Category: Market Action

There was a good US jobs number today:

The American labor market is powering past a global slowdown as unemployment decreased to a six-year low in October and 214,000 workers were added to payrolls.

The jobless rate fell to 5.8 percent, the lowest since July 2008, from 5.9 percent in September, Labor Department figures showed today in Washington. The increase in hiring last month followed a 256,000 advance that was larger than first estimated as job gains head for their best showing in 15 years.

The report probably keeps Federal Reserve policy makers on track to raise interest rates in 2015 even as wages continued to show little momentum. Disappointing average hourly earnings help explain the voter discontent that gave the Republican party control of the Senate in this week’s election.
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The one soft spot in the employment picture remains the inability of wages to show bigger increases. Average hourly earnings for all workers rose 0.1 percent in October from the prior month, and were up 2 percent since October 2013, less than the 2.1 percent median forecast. By this measure pay climbed 3.1 percent in the year before the recession began in December 2007

The ruble is continuing to have problems:

Russia’s central bank said it’s ready to step in at any time to prop up the ruble as the world’s worst-performing currency over the past three months extended declines.

The demand for dollars is creating conditions for risks to financial stability to emerge, the Bank of Russia in Moscow said in a statement on its website today. The monetary authority said it’s also ready to “use its other financial-market tools.”

The central bank led by Elvira Nabiullina has been struggling to stem the ruble’s decline as fighting erupts anew in Ukraine and crude oil, Russia’s main export earner, trades near a four-year low. Traders have tested how far the currency needs to drop before policy makers step in after the Bank of Russia moved closer to a free-floating exchange rate this week.
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The ruble, which slumped as much as 4.3 percent earlier today, traded down 0.2 percent at 46.7136 per dollar at 7:33 p.m. in Moscow. It has plunged 22 percent in the mast three months, the most among more than 170 currencies tracked by Bloomberg.

The monetary authority sold $30 billion in October to limit the ruble fall, according to the statement, the first intervention since May. The value of Russia’s international reserves declined for 11 consecutive weeks to $428.6 billion as of Oct. 31, shrinking by a fifth since last year’s peak.

US bond dealers are losing market share to electronic exchanges:

Daily trading of corporate bonds averaged $21.8 billion in October, the most ever, according to the Securities Industry & Financial Markets Association. Meanwhile, at the 22 primary dealers that are counterparties with the Federal Reserve, it was about average for the year.
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The data suggest the biggest banks are losing a bit of their dominance over the bond market as post-crisis regulations prompt them to cut staff and inventories of riskier debt. In response, investors are changing the way they do business, transacting more frequently on electronic exchanges and stepping into trading once dominated by dealers.
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Last month, bond prices swung the most in more than a year as investors grew jittery about plunging oil prices and slowing global growth. A measure of implied volatility in Treasuries as measured by Bank of America Merrill Lynch’s MOVE index was 19 percent higher in October than the average over the prior year.
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Junk-bond trading averaged a record $8.3 billion a day in October, 26 percent higher than the average during the previous 12 months, according to the Financial Industry Regulatory Authority. The volume of speculative-grade debt traded on MarketAxess Holdings Inc.’s electronic system last month was almost 30 percent higher than the prior record.

At the same time, corporate-bond trading at primary dealers averaged $111 billion a week in October, just under the $112 billion average during the prior year, Fed data show.

Part of the decline in activity at Wall Street’s biggest banks can be attributed to a drop-off in new corporate-bond sales, which tend to drive a significant portion of their business.

Another reason: The firms have been steadily cutting their inventories of riskier debt. They slashed their high-yield bond holdings 68 percent in the week ended Oct. 15 to a net $2 billion, Fed data show.

There will be plenty of grist for academic mills in sorting all this out. Increased volatility is a logical consequence of exchange trading, but there is no shortage of confounding factors!

It was a mixed day for the Canadian preferred share market today, with PerpetualDiscounts off 4bp, FixedResets up 12bp and DeemedRetractibles flat. Volatility was average. Volume was on the low side of average.

Our political and appointed masters are once again avoiding communication with Canadians:

Lawrence Schembri isn’t the first official to warn how dangerous this could be.

But his paper, published today, is notable in that it comes from a deputy governor of the Bank of Canada, which only recently again cited the threats from the massive debt loads of Canadian households.

Mr. Schembri stresses that the system is sound, as long as there’s no “severe” shock that would drive up unemployment, and that the “imbalances” among consumers will probably ease as mortgage rates inevitably rise.

