Category: Market Action

There is increasing awareness that the economy is not all that great:

Bank of Nova Scotia economists are now raising the possibility of no move in the Bank of Canada’s benchmark interest rate until 2016.

Other observers have speculated on late next year or early in 2015 for the first rate hike by the central bank.

But Scotiabank’s Derek Holt, Mary Webb and Dov Zigler say the Bank of Canada is now signalling a hold of more than two years, citing signs in a recent speech by senior deputy governor Tiff Macklem, among other things.
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“The BoC probably now envisages spare capacity remaining into 2016,” the Scotiabank economists said, adding the central bank now projects hitting its 2-per-cent target for annual inflation in mid-2015.

They believe the Bank of Canada may change that forecast, to an even later date, when meets later this month and also issues its monetary policy report.

But that’s OK! We’ll all retire on the CPP:

A proposal to boost the retirement benefits for the middle class from the Canada Pension Plan through increases in contributions is rekindling momentum for pension reform ahead of a key December meeting with Finance Minister Jim Flaherty.

Prince Edward Island Finance Minister Wes Sheridan is trying to rally his colleagues around changes that would see the maximum CPP contribution rise to $4,681.20 a year from $2,356.20 starting in 2016, and the maximum annual benefit would increase to $23,400 from $12,150.

Qualifying for the maximum benefit would take an income of $102,000, up sharply from the current maximum insurable earnings cutoff of $51,000. The overall goal is to boost the savings rates of middle-income Canadians who earn less than six figures.

And – surprise! – middle-class jobs are scarce:

The top-10 list suggests there are really two sets of expanding job opportunities, at either end of the income spectrum – and not much in the middle.

If you’re entering the labour market – say you’re young, or you’re a newcomer to Canada – there are lots of points of entry at the low end of the scale. But they are not generally the types of jobs that lead you down a career path to something better, nor do these jobs fully employ many workers’ skill sets. If you are lucky enough to find full-time, full-year work in these types of jobs, paying $13 an hour or less, you would be making $26,000 a year before taxes, or less.

There is another cluster of job opportunities that pay median wages of $35 an hour or more, which translates to $70,000 a year before taxes, or more.

There are fewer opportunities in the middle, jobs that pay in the $20-something per hour range.

However, a bright note is that European distressed assets seem to have found a level:

Blackstone Group LP (BX) raised more than $4 billion in 2009 to buy European property assets anticipating that cash-strapped banks would be forced to sell as the region’s debt crisis worsened. Almost all of it sat idle for two years.

Today, the inaction has given way to a surge of deals, as lenders from Lloyds Banking Group Plc (LLOY) to Commerzbank AG (CBK) cut loose soured real estate, corporate and consumer loans. Sales of loan portfolios and other unwanted assets by European Union banks could reach 60 billion euros ($82 billion) in face value this year, according to PricewaterhouseCoopers LLP, the most since the firm began tracking data in 2010.
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Apollo is among the most active investors, amassing loans with a face value of about 12 billion euros, including 11,000 mortgages in the U.K. Blackstone, the world’s largest alternative-asset manager, last year put $3.5 billion into distressed European mortgages and properties, the most its real estate group has plowed into the region in one year.
Investors also are buying European properties from real estate developers and taking over troubled companies or lending directly to them where banks have scaled back.
EU banks unloaded 29 billion euros of portfolio loans and assets such as mortgage-servicing units and branches in the first half of 2013, according to Richard Thompson, a partner at PwC in London. That compares with sales of 46 billion euros for all of last year, 36 billion euros in 2011 and 11 billion euros in 2010. The majority of sales have been distressed loans, Thompson said.

The arbitrary nature of corporate bond pricing (and hence the opportunity for profit) is well illustrated by this tale of woe:

Goldman Sachs Group Inc. (GS) mistakenly added about $1.5 million of interest costs to a Ford Motor Co. (F) bond sale last week by using the wrong Treasury note as a benchmark for the security, according to two people with knowledge of the transaction.
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Typically, banks set the price of new corporate securities by using Treasury bonds with similar maturities. If the U.S. government issues notes in the middle of the week, underwriters don’t use that security as a benchmark until the following Monday.

For Dearborn, Michigan-based Ford’s Sept. 26 offering, Goldman Sachs added a 1.45 percentage-point spread to the 1.375 percent Treasury note due September 2018 that was auctioned on Sept. 25, Bloomberg data show. Instead, the bonds should have been based off the 1.5 percent security that matures in August 2018.

Matthew Klein of Bloomberg offers an excellent perspective on endowment investing:

The modern style of institutional investing can be traced to Yale University’s David Swensen, who literally wrote the book on the subject. … Three core ideas inform his thinking.

1. Savers are paid to take risk. If you want to generate big returns you have to be willing to endure large losses at any point.

2. Universities and other institutional investors have long time horizons because they expect to exist forever. This makes them different from regular people who save for retirement.

3. Contrary to standard academic theory, which suggests that savers should invest in broad indexes and avoid fees, market imperfections create opportunities for talented money managers. They can improve a portfolio’s performance through a combination of high returns and diversification benefits.
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The potential for a mismatch between assets and liabilities is one big problem with the Yale model. Another is the focus on hunting for the best hedge funds, private-equity managers and stock pickers. This is where most of the money is made (and lost) in the endowment business. According to the Yale endowment’s most recent report, “nearly 80 percent of Yale’s outperformance relative to the average Cambridge Associates endowment was attributable to the value added by Yale’s active managers, while only 20 percent was the result of Yale’s asset allocation.” That’s great for Yale, but it’s impossible for every institution to have the best managers.

In general, I think Mr. Klein overstates the need for liquidity – it’s important, but my views are closer to precept 2 than that which he espouses.

