Category: Market Action

There’s no smoking gun, but staff turnover may have played a role in the JPMorgan data breach:

As hackers pierced JPMorgan Chase & Co.’s (JPM) defenses in June, the bank’s cybersecurity chief was just getting acquainted with his employer and its sprawling technology infrastructure.

Greg Rattray, a former U.S. Air Force commander for information warfare, became JPMorgan’s head of information security that month after upheaval at the highest levels of the bank’s tech division. His predecessor, Anthony Belfiore, had resigned early this year to join at least five JPMorgan leaders at First Data Corp. In between, Anish Bhimani was acting security officer while holding at least one other tech role.
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JPMorgan’s technology leaders began leaving after April 2013, when the bank’s co-chief operating officer, Frank Bisignano, 55, departed to become CEO of First Data, the Atlanta-based payment processor. He has known Dimon since the 1980s, serving as his longtime deputy. Bisignano’s last job at JPMorgan included a focus on technology and security.

He was joined a few months later by Guy Chiarello, JPMorgan’s chief information officer since 2007, who became First Data’s president. Chiarello is an industry veteran who was previously CIO at Morgan Stanley, where he spent more than two decades.

Tom Higgins, JPMorgan’s head of operational control in charge of physical and technology security, also joined First Data. So did Cindy Armine, JPMorgan’s compliance chief, and Christine Larsen, a JPMorgan executive vice president in charge of process improvement and enterprise-program management.

This is a guy I like:

[Founder of ThinkTank Learning Steven] Ma, a former hedge fund analyst, makes bets on student admissions the way a trader plays the commodities markets. Using 12 variables from a student’s profile—from grades and test scores to extracurricular activities and immigration status—Ma’s software crunches the odds of admission to a range of top-shelf colleges. His proprietary algorithm assigns varying weights to different parameters, derived from his analysis of the successes and failures of thousands of students he’s coached over the years. Ma’s algorithm, for example, predicts that a U.S.-born high school senior with a 3.8 GPA, an SAT score of 2,000 (out of 2,400), moderate leadership credentials, and 800 hours of extracurricular activities, has a 20.4 percent chance of admission to New York University and a 28.1 percent shot at the University of Southern California. Those odds determine the fee ThinkTank charges that student for its guaranteed consulting package: $25,931 to apply to NYU and $18,826 for USC.
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College admissions officers and other educators scoff at Ma’s guarantees; they say no one can predict acceptances to elite colleges because grades and scores are only one part of the highly subjective process. Ma counters that anything can be quantified. His algorithm runs so-called inference calculations using the profile data from thousands of ThinkTank students who’ve already racked up acceptances and rejections from top schools. “With enough data,” he says, “nothing is subjective.”

It’s an interesting article; I find the current emphasis on extracurricular activities to be very strange. Who cares? Is there any reason to believe that they make you a better person, even supposing that being a good person should have any influence on university acceptance?

It is my belief that whatever might have been the case when precious little extracurricular activities were less pervasive, they now measure little more than willingness to jump through arbitrary hoops – and in many cases, “willingness” is a secondary matter, given that you need forty ‘community hours’ to graduate from high school. I think the emphasis on these things does more to breed hypocrisy and robotic obedience than good citizenship – and Mr. Ma’s systematic gaming of the system is a good illustration!

More regulations imply more games. Some consider this news:

Banks in the European Union that attempt to evade new bonus rules face a “coordinated policy response” from the bloc’s regulators.

Michel Barnier, the EU’s financial-services chief, called for action on the “politically very important matter” of lenders that have turned to so-called allowances to get around an EU ban on bonuses worth more than twice fixed pay.
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Barclays Plc (BARC), HSBC Holdings Plc (HSBA), Lloyds Banking Group Plc (LLOY) and Royal Bank of Scotland Group Plc are among banks that have introduced allowances in response to the bonus limit. Lenders have warned that the cap will harm their competitiveness and force them to increase fixed pay.

Allowances, also known as role-based pay, are a regularly adjustable part of employees’ pay packets. They are considered by the banks to be part of salary unaffected by the bonus cap.

Some consider enormous housing-related consumer debt to be a problem. Some don’t.:

Sweden’s Social Democrats are heading for a national election victory backed by housing plans that could dig the country deeper into debt.

