Category: Market Action

There’s a bit of a move forward with the Danish question:

Denmark’s biggest mortgage bank said about a fifth of covered bonds in the nation’s $550 billion market can be excluded from the top liquidity status, opening up for compromise in talks with Europe.

Nykredit Realkredit A/S said it would be willing to back down from earlier industry demands that all covered bonds be given the top liquidity designation as the Danish government talks with other European Union member states in an effort to reach an agreement.
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The comments mark the first time industry representatives have shown willingness to accept a compromise after condemning a proposal last year by the European Banking Authority to give all covered bonds second-class liquidity status. Denmark is home to the world’s biggest mortgage-backed covered bond market per capita and its banks use the securities to meet more than 70 percent of their liquidity needs.

The London-based EBA, which is made up of European regulatory heads, published a recommendation in December that would cap banks’ covered bond usage at 40 percent and force lenders to book the bonds at only 85 percent of their market value. It also said all government bonds should get the highest liquidity status, including debt sold by bailed out nations like Greece.
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An empirical study by the EBA last year found that covered bonds sold in issues of 500 million euros ($689 million) or more in principle have the characteristics needed to have an “extremely high liquidity and credit quality.”

Danish covered bonds were last discussed on February 7.

Some welfare bums are whimpering that there’s not enough swill in the trough:

Chrysler Group LLC is withdrawing its request for funding from the federal and Ontario governments, but says it could begin making new investments for a new minivan assembly line at its Windsor, Ont. factory.

The auto giant had asked for some $700-million in public funds to expand its operations in the province, most crucially at a minivan plant in Windsor. Chrysler had been willing to sink $3.6-billion into Windsor and Brampton, Ont.

But the company has now walked away from that request.

“It is clear to us that our projects were being used as a political football, a process that, in our view apart from being unnecessary and ill-advised, will ultimately not benefit Chrysler,” the company said in a statement.

Some pension plans are getting smarter:

Canada has seen its first major deal for a company to outsource its pension plan risk by buying about $500-million worth of annuities from an insurer.

Pension consulting firm Towers Watson revealed the transaction Tuesday, saying Canada’s first “jumbo” pension annuity deal occurred in the fourth quarter of 2013 and involved a Towers Watson client firm.
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While many U.S. and U.K. companies have been structuring deals for years to shift the risk of their pension obligations to a third-party insurer, the trend has been slow to come to Canada. But Towers Watson said 2013 was a record-breaking year for group annuity purchases by companies, suggesting deals may be picking up speed as firms look for ways to shift pension risk off their books.

A total of $2.2-billion in group annuities were sold in Canada last year – including $1.3-billion in the fourth quarter alone – an increase from $1.05-billion in all of 2012.

Here’s a recent paper of interest by Ranadeb Chaudhuri, Zoran Ivkovich, Joshua Matthew Pollet and Charles Trzcinka :

Several hundred individuals who hold a Ph.D. in economics, finance, or others fields work for institutional money management companies. The gross performance of domestic equity investment products managed by individuals with a Ph.D. (Ph.D. products) is superior to the performance of non-Ph.D. products matched by objective, size, and past performance for one-year returns, Sharpe Ratios, alphas, information ratios, and the manipulation-proof measure MPPM. Fees for Ph.D. products are lower than those for non-Ph.D. products. Investment flows to Ph.D. products substantially exceed the flows to the matched non-Ph.D. products. Ph.D.s’ publications in leading economics and finance journals further enhance the performance gap.
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The existing literature has explored some aspects of the link between managerial talent and both ability and education in the context of money management. For instance, Chevalier and Ellison (1999) find that mutual fund performance is related to certain educational characteristics of mutual fund managers. In particular, mutual fund managers graduating from undergraduate institutions with higher average SAT scores achieve higher raw fund returns. Similarly, Chevalier and Ellison (1999) also find that raw fund returns achieved by managers with an MBA outperform those without an MBA by 63 basis points per year. However, upon adjustments for risk, only the differential in risk-adjusted performance between the managers graduating from undergraduate institutions with higher average SAT scores and those graduating from undergraduate institutions with lower average SAT scores persists, whereas the risk-adjusted performance differential between funds managed by MBAs and non-MBAs disappears.

