Category: Market Action

Nothing happened today, except web server problems for me. Joy!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 4bp, FixedResets down 39bp and DeemedRetractibles gaining 5bp. The Performance Highlights table was dominated by losing low-Spread FixedResets. Volume was well above average.

The Beaudoin-Bombardier family is doing what it does best:

Bombardier Inc.’s Beaudoin-Bombardier family owns a controlling stake in McInnis Cement, a Quebec company that is in talks with the provincial government over financial backing for its proposed $1-billion cement plant in Port-Daniel-Gascons, Que.

As Assiduous Reader Nestor said in the comments, tapering is a long long way off:

Janet Yellen, nominated to be the next chairman of the Federal Reserve, signaled she will carry on the central bank’s unprecedented stimulus until she sees improvement in an economy that’s operating well below potential.

“A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases,” Yellen said in testimony for her nomination hearing before the Senate Banking Committee today in Washington. “Supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”

The Ban-the-Bond movement is having an effect:

Moody’s Investors Service cut its ratings on four of the biggest U.S. banks after deciding the government would be less likely to help them repay creditors in a crisis.

Morgan Stanley (MS), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and Bank of New York Mellon Corp. had their senior holding company ratings lowered one level yesterday after Moody’s concluded a review of eight U.S. banks that began in August. Spokesmen for the four companies declined to comment.

U.S. banking regulators have been preparing rules and procedures that seek to allow the government to wind down even the largest financial companies without providing taxpayer assistance. The plans would require investors to accept losses and could require bonds to be converted into equity capital.

“We believe that U.S. bank regulators have made substantive progress in establishing a credible framework to resolve a large, failing bank,” Robert Young, a managing director at Moody’s, said in a statement. “Rather than relying on public funds to bail out one of these institutions, we expect that bank holding company creditors will be bailed-in and thereby shoulder much of the burden to help recapitalize a failing bank.”

Premier Wynne is terribly, terribly concerned about Rob Ford. In less important news:

Heinz said it is closing its plant in Leamington, Ont., in mid-2014, a move that will cost 740 jobs and end almost a century of ketchup making in the southern Ontario town.
…
Other Canadian food plants slated to close include:

– Lance Canada Ltd.’s bakery in Cambridge, which employs 130 people. It will close in May, the company’s North Carolina parent said.

– Canada Bread’s snack cake plant in Shawinigan, Que., is scheduled to close in May.

– Kraft Canada’s coffee plant in Oakville, Ont., is expected to close this year.

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts up 14bp, FixedResets winning 18bp and DeemedRetractibles up 12bp. A modest – by recent standards – Performance Highlights table is comprised entirely of winners and dominated by FixedResets. Volume was average.

Good times to be in corporate finance:

Canadian companies are borrowing more than ever, breaking records for selling new debt in a push to lock in low interest rates before borrowing costs rise.

Corporations and financial institutions have set a new mark for fixed-income sales this year by issuing more than $100-billion in debt, higher than the full-year record set in 2012.
…
As usual, Canadian banks dominate bond sales this year, raising $47-billion, up 23 per cent from 2012, according to CIBC. However, non-bank borrowers have increased their game, raising an usually large amount of debt, helping to push total issuance to sky-high levels.

ETFs and mutual funds have the great virtue of increasing liquidity for retail investors – I often recommend bond ETFs to clients. But the mismatch between retail liquidity and underlying liquidity is getting worrisome:

A recent presentation by Citi’s Matt King, includes a chart entitled “Entrance with No Exit” that has been costing me sleep. Mr. King’s chart asserts that if and when a significant percentage of the holders of almost $900-billion (U.S.) invested in U.S. corporate debt mutual funds and ETFs (investment grade plus high yield debt) want to sell, there may not be anyone to bid for them.

In the past, large banks carried enormous portfolios of both investment grade and high yield debt issues and provided liquidity to the market – buying bonds when the market was weak and selling when it was strong.

Since the financial crisis, however, U.S. banks have responded to regulatory pressure over proprietary trading and capital requirements by drastically reducing their holdings – from about $300-billion to less than $100-billion – while mutual fund and ETF fixed income assets have almost doubled from just under $500-billion.

