Category: Market Action

Kevin Carmichael and Tara Perkins of the Globe are speculating about the next Superintendent of Financial Institutions:

Mark Zelmer, a former chief of the Bank of Canada’s financial stability department, represents OSFI at the Basel Committee on Banking Supervision, the global club of financial regulators that sets world banking standards, and has been taking on an increasingly public role in recent months.

The other deputy is Andrew Kriegler, who joined OSFI in February, 2013, after more than two decades on Bay Street, most recently as treasurer at Canadian Imperial Bank of Commerce.

Another possibility is Robert Kelly, chairman of Canada Mortgage and Housing Corp. and the former chief executive of Wall Street bank BNY Mellon, although he would presumably have to step down from his relatively new post at CMHC because OSFI regulates it.

The choice has added significance because Ottawa’s ranks of financial experts – a strength that helped Canada weather the financial crisis – are thinning quickly.

My guess? The one with least back-bone. As a second choice, the youngest one, who will have the most time to cash in on those lucrative financial sector directorships that ex-Superintendents get appointed to, for some odd reason.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 34bp, FixedResets off 11bp and DeemedRetractibles gaining 14bp. The lengthy Performance Highlights table is dominated by losing FixedResets with low Issue Reset Spreads. Volume was high.

Who wants to buy some European bank shares? There might be some on sale soon!

European banks have a capital shortfall of as much as 767 billion euros ($1 trillion) before the European Central Bank’s probe into the financial health of the region’s lenders, according to a study.

French banks show the biggest gap of 285 billion euros, followed by German lenders with as much as 199 billion euros, Sascha Steffen of the European School of Management and Technology in Berlin and Viral Acharya at New York University said in their study dated Jan. 15. The figures assume a benchmark capital ratio for other book measures of leverage of 7 percent, they wrote.
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The authors see particularly high risks among German state-owned banks, or Landesbanken. “Germany has many government-owned institutions that may require capital issuances and/or bail-ins,” they wrote.

Spanish banks have a shortfall of 92 billion euros, while Italian banks lack 45 billion euros, the study showed.

Watch out for those rising interest rates:

Royal Bank of Canada, the country’s largest mortgage lender, has quietly cut some of its mortgage rates this weekend. The move appears to be part of a broader dip in rates, although economists generally still expect an increase in 2014.

Five-year fixed mortgage rates rose industry-wide for much of 2013, from their low of 2.64 per cent in April to their high of 3.39 per cent in September, according to Alyssa Richard, the chief executive officer of RateHub.ca. They edged down a bit later in the fall but had generally been steady at around 3.25 per cent since then.

RBC is now cutting its two-, three-, four– and five-year fixed mortgage rates each by 10 basis points. In an emailed statement, the bank said that some mortgage lenders have recently been pricing at lower rates, prompting it to move.

Royal Bank is often a price leader when it comes to mortgages, and other big banks frequently follow suit after it changes its prices. Its five-year fixed mortgage rate is now 3.69 per cent.

The numbers in that story don’t exactly add up all that well, and the Bank of Canada insists that a five year mortgage now runs at 5.14%. Whatever. The reason for the discrepancy, according to ratehub.ca, is:

While the Bank of Canada has the most comprehensive data set, with the high prevelance of mortgage rate discounting, it is not the most accurate. The Canadian Association of Accredited Mortgage Professionals estimates that the average discount applied to a 5 year mortgage rate in 2010 was 1.42%. To source the discounted rates, we have combined our proprietary data supplemented with discount brokerage data from 2006-2010.

They have a picture:

Click for Big

Banks do this ridiculous posted-rate / discounted-rate thing because when you close out a mortgage early, you have to buy it back according to its posted rate, which is much more expensive than buying it back at the discounted rate. The US system, where the standard is a thirty year term with the mortgagee able to pay off at any time at par, is much better for home-owners – but of course, in the US there’s competition.