I don’t think there’s anything wrong with the Yale model, but there are definitely problems with the implementation – as I told one guy recently, just because I believe the “Warren Buffet style” of investment CAN work, doesn’t mean I think YOU can do it.

The field is filled with ignoramuses and charlatans and institutional boards aren’t any better at picking winners than any other retail investor who handles his investments as a part-time job. Hiring a small group of specialists to farm out the work to third party firms just makes matters worse, because then allocations are made on the basis of two salesmen talking to each other.

For an institution to outperform, I believe that you have to have most, if not all, of the investment expertise in-house. ‘You don’t need to sell anything, guys, you just have to outperform on a rolling four year basis or you’re fired.’ This is the Teachers/OMERS model – and it works.

Canajans, eh? The Bank of Canada has published a working paper by Mikael Khan, Louis Morel and Patrick Sabourin titled The Common Component of CPI:An Alternative Measure of Underlying Inflation for Canada, in which the authors use factor analysis to find a common factor among 54 different components of the Consumer Price Index.

Click for Big

But, you ask, which of these 54 series was best correlated with this single underlying factor? Well, I’m glad you asked that question:

Table 2. Relationship between common component and individual components of the CPI

CPI components (y/y)	Correlation	% of explained variance
Alcoholic beverages served in licensed establishments	0.86	0.74

This suggests a new currency ….

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts getting whacked for 40bp, FixedResets off 3bp and DeemedRetractibles gaining 4bp. Predictably, the Performance Highlights table is heavily populated by losing PerpetualDiscounts. Volume was slightly above average.

SEC Chair Mary Jo White gave a speech titled Focusing on Fundamentals: The Path to Address Equity Market Structure. All the usual blather, but there was one point of interest:

So, today, I am pleased to announce a new initiative we are launching that is designed to promote a fuller empirical understanding of the equity markets. SEC staff has prepared and assembled resources and data on the SEC’s web site focusing exclusively on equity market structure. The new web site should be available as early as next week and will serve as a central location for us to publicly share evolving data, research, and analysis.

Part of this initiative will be to disseminate data and related observations drawn from MIDAS that address the nature and quality of displayed liquidity across the full range of U.S.-listed equities –from the life-time of quotes, to the speed of the market, to the nature of order cancellations.
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The new web site will also feature staff research papers based on a variety of data sources and staff reviews that identify and assemble information from the expanding economic literature on market structure topics. One paper, using order audit trail data on off-exchange trading, provides key metrics describing the underlying nature of off-exchange trading by the 44 alternative trading systems that trade equity securities. The staff’s primary observation is that ATS trading looks very similar in many respects to exchange trading.[20] Another paper summarizes current studies that address market fragmentation – both visible and dark. Additional research papers and reviews are already planned.

Maneuvering over the US debt limit continues:

Lew and President Barack Obama have said they won’t negotiate on the limit, which is tied to obligations the U.S. has already incurred. Boehner, an Ohio Republican, has issued a list of demands before he’ll support raising the ceiling. His conditions include approval of TransCanada Corp. (TRP)’s Keystone XL pipeline, major revisions to the tax code and a one-year delay of the insurance mandate in the Obama health-care law.
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The U.S. government is already limited in action after Republicans and Democrats in Congress failed to agree on funding for the new fiscal year that began yesterday. That led to a partial shutdown of the government at midnight, forcing about 800,000 federal workers off the job. The shutdown could cost the economy as much as $10 billion a week, the White House said on its website.

DS is having a good year with US junk:

Royal Bank of Canada is on pace to join the ranks of the 10 largest underwriters of high-yield debt in the U.S. for the first time as the largest Canadian lender seeks profits abroad with issuance slowing at home.

Royal Bank’s RBC Capital Markets ranks 10th among arrangers of speculative-grade bonds at the end of the third quarter after luring bankers from firms including Deutsche Bank AG (DBK) and Credit Suisse Group AG. (CSGN) The Toronto-based firm has never been a top-10 underwriter for non-investment-grade debt in the U.S. on any given year, according to data compiled by Bloomberg.
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While RBC expects total sales of junk bonds in the U.S. market to surpass last year’s record $353 billion, on Sept. 4 it cut its annual forecast for Canadian issuance to as little as C$4 billion ($3.9 billion) from about C$6 billion. The firm boosted the headcount in its U.S. credit team by 15 percent in the past two years, hiring almost 20 people, including 10 sales staff and eight traders. Last month Neil Yaris, who has held jobs at Credit Suisse and Bank of America Corp., joined as co-head of high-yield debt trading.
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Royal Bank’s long-standing goal to be a Top 10 investment bank in the U.S. contrasts with retrenchment in other areas of banking. The company sold its unprofitable U.S. lender RBC Bank to PNC Financial Services Group Inc. in March 2012, ending an unsuccessful decade-long foray into U.S. retail banking.

In Canada, RBC slipped to the third spot among underwriters of high-yield debt, from No. 1 in 2012. Still, the firm has led arrangers of investment-grade company bonds in Canada for at least 14 years.

I’m in the wrong business:

Carnegie Hall employs five full-time stagehands and uses part-timers as needed, a spokeswoman, Synneve Carlino, said in an e-mail.

The full-timers earned an average of $420,000 in 2011, according to the tax return. They move equipment in and out of the building and prepare three stages for performances, while operating audiovisual and other equipment. They work on holidays and weekends.

Oh, they work on holidays and weekends. Well, I’m glad that’s cleared up.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 15bp, FixedResets gaining 7bp and DeemedRetractibles off 2bp. The Performance Highlights table is average sized – by standards of the last few months – with BAM issues notable on the downside. Volume was average.