There’s $900-billion in corporate debt funds and ETFs and a tenth of that in the banking system so, there is no way the banks can offset a buyers strike in bond funds if it occurs.

Click for Big

If an apocalypse happens due to this, it will be bargain season for long term investors, but those who need the cash – or even the margin – might find themselves a little embarrassed.

Decreased liquidity in corporate bonds was discussed on November 5, while US regulatory moves to extend their power over asset managers was discussed November 6. Does anybody else see a pattern here? Mark my words, there will be enforced ‘gating’ of mutual fund and ETF redemptions soon (ETF redemptions coming in big blocks from arbitrageurs). All that power has to go somewhere! We will then see ETFs trading at a discount to NAV, and a lot of very unhappy mutual fund fund clients.

So what’s the solution? As far as I can tell, there ain’t one. Companies will have to keep a little extra cash on hand in case the markets decide to shut down for a while; investors will have to keep a little more cash on hand than otherwise for the same reason. Ultimately, the benefits of allowing retail decent access to the corporate bond markets outweighs the harms … but you can bet the regulators won’t see it that way. Nobody must be hurt! If anybody is ever hurt by anything, it’s because of a Wall Street conspiracy!

It was a day of small gains for the Canadian preferred share market, with PerpetualDiscounts winning 10bp, FixedResets gaining 5bp and DeemedRetractibles up 7bp. Surprisingly, the Performance Highlights table is relatively lengthy. FloatingResets traded up a storm today on big blocks through Nesbitt, with an assist from Scotia, although there is no way of telling whether or not they were ‘real’ crosses or internal crosses; volume was above average.

It might be a while before we see tapering:

Federal Reserve Bank of Atlanta President Dennis Lockhart, who has backed record stimulus, said he wants to see inflation accelerate toward the Fed’s 2 percent goal before the central bank reduces $85 billion in monthly bond purchases.

“I’d like to see some movement toward the target” before tapering, Lockhart said today in a Bloomberg Radio interview with Kathleen Hays. Inflation is “stable but too low” and a move up would “give me some confidence we are not dealing with some downside scenario that might develop,” said Lockhart, who doesn’t vote on policy this year.

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts down 28bp, FixedResets up 20bp and DeemedRetractibles off 5bp. In the Performance Highlights table the three losers are all PerpetualDiscounts while FixedResets dominate the winning side. Volume was above average with the highlights comprised entirely of FixedResets.

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 8bp, FixedResets up 27bp and DeemedRetractibles off 3bp. A fairly lengthy Performance Highlights table is comprised entirely of winners, mostly FixedResets. Volume was average.

There was a good US jobs number:

The addition of 204,000 workers followed a revised 163,000 gain in September that was larger than initially estimated, Labor Department figures showed today in Washington. The median forecast of 91 economists surveyed by Bloomberg called for an increase of 120,000. The jobless rate rose to 7.3 percent from an almost five-year low.

This didn’t help the Treasury and gold markets much:

Treasuries sank the most since July and gold slid as a bigger-than-forecast increase in American payrolls fueled speculation the Federal Reserve may trim stimulus earlier than expected. The dollar strengthened against all 16 major peers while U.S. stocks advanced.

The yield on 10-year Treasuries jumped 14 basis points to 2.74 percent at 12:58 p.m. in New York and climbed as much as 16 basis points. Gold futures dropped 1.8 percent to $1,285.00 an ounce. The Standard & Poor’s 500 Index (SPX) rebounded 0.9 percent after tumbling 1.3 percent yesterday. French bonds fell after S&P downgraded the country’s debt. The dollar climbed 0.4 percent against the euro. AT&T Inc. and BNP Paribas SA led 21 billion euros ($28 billion) of bond sales in Europe this week, the busiest in two months.

That’s right, S&P downgraded France:

• We believe the French government’s reforms to taxation, as well as to product, services, and labor markets, will not substantially raise France’s medium-term growth prospects, and that ongoing high unemployment is weakening support for further significant fiscal and structural policy measures.
• Furthermore, we believe lower economic growth is constraining the government’s ability to consolidate public finances.
• We are therefore lowering our long-term foreign and local currency sovereign credit ratings on France to ‘AA’.
• The outlook is stable, reflecting our view that the probability that we will raise or lower the rating on France over the next two years is less than one-in-three.

