Category: Market Action

The equity jocks are off their meds:

After plunging 1.5 percent on Oct. 7 and rallying almost 1.8 percent yesterday, the Standard & Poor’s 500 Index dropped 2.1 percent at 4 p.m. in New York today, the biggest turnaround in almost three years. As investors weigh the prospect of slower economic growth overseas against the benefit of U.S. interest rates staying near zero, a measure of 10-day volatility has risen to the highest level since April, data compiled by Bloomberg show.

The only phrase that generates more comments on this site than “real estate” is “trailer fees”. So it is with some glee that I report that the trailer fee wars are heating up:

“Trailer fees – the meteor is closer than you think” was the title of a recent note put out by Mr. Sedran and Mr. Holden [of CIBC]. The meteor in question is a ban on trailer fees.

“Regulators are studying the impact of these fees, with the results of those studies and a recommendation expected early 2015. A ban on trailer fees would follow a global trend and would address the regulators’ conflict of interest concerns. We think such a ban is coming, and sooner than many think.”

The story is marred by an inaccuracy:

The big knock against trailer fees is that despite the advisor having a fiduciary duty to put the client in the product that best serves their needs, there is a financial incentive for the advisor to sell the client the fund with the highest trailer fee – a glaring conflict of interest.

… but we may see a lot of “portfolio managers” without track records:

Mr. Sedran and Mr. Holden say the industry will likely transition to a model where advisors would be paid for managing a client’s entire portfolio, similar to how financial planners are paid today. Furthermore, under such a model, the advisor’s compensation would be tied to whether their client’s portfolio appreciates in value. The implication is that it will also be in the advisor’s interest to put clients into the funds they believe will perform the best over time.

The so-called implication is laughable – it will continue to be a lot easier for salesmen to get a fresh $1,000 into the account from the client than it is to outperform by 1% on a $100,000 portfolio. But people like to dream.

There’s a laugh line:

The bigger players, such as the Canadian banks who already have vast mutual fund sales forces in branches, should be able to manage the transition just fine, according to Mr. Sedran and Mr. Holden.

Well, of course. If it hurt the banks, their future employees at the regulatory agencies wouldn’t dream of the idea. I remain interested in the regulatory agencies views on new issue commissions and proxy solicitation fees – which are functionally equivalent to trailer fees – but the silence continues.

I have often remarked at the superiority of US institutions over their Canadian counterparts with respect to transparency. It is very useful to gain insight into the policy-setting process by reviewing the countervailing arguments within the various committees – but, of course, there are always some who would prefer a two-line press release:

Joseph LaVorgna, chief U.S. economist at Deutsche Bank AG in New York, said officials risk sowing confusion.

“It’s hard to have a unifying message when you have this many people who feel it’s incumbent on them to tell you what the Fed is thinking,” he said.

“I wish the Fed would answer generalities with generalities,” he said. “When they try to quantify, that’s when the problems come up.”

There’s some more information from Pew Research regarding stagnant wages:

Following the better-than-expected September jobs report, several economic analyses have pointed out the continuing lack of meaningful wage growth, even as tens of thousands of people head back to work. Economic theory, after all, predicts that as labor markets tighten, employers will offer higher wages to entice workers their way.

But a look at five decades’ worth of government wage data suggests that the better question might be, why should now be any different? For most U.S. workers, real wages — that is, after inflation is taken into account — have been flat or even falling for decades, regardless of whether the economy has been adding or subtracting jobs.

Cash money isn’t the only way workers are compensated, of course — health insurance, retirement-account contributions, education and transit subsidies and other benefits all can be part of the package. But wages and salaries are the biggest (about 70%, according to the Bureau of Labor Statistics) and most visible component of employee compensation.
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But after adjusting for inflation, today’s average hourly wage has just about the same purchasing power as it did in 1979, following a long slide in the 1980s and early 1990s and bumpy, inconsistent growth since then. In fact, in real terms the average wage peaked more than 40 years ago: The $4.03-an-hour rate recorded in January 1973 has the same purchasing power as $22.41 would today.

A similar measure, “usual weekly earnings” of employed, full-time, wage and salary workers, tells much the same story, albeit over a shorter time period. In seasonally adjusted current dollars, median usual weekly earnings rose from $232 in the first quarter 0f 1979 (when the series began) to $782 in the second quarter of this year (the most recent data available). But in real terms, the median has barely budged over that period.

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But amidst all the gloom and doom, there’s some good news:

Prince Edward Island has joined Ottawa’s move to create a national securities regulator, bringing the total to five provinces who have signed onto the plan.

The federal Finance Department said Thursday the province has signed a memorandum of agreement to join the Co-operative Capital Markets Regulatory System.

The addition of P.E.I. follows a decision in July by Saskatchewan and New Brunswick to join B.C., Ontario and the federal government in establishing a national regulator.

I have said for a long, long time that piecemeal cooperation is better than none and much more attainable than the single-regulator pipedream. Mind you, I think the commentary we occasionally see regarding the wonderfulness of a national-mostly regulator is highly overwrought. All that will happen is that some unnecessarily duplicated paperwork will be eliminated. But that’s good reason enough.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts down 12bp, FixedResets losing 13bp and DeemedRetractibles off 8bp. Volatility was average and balanced, but comprised entirely of FixedResets. Volume was on the low side of average.

Russia is intervening in the currency markets:

Russia’s central bank sold $420 million of foreign currency in its third day of interventions this month to slow the ruble’s world-beating decline.

The monetary authority spent the funds on Oct. 6 to shore up the ruble, the latest data on its website showed today. The bank also said it shifted the upper boundary of the currency’s trading band by 5 kopeks yesterday. The exchange rate was little changed at 44.6979 versus the dollar-euro basket as of 10:12 a.m. in Moscow today.

