Category: Market Action

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.
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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.

Michael Lewis – whose book, Flash Boys, is a favourite target for mockery on PrefBlog – had some sharp observations:

Technology entrepreneurship will never have the power to displace big Wall Street banks in the central nervous system of America’s youth, in part because tech entrepreneurship requires the practitioner to have an original idea, or at least to know something about computers, but also because entrepreneurship doesn’t offer the sort of people who wind up at elite universities what a lot of them obviously crave: status certainty.

“I’m going to Goldman,” is still about as close as it gets in the real world to “I’m going to Harvard,” at least for the fiercely ambitious young person who is ambitious to do nothing in particular.

I don’t agree with many of his other assertions in the piece, but I liked that bit!

Eddy Elfenbein of the blog Crossing Wall Street reminds us that a house is just an asset:

Some trader right now is investing in, say, copper. I wish them well. But remember that copper has no independent value. By itself, it’s just an element. Not to get too philosophical, but copper’s entire value is based on what it can do for us. What are the goods and services it can enhance? For that to happen, copper needs to pass though the hands of a business.

This is why long-term studies of what’s been the best investment usually have stocks at the top, followed by bonds and real estate followed by commodities. When you’re investing in a company, you’re really investing in human ingenuity—the way that people can come together and figure out how to make something useful from those assets.

Real estate, for example, is a nice investment. I hope everyone owns their own home. But in the long run, real estate will never, ever, ever, ever outpace stocks. Never. This isn’t just my opinion, it’s reality. It won’t happen because it can’t happen.

A house is simply an asset. No matter how hard it tries, it will never be anything more than an asset. A house does its job by just sitting there. But a stock is different. A stock is part ownership in a corporation. A corporation is people using assets to create wealth. This ain’t just a matter of definitions.

A house’s return cannot exceed inflation over the long term – who would be able to buy it? However, things over the short term can be different, and the short-term can quite possibly exceed one’s lifespan. At present, Canadian house prices are rocketing upwards and have done so for a very long time; part of the recent rise has been interest rates; longer term it has been both a revaluation (in real terms, not just nominal) of the value of having a place to live in the city, whether the city is Toronto, Vancouver or Calgary; and part of it, I think, is due to income inequality. House prices are based not on the average wage of all Canadians, but on the average wage of those Canadians who can afford to buy houses.

My personal view is that a house is just a place to live. But I do know quite a few people who consider them to be investments and buy extra ones for rental purposes. Part of this is risk-aversion; while house prices can and do decline, they rarely decline by as much as equities did during the Credit Crunch. Part of this is wilful blindness; you don’t get a monthly statement from your real-estate broker giving you a solid idea of what you could get for your house if you sold it that day. Part of this is a question of control: renting out houses or speculating on them is something that you can do yourself, without any of the agency problems involved in giving your broker some money to invest on your behalf in companies run by other people, which will be valued by a third set of people. And part of it is … what if I’m wrong?

US public pensions are going to cost a lot:

The 25 largest U.S. public pensions face about $2 trillion in unfunded liabilities, showing that investment returns can’t keep up with ballooning obligations, according to Moody’s Investors Service.

The 25 biggest systems by assets averaged a 7.45 percent return from 2004 to 2013, close to the expected 7.65 percent rate, Moody’s said in a report released today. Yet the New York-based credit rater’s calculation of liabilities tripled in the eight years through 2012, according to the report.

“Despite the robust investment returns since 2004, annual growth in unfunded pension liabilities has outstripped these returns,” Moody’s said. “This growth is due to inadequate pension contributions, stemming from a variety of actuarial and funding practices, as well as the sheer growth of pension liabilities as benefit accruals accelerate with the passage of time, salary increases and additional years of service.”

Here’s a milestone: Government Motors is investment grade:

General Motors Co. (GM), five years after emerging from a government-backed bankruptcy, was returned to investment grade by Standard & Poor’s Ratings Services.