Angst is rising over the Fed exit from QE:

The Fed’s financial-crisis actions — from acquiring debt in the 2008 rescues of Bear Stearns Cos. and American International Group Inc. to three rounds of quantitative easing — have led so far to the record payments. Now, the prospect of a stronger economy and rising interest rates means the value of the Fed’s bond holdings will fall at the same time its funding costs climb because the central bank pays interest on the excess reserves it holds for banks.

This could cause operating losses and invite increased scrutiny from lawmakers already critical of the central bank’s policies.

That’s a risk central bankers are grappling with as they consider when to slow the $85 billion monthly pace of their government and mortgage-backed securities purchases. Federal Reserve Bank of New York President William C. Dudley said in a speech last month that the central bank’s balance-sheet expansion does “create some budget risk” that threatens the institution’s independence.

I know a number of Asset Managers read this blog. How would you guys like a quarter like these guys?

Pacific Investment Management Co., the world’s largest fixed-income manager, had $39 billion in net redemptions during the third quarter as investors fled bonds in anticipation of rising interest rates.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 51bp, FixedResets up 22bp and DeemedRetractibles gaining 2bp. As might be expected, the Performance Highlights table is fairly lengthy, with the down side dominated by Perpetual Discounts and winners by FixedResets. Volume was very high.

Maybe we will have a return to Rae Days as well!

Ontario is prepared to miss its deficit-reduction targets to avoid deep program cuts as Premier Kathleen Wynne’s government walks away from austerity.

The shift in priorities – which will effectively see the minority Liberal administration embrace deficit spending as the best way to rev up the province’s sluggish economy – will be signalled in Finance Minister Charles Sousa’s fall economic statement on Thursday, government sources told The Globe and Mail.

Policy rates were slashed in Europe:

The European Central Bank surprised the market today by cutting interest rates to a record low as falling inflation threatened its mission of keeping prices stable in the 17-country euro zone.

Wholly unexpected by the vast majority of economists, the announcement triggered an immediate fall in the euro. My mid-afternoon central European time, it was down almost 1.5 per cent against the dollar. Commodities fell while stock indexes rose.
…
ECB president Mario Draghi said he expected a “prolonged” period of low inflation but would not define that period, insisting he would have a better picture in December, when the next inflation gauge and other economic date are due. “It’s not going to be a short, short time,” he said at the ECB’s press conference in Frankfurt.

I’ve always said – they may be in trouble, they may always be in second place to the foreign flavour of the month, but it’s hard to make money betting against America:

Specialty operations are finding new opportunities because of 3-D printers, said Patrick Hunter, senior vice president of marketplace operations for MFG.com in Atlanta. The technology allows three-dimensional designs created on computers to be sent digitally to industrial machines, which put down layers of materials ranging from plastic to metal to create parts or products.

“It’s opened the doors to smaller shops because people aren’t tied to the large mass manufacturers,” said Hunter, whose company has been matching companies with parts makers for about a dozen years.

Low volume typically means runs of products of more than 1,000, which exceeds capacity of a home workshop, and less than 5,000 to 10,000, which is usually the minimum to get work done overseas at a factory in China, he said.

More than 58 percent of small shops added new machines for so-called additive technology in 2012, the third year of gains since the recession ended, according to Wohlers Report 2013, which tracks the industrial market for industrial 3-D printing technology from Fort Collins, Colorado.

I have long criticized the standard five-year term for mortgage loans in Canada – it makes no sense to finance a long-term asset exclusively with a short-term loan, although it makes all kinds of sense for lender. The US model, for all its myriad faults, at least matches financing certainty with asset life. But in Denmark the mismatch is even worse:

Danish mortgage banks have struggled to wean borrowers off loans funded by one-year bonds as deadlines near to demonstrate they can withstand a 12-month funding market freeze. Standard & Poor’s in July told lenders they risked downgrades if they don’t cut use of the securities over the next two years. The central bank has also criticized the bonds and the risks borrowers face if interest rates rise.

One-year bonds fund about 40 percent of home loans in Denmark. Borrowers have been attracted to record-low rates thanks to AAA-rated Denmark’s status as a haven from Europe’s debt crisis. Still, households have grown more exposed to interest-rate shocks as debt burdens soar to a world-record of 310 percent of disposable incomes, according to data compiled by the Organization for Economic Cooperation and Development.