Bank of Russia will probably need to spend as much as $30 billion by year-end to slow the decline in the ruble, which lost 14 percent against the dollar last quarter, according to UralSib Capital.
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Demand for dollars and euros is growing among Russian companies as they contend with $54.7 billion of debt repayments in the next three months, according to central bank data.

A little bird asked me to comment on a paper by Pablo Fernandez of University of Navarra – IESE Business School titled CAPM: An Absurd Model:

The CAPM is an absurd (having no rational or orderly relationship to human life; contrary to all reason or common sense) model because its assumptions and its predictions/conclusions have no basis in the real world. The use of CAPM is also a source of litigation: many professors, lawyers… get nice fees because many professionals use CAPM instead of common sense to calculate the required return to equity. Users of the CAPM make many illogical errors valuing companies, accepting/rejecting investment projects, evaluating fund performance, pricing goods and services in regulated markets, calculating value creation…

According to the dictionary, a theory is “an idea or set of ideas that is intended to explain facts or events”; and a model is “a set of ideas and numbers that describe the past, present, or future state of something”. With the vast amount of information and research that we have, it is quite clear that the CAPM is neither a theory nor a model because it does not “explain facts or events”, nor does it “describe the past, present, or future state of something”.

It is important to differentiate between a fact (something that truly exists or happens: something that has actual existence; a true piece of information) and an opinion (what someone thinks about a particular thing). The CAPM could be described as an uninformed opinion, and not as a sensible opinion.

We all should try to explain a portion of “the world as it is”, not of “the world according to a wrong theory” nor of “the world if men were not men”. Ricardo Yepes, professor of philosophy of my university, wrote: “Learning means being able to keep perceiving reality as it truly is: complex – and not trying to fit every new experience into a closed and pre-conceived notion or overall scheme”. We may find out an investor’s expected IBM beta and expected market risk premium (MRP) by asking him. However, it is impossible to determine the expected IBM beta and the expected MRP of the market (for the market as a whole), because these two parameters do not exist. Different investors have different cash flow expectations and use different expected (and required) returns to equity (different expected market risk premium and different expected beta). One could only talk of the beta and the market risk premium if all investors had the same expectations. But investors do not have homogeneous expectations.

Sections 11 and 12 show how to calculate required returns in a sensible way and how to use betas being a reasonable person.
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Just an example: calculation of the beta of electrical companies done by a European Electricity Regulatory Commission. “We calculate the betas of all traded European companies. Leveraged betas were calculated using 2 years of weekly data. The Market Index chosen was the Dow Jones STOXX Total Market Index. There is a great dispersion (from -0.24 to 1.16) and some odd betas (negative and higher than one). We decided to maintain all betas… To unlever the betas, we assumed that the beta of the debt is zero for all companies. Then, the Commission calculates the average of the unlevered betas and relever it using an objective debt to equity ratio based on the average debt to equity ratio of comparable companies. The levered beta proposed by the Commission for the transport activity is 0.471870073”

The Commission acknowledges that calculated betas have a “great dispersion (from -0.24 to 1.16)” but calculates the average of all of them and finally provides betas with a precision of 9 figures after the decimal point!
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According with the CAPM “the market” assigns a beta to every company and that beta may be calculated with a regression of historical data. Of course, every investor should use this “market beta”. As we have already mentioned, the first problem is that this “market beta” does not exist.

When we calculate betas using historical data we encounter several well-known problems:
1. They change considerably from one day to the next.
2. They depend very much on which stock index is used as the market reference.
3. They depend very much on the historical period (5 years, 3 years…) used.
4. They depend on what returns (monthly, yearly…) are used to calculate them.
5. Very often we do not know if the beta of one company is lower or higher than the beta of another.
6. Calculated betas have little correlation with stock returns.
7. β = 1 has a higher correlation with stock returns than calculated betas for many companies
8. The correlation coefficients of the regressions used to calculate the betas are very small.
9. The relative magnitude of betas often makes very little sense: companies with high risk often have lower calculated betas than companies with lower risk.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp, FixedResets off 7bp and DeemedRetractibles down 8bp. Volatility was low (Floaters don’t count!). Volume was low.

PerpetualDiscounts now yield 5.16%, equivalent to 6.71% interest at the standard equivalency factor of 1.3x. Long corporates are now at about 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 250bp, a widening from the 240bp reported September 10.

Europe isn’t looking very good:

U.K. 10-year government bonds rose with their German counterparts as a report showed factory orders in Europe’s largest economy plunged the most since 2009 in August, underlining risks to the euro area’s recovery.

Five-year gilts advanced for the fifth time in six days. The yield fell last week to the lowest level since February as reports signaled the U.K. economy was losing momentum, fueling speculation the Bank of England will delay interest-rate increases. The pound declined versus the euro as Business Secretary Vince Cable said Britain’s currency was still too strong and stifling exports.
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U.K. house prices fell for the first time in almost a year and a half in September, Nationwide Building Society said on Sept. 30, while a Markit Economics report on Oct. 3 showed services growth cooled more than economists forecast, further signs that the recovery may be losing enough momentum for the Bank of England to refrain from increasing borrowing costs. That has fueled gains in government bonds and slowed the rally in the pound.

… and there are renewed deflation fears:

Inflation in the euro area has fallen yet again and now stands at 0.3 percent. Prices are already falling in several of the European Union’s weaker economies. Even so-called core inflation, which excludes temporary factors and reveals the underlying trend, stands at less than 1 percent, a full percentage point below the ECB’s target.

… which is causing some to criticize Draghi and the ECB:

European Central Bank President Mario Draghi has disappointed investors and economists by failing to detail the size of the expansion he’s seeking in the central bank’s balance sheet. This much is clear from today’s investment bank research reports. Parsing Draghi’s comments from yesterday, as his favorite inflation measure fell to a record today, raises the chilling prospect that it may already be too late to avert deflation in the euro region — and that he knows it.