Magdalena Andersson, the party’s economic spokeswoman and the likely finance minister if the Social Democrat-led opposition prevails in this month’s election, has proposed using state-owned bank SBAB to bring down mortgage rates, already at four-year lows, to make housing more affordable. Andersson, whose party would boost spending on healthcare and education as well as housing, also suggested relaxing some rules designed to stem the growth in household debt, which is at an all-time high.
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The country’s housing shortage, a consequence of a growing population and strict regulations that stymie new construction, has caused prices to more than double since 2000. As home values have jumped, so has household borrowing. It increased 5.5 percent in July — the most in 34 months — driven by a 5.8 percent increase in mortgage borrowing, Statistics Sweden said Aug. 27. Swedish households with mortgages owe their creditors an average of almost four times their disposable income while the overall average debt load of Swedes is about 175 percent.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 4bp, FixedResets down 8bp and DeemedRetractibles off 3bp. Volatility was below average. Volume was extremely low.

US jobs numbers disappointed:

Payrolls climbed by 142,000 workers, less than the 230,000 median forecast of economists surveyed by Bloomberg and the smallest gain this year, data from the Labor Department showed today. The unemployment rate fell to 6.1 percent from 6.2 percent in July as people left the workforce.

… but it’s an ill wind that blows nobody any good:

U.S. stocks rose a fifth week, giving the Standard & Poor’s 500 Index (SPX) its longest rally this year, as investors speculated weaker jobs growth will prevent the Federal Reserve from raising rates sooner than anticipated.

European shares rallied for a fourth week after the region’s central bank boosted stimulus. Emerging-market equities advanced, led by Russia’s Micex Index, after Ukraine and rebels agreed to a cease-fire. Producers of consumer products led U.S. stocks higher, while energy shares sank as oil tumbled for the sixth time in seven weeks. Apple Inc. (AAPL) dropped the most since February after a competitor introduced new smartphones.

The S&P 500 rose 0.2 percent to a record 2,007.71, reversing losses on the final day after three straight declines. The Dow Jones Industrial Average (INDU) added 38.91 points, or 0.2 percent, to 17,137.36, ending the week less than one point from an all-time high.

Canadian numbers were even worse:

Employment in Canada’s private sector is at a standstill.

While monthly employment readings have seesawed through the year, one trend is clear: Private companies are in no mood to hire, having shed a record 111,800 jobs in August, according to Statistics Canada.

Month-to-month measures have been volatile but the longer-term view shows full-time and private positions have barely budged in a year, while eight in 10 new jobs have been part-time.
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Private-sector hiring tumbled as the manufacturing, trade and professional services sectors cut jobs. The share of people working in manufacturing has ebbed to a record low this summer. The public sector added 14,000 jobs and self employment rose by 86,900, a record gain.

The outsized readings on private-sector losses and self-employment gains raised eyebrows. Bank of Nova Scotia economists Derek Holt and Dov Zigler called the numbers “very fishy” and advised clients to be “very careful” in drawing conclusions from the monthly data.

Skepticism over the data comes after the agency was forced to correct its July jobs numbers. That month saw a gain of 41,700 positions rather than the 200 jobs it had originally reported, a mistake attributed to an incomplete understanding of changes that occurred in the redesign of its survey.

The broader picture shows employment levels in the private sector “has been relatively flat since the fall of 2013,” Statistics Canada observed.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 15bp, FixedResets up 11bp and DeemedRetractibles gaining 3bp. Volatility was good, dominated by winning FixedResets. Volume was low.

Interesting article in the Globe about global real estate flows:

In June, Citigroup Inc. paid a record HK$5.4-billion ($697-million) for a Hong Kong office tower that will bring most of its 5,000 employees under one roof. Canada’s Manulife Financial Corp. last year paid HK$4.5-billion for a similar-size tower and development in the city’s Kowloon district.

“Canadians are buying everywhere,” said Ross Moore, director of Canada research at CBRE Group Inc., the biggest commercial broker. “They are shopping the world. What’s happened in the last five to 10 years is the big pension funds pretty well own everything of quality in Canada. They love real estate and have all this money coming in and they have to put it somewhere.”

Toronto-based Brookfield Asset Management Inc. has started investing in European warehouse properties and Indian offices after accumulating the biggest holdings of office buildings in both the U.S. and Canada. The real estate unit of Ontario Teachers’ Pension Plan has been investing in Brazil as well as the U.K. and Australia. Canadian Pension Plan Investment Board has bought London residential, retail and office properties.