It was a mildly positive day for the Canadian preferred share market, with PerpetualDiscounts up 9bp, FixedResets winning 11bp and DeemedRetractibles gaining 6bp. Floaters fared poorly. The Performance Highlights table is notable for it’s heavy concentration of BAM issues … will you, won’t you, will you, won’t you, will you join the dance? Volume was above average.

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 38bp, FixedResets gaining 11bp and DeemedRetractibles off 7bp. The BAM Floaters got hammered. TRP issues were prominent in the Performance Highlights table, perhaps adjusting themselves for the new issue that settles Monday. However, as the chart below shows, the four TRP issues are well-behaved in terms of Implied Volatility theory. Volume was very heavy.

Click for Big

Protecting investors is boring! It’s time for a brave new world of social engineering!

The Ontario Securities Commission has proposed a new rule that would require companies to report annually on their policies to add more women to their boards and executive ranks.

The new rules unveiled Thursday will also require companies to report on their term limits for directors, which would bring Canada in line with many other countries that have also required companies to disclose whether they have term limits for their boards. Proponents argue term limits help ensure there is more board turnover so new directors – including women – can be added to the mix.

Companies are also being asked to report on whether they have voluntarily adopted targets for women on their boards or in executive roles.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 3bp, FixedResets gaining 9bp and DeemedRetractibles down 21bp. Volatility was minimal. Volume was high.

Looks like there’s some support for my view that public dissent is good policy:

The central bank’s governing council was created to reassure the public that setting interest rates in Canada wasn’t a one-man show. Yet the bank kept on speaking with one man’s voice: the governor’s. The institution likes it this way. Too much loose talk only creates confusion. The best way for the central bank’s junior players to stay on message is to limit their public appearances. Timothy Lane, a former IMF official who has been on the governing council since 2009, gave three speeches last year, according to the Bank of Canada’s website. Agathe Côté, a 30-year veteran of the Bank of Canada, has given seven speeches in three years as the governing council’s only woman. The public has heard from Lawrence Schembri once in the 11 months that he’s been a member of the policy committee.
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In Wrong: Nine Economic Policy Disasters and What We Can Learn from Them, economics professor Richard Grossman chronicles the human cost of ideological blindness. There is no cure for the affliction, but Prof. Grossman argues forcefully that the kind of debate that goes on at the Fed is the best way to avoid mistakes that result in stubborn, arrogant and ill-informed thinking. Prof. Grossman actually uses Canada’s central bank as a counterpoint. He shares a conversation he had with a Fed economist, who, after visiting Canada to present new research, complained of a “Bank of Canada view,” rather than a free-flowing exchange of ideas.

It won’t happen. The feds have gotten far too fond of having the BoC as just another department of the Ministry of Finance. It will take another disaster – on the scale (domestically speaking) of Nixon / Burns – before the public pressures the politicians towards the view that Central Bank independence isn’t just a feel-good catchphrase. And right now, the trend is in the other direction; What Debt made public his most recent instructions:

“So look, it’s not a reason to panic; in fact, we’ve actually seen Canadian debt beginning to level off. But we would obviously encourage people to look at their debt levels carefully. Eventually, it may not be for two, three years, but eventually interest rates will start to rise. And Canadians should ask themselves serious questions about if interest rates came up significantly, would I still be able to afford my debt payments?”

In more ways than one! Inflation is not the problem:

Central banks in the U.S., Japan and the euro area face inflation levels under their targets while trying to accelerate growth with policies including benchmark interest rates near zero and bond-buying programs. Lagarde said that while “the deep freeze is behind,” world growth remains “too low, too fragile and too uneven,” with some 200 million people needing employment.

“The world could create more jobs before we would need to worry about the global inflation genie coming out of its bottle,” [International Monetary Fund Managing Director Christine] Lagarde said in a speech at the National Press Club in Washington today. “With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery.”

Speaking of ethics, we are now increasing our reliance on paid informants:

The federal Conservatives are following through on a budget promise to set up the snitch hotline.
People who report major international tax evasion over $100,000 can get a share of the money recovered.