For the first time, Draghi has abandoned the incantation he’s used for months against the perceived evils of falling prices: “Inflation expectations for the euro area over the medium to long term continue to be firmly anchored.” That’s how he put it in his opening remarks at the August monetary policy press conference, and then followed it up, at the question-and-answer session, with, “Long-term expectations remain anchored at 2 percent.”
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Yesterday, in addition to dropping the mantra from his speech, Draghi also demurred when he was directly asked if he thought inflationary expectations were anchored:

Well, first of all, the inflation expectations — first of all, we don’t use — let me get this clear, because there has been a certain amount of misunderstanding in the last few weeks — we don’t use one single measure of inflation expectations. We use a broad range of indicators. And our inflation expectations measures have gone down especially on the short horizons and are now around 8 points below 2 percent on the five-year on five-year, and so we look at that with — definitely with great attention. I would say that the measures we’ve taken have been determined exactly because our medium-term outlook on inflation expectation has worsened and we see that the risks have increased.

Lena Komileva, the chief economist at G Plus Economics in London, a research company, interpreted the absence as a sign the ECB is aware that the euro region risks what she calls “Japanification.” Annual inflation was just 0.3 percent last month; it hasn’t touched 2 percent since January 2013.

All this gloom had an effect:

Stocks tumbled and bonds rallied, sending yields to the lowest since May 2013, as the International Monetary Fund cut its global outlook and German industrial production plunged. Oil slid to a 17-month low.

The Standard & Poor’s 500 Index (SPX) fell 1.5 percent to 1,935.10 at 4 p.m. in New York, the lowest level since Aug. 12. The Dow Jones Industrial Average lost 1.6 percent, the most since July. The yield on 30-year Treasuries retreated 8 basis points to 3.05 percent as investors sought safety. Oil tumbled 1.7 percent to the lowest since April 2013, while gold futures climbed 0.4 percent. Volatility rose, with the VIX jumping to the highest since March.

The IMF cut its outlook for global growth in 2015 and warned about the risks of rising geopolitical tensions and a financial-market correction as stocks reach “frothy” levels. German industrial production dropped 4 percent in August in the biggest decline since 2009.

With Hallowe’en fast approaching, I would be remiss if I didn’t alert Assiduous Readers to the BEST PRANK EVER:

A lewd statue of the devil that seemingly popped up overnight in East Vancouver has been taken down by city officials after raising eyebrows — among other things.

The statue stood about eight to nine feet tall on a pedestal near the intersection of 4th Avenue and Clark Drive for several hours Tuesday.

It was removed by city crews at around 3:15 p.m.

The statue also appeared to sport a full erection, a detail that likely raised hell with some of the commuters who use the station.

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It was a positive day for the Canadian preferred share market, with PerpetualDiscounts winning 18bp, FixedResets gaining 1bp and DeemedRetractibles up 2bp. Volatility was minimal. Volume was low.

Nothing happened today, but there was a nice column from Megan McArdle of Bloomberg regarding the Intregity case before SCOTUS that I mentioned on October 3:

But the law is never simple and intuitive, in large part because case law is made by the difficulty of hard corner cases. The briefs run through some of this history. For example: Does your employer have to pay you for your commuting time? That doesn’t seem reasonable; employees could relocate to the far exurbs and get themselves time and a half for hours spent driving and singing along to “Free Fallin’.” Okay, but what if you work in an airport, and at the end of your commute is a lengthy trip through the Transportation Security Administration lines? Should you get paid for what is essentially a mandatory 15 minutes added to your commute? A court said no; the TSA line is not part of your primary duties. Okay, how about if you work in a nuclear power plant, where, for the sake of the neighbors, everyone is rigorously searched and subject to radiation screenings? I can see the workers’ argument there, but a court ruled against them.

The workers’ brief tries to distinguish those cases from the Amazon case. The TSA case seems pretty easy: The security screening is not there for the benefit of the employer; it’s there because it’s required by law. You can’t demand that your employer pay you for commuting just because they’re located in the middle of an extended 15-mph zone. The security checks at the Amazon warehouse, on the other hand, are exclusively for the benefit of the employer, who is trying to prevent theft.

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts winning 11bp, FixedResets gaining 3bp and DeemedRetractibles up 5bp. Volatility was minimal. Volume was very low.

Interestingly, due to microscopic pricing changes, the median YTW-Duration (the YTW-Duration is the duration of the Yield-to-Worst scenario) of the FixedReset subindex is now in the ‘perpetual’ range, for the first time since April, 2009. After recovering from the pricing slump that gave rise to that scenario, there followed a long period during which the bulk of the issues in the index were the huge-spread bank FixedResets, which reduced their expected term by one day every day. In May, 2012, new issuance started making things more interesting with a series in the range of four (median expectation was a call of a relatively new issue at the first opportunity), a series starting at eight and declining to about 6.5 (median expectation is the Deemed Maturity of a bank issue 2022-1-31) and a third, relatively recent series at about 8.5 (median expectation is the Deemed Maturity of an insurance issue, 2025-1-31). And today … continued low yields for the Government of Canada 5-year bond, massive issuance of relatively low-spread FixedResets and calls of the higher-spread issues have tipped the balance to perpetuity. Fun times! This median YTW-Duration figure will almost certainly be volatile for the next year or so.

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For those who are obsessive about such things, the median issue is BAM.PF.F, which at its bid of 25.25, HIMIPref™ calculates as having a 4.32% yield to Call 2019-9-30 and (given a GOC-5 yield of 1.58%), has a yield to perpetuity of 4.31%. At its closing bid of 25.26 on Friday, its YTW scenario was the call 2019-9-30 to yield 4.30%; I was using 1.61% as the GOC-5 yield on Friday. I told you the changes were microscopic!