Nonetheless, he writes in the National Institute Economic Review, things have to change given, among other things, debt-to-income levels that have been at or near record levels in Canada.

The Bank of Canada states that ordinary Canadians can go fuck themselves:

Members of the media may obtain a copy of this article by contacting the National Institute of Economic and Social Research Press Office:

Yeah, I’ll bet the smart cookies in the press do a really good job of summarizing the article in all its essentials. This business of senior officials hiding their thoughts behind foreign pay walls is a real disgrace.

While we’re on the topic of autocratic central banks immune from criticism, PBOC has a familiar problem – people want to borrow money for inappropriate purposes (as determined by central bank):

The People’s Bank of China confirmed it pumped 769.5 billion yuan ($126 billion) into the country’s lenders in the last two months through a newly-created Medium-term Lending Facility. The PBOC injected 500 billion yuan in September and another 269.5 billion yuan in October via the facility — all termed at three months with an interest rate of 3.5 percent.

The announcement, included in the PBOC’s quarterly monetary policy statement, is the first official confirmation of earlier reports on the injections. Goldman Sachs Group Inc. said every 500 billion yuan in funds from the central bank is similar to a 50-basis-point cut in the required reserve ratio.

“It shows the central bank is very reluctant to loosen monetary policy, but it has to reduce financing costs for end borrowers,” said Guan Qingyou, chief macro-economic researcher with Minsheng Securities Co. in Beijing. “It doesn’t mean the new tools can replace traditional tools forever.”

The operations “affected mid-term interest rates while providing liquidity to guide commercial banks to lower their lending rates and overall social-financing costs,” the central bank said in the report published yesterday. “As liquidity generated from capital inflows eases, MLF has played a role of covering the liquidity gap and maintaining a neutral and appropriate liquidity situation.”

The facility is the latest unconventional liquidity tool as the PBOC joins the European Central Bank on a path of easing even as the U.S. begins the shift to a more normal monetary policy. The expansion builds on targeted steps to support growth in Asia’s largest economy, while stopping short of broad-based monetary loosening and fiscal stimulus that could heighten debt risks and the risk of bad loans.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 2bp, FixedResets down 21bp and DeemedRetractibles up 12bp. Volatility was high. Volume was average.

OSFI honcho Jeremy Rudin spoke to a Senate committee today but didn’t actually say anything.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 26bp, FixedResets gaining 10bp and DeemedRetractibles off 1bp. Volatility was average. Volume was low.

PerpetualDiscounts now yield 5.02%, equivalent to 6.53% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.2%, so the pre-tax, interest-equivalent spread (in this context, the Seniority Spread) is now about 235bp, a slight (and perhaps spurious) narrowing from the 240bp reported October 29.

The Parakeet has considered the problem of youth unemployment and come up with the ideal solution: work for free!

How bad are things in Canada’s job market? Bank of Canada Governor Stephen Poloz says bad enough for young people to consider working for free.

Adult children stuck in their parents’ basements because they can’t find adequate employment should take unpaid work to bolster résumés as they wait for the recovery to take hold, Poloz said Monday in Toronto.

The Bank of Canada estimates about 200,000 young people want to work or work more, and Poloz said they may be scarred by prolonged unemployment that prevents them from moving out on their own. He said he’s been asked for advice on how young people can find work.

“Having something unpaid on your CV is very worth it, because that’s the one thing you can do to counteract this scarring effect,” Poloz told reporters was his advice to discouraged youth.

Going back to school for something useful is not an option, apparently. As a sometime employer, I can’t say volunteer work impresses me very much. It’s very difficult to judge the quality, for one thing: no volunteer agency is ever going to fire their volunteers, or give them bad references. And my big question is … was that really the best thing you could think of? Not school, not working at Timmy’s, nothing?

I might make exceptions to this general rule for closely related and idealistic work. If I was hiring a nurse, for instance, going to Liberia for a year to treat Ebola patients or deliver babies would not be a negative. But not necessarily a lot of credit because around here, nurses don’t deliver babies; I need a nurse to treat my paper cuts, which can get pretty vicious sometimes.

Anyway, the parakeet’s getting a pretty rough ride in the G&M comments.

There’s good news about the US deficit:

Robust economic growth has helped push the U.S. budget deficit down to the lowest level since 2008, marking the sharpest turnaround in the government’s fiscal position in at least 46 years.

The shortfall of $483.4 billion in the 12 months ended Sept. 30 was 2.8 percent of the nation’s gross domestic product of $17.2 trillion over the same period, according to data compiled by Bloomberg using Commerce Department figures. The figure peaked at 10.1 percent of GDP in December 2009.