PerpetualDiscounts yield 5.56%, equivalent to 7.23% 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 245bp, a significant increase from the 235bp reported September 25, as long corporate yields have declined about 10bp on the week, while PerpetualDiscounts haven’t done much of anything.

Tiff Macklem gave a speech to the Economic Club of Canada titled Global Growth and the Prospects for Canada’s Exports – I found Chart 12 to be of great interest:

A second factor influencing our exports is competitiveness. Between 2000 and 2012, the labour cost of producing a unit of output in Canada compared with the United States, adjusted for the exchange rate, increased by 75 per cent (Chart 12). The majority of this loss of competitiveness reflects the appreciation of the Canadian dollar (shown in blue), but weak productivity growth in Canada relative to the United States also played a significant role (shown in green).

Click for Big

From the bureaucrats at the UBC Staff Pension Plan comes an excellent lesson in bafflement via bullshit:

“We have what is called a target benefit plan,” says Mr. Parker, who is executive director of the University of British Columbia’s staff pension plan.
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In a target plan, the employer and its employees make fixed contributions, similar to a defined contribution plan. The payouts that can be expected are set as a target, which depends on projections, made by actuarial experts, of what the plan will be able to afford.

So in other words, it’s a Defined Contribution plan but they don’t want to say the words, so instead of handing over the dollar value of the account on retirement, they hand over a package of benefits, that may or may not increase or decrease and which will disappear when the beneficiary dies. Well done!

Fitch is unimpressed with the games in Washington:

The US government shutdown is not in itself a downgrade trigger for the sovereign’s ‘AAA’/Negative rating. However, it undermines confidence in both the budgetary process and critically in the prospect of the debt ceiling being raised in a timely manner to avert the risk of default on US sovereign debt obligations, says Fitch Ratings in a reiteration of its June 28 rating commentary.

A formal review of the rating with potentially negative implications would be triggered if the US government has not raised the federal debt ceiling in a timely manner prior to when the Treasury will have exhausted extraordinary measures and cash reserves. According to official comments by the US Treasury secretary, extraordinary measures could be exhausted by 17 October.

In such a scenario, the Treasury would be forced to dramatically cut back on current spending with adverse implications for the economic recovery. Even if it were to prioritise debt service – something the Treasury has repeatedly stated it has neither the legal authority nor logistical capability to do – it would likely incur arrears on a range of payment obligations and thus continue to incur debt, but in a disorderly and disruptive manner.

Even if the debt limit is not raised in a timely manner we believe there is sufficient political will and capacity to ensure that Treasury securities will continue to be honoured in full and on time. Nevertheless, investor confidence in the full faith and credit of the US would be undermined in such a scenario. This “faith” is a key underpinning of the US dollar’s global reserve currency status and reason why the US ‘AAA’ rating can tolerate a substantially higher level of public debt than other ‘AAA’ sovereigns.

Non-essential operations of the federal government will cease from today – the government shutdown – after the US House of Representatives and Senate failed to agree a continuing resolution to grant it the necessary spending authority.

Further to my rant of September 25, I was infuriated by the “Moment in Time” feature in today’s Globe (not available on-line), which claimed that “[Henry Ford] raised wages so his workers could become customers”, I looked around more carefully and found this:

It should be obvious that this story doesn’t work: Boeing would most certainly be in trouble if they had to pay their workers sufficient to afford a new jetliner. It’s also obviously true that you want every other employer to be paying their workers sufficient that they can afford your products: but that’s very much not the same as claiming that Ford should pay his workers so that they can afford Fords.
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Ford’s turnover rate was very high. In 1913, Ford hired more than 52,000 men to keep a workforce of only 14,000.
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Car production in the year before the pay rise was 170,000, in the year of it 202,000. As we can see above the total labour establishment was only 14,000 anyway. Even if all of his workers bought a car every year it wasn’t going to make any but a marginal difference to the sales of the firm.

We can go further too. As we’ve seen the rise in the daily wage was from $2.25 to $5 (including the bonuses etc). Say 240 working days in the year and 14,000 workers and we get a rise in the pay bill of $9 1/4 million over the year. A Model T cost between $550 and $450 (depends on which year we’re talking about). 14,000 cars sold at that price gives us $7 3/4 million to $6 1/4 million in income to the company.

It should be obvious that paying the workforce an extra $9 million so that they can then buy $7 million’s worth of company production just isn’t a way to increase your profits. It’s a great way to increase your losses though.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 30bp, FixedResets off 3bp and DeemedRetractibles gaining 3bp. Not surprisingly, there’s a bit of a skew in the Performance Highlights table towards winning PerpetualDiscounts. Volume was average.

The US government is heading towards shut-down:

The U.S. government stands poised for its first partial shutdown in 17 years at midnight tonight, after a weekend with no signs of negotiations or compromise from the Congress or the White House.

House Republicans, led by Speaker John Boehner, want to delay President Barack Obama’s Affordable Care Act for a year and make other changes to the law. Democrats, led by Obama, say that won’t happen. Republicans and Democrats say they don’t want to close the government, though neither side is budging from their positions.
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A brief government closure won’t lead to any significant change of the Treasury Department’s forecast for when the U.S. will breach the debt limit, a Treasury spokeswoman said yesterday in an e-mail. The Treasury has said measures to avoid breaching the debt ceiling will be exhausted on Oct. 17.

It was a very, very slightly negative day for the Canadian preferred share market, with PerpetualDiscounts and DeemedRetractibles off 1bp and FixedResets off 2bp. Considering the modesty of the overall moves the Performance Highlights table is surprisingly lengthy, with BAM issues notable on the winning side. Volume was above average.

And that’s it for another month!