Jobs, jobs, jobs!

A surprisingly powerful surge in hiring pushed unemployment to a six-year low of 5.9 percent in September as the U.S. labor market showed renewed vigor.

The 248,000 gain in payrolls followed a 180,000 increase in August that was bigger than previously estimated, the Labor Department reported in Washington. Revisions boosted the job count by 69,000 over the previous two months. The jobless rate fell from 6.1 percent to the lowest level since July 2008.
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Another report today showed the U.S. trade deficit shrank in August to the lowest level in seven months as exports edged up to a record. The gap decreased 0.5 percent to $40.1 billion, the smallest since January, from $40.3 billion in July, the Commerce Department reported.

The narrowing deficit prompted economists at Barclays PLC in New York to boost their tracking estimate of third-quarter gross domestic product to a 3.3 percent gain at an annualized rate from 2.7 percent.

Also today, another report showed service industries grew in September to cap the strongest quarter of expansion in more than 10 years. While the Institute for Supply Management’s non-manufacturing index fell to 58.6 from the prior month’s 59.6, the third-quarter average was the highest since the first three months of 2004, the Tempe, Arizona-based group said.

The quarterly average for the group’s factory index was the highest since early 2011, a report showed earlier this week.

Meanwhile, in Canada:

Canada swung to an unexpected merchandise trade deficit in August as imports surged to a record and exports fell for the first time in four months.

The C$610 million ($543 million) deficit followed a July surplus that was pared to C$2.20 billion from the initial C$2.58 billion estimate. None of the 14 economists in a Bloomberg survey predicted that Ottawa-based Statistics Canada would report a trade deficit today, and the median estimate was for a C$1.6 billion surplus.

The report is another setback in a week that saw Statistics Canada report the world’s 11th-largest economy stalled in July after a second-quarter expansion that was led by a jump in exports. Bank of Canada Governor Stephen Poloz said last month he saw early signs of a needed rotation toward growth led by exports and business investment.

And problems in moving exportable goods don’t seem to be getting any better:

Even with a grain harvest falling below last year’s record, Western Canadian farmers can’t find enough rail cars in the right places to move their crops.

Wet, cool weather across parts of the Canadian prairies has reduced the amount of high quality grain available, helping to fuel another showdown between shippers and the nation’s largest railways. While the crop is 20 percent smaller than last year’s, it will be harder to find and move the right grades to match export sales.

Grain shippers said railways haven’t been supplying enough cars, and about 24,000 orders for transport on the prairies haven’t been filled. Canadian National Railway Co. (CNR), facing a fine for failing to meet its minimum weekly grain shipping target, said farmers haven’t been delivering enough grain to country elevators to comply with the government order.

People are borrowing for more than just houses:

If stock investors are any guide, the $1.3 trillion U.S. junk-bond market is being inflated by a growing amount of leverage being used by buyers.

Both stock and junk-bond managers tend to deploy more leverage when markets are booming, and more than ever is being used to purchase U.S. equities, based on levels of margin debt on the New York Stock Exchange, according to UBS AG (UBSN) analysts. That suggests junk-debt buyers are engaging in similar financing activities.

As investors use more borrowed cash, they increase the potential for bigger losses in a downturn. This trend adds to concern that six years of unprecedented Federal Reserve stimulus has produced a bubble in the junk-bond market — and one that will be all the more painful when it eventually pops.
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Margin debt has surged to more than 2.5 percent of U.S. gross domestic product, about the highest level in data going back to the early 1990s, the UBS analysts [Stephen Caprio and Matthew Mish] wrote. The measure of leverage tends to be a leading indicator of relative yields on speculative-grade bonds, with a rising level of margin debt increasing the odds of future spread widening.

Investors are demanding 4.42 percentage points more than benchmark rates to own dollar-denominated high-yield bonds, compared with 5.9 percentage points on average over the past decade, Bank of America Merrill Lynch index data show.

… and Rob Carrick writes about Corporate bond ETFs: More than meets the eye:

Determined to avoid future catastrophes, the world’s regulators, central banks, investment strategists and money managers are asking questions and raising concerns about all kinds of investment trends and products. One of the latest to be scrutinized is a useful and seemingly innocuous category of exchange-traded fund that holds corporate bonds.

The concern starts with a lack of liquidity in the corporate bond market today. A liquid asset can be easily traded, without concern that you’ll have to pay a premium to acquire it or accept a discount when selling. Corporate bond liquidity has been negatively affected by a combination of a changing regulatory environment for the banks that dominate trading of these securities, and strong demand for these bonds from investors.

Today, the lack of liquidity means investors have to pay up to buy corporate bonds. When interest rates rise, it could mean they’ll take a hit if they sell. ETFs, which hold baskets of corporate bonds, complicate things. If investors dumped corporate bonds en masse, would these ETFs be able to efficiently sell their holdings as needed?

He then spoils this excellent question by allowing disingenuous salesmen to slip off the hook really easily:

If you did submit a sell order for your corporate bond ETF, it would be matched with a buy order from another investor. Even if corporate bonds turn toxic, there are investment dealers designated to maintain an orderly market in ETF trading. They’re supposed to put in a bid for the ETF units you’re selling, even if the price would reflect prevailing market conditions.

These dealers would have the option of exchanging the ETF units they’ve accumulated for the underlying securities. At BlackRock Canada, they say that’s not a problem. “You can’t make an ETF if you don’t have liquid underlying [investments],” said Noel Archard, the company’s head and managing director.