That’s quite the drop!

Whoopsy! BNS disclosed some nasty 14Q4 charges:

Scotiabank (TSX: BNS) (NYSE: BNS) today announced that it expects to record certain charges in its fiscal 2014 fourth quarter earnings, aggregating to a total of approximately $451 million pre-tax, or $341 million after tax. Diluted earnings per share are expected to be impacted by approximately $0.28. These items will also impact the Bank’s Common Equity Tier 1 capital ratio by approximately 10 basis points. The charges fall into two broad categories: (1) changes in estimates and additional credit provisions; and (2) restructuring charges.

DBRS comments:

Some of the charges are consistent with DBRS’s opinion that Scotiabank’s exposure in emerging markets and corporate lending is higher compared to its Canadian bank peers; as a result, DBRS views BNS’s credit risk as the highest among the big five banks, although it remains strong overall as the Bank is also the most geographically diverse. DBRS does not expect the restructuring efforts to negatively impact the Bank’s operations in any material way. In Canada, the efforts are expected to improve customer service and efficiency of non-customer-facing functions. In International Banking, Scotiabank indicates they are attempting to right-size the branch networks in various countries in light of the economic realities.

Brookfield’s aggressive approach to expansion has cost Brookfield Renewable Energy Partners L.P. it’s S&P ‘Positive’outlook:

• •We are revising our outlook on Brookfield Renewable Energy Partners L.P. (BREP) to stable from positive.
• •The outlook revision reflects our assessment of the amount of debt being maintained at the parent level in relation to parent-only cash flow that the partnership is generating.
• •We are also affirming our ratings on BREP and subsidiaries Brookfield Renewable Power Preferred Equity Inc. and BRP Finance ULC, including our ‘BBB’ long-term corporate credit rating on BREP.

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At the same time Standard & Poor’s affirmed its ratings on BREP and subsidiaries Brookfield Renewable Power Preferred Equity Inc. and BRP Finance ULC, including its ‘BBB’ long-term corporate credit rating on BREP.

The outlook revision reflects our view of the company’s ability to generate strong remittable cash flows from its holdings and its increased level of holding company (holdco) recourse debt. The company has articulated a policy of maintaining relatively low levels of leverage at the holdco level with leverage at the holdco used opportunistically for acquisitions with equity as market conditions allow. However, during the course of the year, the company has made a number of acquisitions that, although partially funded with new equity issuance, maintained a higher level of debt at the holdco. This has resulted in lower credit metrics.
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The stable outlook reflects our expectation that BREP will continue to increase its parent-only cash flow while maintaining modest amounts of debt at the holding company as well as maintaining the highly contracted and well-diversified portfolio of generation assets.

We could raise the ratings if we believe that parent-only cash flow to debt will continue at or above 30% assuming the current quality of cash flow score of ‘4’.

We could lower the rating if the partnership is unable to maintain parent-only cash flow to debt above 23% or if there is deterioration in the quality of cash flow score. This could result from acquisitions financed with substantially higher levels of holding-company debt or a material change in the partnership’s contractual profile.

It was another red-hot day for the Canadian preferred share market, with PerpetualDiscounts winning 57bp, FixedResets gaining 16bp and DeemedRetractibles up 21bp. Volatility was suitably elevated, with the highlights showing not a single loser, and CGI.PR.D making a monkey out of me by leading the charts with a gain of over 2%, shortly after I opined that it was near the top of its range, so maybe I should consider working for a bank as a volunteer. Volume was on the low side of average.

Lots of demand for Treasuries:

Even with the end of unprecedented bond purchases from the Federal Reserve, demand for U.S. Treasuries looks as strong as ever.

Investors submitted bids for $5.54 trillion of government debt at auctions this year, or 3 times the amount sold, data compiled by Bloomberg show. The bid-to-cover ratio is higher than the 2.87 last year, when the Fed purchased more Treasuries than at any time since the central bank began quantitative easing in 2008, and has been exceeded only twice on record.

Bill Gross advocates loosening fiscal policy, as well as monetary:

Such is the dilemma facing central bankers (and supposedly fiscal authorities) in 2014 and beyond: How to create inflation. They’ve made a damn fine attempt at it – have they not? Four trillion dollars in the U.S., two trillion U.S. dollar equivalents in Japan, and a trillion U.S. dollars coming from the ECB’s Draghi in the eurozone. Not working like it used to, the trillions seem to seep through the sandy loam of investment and innovation straight into the cement mixer of the marketplace. Prices go up, but not the right prices. Alibaba’s stock goes from $68 on opening day to $92 in the first minute, but wages simply sit there for years on end. One economy (the financial one) thrives while the other economy (the real one) withers.