I found some excellent commentary on teachers’ salaries:

While we might all agree that the middle class is partly a state-of-mind, I define the middle class as the middle 50 percent of individual earnings. With this definition, at age 20-24, 50 percent of individuals with a university degree working fill-time at a single job outside the Toronto CMA earn above $27,300 and below $60,008. Thus our 23-year old teacher who earns $49,400 does actually start in the middle class of the universityeducated group. However the stay of that teacher in the middle class of even the university-educated within society is very brief!

By the time our teacher is aged 25-29, after 5 years of teaching, the teacher has decisively exited the middle class within the university-educated group. The salary of $66,893 after 5 years of teaching falls well above the 75th percentile of salaries although it is remains below the 90th percentile. But after 10 years of teaching, at age 33, our teacher is quite close to the 90th percentile of salaries within the university-educated group. The teacher’s salary is $88,759 and the 90th percentile is $91,000. The last step in the salary grid would push the salary over the 90th percentile salary for a person aged 30-34.
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Finally I would note that all these comparisons of the salaries of teachers to other wage-earners ignore the very large benefit and vacation packages that are part of the compensation of teachers. Even using just salary data, it is clear teachers are very well compensated throughout their entire careers relative to similar persons in Ontario. The benefits and vacation are the whipped cream, toppings and chocolate sauce on the Haagen-Dazs ice cream.

Grave consequences are predicted if the US government shuts down:

A shutdown of the U.S. government would reduce fourth-quarter economic growth by as much as 1.4 percentage points depending on its length, economists say, as government workers from park rangers to telephone receptionists are furloughed.

Mark Zandi of Moody’s Analytics Inc. estimates a three-to-four week shutdown would cut growth by 1.4 points. Zandi projects a 2.5 percent annualized pace of fourth-quarter growth without a shutdown. A two-week shutdown starting Oct. 1 could cut growth by 0.3 percentage point to a 2.3 percent rate, according to St. Louis-based Macroeconomic Advisers LLC.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 5bp, FixedResets up 7bp and DeemedRetractibles off 4bp. Volatility was muted, judging by recent standards. Volume was slightly below average.

Nothing happened today.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts down 20bp, FixedResets gaining 6bp and DeemedRetractibles off 19bp; the FixedReset figure is affected by a reversal of yesterday’s nonsense with FTS.PR.K; the ridiculous gain computed from Toronto Stock Exchange data was worth a little in excess of 20bp to the FixedReset subindex – account for that and relative figures are more reasonable. Volatility was fairly high with BAM issues notable amongst the losers. Volume was high.

One thing (well, one of many things) that has bothered me over the years is the story of Henry Ford as philantropist:

Henry Ford’s vision was that a mass-manufacturing solution would save so much money that his investments would soon pay off. They did, and there was a side benefit: Ford could then afford to pay his workers a much higher wage than average — $5 a day — which made them into consumers who could afford his cars. It’s the kind of long-range view that Ford and other automakers are taking now toward China.

This is repeated so often I sometimes think I must be the only person in the world who realizes that it doesn’t make any sense at all. You can’t get rich taking in each other’s laundry. I find that Ford itself promulgates this myth, albeit with enough supporting narrative to make the real story clear:

After the success of the moving assembly line, Henry Ford had another transformative idea: in January 1914, he startled the world by announcing that Ford Motor Company would pay $5 a day to its workers. The pay increase would also be accompanied by a shorter workday (from nine to eight hours). While this rate didn’t automatically apply to every worker, it more than doubled the average autoworker’s wage.

While Henry’s primary objective was to reduce worker attrition—labor turnover from monotonous assembly line work was high—newspapers from all over the world reported the story as an extraordinary gesture of goodwill.

After Ford’s announcement, thousands of prospective workers showed up at the Ford Motor Company employment office. People surged toward Detroit from the American South and the nations of Europe. As expected, employee turnover diminished. And, by creating an eight-hour day, Ford could run three shifts instead of two, increasing productivity.

Henry Ford had reasoned that since it was now possible to build inexpensive cars in volume, more of them could be sold if employees could afford to buy them. The $5 day helped better the lot of all American workers and contributed to the emergence of the American middle class. In the process, Henry Ford had changed manufacturing forever.

I suspect that this myth was developed in an attempt to spike the guns of the nascent socialist movement:

The fact is that about 6% of Americans were voting Socialist that year, and any decent newspaper would be keeping track of the local races. It’s also important to note that there were many political parties then, including multiple leftist parties, and it would be not unusual to have half a dozen candidates for any office.

Also of note is that socialists were already closely aligned with labor unions, and this is evident in the platform planks.

And to those who think the socialist movement in America has been a failure, take a look at the list of platform planks from 1914: women’s suffrage, clean schools, child labor laws, free schoolbooks, public sector unions, workplace safety inspections, etc.

Every time I see the hoary old chestnut of perpetual motion by high wages repeated, I get just a little more irritated. What Henry Ford did was to increase productivity – wages were increased solely because he had to. It is increased productivity that makes us rich.

There are rumours of potential big changes in the corporate bond markets:

Deutsche Bank AG (DBK) is trying to drum up interest with some of its largest competitors to create a multi-dealer U.S. bond trading platform at the same time that asset managers discuss ways to make buying and selling debt easier, according to people familiar with the matter.

Europe’s biggest investment bank by revenue has pitched its plan for an electronic trading network to JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Barclays Plc (BARC), according to five people briefed on the talks, who asked to not be named because the discussions are private. Executives at State Street Corp. (STT) and FMR LLC’s Fidelity Investments are among institutional investors that have held a series of meetings, the last one in July in New York, to address the difficulty of finding the bonds they want to trade, according to two different people.
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The platform, dubbed Oasis, from Frankfurt-based Deutsche Bank is aimed at the least-active part of the $4.2 trillion-a-year market where bonds might not trade for days or weeks, two of the people said. It follows a more successful introduction of the same idea in Europe, according to one executive.