Europe’s trying everything to stimulate:

The European Central Bank cut interest rates and will start buying assets, in a bid to boost the flow of funding for the euro-area economy while stopping short of broad-based quantitative easing.

ECB President Mario Draghi’s plan to buy asset-backed securities and covered bonds pushed the euro below $1.30 for the first time since July 2013 as he said the inflation outlook had worsened. Germany’s Jens Weidmann opposed the rate cut and ABS plan, according to two officials.

The ECB “will purchase a broad portfolio of simple and transparent securities,” Draghi said at a press conference in Frankfurt today. “Some of our council were in favor of doing more than presented.”
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The European Commission is considering allowing banks to hold a wider range of asset-backed securities to meet liquidity requirements than foreseen by global regulators, according to an EU document obtained by Bloomberg News. Banks will be allowed to use securitizations backed by assets from car loans to small business and consumer debt under the EU rule, whereas the Basel Committee on Banking Supervision sought to limit securitizations to those backed by residential mortgage debt.

… and contagion is important:

Draghi’s stimulus is helping keep a lid on borrowing costs in the U.S. even as the growth outlook continues to improve. The nation’s joblessness fell to 6.2 percent in July from 6.7 percent in December, yet yields on the benchmark 10-year Treasury note have also tumbled from 3.03 percent at year-end. The securities yielded 2.45 percent at 10:59 a.m. in New York, up 0.05 percentage point from yesterday.

Instead of girding for rising interest rates as the economy strengthens, investors have been pouring cash into long-dated U.S. debt.

They’ve funneled $3.9 billion into BlackRock Inc. (BLK)’s iShares 7-10 Year Treasury Bond exchange-traded fund this year, the most among U.S. fixed income ETFs, Bloomberg data show. The fourth-biggest winner has been the iShares 20+ Year Treasury Bond ETF (TLT), with $1.7 billion of deposits.

Analysts keep cutting their predictions for how much borrowing costs will rise, too. They now forecast a 2.89 percent yield on the 10-year Treasury note at year-end, down from a July call of 3 percent, according to a Bloomberg survey.

Today’s mail brought me a wonderful book, Contingent Convertibles [CoCos], by George M. von Furstenberg. I’ve only skimmed it, but it does include a phrase that most of us will have hoped was obvious:

A [Conversion Price] should be part of the cocos covenant so that the number of common shares issued at conversion is known already from the time the cocos are initially offered.

Sadly, that ain’t how they’ll work in Canada.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts losing 14bp, FixedResets down 10bp and DeemedRetractibles off 6bp. Volatility was high. Volume was low.

The CPPIB is spending more on outside managers:

Five years ago, the investment arm of the Canada Pension Plan had total costs of $665-million, according to a new report from the Fraser Institute. In the CPPIB’s most recent fiscal year, overhead had ballooned to $1.4-billion.

To be sure, part of that increase reflected the swelling size of the fund, which is constantly taking in new money, thanks to pension contributions from millions of Canadian workers. But even against the backdrop of its surging assets, the CPPIB is not showing any tendency to rein in its spending. Its costs amounted to 0.58 per cent of its assets back in 2008-09; in the most recent fiscal year, they stood at 0.84 per cent.
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The fund likes to focus attention on its relatively modest operating expenses. A more realistic accounting, though, has to encompass other costs, such as hiring external investment managers and the expenses involved in actually implementing the fund’s strategies.

Those costs are now nearly twice as large as the fund’s operating expenses, according to the report’s authors, Philip Cross and Joel Emes. Much of the additional outlay reflects payments to external money managers, which have soared from $25-million six years ago to $782-million last year.

The Fraser Institute’s news release links to the study, titled Accounting for the True Cost of the Canada Pension Plan, which notes that the CPPIB’s assets under management are about $183-billion.

The CPPIB is making a horrible mistake in going to outside managers. Assiduous Readers will remember that I believe that it is possible to outperform benchmarks – any benchmark – over the long term, and that the reason for this is that most investors – including most professionals – are idiots. At least when it comes to actual investing, they’re idiots. They’re really, really good at sales!

