Category: Market Action

There is more indication that, if Carney was Spend-Every-Penny’s lapdog, Poluz will be his parakeet:

The two previous Bank of Canada governors, Mr. Carney and David Dodge, were unafraid to engage on subjects that didn’t necessarily pertain to the Bank of Canada’s core mandate of keeping inflation at an annual rate of 2 per cent. This tendency brought both men attention that they might not have had otherwise, and could cause them to eclipse their political masters.

Mr. Poloz came across as inclined to mind his own business. He called the central bank a “team player” and “part of the family of the public service.” He told New Democratic finance critic Peggy Nash that he had no problem with a legislation that would give cabinet a veto over hiring decisions at Crown corporations, including the central bank. “I see quite a clean separation between, if you like, administrative independence versus monetary policy independence,” he said.

How can you run an enterprise if you don’t have total control over staff? Answer: you can’t.

There was a decent jobs number in the US:

American employers took on more workers than forecast in May as the world’s largest economy weathered the impact of higher taxes and federal spending cuts.

Payrolls rose 175,000 after a revised 149,000 increase in April that was smaller than first estimated, Labor Department figures showed today in Washington. The median forecast in a Bloomberg survey called for a gain of 163,000. The unemployment rate climbed to 7.6 percent from 7.5 percent as a surge in the number of people entering the labor force swamped the number of positions available.

The Canadian number was very good:

The Canadian economy churned out 95,000 jobs last month, the second-biggest monthly gain on record, mostly in full-time positions in the private sector.

The jump in job creation is the largest since August, 2002, and sent the country’s jobless rate down a notch to 7.1 per cent in May, Statistics Canada said Friday. The increase was eight times what economists had expected.
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Private companies led the way. The private sector added 94,600 positions while the public sector created 6,600 jobs. Self employment fell by 6,200. The construction sector added 42,700 jobs, the biggest gain on record.

Wage gains, though still modest, are running above the rate of inflation, with average hourly wages growing 2.3 per cent in May from last year.

Bloomberg has an interesting piece about high frequency trading:

For the first time since its inception, high-frequency trading, the bogey machine of the markets, is in retreat. According to estimates from Rosenblatt Securities, as much as two-thirds of all stock trades in the U.S. from 2008 to 2011 were executed by high-frequency firms; today it’s about half. In 2009, high-frequency traders moved about 3.25 billion shares a day. In 2012, it was 1.6 billion a day. Speed traders aren’t just trading fewer shares, they’re making less money on each trade. Average profits have fallen from about a tenth of a penny per share to a twentieth of a penny.
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By the end of Aug. 2, Knight had spent $440 million unwinding its trades, or about 40 percent of the company’s value before the glitch.

Knight is being acquired by Chicago-based Getco, one of the leading high-frequency market-making firms, and for years considered among the fastest. The match, however, is one of two ailing titans. On April 15, Getco revealed that its profits had plunged 90 percent last year. With 409 employees, it made just $16 million in 2012, compared with $163 million in 2011 and $430 million in 2008. Getco and Knight declined to comment for this story.

Getco’s woes say a lot about another wound to high-frequency trading: Speed doesn’t pay like it used to. Firms have spent millions to maintain millisecond advantages by constantly updating their computers and paying steep fees to have their servers placed next to those of the exchanges in big data centers. Once exchanges saw how valuable those thousandths of a second were, they raised fees to locate next to them. They’ve also hiked the prices of their data feeds. As firms spend millions trying to shave milliseconds off execution times, the market has sped up but the racers have stayed even. The result: smaller profits. “Speed has been commoditized,” says Bernie Dan, CEO of Chicago-based Sun Trading, one of the largest high-frequency market-making trading firms.

It was a grim day for the Canadian preferred share market – for half of it, anyway! – with PerpetualPremiums losing 48bp, FixedResets gaining 4bp and DeemedRetractibles down 28bp. The lengthy Performance Highlights table is comprised almost entirely of losers, largely PerpetualPremiums. Volume was average.

NextEra’s legal tactics and understanding of the word “terror” terrify me.

The losing streak on the Canadian preferred share market continued today, with PerpetualPremiums losing 17bp, FixedResets down 14bp and DeemedRetractibles off 11bp. The performance highlights table is comprised entirely of losers, mostly Straight Perpetuals – but it’s only a little above average in length! Volume was high.

The SEC is continuing to tiptoe around Money Market Mutual Fund reforms in an effort to please their future employers at the fundcos:

The SEC’s proposal includes two principal alternative reforms that could be adopted alone or in combination. One alternative would require a floating net asset value (NAV) for prime institutional money market funds. The other alternative would allow the use of liquidity fees and redemption gates in times of stress. The proposal also includes additional diversification and disclosure measures that would apply under either alternative.
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The public comment period for the proposal will last for 90 days after its publication in the Federal Register.

