Category: Market Action

US inflation is still tame:

Wholesale prices in the U.S. declined for a third month in November, reflecting lower costs for energy and cars.

The 0.1 percent drop in the producer-price index followed a 0.2 percent decrease the prior month, a Labor Department report showed today in Washington. The median estimate in a Bloomberg survey of 77 economists called for no change. The so-called core measure, which excludes food and energy, rose 0.1 percent.

Prices of goods and materials used in the earlier stages of production fell for a second month as slow improvement in global markets limited demand. Scant signs of accelerating inflation indicate Federal Reserve policy makers meeting next week have more room to maintain their unprecedented $85 billion in monthly asset purchases in order to help spur the expansion.

DBRS confirmed SLF at Pfd-2(high):

Sun Life’s risk management platform, while extensive and established, has mitigated much of the market sensitivity for earnings. Future market events will be watched to see if the Company is able to execute its risk mitigation programs within its declared sensitivities. The financial leverage ratio of debt plus preferred shares relative to total capitalization has improved to 28.2% as at September 30, 2013. A ratio less than 25% would be favourable for the rating. Also, a return to profitability levels that generate fixed charge coverage ratios of at least seven times on a total company basis is anticipated and within reach for the Company.

SLF is the proud issuer of SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D and SLF.PR.E (DeemedRetractibles) and SLF.PR.F, SLF.PR.G, SLF.PR.H and SLF.PR.I (FixedResets).

DBRS confirmed BNA at Pfd-2(low):

The downside protection available to the Class AA Preferred Shares is approximately 77%, based on the market value of the BAM Shares as of November 29, 2013. The current Class AA Preferred Share dividend coverage ratio is approximately 1.3 times. As a result, the Company continues to be able to fund the Class AA Preferred Shares distributions without relying on other methods for generating income or reverting to the sale of common shares in the Portfolio. In the event of a shortfall, the Company may sell some of the BAM Shares, engage in securities lending or write covered call options to generate sufficient income to satisfy its obligations to pay the Class AA Preferred Shares dividends.

The Pfd-2 (low) ratings of the Class AA Preferred Shares are primarily based on the downside protection and dividend coverage available to the Class AA Preferred Shares.

BNA is the proud issuer of BNA.PR.B, BNA.PR.C, BNA.PR.D and BNA.PR.E (all SplitShares).

It was a mixed day of mostly recovery for the Canadian preferred share market, with PerpetualDiscounts gaining 11bp, FixedResets up 17bp and DeemedRetractibles off 1bp. FixedResets were notable on both sides of the modest Performance Highlights table.

Parakeet Poloz chirped a little today:

The Canadian economy faces the risk of deflation and won’t reach full capacity for two years, with imbalances in household debt and the housing market gradually diminishing in that time, Bank of Canada Governor Stephen Poloz said Thursday.

He still expects a soft landing in the housing market, which will be offset by a pickup in exports and business investments.
…
“Right now, it looks to us like it will take around two years to get inflation back up to 2 per cent,” he said in a speech, peppered with nautical references, to the Canadian Club of Montreal Thursday.

Canada’s annual inflation rate has slumped to 0.7 per cent, well below the lower end of the central bank’s 1-to-3 per cent target range. The central bank governor suggested he’s more concerned about inflation cooling further than a pickup.

Merry Christmas!

Unemployment benefits for 1.3 million people in the U.S. are poised to end Dec. 28 as Democrats failed in their last-ditch effort to extend the jobless assistance before the House adjourns tomorrow.

Republicans who control the House refused to keep the aid flowing to the long-term unemployed without agreement on budget cuts elsewhere. Extending the benefits would cost $26 billion over two years, according to the Congressional Budget Office.
…
The failure of Congress to agree could put a dent in the nation’s economy. The Congressional Budget Office estimates that extending the program would boost growth by 0.2 percent and add about 200,000 jobs.

Of course, that’s $130,000 per job.

One might think that all this cheery news would be good for fixed income, but one might think wrong! The Canadian preferred share market got whacked today, with PerpetualDiscounts losing 33bp, FixedResets off 14bp and DeemedRetractibles down 20bp. The Performance Highlights table is relatively modest, dominated by losing BAM FixedResets. Volume was extremely high.

I’m glad to see I’m not alone in my worries over central clearing:

History tells us, using the metric of loss experience, that CCP management is strong. But history is based on a bygone era that is radically different from today’s multi-instrument, multi-national and legally complex world. As CCPs fight for membership, the danger is that the delinquent firm will gain admittance and cause the contagion we all fear. I sense already a relaxation in the risk approaches of several medium-sized firms. CCPs can protect themselves from problem members by multiple means. The most effective, but often least favored, is to avoid them like the plague! The preferred method is through credit assessment and application of tough margins. But the latter option works best in a monopoly environment and not in today’s multi-choice option of CCP selection. And, if the EU dream of full interoperability were ever to come to fruition, risks unacceptable to one CCP could well insinuate themselves, albeit with added margin, into that platform through the interoperability route.