Under the government’s proposed measure, short-term bonds would convert to longer-term securities if refinancing auctions fail or interest rates climb in auctions by more than 5 percentage points. Existing bonds would be excluded from the measure, which would go into effect Jan. 1 if approved by lawmakers.

The bonds convert if the auctions fail? Have the lessons of the financial crisis been forgotten so quickly?

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts flat, FixedResets winning 15bp and DeemedRetractibles gaining 9bp. Volatility was average by long term standards, very low by standards of the past six months. Volume was well above average.

US regulators are making a a big move to extend their power:

BlackRock Inc. (BLK) and Fidelity Investments will be studied by U.S. regulators who are in the early stages of reviewing whether asset managers pose a potential risk to the financial system, two people with knowledge of the matter said.

The Financial Stability Oversight Council’s discussion Oct. 31 and agreement to review New York-based BlackRock and Boston-based Fidelity don’t necessarily mean the companies will be designated systemically important by the council, according to the people, who requested anonymity because the meeting was closed to the public. The panel didn’t take any formal action regarding the companies.

FSOC’s preliminary talks may presage months of wrangling between the industry and officials charged with trying to prevent a repeat of the 2008 financial crisis. Asset managers are among non-bank financial companies that the council is empowered by law to evaluate to determine whether their failure could threaten the entire system and thus require Federal Reserve oversight. BlackRock, Fidelity and the mutual-fund industry’s trade group have said money managers aren’t a threat.

Political cover for the investigation is provided by an Office of Financial Research (who?) report titled Asset Management and Financial Stability:

Reflecting these issues, this report describes:

• • the activities of asset management firms and the funds they manage;
• • the key factors that make the industry vulnerable to shocks: (1) “reaching for yield” and herding behaviors; (2) redemption risk in collective investment vehicles; (3) leverage, which can amplify asset price movements and increase the potential for fire sales; and (4) firms as sources of risk;
• • the key channels through which shocks can be transmitted: exposures across funds and firms and the impacts of fire sales; and
• • the data available to measure those activities, vulnerabilities, and channels, and the nature of the gaps in those data.

The report does not focus on particular risks posed by money market funds. In November 2012, the Council released a detailed analysis of these funds and their risks, and the Securities and Exchange Commission (SEC) recently proposed additional reforms.2
In addition, the activities and risks posed by hedge funds, private equity, and other private funds are not addressed in detail. Additional analysis will be conducted in conjunction with further analysis of data that these funds have begun to file on Form PF. The OFR, SEC, and Commodity Futures Trading Commission (CFTC) are currently evaluating these data for monitoring purposes.

Assiduous Readers will remember that in the case of Money Market Funds, the much-needed regulatory reform was beaten back by the industry and MMFs can continue to operate as zero-capital banks. I have complete faith in the regulators to get everything backwards and regulate the hell out of asset management firms.

Here’s another region with a lousy economy:

Waning European growth and inflation will put pressure on the European Central Bank (ECB) to cut interest rates in an effort to keep the fragile recovery intact.

The autumn economic update released on Tuesday by the European Commission (EC) showed that the euro-zone economy will return to growth in 2014, after two years of recession, but at a slower pace than was forecast in the spring. Inflation in the euro zone fell to just 0.7 per cent in October, the lowest rate since 2009, when the financial crisis was at its peak.

Sometimes – not very often – there is some justice in the world:

Four Deutsche Bank AG (DBK) traders who won reinstatement of their jobs after they were dismissed following an internal probe into rate-rigging were awarded 365,474 euros ($493,370) in missed salary.

The total monthly pay of the four men, who were fired in February, ranged from 10,833 euros to 22,083 euros on average, according to the written version of the judgment made Sept. 11 and released by the Frankfurt Labor Court today. The men, whose names weren’t disclosed, returned to work on Nov. 4, according to the bank.
…
The traders said that before they were dismissed, their bonuses for 2011 were reduced as a sanction for their allegedly inappropriate behavior and that an unidentified Deutsche Bank official said they would be compensated once “the situation had calmed down,” according to the ruling.

Deutsche Bank disputes that account, the document shows. A spokesman for Deutsche Bank, Christian Streckert, declined to immediately comment when reached by phone today.