S&P upgraded the biggest U.S. automaker to BBB- from BB+ today, citing progress in Europe, healthy cash flow and limited reputational and market share damage as a result of the company’s record recalls. The ratings outlook is stable.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts losing 32bp, FixedResets off 8bp and DeemedRetractibles down 10bp. Volatility was low. Volume was low.

PIMCO’s in some kind of trouble with the SEC:

Pacific Investment Management Co. said it’s cooperating with regulators examining how the firm assigned asset prices at Bill Gross’s Pimco Total Return ETF.

“Pimco has been cooperating with the SEC in this non-public matter, and we take our regulatory obligations and responsibilities to our clients very seriously,” Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, said in an e-mailed statement. “We believe our pricing procedures are entirely appropriate and in keeping with industry best-practices.”
…
“What they’re being accused of is in fact the industry standard accounting process,” Dave Nadig, the chief investment officer at ETF.com, a San Francisco-based ETF research and analysis firm, said in a telephone interview.

By law, fund managers have to come up with a price, either by asking dealers for quotes or by extrapolating from data points such as credit rating, size, structure, and comparable securities, Nadig said.

“Because Pimco is an 800-pound gorilla, they negotiate a really good price,” he said. “If the SEC wants to change how bonds are priced, then they can do that, but that’s going to change everybody.”

The ETF attributed some of its outperformance against its benchmark to “an allocation to non-Agency mortgages which benefited from limited supply and a recovery in the housing sector,” according to the latest quarterly report on its website.

Kirsten Grind, Gregory Zuckerman and Jean Eaglesham of the Wall Street Journal explain:

The investments believed to be in question, such as small amounts of mortgage securities—or "odd lots" in the terminology of the financial markets—tend to receive lower prices because of their small sizes or because they are backed by smaller institutions, among other factors.

After the launch of the ETF, Wall Street traders were encouraged by Pimco to offer these small securities to the Pimco ETF, according to some of the people familiar with the matter. Mortgage bonds with a relatively small $500,000 face amount, for example, might have sold for only $480,000, because few investors wanted them, due to the small size.

But when Pimco, shortly after purchasing the bonds, placed a value on them, it typically used outside pricing companies that often assigned higher valuations because they used a similar, but much larger, pool of mortgage bonds to compare them with, according to people close to the firm. Placing a $500,000 valuation on a bond purchased for $480,000, for example, would have allowed Pimco to claim a quick 4% gain on the $500,000 bond, or $20,000.

If that maneuver happened with enough bonds, early results of the ETF could have been aided, these people say.

Traders say buying discounted bonds, then using an outside ratings company to place a higher valuation on those bonds, is akin to buying a used car on the cheap because it is in poor shape but having a lender rely on the list price when making a loan.

Matt Levine of Bloomberg points out:

The point of a bond ETF is, in large part, to make the illiquid liquid: to make it easy for small investors to buy and sell diversified bond portfolios in small sizes. The point of the ETF structure, on the other hand, is to use the market to prevent mispricing: The market in the underlying acts as a check on the valuation of the fund. And the point of the bond market sometimes seems to be to slice credit into tiny weird units that trade in idiosyncratic ways and reward cleverness. Those three things don’t really go together. It sounds like the SEC’s worry is that Pimco’s ETF made the illiquid liquid, but at the cost of losing the check on its valuation. Which then provided idiosyncratic opportunities to reward cleverness.

It’s a complex story, and not completely apparent that anything wrong is happening. It is quite well known that investors (even retail investors!) can make very good returns simply by asking their salesman to alert them to any strange odd-lots the brokerage might have hanging around. Brokerages will often provide liquidity for transferable GICs, for instance, by offering a really, really crumby price – like 150bp over market yield. They’ll then sell it for 100bp over market yield, recouping their costs while giving the ultimate buyer a great deal on his GIC … provided he doesn’t mind buying some weird dollar value of GIC with a basically random maturity date. But when you do that as part of an ETF … complications ensue.