The second great danger facing CCPs is that of instrument coverage. Traditionally, CCPs have been cautious about expanding their instrument coverage. They have focused on the liquidity of any instruments admitted to clearing. They have assessed carefully any barriers to fast liquidation if they were ever forced to unwind a position. They have sought comfort from the presence of committed parties who would be willing to adopt open positions run by a defaulting member. And they have examined the history of the instrument to ensure that they understand its performance over time in both bull and bear sessions of its existence. Such a prudent approach is, I sense, being challenged both by competitive forces but also, more significantly, by the regulatory thrust for ever more central clearing. The problem with many of the new instruments is both their esoteric nature, appeal to specialized segments of the market place and narrow base of truly committed market makers. The risk is that, in times of turmoil, they may become illiquid. The probability is that, in times of stress, many will become one-way markets. A CCP will only be low risk if it can unwind its positions and realize collateral to compensate for any shortfall with immediacy.

It was a negative day for the Canadian preferred share market, with PerpetualDiscounts losing 34bp, FixedResets down 22bp and DeemedRetractibles off 19bp. FixedResets were notable on the poor side of the Performance Highlights table. Volume was extremely high.

PerpetualDiscounts now yield 5.71%, equivalent to 7.42% interest at the standard conversion factor of 1.3x. Long Corporates now yield a little over 4.8%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 260bp, a significant widening from the 250bp reported December 4.

I have mentioned before my admiration of the US regulatory governance model in which dissent is encouraged and publicized. SEC Commissioner Daniel M. Gallagher is outraged that the Volcker Rule has been finalized:

Regulators, including those that, like the SEC, are purportedly independent, have been commanded to “err on the side of doing a little more, and then correct it if you’ve gone too far” in implementing the mandates of Dodd-Frank.[3]

The nonchalant suggestion to “err on the side of” overregulation is fully in line with the staggering level of hubris reflected throughout this joint rulemaking process, which has culminated with a purely political insistence on a pre-year end vote. In contradiction of our procedural rules for voting on major rule releases, including the longstanding guideline that Commissioners should be given thirty days to review a draft before a vote, we were given in early November not the draft final rule itself, but 18 separate documents that we were told would make up the final rule, along with two lists of “interagency staff-level open issues.” On the evening of November 27th, the night before Thanksgiving and less than two weeks before today’s vote, we were presented with revised versions of those documents as well as a reminder that the “back-end” sections were still being negotiated and would be sent separately. Not until five days ago did we have anything even resembling a voting draft, giving us less than a week to review the nearly one thousand pages of the adopting rule. In short, under intense pressure to meet an utterly artificial, wholly political end-of-year deadline, this Commission is effectively being told that we have to vote for the final rule so we can find out what’s in it.
…
Even in the era of never letting a serious crisis go to waste, however, the mere fact that proprietary trading makes a segment of our policy establishment nervous[7] surely is not sufficient justification to potentially destroy the market-making system central to the liquidity and proper functioning of our capital markets. Years from now, I fear, financial historians will marvel at how the Dodd-Frank Act forced regulators to proactively disadvantage American financial institutions as well as the strength and integrity of our capital markets to address such tangential – at best – matters as conflict minerals, resource extraction, and proprietary trading, but gave a complete pass to the main cause of the financial crisis — decades worth of disastrous federal housing policy.

Meanwhile, Commissioner Luis A. Aguilar demontrated again his complete lack of comprehension of the concept of principal trading:

Moreover, proprietary trading by banks poses investor protection risks. For example, as highlighted by Senator Merkley and Senator Levin, banks that engage in proprietary trading may gather information from their clients’ investment activities and exploit them.[5] Indeed, banks have, in the past, created and marketed products that were secretly designed to fail;[6] or used client trading information against client interests.[7]

S&P has a nice monograph out titled Digging Deeper Into The U.S. Preferred Market.

Exhibit 4 charts the 10-year correlation of preferred securities, as represented by the S&P U.S Preferred Stock Index, to other asset classes. It is important to note that preferred securities exhibit higher correlation with high-yield bonds and equities, which are more sensitive to credit, and lower correlation with investment-grade corporate and municipal bonds, which are more sensitive to interest rate risk. … Data from Sept. 30, 2003 to Sept. 30, 2013.

Correlations can vary greatly over time; it would have been more useful to provide rolling five-year correlations. The US preferred share index is about 85% financials. They consider slightly over half of the index to be investment grade.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 9bp, FixedResets gaining 19bp and DeemedRetractibles down 21bp. The Performance Highlights index is fairly lengthy, with numerous bounce-backs from yesterday’s excesses – particularly BAM issues, which dominated both the winning side of the Performance Highlights table and the volume highlights. Volume was very high.

No commentary today! I’m learning all about SMTP as part of the PrefLetter server migration!

The Canadian preferred share market took a pasting today, perhaps due to investors worrying over the weekend about the US jobs number and risk of tapering, but oddly the very lengthy Performance Highlights table is led downwards by low-coupon FixedResets, that one might think would fare relatively better given a general rise in interest rates. Volume was extremely high.

Nice US job numbers!