The court said the total value of the wrongful dismissal claims is 1.9 million euros. That number reflects the pay owed to the plaintiffs, including any potential future earnings under their employment contract.

The poor regulators will have to fill in the notch they made in their red pencil! Well, never mind, there are other careers to destroy and lives to ruin. And after all, the the hysteria helps balance government budgets:

A number of finance firms, including Royal Bank of Scotland and Rabobank face billions of euros in fines next month from European Union regulators for colluding on global benchmark interest rates, reinforcing Brussels’ hard line on the sector after the financial crisis.

EU antitrust chief Joaquin Almunia is set to unveil a record fine of at least €1.5-billion ($2-billion) on six banks, including Barclays and RBS, for rigging the yen Libor interest rate benchmark, a banking source said on Wednesday.

There’s a new wrinkle in the Treasury market:

The U.S. Treasury Department will sell $10 billion to $15 billion of its first floating-rate notes Jan. 29 and said a period of political wrangling over the budget requires a delay in plans to reduce coupon auctions.

The floating-rate notes will have a two-year maturity and be the Treasury’s first new security in 17 years, the department said today in its quarterly refunding announcement. Note and bond sales next week will total $70 billion, the lowest since February 2009 and less than the $72 billion auctioned last quarter, the Treasury said.
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Floaters are securities with rates set periodically, and the Treasury’s notes will be referenced to the 13-week bill rate. They are the first new U.S. government debt securities since Treasury Inflation-Protected Securities were introduced in 1997.

It was a mildly positive day for the Canadian preferred share market, with PerpetualDiscounts winning 13bp, FixedResets up 10bp and DeemedRetractibles gaining 3bp. The Performance Highlights table is dominated by FixedResets with low Issue Reset Spreads. Volume was well above average.

PerpetualDiscounts now yield 5.54%, equivalent to 7.20% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.7%, so the pre-tax, interest-equivalent spread between the two is now about 250bp, a slight (and perhaps spurious, particularly given the index rebalancing as of October 31) increase from the 245bp reported October 31.

OSFI has released a letter to IASB about Insurance Contracts. Their first objection is serious – very serious indeed:

We are concerned that, if the ED is finalized as proposed, OSFI would likely need to make significant adjustments to the financial statements for regulatory capital purposes.

Oh golly! They might have to change their regulatory capital calculations!

Funny, I would have thought that the sole legitimate consideration was: do the proposed changes provide a materially better reflection of reality than the prior accounting paradigm? But I suppose I am only parading my naivety.

Their second objection is equally oblivious to the issues:

Moreover, the adjustments in question may have the effect of relaxing rather than constraining the assumptions that lie behind the requirements of the standard.

Well, that’s fine – as long as the new standards reflect reality better than the old ones, who cares whether they’re relaxing or constraining?

The meat of their letter highlights some motherhood issues, but doesn’t provide any suggestions:

In our 2010 comment letter, OSFI noted the potential for significant, inappropriate volatility if short term fluctuating market rates were used to discount very long-duration liabilities. The IASB has confirmed that either a bottom-up or top-down approach could be used to determine the discount rate. However, due to the high-level nature of a principles based standard, we understand there are a wide range of views of how the top-down approach could be interpreted for the long duration discount rates as currently drafted in the ED. We are pleased that the exposure draft allows more weight to be put on long term estimates than on short-term fluctuations when forecasting unobservable discount rates for long-duration liabilities. We believe current period fluctuations should not exaggerate the volatility of very long-dated liabilities. As such, long-duration liabilities beyond the observable period where deep and liquid markets exist should grade to a slow-moving long-term rate.

When discussing Asset Liability Management, they’re a little shy about stating their concern directly:

We believe the use of OCI for insurance contract liability measurement should be optional, rather than mandatory as currently proposed in the ED.

Asset Liability Management (ALM) practices are designed to ensure that there are sufficient assets to support insurance liabilities. This is achieved by investing in various types of assets with different attributes (e.g. yield, cash flow, risk and duration) that best fulfill various insurance liabilities obligations. Accounting standards should capture economic mismatches between assets and the insurance contract liabilities they support, but standards should not create accounting mismatches on their own. We believe the mandatory use of OCI may have an unintended consequence by reflecting both economic and accounting mismatches in the financial statements, making it difficult for users to distinguish between true economic mismatches and those created by accounting standards.