Alfred Lee, vice-president and portfolio manager at BMO Mutual Funds, said corporate bond ETFs give investors more liquidity than if they tried to sell an individual bond. “Given a liquidity event, liquidity is not going to be as good as in a normal environment. But we’re going to be owning the most liquid bonds out there.”

To sum up, problems in the corporate bond market will be reflected in the price of bond ETFs. However, ETF industry people say their funds will not exacerbate things.

(The article is also spoilt by the inclusion of the old nonsense about how risk and return are magically changed by putting the raw materials into a box.[ETF] Disadvantages: No maturity date, which means prices subject to interest rate trends. See Bond ETFs demystified for an explanation of what is really going on.)

Anyway, I hope that Noel Archard was misquoted, or quoted out of context, or severely shortened, or something, because his statement is nonsense. Synthetic ETFs can be a threat to financial stability; I’ll agree that there aren’t many of these in Canada, but we do have some, we could have more, and the underlying investments can be illiquid.

Alfred Lee also evades the question, by claiming that his firm (? Does this mean BMO ETFs? BMO Mutual Funds? BMO as principal?) will ‘be owning the most liquid bonds out there’. Who cares, in a crisis (and, I might ask, does he have a mandate to focus on liquidity?)? The issue is the price sensitivity of these bonds.

There are three main problems that I see:

• Firstly, in a crisis, people are going to want to get out faster than they got in; i.e., we could see one month’s redemptions equal to X month’s current purchases. This will pressure dealer inventories and hence prices.
• Secondly, we can expect risk aversion to increase in a crisis, which will increase the price sensitivity to this picked up selling, and
• Thirdly, there is the structural issue … ETFs are meant to increase the liquidity of an investment in their underlying. That’s their whole point! The implication is that you have investors in a particular asset class (e.g., the corporate bonds currently being discussed) whose holdings would be reduced, or non-existent, if they had to invest directly in the underlying (i.e., the liquidity provided by the ETF is a critical contributor to their decision to invest in the asset class). Therefore, on top of the increase in risk aversion due to the crisis, you’ve also got a structural increase in risk aversion.

It could be ugly, by which I mean a beautiful time to be trading.

There’s a strange story on US employment law:

On Oct. 8 the Supreme Court will hear arguments about whether that time counts as work. In 2010 two former employees of Integrity Staffing Solutions, a temp agency that supplies workers at many of Amazon’s U.S. warehouses, sued the company demanding back pay for the time they spent in security lines after clocking out at Amazon warehouses in Nevada. The security checks, the plaintiffs argued, were required by Integrity and therefore part of the job. (Amazon-employed workers go through the same checks.)

At issue is the scope of a 1947 amendment to the Fair Labor Standards Act that says employers don’t have to pay for time spent on work-related activities like getting to or from the office. Nine years later, the Supreme Court established in a pair of rulings that the key is whether the activity in question is “integral and indispensable” to the principal activities workers are paid to do. Butchers at a meatpacking plant, the court found, had to be paid for time spent sharpening their knives, and workers at a battery plant deserved compensation for time spent showering after work to wash off traces of sulfuric acid and lead.

The question in the Integrity case is whether security checks are more like those showers or more like commuting. With screenings increasingly common, the case could have implications for a wide range of workplaces….

Integrity says it doesn’t owe the workers money because the screenings weren’t directly related to their jobs. “No court has ever held that ‘not breaking the law’ is a principal job activity for which compensation must be paid,” the company’s lawyers wrote in a brief last May.

To me, this is open and shut. Of course time spent going through a security check should be compensated, if the employer insists you do it. I can reduce my commute by living in a tent at the warehouse’s front door, but reducing the time spent proving I’m not a crook is beyond my power (unless I quit my job, which I would). But not only has this case made it to the Supreme Court, but the Comrade Peace Prize administration is supporting the employers!

The Departments of Justice and Labor also submitted on Integrity’s behalf. There is, Solicitor General Donald Verrilli Jr. wrote, “no clear-cut distinction—either in terms of purpose or effect—between petitioner’s screenings and those that are routine at countless government and private-sector buildings.”

Crazy world. The forces of fear have won.

As an aside, I went to hotair.com to see what this week’s official Republican talking points on the issue are, but couldn’t find a mention of the SCOTUS Integrity case. I did find this complaint about a subtraction algorithm in the Common Core, though; as I often am when reading HotAir, I was perplexed by the level of annoyance shown. I use this algorithm all the time when doing mental subtraction. What’s the big deal?

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 5bp, FixedResets off 1bp and DeemedRetractibles down 4bp. Volatility was minimal. Volume was low.

Treasury trading is going electronic:

While investors traditionally negotiated prices for U.S. Treasuries by telephone, they’re increasingly turning to computer-based marketplaces for a range of price quotes from different dealers. A record 48 percent of trades in U.S. government debt have occurred on electronic platforms this year, up from 31 percent in 2012, according to a Greenwich Associates study released yesterday.

There’s a new pseudo-scandal:

A high-frequency trader was indicted for “spoofing,” the placing and immediate canceling of orders to manipulate commodities markets, in what the U.S. Justice Department says is the first criminal case of its kind.

Michael Coscia, 52, of Rumson, New Jersey, the principal of Panther Energy Trading LLC, was indicted by a federal grand jury in Chicago and charged with six counts of commodities fraud and six of spoofing. He’s accused of illegally reaping nearly $1.6 million as a result of orders placed through CME Group Inc. (CME) and European futures markets in 2011.

Matt Levine of Bloomberg is a superb journalist. He not only explains the allegations better than the news story did, he also adds some wise words of his own:

Basically, spoofing doesn’t hurt fundamental investors directly.11 Fundamental investors trade based on fundamental views of value, not order-book information, so they shouldn’t be thrown off by fake bids and offers. Also they probably trade too slowly to even notice this sort of spoofing. Spoofing only directly hurts market-makers, whose job is to buy and sell in reaction to changes in supply and demand. In most modern markets, that means primarily high-frequency traders. If the FBI is going after spoofing, that’s good for other high-frequency traders. The reason to crack down on spoofing is that high-frequency traders are socially valuable and need to be protected.