In order to outperform, you need a dedicated staff and this staff has to be completely focussed on the nitty-gritty of investment analysis. The organization must have no sales exposure at all if it is to be successfule – which means that the organization must run its own money and only its own money. This necessarily means that consistent outperformance is restricted to organizations with huge amounts of assets, but that’s life. The moronic proposals for an Ontario superfund (discussed on April 21, 2009 and elsewhere on PrefBlog) will lead to a change of culture in the superfund management, from a culture of returns, returns returns! to a culture of clients, clients clients! which are polar opposites with respect to the personalities of the individuals concerned and with respect to the effect on investment performance.

CalPERS is run on the hub and spoke model. Its performance is a disaster. The UofT retirement fund is hub-and-spoke – and it’s a disaster. When you run an investment organization according this model, you are paying for salesmen to have lunch with each other. We are going to pay dearly for the CPPIB’s increasing appetite for good investment stories.

CU Inc. issued long paper today:

CU Inc. announced today that it will issue $1,000,000,000 of 4.085% Debentures maturing on September 2, 2044, at a price of $100.00 to yield 4.085%. This issue was sold by RBC Dominion Securities Inc., BMO Nesbitt Burns Inc., TD Securities Inc., Scotia Capital Inc. and CIBC World Markets Inc. Proceeds from the issue will be used to finance capital expenditures, to repay existing indebtedness, and for other general corporate purposes of ATCO Electric Ltd. and ATCO Gas and Pipelines Ltd.

The company has a PerpetualDiscount outstanding, CIU.PR.A, which has a 4.60% coupon and is bid at 22.96 to yield 5.02%. Call it a round 5% for luck. This implies the interest-equivalent yield for CIU.PR.A is 6.5%, which, given the number on the bond issue, imply a Seniority Spread for this company of about 240bp.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp, FixedResets off 7bp and DeemedRetractibles up 6bp. Volatility was average. Volume was a little low, although Fortis issues got a bit of boost from the new issue announcement.

PerpetualDiscounts now yield 5.13%, equivalent to 6.67% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little under 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 250bp, unchanged from the figure reported August 27.

Auto dealers in Georgia are competing with new technology using tried and true methods:

Tesla Motors Inc. (TSLA), which has fought U.S. dealers over its direct sales of electric cars, faces a new challenge in Georgia where auto retailers want the Peach State to bar distribution of sedans from the company’s store.

Tesla sells vehicles in violation of the state’s rules limiting the annual volume of cars it can sell directly to the public, the Georgia Automobile Dealers Association said in a petition filed with the Georgia Department of Revenue.

The group, which represents 500 dealerships, asked that Tesla’s license be revoked and the agency block sales of Tesla’s Model S sedan at its shop in Marietta, near Atlanta.
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The carmaker’s license in Georgia allows it only to sell vehicles made “in accordance with custom design specifications of the customer” and retail fewer than 150 a year, the group said in the petition. Tesla sold 173 sedans at its suburban Atlanta outlet, its only store in the state, from October to June, according to the petition, a copy of which was obtained by Bloomberg News from the revenue department.

It was a good day for economic news:

The dollar climbed 0.7 percent to 105.10 yen at 4 p.m. in New York and gained 0.8 percent to $1.6472 per British pound. Yields on 10-year Treasury notes increased seven basis points, the most in more than a month, to 2.42 percent. The Standard & Poor’s 500 Index lost less than 0.1 percent after the biggest monthly rally since February, as energy companies tumbled 1.3 percent. Gold slid 1.7 percent and Brent crude slumped to a 16-month low.

U.S. manufacturing expanded in August at the fastest pace in three years as orders grew by the most in a decade, bolstering the case for the Federal Reserve to raise interest rates sooner than anticipated. Gauges of factory output in Europe and China signal slower growth, boosting speculation that policy makers will need to boost stimulus measures. European money markets are pricing in about a 50 percent probability that the European Central Bank will cut interest rates by 10 basis points this week, according to BNP Paribas SA.
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There’s about a 44 percent chance Fed policy makers will raise the benchmark interest-rate target by June 2015, futures data compiled by Bloomberg showed today. A 36 percent likelihood was seen on Aug. 18.
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Bond yields across the euro area have tumbled, enhancing the appeal of payments available from Treasuries, since ECB President Mario Draghi said at the Federal Reserve Bank of Kansas City’s annual conference in Jackson Hole, Wyoming, on Aug. 22 that the central bank will use “all the available instruments needed to ensure price stability.”