It may well be that PhDs and ‘institutions with higher average SAT scores’ both correlate well with ‘not a salesman’. I would be interested to get data based on field of specialization, but it’s not there yet – and isn’t likely to be, as long as business school profs have specializations in finance, economics and other mumbo-jumbo.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 26bp, FixedResets off 13bp and DeemedRetractibles gaining 14bp. Volatility was average. Volume was on the high side of average.

This is interesting – a zero-cost brokerage:

How does Robinhood make money?

Robinhood will offer margin trading as well as API access, which will allow partnered developers to build applications in conjunction with Robinhood. Robinhood will also receive remuneration for providing trade volume in certain markets. In the future, we plan to offer premium services for active investors.

Robinhood is venture-funded by Google, Andreessen Horowitz and many others, which affords us the freedom to focus on building a wonderful brokerage experience rather than short-term profits.

So presumably they’re selling the order flow to an agglomerater, which will then fill the market orders just inside the market – most of the time – before routing the excess to the public markets – or even another agglomerater, for all I know. Cool.

TARP is showing the usual bureaucratic mission creep:

In Flint, once a thriving auto-industry hub, excavators with long metal arms and shovels have begun tearing down 1,500 dilapidated homes in an attempt to lift the housing market.

The demolitions in this Michigan city of about 100,000 people are part of the stepped up efforts by officials in several Midwestern states to rid their blighted neighborhoods of decayed housing that’s depressing prices. The funding for the excavator work comes from a surprising source — the Hardest Hit Fund of the Troubled Asset Relief Program, or TARP, created in 2008 to stabilize to the financial system.

The $7.6 billion Hardest Hit Fund was intended to help troubled property owners avoid foreclosure and keep their homes. As foreclosures fall in most parts of the country, the fund is using the unspent $3.2 billion to remedy the crisis of abandoned homes. In Detroit alone, 70,000 dwellings, or about 19 percent of the total, may need to be torn down, according to the city.

The Globe had an interesting story on a DDoS attack:

Social networking website Meetup.com is fighting a sustained battle against cyberattackers who are demanding only $300 to call off a campaign that has kept the site offline for much of the past four days.
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A Meetup blog said that the company was a victim of a distributed denial of service (DDOS) campaign, a type of attack that knocks websites offline by overwhelming them with incoming traffic. It said that no personal data, including credit card information, had been accessed.

A web search brought up news of the record-holding DDoS attack:

A squabble between a group fighting spam and a Dutch company that hosts Web sites said to be sending spam has escalated into one of the largest computer attacks on the Internet, causing widespread congestion and jamming crucial infrastructure around the world.
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The attacks were first mentioned publicly last week by CloudFlare, an Internet security firm in Silicon Valley that was trying to defend against the attacks and as a result became a target.
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The so-called distributed denial of service, or DDoS, attacks have reached previously unknown magnitudes, growing to a data stream of 300 billion bits per second.

… and further interrogation of Mr. Google found a description of CloudFlare advanced DDoS protection with a description of how these attacks work:

Below you will find detailed information on these attacks and how the CloudFlare network protects against them:

• •Layer 3/4 attacks
• •DNS amplification attacks
• •SMURF attacks
• •ACK attacks
• •Layer 7 attacks
• •Making DoS a thing of the past

… which I found enthralling.

The Conference Board of Canada is having another kick at Milkfare:

Canada’s dairy industry faces a grim future of stagnant sales, dwindling farms and lost opportunity if the country remains a bystander to a global boom in milk products trade, the Conference Board of Canada argues in a new study.

But it doesn’t have to play out this way, the think tank concludes. Trade can both save the family farm and lift the overall economy, according to a chapter released Monday from a major new examination of the 1970s-era supply management regime.

The Canadian economy would gain $1.2-billion a year and as many as 8,000 new dairy jobs if the industry was freed to pursue rapidly expanding dairy markets in Asia and Africa, the report says.

It was another positive day for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp, FixedResets up 2bp and DeemedRetractibles winning 14bp. Volatility was low. Overall volume was average, despite some good sized blocks at the top of the charts.

Nothing happened today.

It was another positive day for the Canadian preferred share market, with PerpetualDiscounts winning 17bp, FixedResets gaining 10bp and DeemedRetractibles up 13bp. Volatility was merely average, but the Performance Highlights table is comprised entirely of winners, all but one of them a FixedReset. Volume was average, but the highlights were uniformly FixedResets.

And that’s it for another month!