Oasis clients would tell their bank how much of a particular corporate bond they want to buy or sell, a process known as an indication of interest, and the dealer would enter a resting order into the electronic system, two of the people involved said. If another party is interested and the trade crosses, the transaction would be done between banks so that the clients remain anonymous, the people said.
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Information leakage, or the possibility of rival investors profiting off an investor’s plan to trade, is a major concern among bank clients that Oasis is meant to address, the people said. If the system succeeds, clients could eventually be allowed to access Oasis directly, they said.

Investors and their banks may have trouble moving more of the market onto computers. Corporate debt is unsuitable for full electronic trading, according to a study last month by McKinsey & Co. and Greenwich Associates. There are more bonds than stocks, and debt trades less frequently, making a full transition to computer-based buying and selling unlikely, the consultants said.

Dealers have resisted a shift to electronic bond trading because the increased transparency can cut profits. In the 90 days after the Financial Industry Regulatory Authority’s Trace started disseminating prices of junk bonds, trading in the securities dropped 41 percent, according to Massachusetts Institute of Technology and Harvard University researchers.

I think the process is doomed to failure, although it might be a step in the right direction. The big problem is lack of inventories, which are small because the profits are thin and the capital expensive. I think the only logical goal is for the big pension funds to act more like trading desks, making markets and swapping stuff in and out of their portfolios on demand (while maintaining overall portfolio objectives) – the way, for instance, I have been trading fixed income in my small way for the past twenty-one years (although, with respect to bonds, only through brokers). I suspect, however, that there are immense cultural and regulatory roadblocks between the current reality and the endgame.

There’s a funny story on French regulation:

This week, a Paris court of appeal ordered the cosmetics chain Sephora to close its flagship store on the avenue at 9 p.m., rather than staying open until midnight during the week and until 1 a.m. on Fridays and Saturdays.
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But at a time when the national economy remains stuck in a rut and unemployment continues to rise, this latest ruling on Sephora has struck a raw nerve. The case was brought by a consortium of labour unions, which has been zealous in its attempts to have the store-closing hour law enforced, arguing that it needs to protect workers from unscrupulous owners who force them to work antisocial hours. But that logic is patently untrue in this case.

The cosmetics chain reckons it does about 20 per cent of its business after 9 p.m., and the 50 sales staff who work the late shift do so voluntarily – and are paid an hourly rate that is 25 per cent higher than the day shift. Many of them are students or part-time workers, and they have publicly expressed their indignation about being put out of work by labour unions.

S&P has a very interesting report on Exchange operational issues and problems thereof and credit implications thereof thereof:

We view stock exchanges’ higher vulnerability to operational risk (compared with derivative and futures exchanges), primarily as a function of the numerous point-to-point connections between stock exchanges and the variety of order types they process. Derivatives and futures exchanges, like IntercontinentalExchange and CME Group, tend to have “vertical silo” business models, in which the listings, trading, and clearing of contracts are done under one roof. This means they are less connected to other exchanges and clearinghouses.

The greater fragmentation in the equities markets (especially in the U.S.) creates more interconnectivity between exchanges, which leaves them more vulnerable to operational failures. There are 16 SEC-registered securities exchanges and more than 50 alternative trading platforms in the U.S., each of which is linked with others though a vast web of connections, including those that provide connectivity, routing services, and market data. And additional regulatory and disclosure requirements for stock exchanges, such as the consolidated tape–which provides real time data on prices and trading volumes–increase the complexity of the systems and exposure to operational problems.

Numerous order types also add to the complexity of the equities markets and amplify operational risk. To make the matter even more complicated, there have been discrepancies around how some exchanges execute their order types compared with their own rule books. For example, in January 2013, BATS announced that upon a National Best Bid and Offer (NBBO) update on BATS’ BYX Exchange, BZX Exchange, and BATS Options, it had discovered a problem with its matching engine that caused the execution of a short sale order at a price that was equal to or less than the NBBO. The problem started in 2008, but it took the company more than four years to identify it.

There’s been another breakthrough in solar energy technology, not made in Ontario as we spent all the potential research money on not-ready-for-prime-time technology:

The Fraunhofer Institute for Solar Energy Systems ISE, Soitec, CEA-Leti and the Helmholtz Center Berlin jointly announced today having achieved a new world record for the conversion of sunlight into electricity using a new solar cell structure with four solar subcells. Surpassing competition after only over three years of research, and entering the roadmap at world class level, a new record efficiency of 44.7% was measured at a concentration of 297 suns. This indicates that 44.7% of the solar spectrum’s energy, from ultraviolet through to the infrared, is converted into electrical energy. This is a major step towards reducing further the costs of solar electricity and continues to pave the way to the 50% efficiency roadmap.

S&P is also taking a wait and see attitude towards Fairfax, proud issuer of XXX:

Standard & Poor’s Ratings Services said today that the Sept. 23, 2013, signing of a letter of intent by an investor consortium led by Fairfax Financial Holdings Ltd. (Fairfax) to acquire BlackBerry Ltd., subject to due diligence, for approximately $4.7 billion has no effect on the ratings on Fairfax. As disclosed in the announcement, Fairfax currently owns about 10% of BlackBerry’s common shares, which it intends to contribute to the transaction. We expect the consortium to complete its due diligence by Nov. 4, 2013. If satisfactory, the consortium would enter into a definitive transaction agreement with BlackBerry at that time. Until then BlackBerry will be free to consider alternative offers. We will monitor the development of this transaction during the next six weeks and evaluate any potential impact on Fairfax as more information becomes available about the financing structure and the likelihood of the transaction being completed.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 11bp, FixedResets ostensibly down 42bp and DeemedRetractibles up 21bp. The large FixedReset loss is about half due to a single issue, FTS.PR.K, which ostensibly closed at 20.27-24.29, 1×1 after trading 31,415 shares in a range of 24.25-50. So this is either a lazy market maker or stupid dumb reporting by the Toronto Stock Exchange – I can’t be bothered to work out which. The Performance Highlights table is extremely lengthy. Volume was very high.