In order to fulfill various types of insurance liabilities obligations, investing in assets like mortgages, equities and derivatives instead of plain vanilla bonds could be appropriate for a portfolio that is well managed and diversified. We believe the interaction between IFRS 4 and IFRS 9 needs further consideration to take into account ALM practices of life insurers and to reduce accounting mismatches.

A very bureaucratic letter! All the substance will take place behind closed doors, to ensure opacity and non-accountability.

The latest housing bubble worry emanates from Australia:

Australia, where housing accounts for about 60 percent of average household wealth compared with a global average of 45 percent, joins countries from Canada to Sweden to China seeing rapid price gains amid low borrowing costs that are sparking fears of a housing bubble. For now, constrained housing supply and demand from investors are driving prices higher, overpowering the downdraft from slower economic growth and a rising jobless rate.
…
In Sydney, the nation’s most populous city, the average home price surged 13 percent in the 10 months to Oct. 31 to a record A$718,122 according to the RP Data-Rismark home value index. That compares with $806,000 in New York as of Sept. 30, according to the Real Estate Board of New York, and 331,338 pounds ($536,237) in London, according to the Nationwide Building Society.

A report to the U.S. Treasury’s Borrowing Advisory committee titled Assessing fixed income market liquidity makes some cogent points:

• ● Market turnover has if anything increased since the financial crisis
• ● But liquidity is about much more than turnover
  • – Tendency to disappear abruptly when really needed
• ● Primary liquidity not really a problem; major issues all in secondary
• ● Neither turnover nor the street have been able to keep pace with the massive expansion in markets
• ● Regulations have created multiple constraints likely to curtail liquidity when it is really needed:
  • – Most have pushed liquidity towards Treasuries, reducing it in risky assets:
  • • Basel risk-weightings, swaps clearing, LCR requirements
    • – Now, supplementary leverage ratios risk curtailing it even in Treasuries: dealers likely to meet requirements by reducing assets rather than raising capital
  • ● Effects of regulations to date have been offset by Fed policy pushing investors in the opposite direction:
    • – Significant demand for fixed income assets in general, and risky assets in particular
  • ● Technology and shifts in market structure have added to the appearance of liquidity, but done little to add depth
  • ● Potential for significant dislocation when investor flows reverse

  …
  Secondary trading requires risk warehouses
  …
  Capital cost under Basel 3 … 3-5x increase in charges for corporate bonds
  …
  Dealers can no longer afford to act as credit warehouses

There are a lot of great charts in those slides and I thoroughly recommend a full reading of the presentation. It strikes me that at some point, some large hedge fund – perhaps one that already acts as an intermediary for retail equity trades, standing between the brokerage house and the exchanges – will find it worth their while to make markets from their long positions. I think that – subject to regulatory bullshit, which is probably extremely bullshitty – the big Canadian funds should be doing that now. Why not?

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 5bp, FixedResets gaining 2bp and DeemedRetractibles off 8bp. Volatility was dominated by FixedResets. Volume was well above average.

So what happens to US banks if skyrocketting interest rates cause another housing collapse? The Fed wants to know:

The Federal Reserve said it will examine how the biggest banks might react to a jump in long-term interest rates and another housing crash as it released the next round of stress-test scenarios designed to monitor the ability of the U.S. financial system to withstand economic shocks.

The central bank mentioned that as part of two adverse scenarios it will gauge bank resilience against declines in the prices of high-risk, high-yield loans and debt and some high-priced real estate markets around the country, according to a statement released in Washington today. The central bank also inserted a test for large trading and clearing banks on counterparty default.

There’s an interesting piece on Bloomberg about local government in the rural US:

Monroe is hemorrhaging residents, like rural jurisdictions across the U.S. Yet these communities operate with the same layers of government as when horse-and-buggy travel helped determine the boundaries of the nation’s more than 3,000 counties. As population drops and infrastructure decays, officials and residents concerned about the loss of jobs and identity resist shrinking their government.