Good old regulators! Keeping the world safe for you, me and, of course, themselves:

Forget hiring a top hedge fund to manage your portfolio. Your better bet might be an employee at the Securities and Exchange Commission, according to a new report suggesting that regulators are trading on inside information relating to investigations and upcoming enforcement actions.

In the report titled “The Stock Picking Skills of SEC Employees,” researchers found that SEC employees’ stock purchases look like your average person’s. But when these employees sell their stocks, they appear to systematically beat the market by making sales within weeks of costly enforcement actions by the agency.

“These results suggest that SEC employees potentially trade profitably under the new rules, and that at least some of their profits potentially stem from trading ahead of costly SEC sanctions and on privileged non-public information,” write Shivaram Rajgopal, a professor of accounting at Emory University, and Roger M. White, a doctoral student in accounting at Georgia State University. “In short, it appears that SEC employees continue to take advantage of non-public information to trade profitably in stocks under their regulatory purview.”

But fear not, regulatory weenies! There’s another benchmark fixing scandal shock horror!

The London gold fix, the benchmark used by miners, jewelers and central banks to value the metal, may have been manipulated for a decade by the banks setting it, researchers say.

Unusual trading patterns around 3 p.m. in London, when the so-called afternoon fix is set on a private conference call between five of the biggest gold dealers, are a sign of collusive behavior and should be investigated, New York University’s Stern School of Business Professor Rosa Abrantes-Metz and Albert Metz, a managing director at Moody’s Investors Service, wrote in a draft research paper.
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The paper is the first to raise the possibility that the five banks overseeing the century-old rate — Barclays Plc (BARC), Deutsche Bank AG (DBK), Bank of Nova Scotia, HSBC Holdings Plc (HSBA) and Societe Generale SA (GLE) — may have been actively working together to manipulate the benchmark. It also adds to pressure on the firms to overhaul the way the rate is calculated. Authorities around the world, already investigating the manipulation of benchmarks from interest rates to foreign exchange, are examining the $20 trillion gold market for signs of wrongdoing.

I really have no comprehension regarding the fuss. If I don’t like a price, I don’t trade – although that, of course, is an incredibly sophisticated trading strategy. If I’ve used it for valuation purposes, then any difference between the benchmark and the “true” price is just a timing difference. Who cares?

Yellen is taking a steady as she goes view on tapering:

Federal Reserve Chair Janet Yellen said the central bank is likely to keep trimming asset purchases, even as policy makers monitor data to determine if recent weakness in the economy is temporary.

“Unseasonably cold weather has played some role,” she said in response to a question today from the Senate Banking Committee. “What we need to do, and will be doing in the weeks ahead, is to try to get a firmer handle on exactly how much of that set of soft data can be explained by weather and what portion, if any, is due to softer outlook.”
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Yellen repeated the Fed’s statements that the central bank intends to reduce asset purchases at a “measured” pace, and she said in response to a separate question that the bond-buying program is likely to end in the fall. At the same time, “if there’s a significant change in the outlook, certainly we would be open to reconsidering,” she said.

It was another positive day for the Canadian preferred share market, with PerpetualDiscounts up 7bp, FixedResets gaining 4bp amd DeemedRetractibles winning 18bp. Volatility was muted. Volume was on the high side of average, with some nice tickets written for a few issues.

Nothing happened today, either.

It was another good day for the Canadian preferred share market, with PerpetualDiscounts gaining 16bp, FixedResets up 17bp and DeemedRetractibles winning 19bp. The Performance Highlights table was longer than usual, all winners, with one lonely DeemedRetractible listed among the dominating FixedResets. Volume was heavy.

PerpetualDiscounts now yield 5.59%, equivalent to 7.27% interest at the standard 1.3x equivalency factor. Long corporates now yield about 4.55%, so the pre-tax interest-equivalent spread is now about 270bp, unchanged from the February 19 report.

Nothing happened today.

It was a strong day for the Canadian preferred share market, probably a result of all the RY.PR.N, RY.PR.P & RY.PR.R redemption money appearing in brokerage accounts and being spent. PerpetualDiscounts were up 17bp, FixedResets won 21bp and DeemedRetractibles gained 10bp. There are not a lot of performance highlights, but they’re uniformly positive. Volume was high and all the volume highlights were FixedResets.

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 10bp, FixedResets gaining 7bp and DeemedRetractibles up 8bp. Volatility was low. Volume was average.