Be the first kid on your block to denounce his parents!

And in today’s mixed-up world, nobody knows or cares about the difference between trading as principal or agent:

Front running occurs when someone with advance knowledge of another market participant’s plan to make a sizable transaction puts an order in first, often profiting from a market move that can occur once the big trade has gone through.

Wrong. For it to be front running, you need to have obtained the information while acting as a fiduciary. And guess what? Institutional desks trade as principals. The current fashion for turning them into order-takers will have a severely negative influence on the market. But who cares, as long as it happens after the next election?
It was a poor day for the Canadian preferred share market, with PerpetualDiscounts losing 22bp, FixedResets off 2bp and DeemedRetractibles down 9bp. Volatility was muted. Volume was on the high side of average.

PerpetualDiscounts now yield 5.67%, equivalent to 7.37% interest at the standard 1.3x equivalency factor. Long corporates now yield about 4.7%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 265bp, a significant widening from the 255bp reported January 8.

Nothing happened today, either.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 20bp, FixedResets gaining 2bp and DeemedRetractibles off 4bp. The Performance Highlights table is notable for a fine complement of winning BAM PerpetualDiscounts. Volume was high, with many issues trading over 100,000 shares.

Nothing happened today. Bloomberg has a nice piece on Chinese MMFs, but it’s not written in such a way that I can convey the gist by extracting a few paragraphs. It will be most interesting to see what, if any, mechanisms are introduced to forestall disruptive panic after a major default.

It was a negative day for the Canadian preferred share market, with PerpetualDiscounts off 3bp, FixedResets flat and DeemedRetractibles down 16bp. The Performance Highlights table is heavily skewed to the downside and notable for the presence of two TRP issues, hit with fallout from the new issue. Volume was high.

Today’s big news was a lousy US jobs number:

The 74,000 gain in payrolls, less than the most pessimistic projection in a Bloomberg survey, followed a revised 241,000 advance the prior month, Labor Department figures showed today in Washington. The median forecast of 90 economists called for an increase of 197,000. The unemployment rate dropped to 6.7 percent, the lowest since October 2008, as more people left the labor force.

It was even worse in Canada:

The Canadian economy unexpectedly shed 45,900 jobs in December, the steepest decline in nine months, led by a drop in full-time positions.

The country’s jobless rate rose to 7.2 per cent in December from 6.9 per cent, Statistics Canada said Friday, putting it at a five-month high.

Canada’s job growth slowed by year’s end as a string of companies, from Sears Canada Inc. to Potash Corp. of Saskatchewan Inc. and BlackBerry Ltd., announced job cuts while a wave of manufacturers, particularly in Central Canada, said they plan to close plants. Through 2013, job gains in Canada averaged 8,500 a month, a sharp drop from the average of 25,900 new positions per month in 2012.

December’s weak reading, which sent the Canadian dollar to a new four-year low, was far below expectations as the number of full-time positions tumbled by 60,000. Economists had forecast about 14,000 new jobs and an unchanged rate.

And Fischer got the White House nod for Fed vice-chair:

Stanley Fischer, former head of the Bank of Israel, will be nominated to serve as vice chairman of the Federal Reserve, the Obama administration said.

Fischer, 70, would replace Janet Yellen, who was approved by the Senate this week for the chairmanship of the U.S. central bank. Lael Brainard, formerly the U.S. Treasury Department’s top international official, will fill an empty seat on the board, and Jerome Powell is being nominated for a second term, according to a statement today from the White House.

DBRS confirmed DF.PR.A at Pfd-3(low):

Since the last rating confirmation in September 2013, the net asset value (NAV) of the Company has been increasing. As of December 31, 2013, the downside protection available to the Preferred Shares is approximately 40.2%, and the dividend coverage ratio is 0.82 times. The Pfd-3 (low) rating of the Preferred Shares is based primarily on the downside protection available and the additional protection provided by an asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.