But I will point out that a large fund (such as anything run by PIMCO!) might quite rationally take a long view … buy enough discounted small lots of the same issue and eventually that discount is no longer applicable.

But perhaps a new way of potentially scoring excess returns is coming!

With interest rates barely above zero, the typical U.S. savings account has all the excitement of, well, waiting in line at the bank. But what if instead of marketing yet another CD or credit card, banks held raffles and gave millions away each month to savers? The local bank might feel less like the villain behind those big overdraft fees and more like a casino on the Vegas strip.

A bank in South Africa tried this in 2005. The First National Bank’s Million-a-Month Account promised savers a chance to win 113 prizes a month, including a grand prize of 1 million South African rand (about U.S.$150,000 at the time). Within 18 months, the bank had more prize-eligible accounts than regular ones. These new customers, many of them poor, saved an extra 1 percent of their incomes, a recent study found, and boosted their overall saving 38 percent.

The only thing preventing a big bank from doing this in the U.S.: It’s completely illegal. A bill in Congress — which passed the U.S. House of Representatives on Sept. 16 — would change the law. If it’s passed by the U.S. Senate in the next few months and signed by President Barack Obama, banks of all sizes could start tempting savers with “savings promotion raffles.”
…
In the U.S., federal law already lets credit unions offer prizes to savers, as long as states are okay with it. The Save-To-Win game, started in Michigan in 2009, is available at credit unions in four states. In Michigan, every $25 saved increases the chance that a customer could win dozens of monthly prizes worth up to $3,750, or six $10,000 grand prizes each year. So far, more than 50,000 people have saved more than $94 million through the game.

The fun of competing for prizes does get more people saving, the studies of the South African and Save-To-Win experiments suggest. And low-income people especially benefit from this extra cushion of cash. A quarter of Americans tell researcher they’re certain they’d have no way to come up with $2,000 in the next month.

In a paper titled International Transmission Channels of U.S. Quantitative Easing: Evidence from Canada, Tatjana Dahlhaus, Kristina Hess and Abeer Reza claim:

The U.S. Federal Reserve responded to the great recession by reducing policy rates to the effective lower bound. In order to provide further monetary stimulus, they subsequently conducted large-scale asset purchases, quadrupling their balance sheet in the process. We assess the international spillover effects of this quantitative easing program on the Canadian economy in a factor-augmented vector autoregression (FAVAR) framework, by considering a counterfactual scenario in which the Federal Reserve’s long-term asset holdings do not rise in response to the recession. We find that U.S. quantitative easing boosted Canadian output, mainly through the financial channel.
…
Standard economic theory, however, provides ambiguous implications for the international spillover of monetary easing (Rogoff [2002]). Through the expenditure-switchingeffect, a monetary expansion in the United States would depreciate the home currency and deteriorate its terms of trade, making home goods cheaper for foreigners. The resulting increase in home country net exports would then detract from the real output of the foreign economy. The income-absorption effect, on the other hand, implies that as long as expansionary monetary policy in the home country drives up domestic income, home demand for imports would rise, boosting the economy of foreign exporters. Finally, in the presence of globalfinancial market integration, any increase in asset prices and reductions in yields in the domestic financial market resulting from QE may be reflected by similar movements in corresponding foreign financial market variables,2 which in turn would boost foreign consumption and investment through the same mechanism as it does in the domestic case. Therefore, whether Canada benefits from the U.S. expansion through QE depends on which of these effects dominate, and is an empirical question that we attempt to answer here.