I wasn’t the only one to laugh off the Lehman bankruptcy:

The day after Lehman Brothers Holdings Inc. declared the largest bankruptcy in U.S. history in 2008, Federal Reserve officials remained unsure whether the financial crisis would do lasting damage to the U.S. economy.

“I don’t think we’ve seen a significant change in the basic outlook,” Dave Stockton, the Fed’s top forecaster, said on Sept. 16, 2008 according to transcripts released today in Washington. “We’re still expecting a very gradual pickup in GDP growth over the next year.”

A new worry … tapering!

Equities erased gains today as Dallas Fed President Richard Fisher said it’s hard to argue that further expansion of central bank balance sheet has had “much efficacy.”

“This is why I’ve been such a strong proponent of dialing back our large-scale asset purchases and will continue advocating that we do so,” Fisher said in text of speech in Austin, Texas.

St. Louis Fed President James Bullard, who doesn’t vote on the Federal Open Market Committee this year, said the central bank is on target to continue scaling back stimulus, adding that soft economic data in 2014 is probably due to bad weather.

The Dallas Fed published excerpts from Fisher’s speech:

But as I have shown this afternoon, the store of bank reserves awaiting discharge into the economy through our banking system is vast, yet it lies fallow. Take a look at this chart of total reserves of depository institutions: They have ballooned from a precrisis level of $43 billion to more than $2.5 trillion.[Graph: Bank Reserves…]

Here is the point: There is plenty of money available for businesses to work with. Consider this: In fourth quarter 2007 the nation’s gross domestic product (GDP) was $14.7 trillion; at year-end 2013 it was estimated to be $17.1 trillion. Had we continued on the path we were on before the crisis, GDP would currently be roughly $20 trillion in size. That’s a third larger than it was in 2007. Yet the amount of money lying fallow in the banking system is 60 times greater now than it was at year-end 2007. One is hard pressed to argue that there is insufficient money available for businesses to put people back to work.

Now, bear in mind that we at the Fed only control the monetary base (cash plus bank reserves), not the velocity with which money is used. Again, consider this graph:[Graph: Newly Created Money…]

Over the past six years, the monetary base has increased 340 percent, 10 times the rate at which the economy would have expanded in nominal terms had we not suffered the recent recession. One is hard pressed to argue that there is much efficacy derived from additional expansion of the Fed’s balance sheet. This is why I’ve been such a strong proponent of dialing back our large-scale asset purchases and will continue advocating that we do so.

It is my firm belief that the fault in our economy lies not in monetary policy but in a reckless and feckless federal government that simply cannot get its fiscal and regulatory policy geared so as to encourage business to take the copious amount of money we at the Fed have created and put it to work creating jobs and growing our economy. Fiscal policy is not only “not an ally of U.S. growth,” it is its enemy. If the fiscal and regulatory authorities that you elect and put into office to craft taxes, spending and regulations do not focus their efforts on providing incentives for businesses to expand job-creating capital investment rather than bicker with each other for partisan purposes, our economy will continue to fall short and the middle-income worker will continue being victimized, no matter how much money the Fed puts into the system.

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‘Fair enough’, say preferred share market investors, ‘the expansion of the money supply didn’t have much effect, therefore its removal will be a disaster for the market.’

But there are signs of Canadian hyperinflation:

Canada’s inflation rate accelerated the most in 20 months on a surge in home heating costs amid one of the most severe winters in decades.

The consumer price index rose 1.5 percent in January from a year earlier, the most since June 2012, following December’s 1.2 percent pace, Statistics Canada said today from Ottawa. The nation’s statistics agency also said retail sales in December dropped 1.8 percent, the most in a year. Economists forecast inflation rising at a 1.3 percent pace and a 0.4 percent drop in sales, according to median forecasts in separate Bloomberg News surveys.

It was another positive day for the Canadian preferred share market, with PerpetualDiscounts winning 16bp, FixedResets gaining 2bp and DeemedRetractibles up 7bp. Volatility was muted. Volume was low.

Brother, can you spare a few million dollars for an investment banker down on his luck?

Royal Bank of Scotland is expected to announce its withdrawal from many investment banking activities as well as much of its international business in a move that is expected to reduce staff numbers by at least 30,000 over the next three to five years, the Financial Times reported on Thursday.