Perhaps sooner rather than later, investors must recognize that modern day inflation, while a necessary condition for survival, is not a sufficient condition for increasing wealth at a rate necessary to satisfy future liabilities associated with education, health care, and a satisfactory retirement. The real economy needs money printing, yes, but money spending more so, and that must come from the fiscal side – from the dreaded government side – where deficits are anathema and balanced budgets are increasingly in vogue. Until then, Grant’s deflation remains a growing possibility – not the kind that creates prosperity but the kind that’s the trouble for prosperity.

I can tell you one group that is all in favour of FX trading hysteria:

Legal expense at JPMorgan in the [quarterly] period was $1.01 billion, tied “in large part” to the currency investigations, Chief Financial Officer Marianne Lake said on Oct. 14.

Loblaw Companies, proud issuer of L.PR.A, has been confirmed by DBRS as Pfd-3:

The confirmations reflect the closing of the acquisition of Shoppers as well as acceptable operating performance in a difficult competitive environment in the core food retail business. In addition, the rating action reflects DBRS’s expectation that the Company will continue with its deleveraging plan set at the time of the Shoppers acquisition, which should result in credit metrics considered acceptable for the current rating by the end of 2015. Loblaw’s ratings continue to be supported by its strong business profile, featuring industry-leading size, scale and market positions in retail and pharmacy across Canada. The ratings incorporate the intense competition in the food retail industry in Canada and the expected decline in financial leverage in the near to medium term, subsequent to the acquisition of Shoppers.

George Weston Limited, proud issuer of WN.PR.A, WN.PR.C, WN.PR.D and WN.PR.E, has been confirmed at Pfd-3 by DBRS:

The confirmations reflect Weston’s stable balance-sheet debt levels despite pressure on the Weston Foods bakery business from higher commodity costs, and the confirmation of the ratings of Loblaw Companies Limited (Loblaw; see separate press release). Weston’s ratings continue to be based on its strong brands, efficient operations and its ownership interest in Loblaw. The ratings also reflect the Weston Foods segment’s exposure to volatile input costs and the mature nature of the bakery industry.
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Weston’s financial profile is expected to remain relatively stable going forward based on the Company’s ownership interest in Loblaw, its cash on hand and its stable balance-sheet debt levels. DBRS believes that Weston will continue to use cash on hand and free cash flow generated to invest in growth and/or increase returns to shareholders over the longer term. Weston is likely to remain relatively conservative in the medium term particularly while Loblaw’s leverage remains high resulting from the acquisition of Shoppers Drug Mart Corporation. In the medium term, Weston’s ownership interest in Loblaw could return to above the 50% level as Loblaw is likely to use free cash flow to complete share repurchases once Loblaw completes its deleveraging plan. Over the longer-term DBRS notes that a positive rating action at Loblaw would not necessarily result in a corresponding rating action to Weston.

The Canadian preferred share market was on fire today, with PerpetualDiscount winning 54bp and both FixedResets and DeemedRetractibles up 18bp. Volatility was suitably high. Volume was low.

Tapering, schmapering. Liquidity is now Made in Japan:

U.S. stocks jumped, sending benchmark indexes to records, as an unexpected boost in stimulus from the Bank of Japan spurred optimism in the global economy.
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The Standard & Poor’s 500 Index advanced 1.2 percent to 2,018.05 at 4 p.m. in New York, topping its previous all-time closing high of 2,011.36 on Sept. 18. The Dow Jones Industrial Average rallied 195.1 points, or 1.1 percent, to 17,390.52, also an all-time high. The Nasdaq Composite (CCMP) Index surged 1.4 percent to the highest since March 2000.
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U.S. equities joined a global rally as Japan’s Government Pension Investment Fund said it will put half its holdings in local and foreign stocks, double previous levels, and invest in alternative assets. The Bank of Japan raised its annual target for monetary expansion to 80 trillion yen ($724 billion) from as much as 70 trillion yen. The Topix index (VIX) soared the most in a year, leading a rally in equities around the world.

Better-than-forecast corporate earnings and optimism in the economy helped the S&P 500 rebound after a 7.4 percent dip from Sept. 18 to Oct. 15. The gauge advanced 2.3 percent in October, extending its gain this year to 9.2 percent.