R Split III Corp., proud issuer of RBS.PR.B was confirmed by DBRS at Pfd-2:

On September 24, 2013, DBRS upgraded the ratings on the Preferred Shares to Pfd-2 from Pfd-2 (low) based on the increased downside protection levels available to holders of the Preferred Shares over the prior year, as well as the increase in distribution coverage ratio. Since the rating was upgraded, the net asset value of the Company has generally been increasing steadily, rising from $43.55 on September 12, 2013, to $54.22 on September 11, 2014. Downside protection available to holders of the Preferred Shares increased to 74.9% as of September 11, 2014, compared to 68.8% on September 12, 2013. In addition, RBC raised its dividends twice this year, on February 26, 2014, and most recently on August 22, 2014, increasing quarterly distributions to 75 cents per share from 67 cents per share. This dividend boost increases the Preferred Share distribution coverage ratio to 2.9 times (up from 2.6 times in September 2013). The confirmation of the rating of the Preferred Shares is based primarily on the current level of downside protection available and the current distribution coverage ratio.

With a market capitalization of less than $10MM, RBS.PR.B is not tracked by HIMIPref™.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts rocketing up 34bp (more than half of this was due to strength in three BAM issues), FixedResets off 1bp and DeemedRetractibles down 4bp. Volatility was good, highlighted by winning BAM PerpetualDiscounts. Volume was below average.

RBC issued sub-debt at 3.45%+112:

Royal Bank of Canada (RY on TSX and NYSE) today announced an offering of $1 billion of subordinated debentures (“the Notes”) through its Canadian Medium Term Note Program.

The Notes bear interest at a fixed rate of 3.45 per cent per annum (paid semi-annually) until September 29, 2021, and at the three-month Banker’s Acceptance Rate plus 1.12 per cent thereafter until their maturity on September 29, 2026 (paid quarterly). The expected closing date is September 29, 2014. RBC Capital Markets is acting as lead agent on the issue.

The bank may, at its option, with the prior approval of the Office of the Superintendent of Financial Institutions Canada, redeem the Notes on or after September 29, 2021 at par, in whole at any time or in part from time to time, on not less than 30 days and not more than 60 days notice to registered holders.

Net proceeds from this transaction will be used for general business purposes.

Rumblings about corporate bond liquidity are getting more frequent:

Index fund managers are finding it hard to secure the bonds they need at the prices they want, forcing them to make trade-offs that can hurt investors and leave managers vulnerable in a market downturn.

Bond liquidity has all but dried up for corporate issues after new regulations and capital requirements forced Wall Street banks to slash their inventories of fixed-income products following the financial crisis. That’s especially challenging for index fund managers who must acquire certain bonds to be able to track specific benchmarks.

The lack of liquidity also means funds may have trouble selling bonds in the event interest rates rise and the investors who have sunk about $1.2-trillion (U.S.) in net deposits into long-term bond funds since the end of 2004 head for the exits.

The Financial Stability Board (FSB) is examining whether exchange-traded funds pose a risk to the global financial system for precisely that reason, according to the Bank of Canada’s representative to the committee at the Bank for International Settlements.

“There’s been investments and positions taken that may not have the liquidity there that people expect, especially as interest rates start to normalize,” Carolyn Wilkins, senior deputy governor at Canada’s central bank, told Bloomberg News in an interview. “So the liquidity illusion, if you want to put it that way, is something that we’re worried about.”

I certainly hope she was misquoted in the Bloomberg story regarding that interview:

The efforts of the Basel Committee are helping to restore faith in the financial system, Wilkins said.

“People are going to have the knowledge that the banks not only in Canada, but globally are safer,” she said. “That means that the probability of something going wrong that they’ll be on the hook for later as taxpayers will be lower.”

While additional regulatory requirements may translate into extra transaction costs for the banks and businesses and customers they deal with, “those costs should be worth it because they’re reducing the chances that something goes pear shaped,” she said.

Well, of course there are benefits to increased capital levels, although I don’t have quite the same certainty with respect to some regulatory requirements. And anybody will agree there are costs. The hard part is – and what has been consistently ignored by OSFI, the Bank of Canada, and every apparatchik in the apparatus – is balancing the two. We have a very safe banking system in Canada – and it has come at the expense of innovation and economic growth.