PerpetualDiscounts now yield 5.53%, equivalent to 7.19% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.9%, so the pre-tax interest-equivalent spread (in this context, the Seniority Spread) is now about 230bp, a small (and perhaps spurious) decline from the 235bp reported September 18.

I’m glad to see someone resisting the politicization of the Fed:

Richard Fisher, president of the Federal Reserve Bank of Dallas, said the White House botched the nomination for Chairman Ben S. Bernanke’s successor by allowing an unprecedented public debate over who would be the best choice.

“The White House has mishandled this terribly,” Fisher said today in response to a question from the audience after giving a speech in San Antonio, Texas. “This should not be a public debate,” he said, adding that the Fed “must never be a political instrument.”

There is some concern regarding the seasonal adjustments in the US jobs number:

Yet a new paper presented by Johns Hopkins economist Jonathan Wright at the Brookings Institution’s Panel of Economic Activity indicates that the Fed may have been misled by meaningless data. The evidence suggests that employment growth was just as anemic in July, when the Bureau of Labor Statistics reported 332,000 new jobs, as it was in February, when the BLS reported that only 104,000 jobs were added.

The problem is due to some peculiarities in the formula for seasonal adjustments. Weather, the school calendar and holidays all affect how many people are working in any given month, creating a lot of volatility in the raw jobs numbers. For example, the BLS reported that 1.2 million jobs were lost in July and 378,000 were added in August. Thanks to seasonal adjustments, however, most people think that 104,000 jobs were added in July and 169,000 were added in August. The truth is somewhere in between.
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First, the Fed has become hypersensitive to monthly jobs data. Second, the process by which the BLS smooths out its raw data seems to have been corrupted by a statistical artifact. As Wright explains, the job losses associated with the Great Recession were concentrated at the end of 2008 and the beginning of 2009 — the coldest months of the year. That distorted the BLS’s seasonal adjustment algorithm, which uses the past three years of data to determine the “normal” pattern of employment growth in different months.

This was first suspected by economists at Nomura and Goldman Sachs, as Cardiff Garcia reported at FT Alphaville. However, Wright’s paper presents the first conclusive evidence.

It is becoming apparent that Obamacare is more like wealth transfer than insurance:

Binko is one of 2.7 million healthy 18- to 34-year-olds, dubbed the young invincibles, that the Obama administration has said are needed in the exchanges to offset the cost of providing care for millions of other uninsured people who are likely to be older and sicker. Without young adults, who pay for insurance yet rarely use it, premium costs in the exchanges may soar.

“For young people learning to take care of ourselves, it’s foolish if we have to take care of the older generation too,” Binko, who now lives in Los Angeles, said in an interview.

Young invincibles are the focus of a pitched battle between Obamacare backers and the law’s opponents as the U.S. nears the Oct. 1 roll-out of government-run insurance exchanges. It’s a conflict playing out on television and the Internet, on college campuses and in door-to-door campaigns by volunteers nationwide.

“This demographic is critical,” Caroline Pearson, a vice president at Washington-based consulting firm Avalere Health LLC, said in an interview. “If you mostly have high risk people, premiums go up. It becomes a death spiral.”

Whether or not wealth transfer is desirable, if indulged in it should be financed through the tax system, rather than dressed up as something it isn’t.

Here are some illuminating tech facts:

BlackBerry, which released the flagship Z10 touchscreen phone earlier this year, sold 5.9 million smartphones during the last three months. Apple sold more than 9 million over the weekend.

The companies’ different trajectories became even more vivid today when BlackBerry said it tentatively agreed to a $4.7 billion buyout by a group led by Fairfax Financial Holdings. Meanwhile, Apple’s stock rose 5 percent following the sales announcement, giving the California company a market value of almost $446 billion.

Speaking of Blackberry, it’s setting records:

BlackBerry Ltd. (BBRY), once valued at $83 billion, may be stuck with the cheapest valuation ever for a North American technology or telecommunications takeover.

The smartphone maker said yesterday it reached a tentative agreement for a $4.7 billion buyout by a group led by Fairfax Financial Holdings Ltd. (FFH), its biggest shareholder. Including net cash, the proposal values the Waterloo, Ontario-based company at an 80 percent discount to its book value and just 0.17 times its sales, the cheapest revenue multiple on record among similar-sized North American telecommunications or technology acquisitions, according to data compiled by Bloomberg.

AltaGas Ltd., proud issuer of ALA.PR.A, was confirmed at Pfd-3 [Stable] by DBRS:

DBRS has today confirmed the ratings on both the Medium-Term Notes and Issuer Rating of AltaGas Ltd. (AltaGas or the Company) at BBB and on the Preferred Shares – Cumulative at Pfd-3, all with Stable trends. The confirmation reflects Company’s: (1) improving business risk profile, as almost 80% of the Company’s earnings are supported by either stable regulated returns or long-term contacts; (2) diversified sources of revenue from its Utilities, Power and Gas segments operating in Canada and the United States; (3) improved quality of earnings since the addition of utilities (SEMCO Energy Inc. and Pacific Northern Gas Ltd.) and cleaner power generation assets (Blythe Energy, LLC (Blythe)) to the Company’s portfolio. These new assets are primarily underpinned by long-term take-or-pay commitments, resulting in no incremental direct exposure to commodity price risk.
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DBRS notes that in the past five years, AltaGas’s credit metrics have weakened due to its aggressive growth capital expenditures (capex) program, which has added approximately $4 billion in new and expanded assets. Company’s key credit metrics are expected to remain weak over the near term, but are expected to recover in the medium term as major projects come on stream and full-year benefits from new assets are realized. Going forward, DBRS expects the Company to finance its capex program with a prudent mix of equity and debt and maintain credit metrics consistent with its current rating.

