spot Rate : 0.6300 Average : 0.3861 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 21.01 Evaluated at bid price : 21.01 Bid-YTW : 5.86 %
BAM.PR.K	Floater	Quote: 16.42 – 17.14 Spot Rate : 0.7200 Average : 0.5232 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 16.42 Evaluated at bid price : 16.42 Bid-YTW : 3.19 %
SLF.PR.A	Deemed-Retractible	Quote: 24.26 – 24.78 Spot Rate : 0.5200 Average : 0.3869 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.26 Bid-YTW : 5.14 %
PVS.PR.B	SplitShare	Quote: 25.31 – 25.74 Spot Rate : 0.4300 Average : 0.3039 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-01-10 Maturity Price : 25.00 Evaluated at bid price : 25.31 Bid-YTW : 4.09 %
BAM.PR.M	Perpetual-Discount	Quote: 21.16 – 21.50 Spot Rate : 0.3400 Average : 0.2162 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 21.16 Evaluated at bid price : 21.16 Bid-YTW : 5.64 %
HSE.PR.C	FixedReset	Quote: 25.04 – 25.34 Spot Rate : 0.3000 Average : 0.1805 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-12-22 Maturity Price : 23.17 Evaluated at bid price : 25.04 Bid-YTW : 4.40 %

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