The Russell 2000 Index rallied 6.5 percent in October for its best month since July 2013. The Dow gained 2 percent in the month and the Nasdaq Composite Index jumped 3.1 percent.

The S&P 500 climbed 2.7 percent this week after posting its best week since January 2013 through Oct. 24. Equities rose yesterday after data showed the U.S. economy expanded faster than forecast last quarter, signaling growth is strong enough to withstand the end of Federal Reserve bond buying.

Data today showed consumer spending in the U.S. unexpectedly dropped in September as incomes rose at the slowest pace of the year. The Institute for Supply Management-Chicago Inc.’s business barometer rose to 66.2 in October from 60.5 in the prior month, according to a report today. A reading less than 50 signals contraction.

The Thomson Reuters/University of Michigan final October index of consumer sentiment increased to 86.9 from 84.6 a month earlier.

The Canadian preferred share market closed the month on a strong note, with PerpetualDiscounts up 10bp, FixedResets gaining 8bp and DeemedRetractibles winning 22bp. Volatility was average. Volume was very low.

This sounds like a good programme:

Unemployed (USURTOT) and pregnant with her second child in late 2013, Shantel Burris knew she needed to make a change. In a year, the 24-year-old went from jobless benefits to earning double the New York minimum wage.

Her first step was getting a high school diploma, and a chat with a counselor sparked a “nonstop” process of preparation centered on 11 weeks of free job training and a battery of mock interviews at Career Network: Healthcare. The New York initiative trained and matched her with a position in August at Montefiore Medical Center, where she prepares patient meal trays for $16.08 an hour.

Programs like Career Network seek to alleviate a shortage of workers in jobs that require less than a bachelor’s degree though more than a high school diploma. For the 146.2 million Americans who are 18 and older without an associate’s or higher degree, such opportunities offer a pathway to higher pay and job stability that would be difficult to find on their own.

Success hinges on identifying openings at local employers and equipping a spectrum of Americans — from the jobless to the underemployed — with needed skills. Such programs might also help hiring catch up with job vacancies, which are near a record high.
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The need for a demand-driven approach became apparent when JPMorgan Chase & Co., as part of its philanthropic efforts, explored ways to reduce the so-called skills gap. The New York-based company in December announced New Skills at Work, a five-year $250 million global project to tailor training to available jobs.
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JPMorgan will examine labor demand in nine U.S. metro areas, identifying fast-growing industries with middle-skill openings and better pay. The data and funding will be shared with community organizations serving youth and long-term unemployed.

I think someone at CDHowe reads PrefBlog:

Canada’s central bank should start publishing minutes of interest-rate meetings including any dissenting views, to meet the standards of counterparts in the U.S. and U.K., a research group said.

Such a move would improve the Ottawa-based Bank of Canada’s transparency and improve public understanding of the process used to determine interest rates, the Toronto-based C.D. Howe Institute said in a report due to be published today.

The central bank has resisted disclosing minutes, saying the rate-setting panel works by consensus and the distilled views of policy makers are represented in the statements that accompany the eight-yearly rate decisions.
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“Withholding dissenting opinions has the potential to limit public understanding of important monetary policy questions,” Pierre Siklos, an economics professor at Wilfrid Laurier University in Waterloo, Ontario, said in a summary of the report, co-authored with Matthias Neuenkirch at the University of Trier in Germany.

I said the same thing on October 10, 2014 and December 10, 2013 … and probably earlier, since I’ve thought this forever, but I won’t bother looking up more dates.

Ben Steverman of Bloomberg points out that that even US banks are still in the pre-PC mainframe era:

Behind every check written, card swiped and paycheck delivered is an antiquated payment system that isn’t real time. About $80 trillion a year flows by fits and starts through a Rube Goldberg-like set of interlocking payment networks. The most prominent is the Automated Clearing House, or ACH, now celebrating its 40th birthday. These networks carry funds electronically, yes. But they often only sync up with banks once a day. In other words, if you miss today’s only flight off Kiribati, then you have to wait for tomorrow’s.