TransAlta bit the bullet:

TransAlta Corporation (“TransAlta”) (TSX: TA; NYSE: TAC) today reported its fourth quarter 2013 and full year 2013 financial results, its outlook for 2014 and two significant initiatives to enhance the Corporation’s financial strength to grow, provide a solid and sustainable dividend, and to ensure a strong balance sheet throughout the commodity cycle.
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TransAlta also announced today two key initiatives: the sale of our 50 per cent interest in CE Generation, Blackrock development and Wailuku to our partner in these holdings, MidAmerican Renewables for U.S.$193.5 million and the resizing of our dividend to an annualized amount of $0.72 per common share to align with our growth and financial objectives.
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With the revised dividend, our expected dividend is 57 per cent to 67 per cent of Free Cash Flow.
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On Feb. 20, 2014, our Board of Directors declared a quarterly dividend of $0.18 per common share (or $0.72 per common share on an annualized basis).

The dividend used to be $0.29 per common share per quarter, or $1.16 annualized, so the reduction is 38%. DBRS comments:

As noted on the rating report dated March 12, 2013, TAC’s leverage remained high for the current business risk level and DBRS expects the Company to reduce its leverage to below 50% by the end of 2014. In addition, the report noted that TAC has an unsustainable payout ratio that negatively affects its leverage. The Transactions announced today mitigate the two primary concerns noted above. Proceeds from the divestiture are expected to be used to reduce debt and the dividend reduction will likely result in approximately $90 million in incremental cash flow, net of the dividend reinvestment program proceeds. Pro forma the Transactions, the Company’s adjusted debt-to-capital ratio is expected to be near 50% and the other two key credit metrics, cash flow-to-debt and EBITDA interest coverage, are expected to be in line with the BBB rating. DBRS expects TAC to continue to fund any significant unforeseen costs, cash shortfalls and/or acquisitions in a prudent manner to maintain key credit metrics in line with the current rating range. Should key credit metrics no longer be commensurate with the current BBB rating, a negative rating action could result.

They had some harsh words for Bombardier:

DBRS today notes that Bombardier Inc. (Bombardier or the Company) has recently released new information including a delay in entry-into-service (EIS) for the C-Series until late 2015, weaker-than-expected full-year 2013 results and a worse-than-expected outlook for full-year 2014. The newly released information is consistent with the risks that were already incorporated when DBRS downgraded the Company to BB (low) in November 2013 following placing the Company’s rating under review in August, 2013. The trend currently remains Stable, also noting that Bombardier’s business risk profile continues to support the current rating. Nonetheless, most of Bombardier’s key credit metrics are below the current rating level and the Company’s financial profile remains a risk. DBRS could take further negative rating action should the Company announce further material program cost increases, further C-Series EIS delays, profitability challenges or incur greater than expected additional indebtedness.

It was another positive day for the Canadian preferred share market, with PerpetualDiscounts winning 10bp, FixedResets gaining 1bp and DeemedRetractibles up 6bp. Volatility was minimal. Volume was on the low side of average, despite RBC’s monster crosses in MFC.PR.D.

How ’bout them mutual funds, eh?

Canadians have accumulated savings of one trillion dollars in mutual funds – marking the first time in their 82-year history in Canada that funds have topped this significant milestone. As reported today by The Investment Funds Institute of Canada (IFIC), assets under management (AUM) for the mutual funds industry reached $1.01 trillion as of January 31, 2014, an increase of $140.1 billion or 16.1% over the previous 12 months.

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DBRS confirmed NSI.PR.D at Pfd-2(low):

The rating assumes that the Company will continue to manage its annual dividend payout to maintain its regulated capital structure. While capital expenditures (capex) are expected to remain elevated ($283 million announced for 2014), operating cash flow is estimated to be adequate to support capex. DBRS expects that the residual operating cash flow after capex, combined with the incremental debt to maintain the regulatory capital structure, will be distributed to NSPI’s parent company, Emera Inc. (Emera; rated BBB (high), Under Review with Developing Implications). DBRS will continue to view NSPI on a stand-alone basis, assuming the Company adheres to the current flexible dividend distribution strategy.

It was another positive day for the Canadian preferred share market, with PerpetualDiscounts up 13bp, FixedResets gaining 5bp and DeemedRetractibles winning 14bp. Volatility was virtually non-existent. Volume was average.

PerpetualDiscounts now yield 5.60%, equivalent to 7.28% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.6%, so the pre-tax interest-equivalent spread (in this context, the Seniority Spread) is now about 270bp, unchanged from the February 12 report.