DBRS confirmed FTN.PR.A at Pfd-4(high):

Since the last rating confirmation in January 2013, the NAV of the Company has improved as U.S. and Canadian financial institutions outperformed the broader North American equity indices. Downside protection available to holders of the Preferred Shares rose to 41.6% as of December 31, 2013, from 32.8% on December 31, 2012. Despite the increased downside protection, the current dividend coverage ratio of around 0.65 and the reinstatement of Class A Share distributions result in an average grind of approximately 10% over the next two years. As a result, the rating has been confirmed at Pfd-4 (high).

And it was mostly good for the Canadian preferred share market today, although not as good as one might have thought, given an astonishing 13bp decline in the Ten-Year Canada yield, with PerpetualDiscounts off 1bp, FixedResets gaining 13bp and DeemedRetractibles up 15bp. The Performance Highlights table isn’t particularly lengthy but is uniformly positive and dominated by FixedResets. Volume was a little below average.

There’s a disturbing trend in the States:

New Jersey Governor Chris Christie called a news conference today after disclosures that an aide triggered a days-long traffic jam as political revenge, a revelation that threatens his national image and possible 2016 presidential run.
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Christie aides ordered the shutdown of the Fort Lee approach lanes to the bridge during four days in September to punish a Democratic mayor, according to e-mails obtained yesterday.
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An outline of the Christie administration’s link to the jams was contained in a cache of e-mails and text messages obtained yesterday by Bloomberg News.

“Time for some traffic problems in Fort Lee,” Bridget Anne Kelly, a deputy chief of staff for legislative and intergovernmental affairs, wrote to David Wildstein, a high school friend of Christie’s whom the governor appointed to the Port Authority.

“Got it,” Wildstein replied.

From Sept. 9 to 12, delays in crossing the George Washington Bridge that typically last about 30 minutes stretched to 4 hours or more. On the fifth day, officials on the New York side re-opened lanes on what the Port Authority calls the busiest bridge in the world, a key link for U.S. East Coast traffic on Interstate 95.

“We are appropriately going nuts,” Wildstein wrote to Kelly on Sept. 13, as traffic flowed. David Samson, Christie’s appointee as Port Authority chairman, was “helping us to retaliate” for the easing of the vehicular snarls.

This happened slightly prior to deliberate unnecessary inconvenience during the federal shut-down:

President Obama is not a bad poker player, but the man with all the chips always starts with the advantage (and he gets all the aces). He has closed Washington down as tight as he dares, emphasizing the trivial and the petty in making life as inconvenient as he can for the greatest number. It’s all in a noble cause, of course. Access to most of the memorials is limited, and often in curious ways. The Lincoln Memorial is easy to reach, with the streets around it remaining open. But the Martin Luther King Memorial is made difficult to reach, relegating it, you might say, to the back of the bus. Not very nice.

The Park Service appears to be closing streets on mere whim and caprice. The rangers even closed the parking lot at Mount Vernon, where the plantation home of George Washington is a favorite tourist destination. That was after they barred the new World War II Memorial on the Mall to veterans of World War II. But the government does not own Mount Vernon; it is privately owned by the Mount Vernon Ladies’ Association. The ladies bought it years ago to preserve it as a national memorial. The feds closed access to the parking lots this week, even though the lots are jointly owned with the Mount Vernon ladies. The rangers are from the government, and they’re only here to help.

This willingness to use government services as a political weapon has always been around, of course. But these examples are egregious.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 14bp, FixedResets down 6bp and DeemedRetractibles off 3bp. Volatility was average. Volume was average.

Nothing happened today.

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp, FixedResets up 11bp and DeemedRetractibles down 12bp. The Performance Highlights table is short by standards of the past year. Volume was on the low side of average.

PerpetualDiscounts now yield 5.66%, equivalent to 7.36% 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 255bp, a slight (and perhaps spurious) narrowing from the 260bp reported December 27.