It was a strong day for the Canadian preferred share market, with PerpetualDiscounts winning 31bp, FixedResets gaining 17bp and DeemedRetractibles up 27bp. The Performance Highlights table is suitable skewed towards winners. Volume was very extremely awfully high.

S&P’s chief economist has more tapering chatter:

• That the Fed did not announce tapering in September did not surprise us, as we have stuck to our December call.
• Starting to taper was conditional on U.S. growth moving up a notch, which has not happened; in fact, the Fed has lowered its growth outlook.
• In the wake of a financial crisis and deep recession, central banks face asymmetric risks: Tightening policy too early carries higher risks than leaving policy loose for too long.
• Forward guidance attempts to guide markets, but, by incentivizing markets to hang on every central bank utterance, and react in a globally synchronized way, it risks amplifying the policy signals and creating volatility.
• The new Fed chair should resist the temptation to overengineer forward guidance, but rather double down on the core message: The Fed has the requisite tools and is determined to use them.

Julie Dickson of OSFI made a speech to the 2013 National Insurance Conference of Canada:

Given that catastrophic risk seems to be growing, going forward we may also see insurers more actively expanding risk transfer mechanisms through Insurance Linked Securities (ILS). Catastrophe bonds can be used to help companies to reduce exposure to certain risks, including earthquakes. Cat bonds are an effective way to transfer risk to capital markets, instead of reinsurance markets, and to spread risks. At the same time, they do not eliminate all risk. For example, basis risk, where the trigger for a claim might not be directly matched to the losses of the insurer, could result in the insurer experiencing losses with no protection. From a capital perspective, if the link is not one-for-one with the expected losses, there is no capital benefit. But such catastrophe bonds can be a good addition to an insurer’s risk management program.

While issuance of catastrophe bonds may be a good addition to a company’s risk management tools, investments in catastrophe bonds could present risks to investors, particularly if the investments are being made in a search for yield, without regard to an understanding of the risks involved.

Another example of search for yield, which has recently been expressed in international circles [Footnote], is concern about too much capital from institutional investors (such as pension funds) entering the insurance system in search of yield. Such excess funding or capital can put downward pressure on premium rates, and assuming those rates were properly reflective of risk, this is not what should be happening (for example, where the increased severity and frequency of actual catastrophe risk is on the rise).

While we have not seen similar behaviours in Canada thus far, it is important to continue to be on the lookout for any evidence of a search for yield and unintended consequences.

[Footnote reads]:September 4, 2013, Lloyd’s chairman warns on ‘systemic risk’ of capital rush, Alistair Gray, Financial Times. The article can be found at the following link (subscription required): http://www.ft.com/intl/cms/s/0/04b80c2e-15aa-11e3-b519-
00144feabdc0.html

There’s a report on the report referenced in the footnote here.

I don’t consider this a big deal, but it’s one of the more precious initiatives around:

We are proposing amendments to Item 402 of Regulation S-K to implement Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 953(b) directs the Commission to amend Item 402 of Regulation S-K to require disclosure of the median of the annual total compensation of all employees of an issuer (excluding the chief executive officer), the annual total compensation of that issuer’s chief executive officer and the ratio of the median of the annual total compensation of all employees to the annual total compensation of the chief executive officer. The proposed disclosure would be required in any annual report, proxy or information statement or registration statement that requires executive compensation disclosure pursuant to Item 402 of Regulation S-K. The proposed disclosure requirements would not apply to emerging growth companies, smaller reporting companies or foreign private issuers.

On the other hand, this one is just stupid:

The OCC, Board, FDIC, Commission, FHFA, and HUD (the agencies) are seeking comment on a joint proposed rule (the proposed rule, or the proposal) to revise the proposed rule the agencies published in the Federal Register on April 29, 2011, and to implement the credit risk retention requirements of section 15G of the Securities Exchange Act of 1934 (15. U.S.C. 78o-11), as added by section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Section 15G generally requires the securitizer of asset-backed securities to retain not less than 5 percent of the credit risk of the assets collateralizing the asset-backed securities. Section 15G includes a variety of exemptions from these requirements, including an exemption for asset-backed securities that are collateralized exclusively by residential mortgages that qualify as “qualified residential mortgages,” as such term is defined by the agencies by rule.

It was credit risk retention by the brokerages that sparked the crisis in the first place!

Power Corporation, proud issuer of POW.PR.A, POW.PR.B, POW.PR.C, POW.PR.D, POW.PR.F and POW.PR.G, was confirmed at Pfd-2(high) by DBRS:

The credit strength of POW is directly tied to its roughly two-thirds equity interest in Power Financial Corporation (PWF), which represents a substantial majority of the Company’s earnings and cash flow, as well as the Company’s estimated net asset value.
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As the controlling shareholder of PWF, and, by extension, of GWO and IGM, POW defines the strategic vision for its financial services investments, while setting the “tone from the top” in terms of conservative management style and risk analysis and tolerance. The Company’s senior officers and delegates exercise a greater degree of influence through their active participation on the respective boards and board committees of POW’s various subsidiaries than is generally the case at more widely held companies. Such an integrated management and governance approach is seldom encountered and has served the Company’s stakeholders well. On a stand-alone basis, POW’s financial profile is conservative, with debt and preferred shares representing just over 13% of capitalization. Financial leverage appears to be used to fund a portfolio of cash and short-term investments and a modest level of working capital. The Company’s liquidity is strong, with nearly $700 million in cash and short-term securities at June 30, 2013.