What job do you look for when you’re an unemployed Master of the Universe?

As trading in dollar-denominated bonds declined 22 percent in the past five years to an average daily $809 billion, so have the jobs, leaving even some of the most senior traders and salesmen moving from firm to firm. Dozens of journeymen are populating an industry that used to attract the young in throngs, lured by money and prestige, according to Michael Maloney, president of fixed-income recruiting firm Michael P. Maloney Inc.

“The business model is broken and 50 percent of the people in our world who are in trading are stuck right now,” Maloney said in an interview in his New York office.
…
While the size of the U.S. bond market ballooned by more than $5 trillion since 2008 to $37.8 trillion at year-end, trading in the debt has slumped, according to data from the Securities Industry & Financial Markets Association. Average daily turnover fell to $809 billion last year from $1.04 trillion in 2008.

That’s partly because banks have pulled back from making markets in bonds as higher capital requirements make it less profitable. The business — where buyers and sellers are primarily matched over the telephone or through e-mails — has also suffered shrinking margins because of regulator-mandated price transparency and the rise of electronic trading.
…
Transaction costs declined after the Financial Industry Regulatory Authority introduced its bond-price reporting system, called Trace, in 2002. Wall Street bond traders lost about $1 billion in fees in the next year, or about $2,000 a trade, according to a study in the Journal of Financial Economics. The system is intended to provide transparency in an opaque market, and help prevent investors from being fleeced.
…
The number of credit traders working for the firms plunged 30 percent to about 300 over the same period, even as companies issued record amounts of bonds in the U.S. to take advantage of historically low interest rates, according to Options Group and data compiled by Bloomberg.

The ‘broken’ corporate bond market was also discussed yesterday.

Now, never let it be thought that I consider secondary market trading to be an important thing in and of itself. Secondary market trading is important only insofar as it affects the issuance market, because the purpose of the corporate bond market is exactly the same as that of the equities market: to transfer money from sources of capital to sinks, to be returned (with luck!) as an income stream from the real-world investment that’s done with the money. And issuance in recent years has been monstrous in the past few years so, we might rashly conclude – no problem!

However, as has been pointed out by Ron Mendel of Hartford Investment Management in his admirable essay Private Placement Debt: Diversification, yield potential in a complementary IG asset:

Private placement investors require additional yield relative to comparable public bond issues, as lenders demand greater yield to compensate for increased liquidity risk as well as the underwriting and monitoring costs. This premium is variable over time and is a function of technical, supply and demand characteristics, credit fundamentals and insurance liability requirements. The typical liquidity premium historically ranges between 25 – 45 basis points.

That’s a hell of a spread, although not as much as we get in the Canadian preferred share market! It will also be noted that this is the rate in an environment comprised largely of insurance companies; other investment entities, including individuals, are probably going to want a bigger premium for giving up liquidity. Additionally, the ability to issue corporate debt has not yet been tested in an environment of increasing policy rates or general doom and gloom (after the extraordinary gloom and doom of the credit crunch, anyway).

A lack of secondary market liquidity will ultimately increase spreads at issuance and will therefore harm the economy, hurting workers; in addition, the economic harm will be mitigated to some extent by lower policy rates, hurting savers. This is just a mess all ’round.

On a brighter note, King Timmy is unconcerned about the inversion clampdown:

Scott Bonikowsky, a Tim Hortons spokesman, said the deal is “moving forward as planned” and is driven by long-term growth and not tax benefits. The actions to curb inversions announced yesterday by Treasury Secretary Jacob J. Lew are getting an immediate test as eight U.S. companies with pending deals decide whether to move forward.

It was a modestly negative day for the Canadian preferred share market, with PerpetualDiscounts down 13bp, FixedResets off 10bp and DeemedRetractibles flat. Volatility was low. Volume was slightly below average.