It can take a customer of a U.S. bank more than three days to transfer funds to another U.S. bank. Banks haven’t seen an advantage in speeding that up, even though the lag is painful for businesses and families. Purchases don’t always clear before a store owner has to pony up for more inventory. Families get hit with overdraft fees when checks really are in the mail.
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What the U.S. needs, the Federal Reserve said last month, is an entirely “new infrastructure” to keep banks connected day, night and through the weekend. Then last week, the Clearing House, a group owned by the largest banks, said it would build a real-time payment network. It didn’t specify a time frame or release cost estimates. It did say your bank would credit your account immediately and settle up with the payer’s bank later. The Fed estimates businesses could save $10 to $40 billion with a more efficient network.
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Banks have been procrastinating on an upgrade. They worry changing over 1970s-era networks will be a big hassle. A 24/7 system will need to sync with bank’s old batch systems, which are designed to need maintenance on Sundays. And, if popular enough, real-time payments could threaten banks’ annual collection of $30 billion in overdraft fees and more than $12 billion in card fees.

That’s NUTHIN’! For a bachelor’s degree in Banking Contempt, transfer money across the Canada-US border. For a master’s, transfer it abroad. And for a Ph.D., see what happens when one of the clerks along the way makes a trivial data-input error. That’s happened to me … the money just disappears for a few days. Completely. They can’t even guess what happened.

IIROC – a regulatory organization notable for funnelling slush-funds to well-connected, friendly enterprises – has stepped up its interference in the bond market:

The Investment Industry Regulatory Organization of Canada said Thursday that it will change the reporting system for debt securities dealers. They will soon be required to report every trade on a daily basis, rather than weekly.
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The new rules officially come into effect in two phases starting in November 2015, and they are meant to tighten up the current market trade reporting system (MTRS), which is based on weekly statistics that IIROC has said are not dependable enough, since methodologies differ among the firms.

Under the current reporting system, dealers issue a weekly aggregate transaction report to the Bank of Canada through MTRS. In the new system, called MTRS 2.0, IIROC dealer members will swiftly report to IIROC all of their over the counter debt security transactions, as well as those of their affiliates that are government securities distributors (GSDs). IIROC will then share the data with the Bank of Canada.

Enbridge was confirmed at Pfd-2(low) by DBRS:

DBRS has confirmed the Issuer Rating of Enbridge Inc. (ENB or the Company) at A (low) and ratings on ENB’s Medium-Term Notes & Unsecured Debentures, Commercial Paper and Cumulative Redeemable Preferred Shares ratings at A (low), R-1 (low) and Pfd-2 (low), respectively, all with Stable trends. The ratings reflect (1) a relatively strong business risk profile, (2) pressure on ENB’s near-to-medium-term credit metrics and (3) results under the ten-year Competitive Tolling Settlement (CTS), effective July 1, 2011.
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(2) DBRS expects ENB’s credit metrics, on fully consolidated and modified consolidated bases, to be pressured during the early years of its planned $37 billion capex program (excluding Sponsored Investments) from 2014 to 2018, due to a significant debt financing component related to large free cash flow deficits. DBRS expects improvement in the later years (as the longer-dated projects come onstream and begin to generate cash flow).

Enbridge has a lot of issues outstanding – roughly 10% of the universe. ENB.PF.A, ENB.PF.C, ENB.PF.E, ENB.PF.G, ENB.PR.A, ENB.PR.B, ENB.PR.D, ENB.PR.F, ENB.PR.H, ENB.PR.J, ENB.PR.N, ENB.PR.P, ENB.PR.T and ENB.PR.Y.

It was a mildly positive day for the Canadian preferred share market, with PerpetualDiscounts, FixedResets and DeemedRetractibles all gaining 3bp. Volatility was average. Volume was very low.

The TMXMoney screen for BAM.PR.E is worth a picture:

Click for Big

The FOMC is feeling a little more cheerful:

Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace. Labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing.
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Although inflation in the near term will likely be held down by lower energy prices and other factors, the Committee judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.

The Committee judges that there has been a substantial improvement in the outlook for the labor market since the inception of its current asset purchase program. Moreover, the Committee continues to see sufficient underlying strength in the broader economy to support ongoing progress toward maximum employment in a context of price stability. Accordingly, the Committee decided to conclude its asset purchase program this month.
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To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.
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Voting against the action was Narayana Kocherlakota, who believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset purchase program at its current level.

As the Fed is a competently run central bank, one of the many statistics it publishes is the Ten-Year Breakeven Inflation Rate:

Click for Big

After a brief wail, equities decided it wasn’t really news:

U.S. stocks pared declines, Treasuries retreated and the dollar rallied after the Federal Reserve confirmed it will end its asset-purchase program amid signs of a strengthening economy.