I wouldn’t object to exchange-initiated rules about order cancellation – say, a black-out period of one second, so an order can’t be cancelled until it has been live for a second. But anti-spoofing laws – with criminal penalties, yet! – aren’t just silly, they’re extremely difficult to enforce.

Canadian Utilities, proud issuer of , has been confirmed at Pfd-2(high) by DBRS:

DBRS has today confirmed the ratings of the Unsecured Debentures and Issuer Rating of Canadian Utilities Limited (CU or the Company) at “A,” along with confirming the Commercial Paper and Cum. Preferred Shares at R-1 (low) and Pfd-2 (high), respectively, all with Stable trends. The confirmation reflects (a) the low-risk regulated electric and gas business of its wholly owned subsidiary, CU Inc. (CUI; rated A (high) by DBRS), which accounts for approximately 65% of consolidated earnings, (b) the self-sustaining and minimal funding requirements for its non-regulated operations, and (c) the low level of debt at the holding company level ($200 million). The one-notch differential in the ratings of CU and CUI primarily reflects structural subordination at CU.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts losing 10bp, FixedResets down 8bp and DeemedRetractibles off 1bp. Volatility, while modest, was comprised entirely of losing FixedResets. Volume was low.

PIMCo doesn’t love us any more:

Pacific Investment Management Co.’s Total Return ETF slashed its holdings of Canadian debt to 2.1 percent from 9.2 percent in the five days ending yesterday, according to data compiled by Bloomberg.

The $3 billion exchange-traded fund, which follows a similar investment strategy as Newport Beach, California-based Pimco’s flagship $222 billion mutual fund, was run by co-founder Bill Gross before his sudden departure on Sept. 26.

Pimco has less invested in Canada than benchmarks recommend, said Ed Devlin, who oversees $17 billion, including the Canadian portfolios, for Pimco. He said he prefers markets such as Mexico.

“We still think Canada is a relatively unattractive market when we look at rates around the world,” Devlin said at the Bloomberg Canadian Fixed-Income Conference in New York yesterday. “Other markets are much more attractive.”

Devlin noted the yield on the Canadian 10-year bond, at about 2.1 percent, is in line with inflation. “What’s fun about that? Not much,” he said.

Equities started the quarter on the wrong foot:

The Standard & Poor’s/TSX Composite Index (SPTSX) fell 155.07 points, or 1 percent, to 14,805.44 at 4 p.m. in Toronto, retreating for a third straight day. The index lost 4.3 percent in September, the most since May 2012, and fell 1.2 percent in the third quarter.

U.S. stocks tumbled today amid concern over economic growth in Europe and geopolitical turmoil as the Federal Reserve prepares to end its bond-buying program. The Russell 2000 Index (RTY) dropped more than 10 percent from a record reached in March, meeting the common definition of a correction.

Equities fell as Italy cut its growth forecast, German manufacturing shrank and euro-area factories lowered prices in September by the most in more than a year. The weakness underlined the mounting challenge facing policy makers before the European Central Bank meets tomorrow.

… but bonds were on fire!

Treasuries gained the most in more than eight months as yields higher relative to most Group of Seven nations increased demand from investors worldwide concerned global growth is stalling.

Benchmark 10-year notes yielded almost the most versus their German counterparts since 1999 after the dollar touched a two-year high versus the euro yesterday. The European Central Bank may detail its plan to buy asset-backed securities tomorrow amid slowdowns in Germany in France. Stocks tumbled, pushing the Russell 2000 Index into a correction, and bolstering the haven appeal of U.S. government securities.
…
The U.S. 10-year yield fell 10 basis points, or 0.10 percentage point, to 2.39 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. It’s the biggest drop since Jan. 23. The 2.375 percent security rose 29/32, or $9.06 per $1,000 face amount, to 99 28/32.

U.S. 10-year notes yielded 1.48 percentage points more than their German counterparts after reaching 1.57 on Sept. 17, the most since June 1999. They were 1.85 percentage points higher than those of Japanese peers, up from 0.63 percentage point in May 2012.

Meanwhile, for you brokers out there worrying about clients leaving you after a not very exciting quarter … PIMCo feels your pain:

Pimco CEO Douglas Hodge said this week during a conference call that the firm is expecting and is ready for client redemptions. Pimco could see withdrawals of 10 percent to 30 percent, Sanford Bernstein said in a report. Pimco has not disclosed how much money has left the firm since Gross’s departure.

Investors yanked a record $446.5 million from Pimco’s $2.9 billion Total Return ETF after Gross’ departure from the firm on Sept. 26., before slowing redemptions to $98 million on Sept. 29 and $87 million yesterday. The exchange-traded fund follows a similar investment strategy as the Pimco Total Return mutual fund.

Pimco’s largest competitors had already been benefiting this year as investors have moved away from the firm’s Total Return into top-performing rivals as well as flexible funds that can protect from rising interest rates. Pimco’s Total Return Fund has lagged behind competitors this year, trailing 62 percent of its peers, according to data compiled by Bloomberg.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 16bp, FixedResets gaining 1bp and DeemedRetractibles up 6bp. Volatility was minimal. Volume was low.

The downside of the elimination of bankruptcy law as it relates to banks is becoming apparent:

But after studying the proposals, National Bank Financial analyst Peter Routledge found that, under the new rules, commmon shareholders should be much more concerned, because they are quickly treated as collateral damage under the new regime. Should a new crisis emerge, common shareholders could be quickly wiped out, and that could rewrite the survival playbook.