And, with the 75th anniversary of Canada’s declaration of war on Germany almost upon us, we are getting a flavour of what it was like to live through the Munich Crisis:

[Outgoing president of the European commission, José Manuel] Barroso told the closed meeting that Putin had told him Kiev would be an easy conquest for Russia, according to the Italian newspaper, La Repubblica. According to the account, Barroso asked Putin about the presence of Russian troops in eastern Ukraine. Nato says there are at least 1,000 Russian forces on the wrong side of the border. The Ukrainians put the figure at 1,600.

“The problem is not this, but that if I want I’ll take Kiev in two weeks,” Putin said, according to La Repubblica.

The Kremlin did not deny Putin had spoken of taking Kiev, but instead complained about the leak of the Barroso remarks.

Petro Poroshenko, the Ukrainian president, attended the EU summit and painted an apocalyptic picture of the conflict, with EU leaders dropping their usual public poise in a heated debate.

Dalia Grybauskaite, the Lithuanian president, declared Russia was “at war with Europe”. The German chancellor, Angela Merkel, the main mediator with Putin, was said to be furious with the Russian leader, warning that he was “irrational and unpredictable”, while David Cameron was said to have raised the issue of Britain discussing policy options regarding Putin.

Cameron likened the west’s dilemma with Putin to relations between the then British prime minister, Neville Chamberlain, with Adolf Hitler in Munich in 1938, when Anglo-French appeasement encouraged the Nazi leader to launch the second world war the following year.

“We run the risk of repeating the mistakes made in Munich in 1938. We cannot know what will happen next,” Cameron was reported as saying. “This time we cannot meet Putin’s demands. He has already taken Crimea and we cannot allow him to take the whole country.”

DBRS confirmed Aimia, proud issuer of AIM.PR.A and AIM.PR.C:

DBRS has today confirmed Aimia Inc.’s (Aimia or the Company) Issuer Rating at BBB and the ratings of its Senior Secured Debt and Preferred Shares at BBB and Pfd-3, respectively, all with Stable trends. The confirmation of the ratings is based on the Company’s relatively stable operating performance and credit metrics through 2013 and progress made to date with the Aeroplan program transformation and financial cards agreement with TD Bank Group (TD; rated AA with a Stable trend by DBRS) and Canadian Imperial Bank of Commerce (CIBC; rated AA with a Stable trend by DBRS). The ratings continue to be based on the strength of Aimia’s brands and its strong relationship with key commercial partners. The ratings also reflect the Company’s high exposure to consumer spending and redemption patterns, as well as the significant but moderating degree of revenue concentration.
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DBRS expects Aimia’s financial profile to remain commensurate with the current rating category, based on strong and stable free cash flow-generating capacity and steady leverage. DBRS believes free cash flow will decline modestly due to slightly higher capex requirements and continued growth in the Company’s dividend payments. Free cash flow is expected to continue to be applied primarily toward small tuck-in acquisitions, most likely in the data analytics business. DBRS anticipates that Aimia will use cash on hand to repay approximately $150 million of debt maturing in 2014. As such, when combined with the expected decline in adjusted EBITDA, key credit metrics should remain appropriate for the current rating category (i.e., gross debt-to-adjusted EBITDA before distributions of approximately 1.75x to 2.25x and adjusted EBITDA coverage around 7.0x).

The Canadian preferred share market opened the month on a sour note, with PerpetualDiscounts losing 17bp, FixedResets down 6bp and DeemedRetractibles off 2bp. Volatility was low. Volume was practically non-existent.

Times are tough indeed for the gnomes of Zurich:

Zurich’s red-light district is dimming. Bankers who have been core patrons of the city’s sex industry and cabarets are curbing spending.

The venues of Langstrasse — or long street — are closing, replaced by hipster bars, techno clubs and even a backpackers’ hostel. Like the finance industry, the sex trade has opted for a lower profile.

“Times have changed,” said Kevin Joliat, the manager of the Petit Prince nightclub in central Zurich. “Bankers really have to show who the client was, why they spent the money and was it really necessary,” said Joliat, who once worked at Zuercher Kantonalbank, Switzerland’s largest state-owned bank.

The decline of erotic entertainment highlights a changing culture in Zurich as banking jobs ebb and public opinion turns against inflated bonuses. That and smaller budgets for entertaining customers have deprived the clubs and bars of a key customer base

Meanwhile, the West has a problem:

As Russian-backed separatists advance in southeastern Ukraine, the U.S. and European Union are still searching for a sanction that can force Vladimir Putin to stop and think again.