The Standard & Poor’s 500 Index (SPX) slid 0.1 percent at 4 p.m. in New York. The index fell as much as 0.8 percent after the Fed’s policy statement before trimming the slide. The 10-year Treasury note yield rose three basis points to 2.32 percent. The Bloomberg Dollar Spot Index jumped 0.6 percent, erasing earlier losses. Gold prices headed for the biggest drop in three weeks.

Moody’s downgraded Talisman to Baa3:

The Baa3 senior unsecured rating reflects Talisman’s sizable reserves, production and valuable other assets, tempered by the execution risks of an ongoing major shift in strategy and capital spending and dividends that outstrip internal cash flow generation. While production has declined due largely to asset sales, we expect modest production growth in 2015 from existing assets given the use of development capital in Southeast Asia, the Eagle Ford and Columbia. However, we expect an overall decline in reserves and production, cash flow, debt and negative free cash flow over the next 12 to 18 months as asset sales take place. When the strategic re-positioning is complete, we believe that Talisman will be positioned as a Baa3-rated company, with internally generated cash flow that can largely fund its negative free cash flow in the North Sea and an asset base that can provide growth opportunities and improvements in Talisman’s very high finding and development costs and very weak leveraged full-cycle ratio.
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The stable outlook reflects our expectation that Talisman will complete its restructuring and have size, leverage and return metrics supportive of a Baa3 rating. The rating could be downgraded if capital productivity fails to improve with a leveraged full cycle ratio of at least 1.0x or if retained cash flow to debt appears likely to decline below 30%. The rating could also be downgraded if the proceeds of asset sales are used for shareholder returns and not debt reduction.

A rating upgrade is unlikely in the near term, but possible if Talisman displays a clear focus on core assets that have a positive organic growth profile that can be developed at reasonable costs leading to sustainable sequential growth in production and reserves, and sustainable improvements in both the leveraged full-cycle ratio (above 1.5x) and RCF to debt (above 40%).

Talisman is the proud issuer of TLM.PR.A, which was downgraded to P-3 by S&P earlier this month, and downgraded to Pfd-3 by DBRS in September.

The Canadian preferred share market skyrocketted today, with PerpetualDiscounts winning 45bp, FixedResets up 32bp and DeemedRetractibles gaining 22bp. Volatility was high, with BAM issues prominent in the hightlights. Volume was average, but there were quite a few six-figure volumes; on the other hand, most of those high volumes were due to RBC performing matched pairs of crosses … which may be real, or may indicate that they were mostly ‘internal crosses’ (where the same manager manages both accounts and he’s just rebalancing).

PerpetualDiscounts now yield 5.09%, equivalent to 6.62% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.2%, so the pre-tax interest-equivalent spread is no about 240bp, a significant narrowing from the 270bp reported October 15.

Nothing happened today.

It was a modestly good day for the Canadian preferred share market, with PerpetualDiscounts and DeemedRetractibles both up 5bp and FixedResets winning 9bp. Volatility was modest. Volume was very low.

There is muttering that increased regulation has not only deliquified the corporate market but that the Treasury market is also suffering:

It was still early in the New York trading day on Oct. 15 and investors were already pouring into U.S. government bonds as global financial markets from Asia to Europe buckled. Because yields were falling so fast, Comiskey, the head Treasury dealer at Bank of Nova Scotia, realized that he ran the risk of being stuck with losses or unwanted inventory if his computers automatically generated quotes to buy and sell with customers.

So for about half an hour, as yields on 10-year Treasuries tumbled below 2 percent in the biggest plummet in five years, he executed client orders individually over the phone.
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Bank of Nova Scotia was hardly alone in taking steps to protect itself in one of the most volatile trading days since the collapse of Lehman Brothers Holdings Inc. in 2008, showing how regulators’ efforts to rein in risk-taking among the world’s biggest banks is causing disruptions in what is supposed to be the deepest, most liquid market in the world — that of U.S. Treasury securities. Because dealers have cut back so much in recent years, concern is deepening that parts of the market have become less efficient in times of turmoil.
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JPMorgan & Chase Co., a primary dealer, estimates the amount of U.S. debt available to trade at one time without moving prices has plunged 48 percent to $150 million since April. The measure is based on the average size of the best three bids and offers that go through the New York-based bank’s trading desks on a weekly basis.
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An unprecedented $946 billion of U.S. government debt changed hands through London-based ICAP Plc on Oct. 15, which suggests that concerns over liquidity may be overblown and were due more to the fact buyers couldn’t get the prices they wanted when everyone else wanted to buy at the same time.