Power Financial Corporation, proud issuer of PWF.PR.A, PWF.PR.E, PWF.PR.F, PWF.PR.G, PWF.PR.H, PWF.PR.I, PWF.PR.K, PWF.PR.L, PWF.PR.M, PWF.PR.O, PWF.PR.P, PWF.PR.R and PWF.PR.S, has also been confirmed at Pfd-1(low) by DBRS:

The financial strength of PWF is largely derived from its controlling interests in two of Canada’s leading financial service providers: Great-West Lifeco Inc. (GWO; rated AA (low), Stable), one of the three largest life insurance concerns in Canada, and IGM Financial Inc. (IGM; rated A (high), Stable), one of the largest mutual fund complexes in Canada.
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The Company’s almost 30% indirect equity interest in Pargesa Holding S.A. (Pargesa), a Geneva-based holding company, provides some additional geographic and industry diversification. While Pargesa does pay a small dividend, which is normally passed through to the Company, it is primarily managed to maximize net asset value over the long term.

The Company’s financial leverage has been maintained at a reasonable level for the past ten years. The Company’s capitalization remains conservative, with a less than 20% unconsolidated total debt (including preferred shares) ratio at the end of June 2013. Fixed charge coverage ratios are similarly strong relative to both earnings and cash flow. Liquidity is not a source of concern, with approximately $800 million in cash and short-term securities at the holding company level at June 30, 2013, in addition to stores of liquidity at both GWO and IGM.

I’m sure we’ll soon be seeing some commentary on FFH, in the wake of their big deal:

BlackBerry Ltd. (BB) reached a tentative agreement for a $4.7 billion buyout by a group led by its biggest shareholder, forging a path to go private after years of losing ground to Apple (AAPL) Inc.’s iPhone and Google Inc.’s Android.

The group led by Fairfax Financial Holdings Ltd. (FFH) would offer $9 a share in cash, according to a statement today — a 3.1 percent premium over BlackBerry’s closing price last week. The consortium is still seeking financing for the offer, which will be subject to due diligence and further negotiation.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts and FixedResets both off 3bp, while DeemedRetractibles were up 14bp. The performance highlights table is surprisingly lengthy, given the modest overall moves. Volume was average.

We’re getting a good start on October tapering chatter:

Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year who has backed record stimulus, said a small tapering of bond buying is possible next month after the Fed made a close call this week in deciding not to slow purchases.

“That was a borderline decision” after “weaker data came in,” Bullard said today on Bloomberg Television’s “Bloomberg Surveillance” with Tom Keene and Sara Eisen. “The committee came down on the side of, ‘Let’s wait.’”

Bullard called October a “live meeting,” because “it’s possible you could get some data that change the complexion of the outlook and could make the committee be comfortable with a small taper in October.”

Meanwhile, political games in Washington may have an effect:

The U.S. House voted to finance the federal government through Dec. 15 and choke off funding for President Barack Obama’s health-care law, setting up what could be a prolonged showdown with the Senate and White House.

House Republicans said they wouldn’t accept Senate Majority Leader Harry Reid’s plan to remove the health-care language from the bill next week and warned of a temporary government shutdown after the fiscal year ends Sept. 30.

“We’ll add some other things that they hate and make them eat that, and we’ll play this game up until either Sept. 30, Oct. 3, somewhere in between,” said freshman Representative Richard Hudson, a North Carolina Republican. “At that point Harry Reid’s going to realize we’re serious and hopefully at that point, he’ll begin to negotiate with us.”

Inflation continues to be the least of our worries:

Canada’s inflation rate slowed for the first time in four months in August, approaching the bottom of the central bank’s target band, on lower costs for mortgage interest and prescription drugs.

The consumer price index rose 1.1 percent in August from a year ago, following July’s 1.3 percent pace, Statistics Canada said today from Ottawa. The core rate, which excludes eight volatile products, slowed to 1.3 percent from 1.4 percent.

Bank of Canada Governor Stephen Poloz, who sets policy to keep price gains in the middle of a 1 percent to 3 percent range, has said inflation will remain below 2 percent until mid-2015. The central bank’s key lending rate has been 1 percent for three years, the longest pause since the 1950s, and economists surveyed by Bloomberg predict Poloz won’t raise borrowing costs until the second half of 2014.

I must tell you about my wonderful new flashlight I purchased a few days ago from Baby Point Hardware

Click for big

The light source is a 3×8 grid of halogen lamps; it’s powered by 3 AA batteries. The light is very bright and by itself is reason to be impressed. There’s a magnet on the back – so I’ve got mine stuck to my fridge – and there’s also a plastic fold-out hook (like the hook on a clothes hanger) for hanging it somewhere convenient. What I find very impressive is that the halogen bulbs are recessed behind a cover that has a lens in front of each bulb. When you shine the light at a wall, it doesn’t make a diffuse rectangular pattern as one might expect, it makes a circular pattern just like a regular single-light-source flashlight would. I think this is really great engineering and – best of all – it only cost ten bucks and change!

My only complaint is that there is no manufacturer information on the case – the only clue is a logo for “Lightway”. However logical the name “Lightway” might be for a flashlight, it doesn’t help much with Google searches, which bring up a lot of Christian ministries but not a single flashlight manufacturer.

What a great time to be alive! Even little things like flashlights are being improved out of all recognition!

In markets, Canadian equity volume was huge as some tech firm did what tech firms do best.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 24bp, FixedResets off 2bp and DeemedRetractibles gaining 2bp. The Performance Highlights table is longer than might be expected, but with mixed contents. Volume was very low.