More than 1,000 of the Russian president’s troops are operating inside Ukraine, manning sophisticated weaponry and advising local separatists, the North Atlantic Treaty Organization said yesterday. The escalation, denied by Russia, prompted a warning of “consequences” from U.K. Prime Minister David Cameron, and German Chancellor Angela Merkel said EU leaders would discuss new sanctions this weekend.

The U.S. and EU have been trying since March to come up with measures that would impose sufficient costs to make Putin call off his effort to destabilize eastern Ukraine while causing only minimal harm to Russian citizens and European and U.S. economies and businesses.

Here’s my plan: bar Putin from Disneyland.

The Canadian preferred share market finished the month on a positive note, with PerpetualDiscounts winning 18bp, FixedResets up 12bp and DeemedRetractibles gaining 4bp. Volatility was quite good. Volume was quite low.

Nothing happened today, either.

Nothing happened today.

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 10bp, FixedResets off 10bp and DeemedRetractibles up 15bp. Volatility was muted. Volume was above average, with the highlights comprised entirely of FixedResets.

PerpetualDiscounts now yield 5.13%, equivalent to 6.67% interest at the standard conversion factor of 1.3x. Long corporates now yield about 4.15%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 250bp, a slight (and perhaps spurious) decline from the 255bp reported August 13.

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 28bp, FixedResets gaining 6bp and DeemedRetractibles off 2bp. Volatility was good, with both winners and losers dominated by FixedResets. Volume was average.

Bloomberg has a fascinating article on the value of liquidity:

For an extreme case, look at Bridgewater Associates. The investment manager is the largest holder of the iShares MSCI Emerging Markets ETF (EEM), with $3.3 billion worth of shares. It’s charged 0.67 percent in fees, about four times more than what’s charged for several other liquid, emerging markets ETFs that trade similarly to EEM.

If Bridgewater switched to the iShares Core MSCI Emerging Markets ETF (IEMG), which charges 0.18 percent, they’d save about $15 million each year. But while IEMG trades a healthy $54 million worth of shares daily, EEM trades $2.1 billion worth. With a $3.3 billion stake, you can see why they’d prefer EEM. For the rest of us, IEMG trades plenty.
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EEM also costs the Ontario Teachers’ Pension Plan and the State of New Jersey Common Pension Plan about $7 million per year. And there are many other high-profile holders of EEM, which has $43 billion in assets. Its cheaper, equally effective, better-performing sibling IEMG has $5 billion.

A high-cost ETF is also a big part of hedge fund manager John Paulson’s portfolio. He has $1.3 billion in SPDR Gold Shares (GLD), which charges 0.40 percent. If Paulson moved into the iShares Gold Trust (IAU), which charges 0.25 percent, he’d save $1.9 million per year. Again, there’s a liquidity gap: IAU’s respectable $26 million worth of shares traded daily pales next to GLD’s $768 million.

Let’s see … it’s about seven years since the start of the credit crunch and already we’re seeing demands for growth at all costs. Huh. It usually takes about twenty, but then, we’re Canadian and are therefore smarter bankers than everybody else (1980s excepted):

Peter Routledge at National Bank of Financial says the bank is misguided in limiting its growth in capital markets.

“Some observers argue that RY must limit its growth in capital markets, maintaining this segment’s contribution in the neighborhood of 25% of total earnings, and justify this self-imposed limitation on the view that capital markets activities contain exorbitant tail risks that will ultimately threaten the bank’s capital. We disagree.”

He points to a number of reasons. Even when the financial crisis hit, RBC’s capital markets arm “earned its way through this infamous period and avoided the financial traps into which many other financial institutions fell. The segment also avoided material earnings hits during the equity market correction of the early 2000s.”

That was no accident, he argues. RBC is simply better at risk-return calculations. “This competitive advantage would, if the bank decided to exploit it more aggressively, enable the bank to expand its capital markets revenues and earnings without putting shareholder capital at undue risk.”

Investors and forecasters believe different things:

After giving up on calls last month that Treasury yields will rise in 2014, forecasters are sticking to estimates those on the 10-year note will climb next year and reach 3.6 percent as the Federal Reserve increases interest rates. Yet based on the performance of long-term Treasuries, implied yields suggest investors don’t foresee yields that high for a decade or more.