The jobless rate dropped to a five-year low of 7 percent in November as American employers added more workers than forecast, boosting speculation the Federal Reserve may start scaling back stimulus as soon as this month.

The 203,000 increase in payrolls followed a revised 200,000 advance in October, Labor Department figures showed today in Washington. Joblessness fell from 7.3 percent.
…
The Labor Department’s household survey showed more people were entering the labor force. The so-called participation rate rose to 63 percent in November, the first gain since June. A month earlier it fell to 62.8 percent, the lowest level since March 1978.

Factories took on the most workers since March 2012, employment in construction accelerated and payrolls in transportation and warehousing picked up, today’s figures showed.

Job gains have combined with cheaper gasoline, stock-market gains, higher home values and more available credit to fuel demand for big-ticket goods such as automobiles.
…
Factories added 27,000 jobs, helped by a pickup at automakers, after a 16,000 gain in October. Construction firms took on 17,000 workers.

Average hourly earnings increased by 0.2 percent to $24.15 in November from the prior month, and climbed 2 percent over the past 12 months. The average work week for all workers climbed six minutes to 34.5 hours last month.

The energy sector has also been a bright spot for hiring, as America experiences an oil and natural gas boom.

BSD.PR.A was confirmed at Pfd-4(low) by DBRS:

As of December 5, 2013, the Portfolio consisted of 77% Canadian common stock, 20% REITs and 2% Canadian preferred stock. Since the rating was last confirmed in December 2012, performance has been relatively flat. Downside protection available to holders of the Preferred Securities fell to 13% in June 2013 but has since recovered, rising to approximately 20% at the end of November 2013 (similar to November 2012 levels). The yield on the Portfolio has decreased slightly, causing the distribution coverage ratio to drop to 0.75 times (as of November 29, 2013). The rating on the Preferred Securities continues to be constrained by the large percentage of underlying securities in the Portfolio that are not rated by any rating agency and the grind on the Portfolio due to distributions exceeding income.

I made a minor update to the November 29 Tracking Error, regarding ZPR’s valuation methodology and technical issues.

It was a mixed, mostly negative day for the Canadian preferred share market, with PerpetualDiscounts off 18bp, FixedResets gaining 2bp and DeemedRetractibles down 21bp. There was a good amount of volatility, mostly negative, led downwards by SplitShares, oddly enough. Volume was high.

It was another negative day for the Canadian preferred share market, with PerpetualDiscounts losing 17bp, FixedResets down 11bp and DeemedRetractibles flat. Volatility was modest. Volume was high.

More good news for fixed-income investors …:

The Bank of Canada says deep discounting by retailers is spreading disinflation – a byproduct of more consumers crossing the border to shop and the arrival here of U.S. chains such as Target Corp.

The central bank left its key overnight interest unchanged at 1 per cent Wednesday, citing a heightened risk of even lower inflation. The bank blamed excess supply in the economy and heightened competition in the retail sector, which it said are proving to be “more persistent than anticipated.”

Canada isn’t yet facing deflation – outright falling prices. But inflation is now running disquietingly below the Bank of Canada’s 2-per-cent target, and outside its acceptable range of 1 to 3 per cent. Consumer prices rose at a meagre annual rate of just 0.7 per cent in October, and economists expect inflation to remain similarly dormant in the months ahead.

The good news didn’t impress the Canadian preferred share market, with PerpetualDiscounts down 25bp, FixedResets off 17bp and DeemedRetractibles losing 34bp. The performance highlights table is comprised entirely of losers. Volume was very high.

PerpetualDiscounts now yield 5.62%, equivalent to 7.31% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.8%, so the pre-tax, interest-equivalent spread (in this context, the “Seniority Spread”) is now about 250bp, a minor (and perhaps spurious) widening from the 245bp reported November 27.

Still doing some catching up … there’s a lot of catching up to do! I don’t think there will be much commentary for a little while yet!

It was a negative day for the Canadian preferred share market, with PerpetualDiscounts off 13bp, FixedResets losing 24bp and DeemedRetractibles down 15bp. This compares favourably again with the TXPR and TXPL indices which were down 33bp and 45bp, respectively. Something peculiar is going on indeed! Volatility was high, with FixedResets prominent among the losers, led downward by ENB issues, which may have been affected by today’s new issue announcement, or their superb performance in the last two days of November … or both, since the two phenomena probably have a least some relationship! Volume was high.

Today’s excuse for the lack of commentary is month-end. Good enough?

It is interesting to note that TXPR and TXPL were down 38bp and 40bp, respectively, according to the Toronto exchange. These large moves are not consistent with what I am seeing in my bid-based, investment-grade indices. I will be fascinated to learn if the apparent ZPR tracking error, discussed in my review of November’s MAPF performance, is confirmed; my nickel is on the scenario that it will be, that their tracking error for early December is normal, and that TXPR and TXPL reverse their late November blip. But only a nickel!

It was a negative day for the Canadian preferred share market, with PerpetualDiscounts losing 24bp, FixedResets down 7bp and DeemedRetractibles off 6bp. Volatility was average, skewed to the downside. Volume was above average.