Richard Prager, the head of trading and liquidity strategies at BlackRock Inc., the world’s largest asset manager, says regulations are one of the reasons why bond dealers have less incentive to facilitate trades for clients.

To comply with higher capital requirements from the Basel Committee on Banking Supervision, firms with bond trading desks have responded by reducing inventories. Primary dealers have slashed their U.S. debt holdings 56 percent to $64 billion from a record high in October 2013, data compiled by Bloomberg show.

But dealer holdings of junk have fallen off a cliff:

Wall Street’s biggest debt dealers have been dumping speculative-grade securities at the fastest pace on record ahead of annual stress tests by the Fed. They reduced their holdings by 68 percent in the week ended Oct. 15 as the market posted losses of 1.5 percent that week alone, according to data released by the Fed last week.
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The Fed is homing in on speculative-grade corporate debt in particular because such bonds and loans tend to suffer disproportionately in times of stress.

Under a worst-case scenario being simulated in the latest round of Fed stress tests, “U.S. corporate credit quality deteriorates sharply,” according to an Oct. 23 Fed report. Relative yields on high-yield bonds and loans would “widen to levels the same as the peaks reached in the 2007–2009 recession.”

At 4.38 percentage points, the extra yield investors currently demand to own junk bonds instead of government debt is just a fifth the 21.8-percentage-point spread reached in December 2008, according to Bank of America Merrill Lynch index data.

The ECB is getting serious about deflation:

The European Central Bank said it settled 1.704 billion euros ($2.2 billion) of covered-bond purchases last week as it started its latest effort to revive the euro-area economy.

The Frankfurt-based institution began purchases on Oct. 20, returning to the market for a third time in six years as part of a renewed attempt to stave off deflation and pump life into a moribund recovery.

Investors have been closely watching the ECB’s first week of asset buying to gauge how quickly President Mario Draghi plans to fulfill his pledge of expanding the institution’s balance sheet by as much as 1 trillion euros. Even though the ECB will add asset-backed securities to the purchase plan this year, stimulus may not be enough to revive the region’s economy.
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German opposition to sovereign-bond purchases means officials have chosen covered bonds and ABS as the latest tools to help expand the balance sheet. While policy makers say their plans will spark new issuance, economists at firms including Morgan Stanley and Commerzbank AG say the central bank will probably need to buy other assets to reach the target.

Of the region’s 2.6 trillion-euro covered-bond market, the ECB will only buy assets acceptable under its collateral framework for refinancing loans. Purchases will be announced weekly, starting today, and the pool of bonds eligible is about 600 billion euros, ECB Vice President Vitor Constancio said this month.

ABS buying is scheduled to begin later this quarter and there are about 400 billion euros of such assets eligible to buy, according to Constancio.

Who remembers Osborne Computer Corporation? Not Ford!:

The problem with high-tech hardware, whether it’s a smartphone or a pickup truck, is that everyone wants the newest thing. When Apple (AAPL) has a new iPhone in the works, would-be buyers delay their purchases until the next iteration hits the market. Turns out, that tricky timing dynamic happens with cars, too.

Ford Motor (F), in particular, is facing a bad bit of product whiplash at the moment. It has 16 vehicle launches next year, ranging from facelifts to entirely new models, in the most aggressive schedule to date of what car folks call “product cadence.”
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The so-called “product launch effects” drove Ford’s auto-related sales down 3 percent in the recent quarter. Profit plummeted 34 percent, in part because Ford idled factories to retool assembly lines for making its new vehicles. Sales of the Ford Edge slid 18 percent in North America as buyers awaited an all-new version expected to hit dealers in the spring. And some 11 percent fewer Ford Fiestas zipped off lots, a vehicle that hasn’t been changed drastically since 2008.

Nowhere is the product path more fraught than for the F-150 pickup, the long-time best-selling vehicle in North America and Ford’s big metal enchilada. Not only is Ford making a new F-150; it’s making a drastically new one. Huge plates of steel will be replaced with lighter aluminum in a bid for fuel efficiency. It’s a massive overhaul, and truck buyers definitely took notice.

So, Toronto civic election results are beginning to trickle in and it appears heavy turnout is favouring Tory. So every Councillor elected tonight will stay up late to put together a grab-bag list of little projects that will just cost pennies per taxpayer each, and they’ll all get approved. Inclusiveness, you know. An end to divisiveness.

It was a strong day for the Canadian preferred share market, with PerpetualDiscounts winning 24bp, FixedResets up 14bp and DeemedRetractibles gaining 9bp. Volatility was average. Volume was low.