Getting it right has never been more important. With America’s outstanding public debt at a record $17.7 trillion, Fed Chair Janet Yellen faces the task of lifting rates from close to zero without sparking a surge in funding costs. While economists point to unrest in Ukraine and Gaza for why Treasuries remain in demand, the bond market’s view that the U.S. expansion isn’t strong enough to force the Fed’s hand suggests yields can stay low for years to come.
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Peak rates, known as the neutral or terminal rate, have averaged 4.25 percent when inflation has historically been at the bank’s current target, New York Fed President William Dudley said in May. Trading in the interest-rate swaps suggests benchmark borrowing costs will top out closer to 3 percent.

Swaps based on the Fed funds effective rate, a proxy for the target rate, indicate it will average 2.84 percent in 2019. Another gauge, the one-year swap traded five years forward, has fallen a full percentage point this year to 3.2 percent.

Those peak levels are lower than the Fed’s own “dot plot” projections released in June, which showed a long-term forecast of 3.75 percent based on the median estimate. If the bond-market indicators prove to be accurate, they would also be the lowest since the 1950s, according to MKM’s Darda.

Barry Ritholtz of Bloomberg has some wise words on numeracy in general and investing in general:

When it comes to stock picking and portfolio construction, understanding probabilities goes a long way. You must assume that some of your picks aren’t going to work out. Once you recognize that simple reality, you then can have an exit strategy for when those eventualities occur.

Same with portfolio construction. As we showed last week in the annual asset-class performance chart, recognizing what you don’t and can’t possibly know is a key to long-term planning.

Some have suggested starting statistics education in kindergarten. That might be a little radical, but beginning early is crucial. Having an educated population that understands probability and statistics is the key to an informed citizenry and a better economy.

… while Jeff Green and John Irwin of Bloomberg remind us that actually being able to do something is a rare and valuable talent:

Two years out of high school, Evan Fischbach is earning $40,000 a year. His secret: shop class.

Fischbach, 19, has known he wanted to work on cars ever since he took an automotive class in his junior year of high school in Saline, Michigan. His college-educated parents wondered if he was aiming too low.

Then when Fischbach was still a junior, a local auto dealer desperate for mechanics hired him as an apprentice in the service bay. Now he’s earning about three times as much as the average 19-year-old high school grad and slightly more than the national median, according the Bureau of Labor Statistics.
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Fifty years ago, most American kids in middle and high school attended shop class, where they learned to make ash trays, rebuild engines, weld metal and even market products. As the space race gave way to the high-tech era, policy makers decided such skills were unnecessary. College prep classes gradually supplanted shop, which by then was perceived as a place for slackers and stoners.

The average number of high school credits earned in career and technical education fell 15 percent from 1990 to 2009 at the same time core academic credits in study areas such as English, math and science rose 20 percent, according to the U.S. Department of Education.

DBRS has some comments on the proposed Burger King – Tim Horton’s tie-up:

Should an official agreement or offer be announced, DBRS would review the value and form of financing, structure of the transaction and resulting combined entity, as well as the business plan and financial management intentions going forward. The combination of THI and Burger King would result the third-largest quick-serve restaurant in the world with 18,000 restaurants in over 100 countries. DBRS notes that Burger King has significantly higher leverage than THI (approximately 5.0 times (x) lease-adjusted debt-to-EBITDAR versus approximately 2.77x for THI, both for the last 12-months ended Q2 2014).

DBRS also notes that THI’s Senior Unsecured Debt contains a change of control trigger provision that requires the occurrence of both a change of control and a rating event (i.e., downgrade below investment grade). If triggered, the provision requires than an offer be made to repurchase at a price equal to 101% of the outstanding Senior Unsecured Debt of the Company.

Towers Perrin has released the Pension Finance Watch for July 2014:

Negative equity returns pushed the pension index down in July. The Towers Watson Pension Index declined 1.6% for the month to 73.9, and has now dropped 5.5% for the year.
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Our liability index (based on projected benefit obligations) increased 0.3% for July, all of which represents interest accumulation. The changes in asset and liability values caused the Towers Watson Pension Index to drop 1.6% to 73.9.

The 73.9% funding figure is at the high-end of the post-Credit Crunch Range, but well below the pre-Credit Crunch range.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 12bp, FixedResets off 6bp and DeemedRetractibles gaining 10bp. Volatility was minimal. Volume was very extremely awfully low.