Employing standard banking assumptions about leverage ratios and balance sheet sizes, Mr. Routledge discovered that just a 6 per cent drop in asset values, possibly from writing down a loan book and securities portfolio, would deplete a bank’s common equity capital. Because the bank’s existing common shareholders would then be wiped out, the preferred shareholders and bondholders would have their securities converted into common shares – making them the bank’s new owners.

Under the old rules, governments tried their best to protect common shareholders by setting up bailout schemes such as the Troubled Asset Relief Program, which purchased preferred shares and took toxic debt off of bank balance sheets, but did not upend the common equity investor base.

Mr. Routledge worries too few people appreciate just how easy it is to wipe out the existing shareholders under the proposed rules. When people start to realize this, possibly during the next crisis, he fears it will have disastrous implications for troubled banks.

Speaking of banks and debt:

Debt reduction through austerity reduces spending and thus slows growth; slower growth reduces incoming revenues and thus limits the ability to reduce debt.

This is a factor in the stubborn lack of global capital investment that has been limiting economic expansion – and Canada is no exception.

Standard & Poor’s on Monday pointed a finger at consumer debt as it lowered its 2014 growth forecast for the Canadian economy to 2.3 per cent from 2.5 per cent.

“Consumers might still be postponing purchases, worried about the heavy debt burdens they built up in the past decade, and this could be short-circuiting the growth we normally see in recoveries,” said S&P global fixed income analyst Robert Palombi. Without that consumer pick-up, he said, businesses lack a key catalyst to invest in expansion, which in turn has stifled employment growth.

New OSFI honcho Jeremy Rudin gave a speech to the Economic Club of Canada but didn’t say anything of interest.

The ruble’s in trouble:

Prospects Russia is considering capital controls amid the worst performance in emerging markets for the nation’s bonds and currency sent the ruble tumbling past the level at which the central bank said it would step in.

The ruble temporarily slid beyond 44.40 against the Bank of Russia’s basket of dollars and euros after two officials said policy makers are considering temporary restrictions if net outflows rise significantly. It pared declines after the central bank said it isn’t considering limits on cross-border capital movements. The yield on 10-year bonds rose six basis points to 9.42 percent, bringing this quarter’s increase to 102 basis points. The Micex Index pared its first gain in four days.

Reimposing restrictions on the flow of money that were abandoned eight years ago threatens to worsen a selloff in Russian assets that has gained momentum as the U.S. and European Union expanded sanctions over the conflict in Ukraine. The ruble slid 14 percent versus the dollar this quarter, breaking record lows in the past three days.

“Capital outflows should sharply increase now,” Stanislav Kopylov, who helps manage 45 billion rubles ($1.14 billion) at UralSib Asset Management in Moscow, said by phone from Moscow. “When you’re threatened like that, you need to urgently pull out the cash.”

And so much for Putin’s grandiose dreams of having a reserve currency:

After proclaiming in 2007 that the ruble was poised to become a haven for global investors, the Russian leader has watched it fade, a victim of his nation’s stagnating economy since the land grab in Ukraine. Now so much money is leaving Russia that its central bank is considering temporary capital controls, according to two officials with direct knowledge of the discussions.

The ruble’s share of global trading dropped to 0.4 percent from 0.6 percent since 2012, falling five places to rank 18th most-traded in the world, while the yuan tripled to 1.5 percent, according to the Society for Worldwide Interbank Financial Telecommunication, or SWIFT. Even as protests in Hong Kong this week challenged China’s leadership, direct trading began between the yuan and the euro, capping a year in which trade with European Union nations grew 12 percent.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 2bp, FixedResets up 8bp and DeemedRetractibles off 1bp. Volatility was low. Volume was low.

Now to figure out why PrefInfo isn’t working.

I swear, I’m thinking about changing the name of this thing to RealEstateBlog! Whenever I post about real estate prices I get more responses than with respect to anything else. So, Garth Turner, look out!

Assiduous Reader prefhound sends me a clipping with the following assertions:

I conclude that a house is pretty much similar to a financial investment. Even today’s apparently “elevated” house prices seem reasonably similar to today’s “modest” long term future equity investment potential on an after-tax basis.

For example, at today’s house prices, buying a house for X dollars could generate a long run return of about 3% (tax free). I see this as coming from the sum of 4 components:
1. Cost of Property Tax – about 1% of X per year
2. Cost of Maintenance and Ongoing Renovations – about 3% per year. Some years are much lower and some much higher.
3. Long run Price Appreciation of property – about 3% per year if kept livable and up to standard. 3% = 2% inflation plus the long run salary growth due to 1% productivity gains.
4. Rent Savings of approximately 4% of the house value per year.

Add up these items (4% in costs; 7% in gains and savings) and the result is about 3% long run return.

Further, with a little help from a few educated estimates:

With my previous estimates of rents and competitive investment returns after tax (all smoothed to the same return every year – which is an approximation), I then compared the house owning scenario to a renting scenario where the total cash flows were the same, but any excess/shortfall went into/came from investments.

Remarkably, the renting scenario came out with a current investment asset worth about 96% of the current house value. The renting scenario was roughly financially equivalent to owning.

In the renting scenario we were saving a lot of money for the first 15 years, but then drawing down from savings to pay rent in recent years when maintenance was lower.

… and, provocatively:

Another aspect of this discussion is that houses seem like strip bond investments in an asset mix. This is especially true if there is no mortgage making home equity more volatile.

Perhaps asset mix discussions should consider a paid off house as a bond and a fully mortgaged house as equity, so that the fraction equity = current mortgage / value ratio. This may be sensible while working and continuously saving, but when retirement cash flows require drawing on investments, income generating financial fixed income becomes increasingly important.