“People like that eye-to-eye contact,” said Monroe County Judge Larry Taylor, the top elected official in the county of 7,800. It has lost 44 percent of its population since 1980 as its main budget grew 9 percent, even when adjusted for inflation.
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In North Dakota, public costs would have fallen 2.5 percent annually by combining general government, road maintenance, public safety, and health and welfare, according to a 1996 North Dakota State University analysis of a failed proposal to merge 53 counties into 15.

Rob Carrick of the Globe writes an interesting piece on BMO’s generic advisor, titled Investing advice: How adviceDirect stakes out middle ground:

In the investing business, there’s no surer validation of a new initiative than having your competitors copy you. AdviceDirect has struck out on that count. After a full year in operation, no one else has introduced a service where clients invest online while receiving a combination of Web-based and person-to-person advice.

But adviceDirect is on to something in targeting people who gravitate to DIY investing, but need help. “The discipline adviceDirect gives a do-it-yourself investor can be very attractive for people who don’t have the time, the experience or the confidence,” says Viki Lazaris, president and CEO of BMO InvestorLine.
…
BMO won’t say how many people have signed up for adviceDirect, but you get an idea of how busy things are in the fact that the advice team there comprises just eight people right now. If adviceDirect manages to build its franchise, it will be a result of the work done by these investment specialists (that’s BMO’s title for them).

I’ll suggest that a good business case for adviceDirect can be made solely on the basis of insurance … insuring BMO against the risk that mutual fund trailers will be banned (see various posts and comments commencing on December 17, 2012). In such a case, they’ll be up and running with a working model of access to small investors and that head start could be quite an advantage.

Incidentally, there was a bit of an update on that situation in June:

Indeed, according to the OSC’s transcript of the event, Greg Pollock, president and CEO of Advocis, cautioned that “financial advice would become unaffordable, and therefore
inaccessible, to the average Canadian.”

There also are fears that any move away from embedded commissions could ultimately drive many advisors out of the business. Indeed, defenders of the current system point to the U.K., which introduced new rules outlawing embedded commissions, among other reforms, on Jan. 1. It was suggested at the OSC meeting that the U.K. has lost 25% of its advisory sales force due to its ban on commissions, with several large financial services institutions dropping out of the retail investment advice business altogether.
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According to data from London-based Matrix Solutions Inc., since the RDR took effect on Jan. 1, the number of authorized investment intermediary firms is down by about 6% as of May; the total number of registered individuals in this sector is off by 9.5%; and the ranks of so-called “customer-facing staff” is down by 12.3%.

Those figures are much lower than was suggested at the OSC’s January meeting, and it appears that the immediate effects now are being reversed a bit. In fact, the data show that the number of registered reps rose in May month-over-month, and the number of customer-facing reps rose for the second straight month.

Ontario has a message for business – Spend, spend, spend!

In a speech at Toronto’s Empire Club Monday, Finance Minister Charles Sousa took aim at so-called “dead money” – capital that corporations have been holding onto since the global recession. The federal government has already pressed companies to invest that money in the economy, and Mr. Sousa said his government would use the tax system to encourage them to do it.

These would include a tax credit for research and development spending, and an incentive for companies that buy new equipment or technology, or spend money to train employees.

Mr. Sousa said he understands why companies have been hoarding cash, but warned that doing so is holding back Canada’s economy.

Me, I’d say that what is holding back Canada’s economy is government distortion of the free markets, but I’m not the treasurer of Ontario.

Robert Shiller is warning of another housing bubble – but this one’s in Brazil:

The government increased the price limit of houses people can buy using the unemployment insurance fund on Sept. 30 after public lending for homes increased more than four times as much as private banks in the two years through June, to 202 billion reais ($90 billion), according to central bank data.

Rousseff’s homebuilding program has propelled demand as she seeks to stimulate the economy before next year’s presidential election. Robert Shiller, six weeks before winning the Nobel Prize for economics, cautioned that such demand may be fueling a bubble as home prices grow twice as fast as rent. Mortgage debt as a percentage of disposable household income has climbed to a record 15 percent, almost double the level at the start of Rousseff’s term.

It was a strong day for the Canadian preferred share market, with PerpetualDiscounts winning 27bp, FixedResets up 26bp and DeemedRetractibles gaining 16bp. FixedResets with a low Issue Reset Spread dominated the winning side of the Performance Highlights table. Volume was average.