So, like Assiduous Reader adrian2, prefhound is holding to the ‘house price proportional to inflation plus productivity’ argument.

While pondering this, and wondering why I didn’t become a real-estate analyst, I came across a paper by Peter Harrison titled MEDIAN WAGES AND PRODUCTIVITY GROWTH IN CANADA AND THE UNITED STATES:

In 2008, Sharpe, Arsenault and Harrison attempted to explain why the median earnings of full-time, full-year workers in Canada rose only $53 dollars, from $41,348 (2005 dollars) in 1980 to $41,401 in 2005, while over the same period, total economy labour productivity gains were 37.4 per cent. They identified four key factors: measurement issues, rising earnings inequality, falling terms of trade of labour (the relationship between the prices workers receive for output and the cost of living), and falling labour share. That study in some sense raised more questions than it answered about the relationship between real wages and labour productivity. This research note expands on Sharpe, Arsenault, and Harrison (2008) in order to shed additional light on the relationship.

The guts of the matter is a very interesting table:

This table is applicable to 1980-2005 which is to say from the tail-end of the inflationary period to the middle of the Great Moderation.

Ha! So where’s your productivity gains now, fellas? Admittedly, this analysis refers to the entire labour pool and I suspect that only the upper 60% of the labour pool really counts, but still, that’s a real eye opener. Like I always say, the means of production should controlled by the proletariat, held in trust by me.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 12bp, FixedResets off 6bp and DeemedRetractibles gaining 2bp. Volatility was minimal. Volume was absurdly low.

On September 24, I mentioned bank account promotions in which depositors effectively received a lottery ticket for making a deposit – this is similar to premium bonds in the UK, but not government-backed. My attention has now been drawn to a more savory alternative:

VISIT an outlet of Chilango, a Mexican food chain in London, and you will be invited to “become part of the story”, not just by eating a burrito but by buying a “burrito bond”. These are four-year loans to the firm of at least £500 ($835), paying annual interest of 8%, along with a variable number of free burritos, depending on how much an individual lends. Helped by Crowdcube, a crowdfunding website, Chilango has already raised £1.8m in this way—80% more than its initial goal—from 585 bond-buyers.

In Britain “mini-bonds” are more loans than bonds, in that they are not tradable (elsewhere they are a less regulated version of conventional bonds). They let individuals lend money directly to small, unlisted businesses. They tend to pay well, albeit with lots of risks and quirks.

We’ll never get that here in Canada. Small, unlisted businesses don’t employ ex-regulators and are therefore beyond the Pale.

There may have been a a little progress made in the battle against bank hegemony:

The Canadian Securities Administrators (the CSA) recently announced that the operation of the CSA National Systems (SEDAR, SEDI and NRD) has been transferred as of January 13, 2014 from CDS INC. to CGI Information Systems and Management Consultants Inc. (CGI).

As a result, CDS INC. (through its affiliate CDS Innovations Inc.) is no longer the exclusive provider of SEDAR data feeds. The CSA will now become the direct provider of these data services to subscribers and data resellers. The services consist of the provision of Canadian public company data filed on SEDAR as well as investment fund data filings. The data is delivered in near real-time (i.e., shortly after the time when made publically available in SEDAR), and includes the original PDF formatted filing, a text conversion of the filed document, and a control file indicating changes in the status of filed information.

Customization of information content received (for example, filtering to receive only certain documents) will continue to be available.

Going forward, these SEDAR data services will be offered directly by the Alberta Securities Commission (ASC), in its capacity as the representative securities regulatory authority authorized to grant licenses and enter into agreements with third parties relating to the use of SEDAR data. SEDAR data services can also be obtained from value-added resellers who have been authorized by the ASC to provide the services.

In addition, data feeds of SEDI data or an organization’s NRD data are no longer delivered by CDS INC. or its affiliate CDS Innovations Inc. These services are now offered directly by the ASC, again in its capacity within the CSA as the representative securities regulatory authority authorized to grant licenses and enter into agreements with third parties relating to the use of SEDI data or NRD data.

SEDI data services consist of providing publicly available information on filings, holdings and transactions by insiders of Canadian public companies who are required to report such trades in SEDI. The SEDI system contains information on almost 50,000 insiders and 6,400 issuers, and averages 20,000 insider reports per month.

A registered firm may subscribe to NRD data services to receive a regular feed of its organization’s registered individuals and registration categories.

Should you have interest in or questions about the services noted above, or wish to become a value added reseller, please contact the CSA IT Systems Office at data-distribution-services@csa-acvm.ca

Regrettably, however, this public information is still not public:

Except as otherwise set out in these Terms of Use or unless you have a written agreement in effect with the ASC which states otherwise, you may only provide a hypertext link to this Web Site on another web site, provided that (a) the link is a text-only link clearly marked “SEDAR Home Page”; (b) the user must be linked directly to the URL http://www.sedar.com and not to any other pages within this Web Site; …

Huh. I’ll be writing the ASC and asking for permission to link to the secret public documents. Any bets on my success?

Assiduous Reader MP sends me a link – unlike youse other bums, who never send me NUTHIN’ – to the page for Andrew McCreath’s BNN show, which includes links to two interviews with Nicolas Normandeau, PM of HPR. The first is a competently performed exposition of preferred share basics, the second has a moment of interest when Mr. Normandeau explains his liking for bank-issued DeemedRetractibles. He also doesn’t like FixedResets with low Issue Reset Spreads and claims to have positioned the fund for a modest upwards parallel shift in market yields. Mr. Normandeau works for Fiera, which is controlled by National Bank, as discussed on March 4, 2013.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 3bp, FixedResets up 7bp and DeemedRetractibles gaining 2bp. Volatility was nonexistent. Volume was very extremely awfully low.