Gating will accelerate runs, as investors rush to redeem before they are imposed. Similarly for liquidity fees, in which case it’s devil take hindmost.

What is gating? The 698-page full proposal (which I confess I have not read in its entirety) explains:

The second alternative proposal would require money market funds to impose a liquidity fee (unless the fund’s board determines that it is not in the best interest of the fund) if a fund’s liquidity levels fell below a specified threshold and would permit the funds to suspend redemptions temporarily, i.e., to “gate” the fund under the same circumstances.

It will be recalled, by those who retain the brains they were born with, that MMFs can only break the buck if there is a default and the only way to protect against such an occurrence is capital. However:

In the sections that follow, we discuss our evaluation of a NAV buffer requirement and an MBR requirement for money market funds. We also discuss comments FSOC received on these recommendations. For the reasons discussed below, the Commission is not pursuing these alternatives because we presently believe that the imposition of either a NAV buffer combined with a minimum balance at risk or a stand-alone NAV buffer, while advancing some of our goals for money market fund reform, might prove costly for money market fund shareholders and could result in a contraction in the money market fund industry that could harm the short-term financing markets and capital formation to a greater degree than the proposals under consideration.

One of the ‘reasons against’ is completely devoid of logic:

In addition, a NAV buffer does not protect shareholders completely from the possibility of heightened rapid redemption activity during periods of market stress, particularly in periods where the buffer is at risk of depletion. As the buffer becomes impaired (or if shareholders believe the fund may suffer a loss that exceeds the size of its NAV buffer), shareholders have an incentive to redeem shares quickly because, once the buffer fails, the fund will no longer be able to maintain a stable value and shareholders will suddenly lose money on their investment.504 Such rapid severe redemptions could impair the fund’s business model and viability.

Naturally, the buffer size most susceptible to these ill-effects is the buffer size of …. zero! So the SEC wants to maximize the incentive for shareholders to redeem shares quickly.

Equally moronic is:

The most significant direct cost of a NAV buffer is the opportunity cost associated with maintaining a NAV buffer. Those contributing to the buffer essentially deploy valuable scarce resources to maintain a NAV buffer rather than being able to use the funds elsewhere. The cost of diverting funds for this purpose represents a significant incremental cost of doing business for those providing the buffer funding. We cannot provide estimates of these opportunity costs because the relevant data is not currently available to the Commission.

The purpose of a market is to find a clearing price. The amount of buffer capital available will be determined by the excess yield it receives. The excess yield paid to buffer capital will determine the yield reduction to the normal unitholders. The yield reduction to the normal unitholders will determine the size of the fund. The size of the fund will determine the amount of buffer capital required.

It all works out, as long as you’re not afraid of free markets.

And then they get to the nub:

Taken together, the demand by investors for some yield and the incentives for fund managers to reduce portfolio risk may impact competition and capital formation in two ways. First, investors seeking higher yield may move their funds to other alternative investment vehicles resulting in a contraction in the money market fund industry.

Naturally, a contraction in the MMF industry would impair employment prospects for regulators.

In his opening statement Commissioner Troy A. Paredes demonstrated that it is possible to have lived through the Credit Crunch and not learnt a damned thing:

It has been suggested that some investors might redeem preemptively before a fee is imposed or a gate comes down. I think that this concern is overstated. Boards have discretion over whether a fee or gate will be instituted. Because fund investors do not know what the board will decide, they may find it difficult to redeem preemptively with any confidence that their timing is correct. In any event, to reduce the potential skittishness of investors, fund managers have an incentive to operate money market funds even more conservatively than Rule 2a-7’s risk-limiting conditions require. On the remote chance that preemptive redemptions are heavy enough to stress a fund, then the liquidity fee would be triggered and the board could decide to gate, the corrective effects of which I just described.

In the midst of a panic with several possible outcomes investors will (i) assign higher than realistic probabilities to their worst-case scenario and (ii) double it.

The basic theme is that MMFs should be allowed to endanger financial stability because a more conservative stance might harm their business.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums losing 21bp, FixedResets gaining 3bp and DeemedRetractibles down 20bp. The relatively lengthy performance highlights table is comprised entirely of losers, mostly straight perpetuals with a couple of low-coupon DeemedRetractibles thrown in. Volume was high.

PerpetualDiscounts now yield 4.98%, equivalent to 6.47% interest at the standard conversion factor of 1.3x. Long corporates now yield 4.21%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 225bp, unchanged from the figure reported May 29.

Europe is escalating the war on bankers, with proposed rules on fund manager bonuses and performance fees:

European Parliament lawmakers will delay voting on rules to curb fund manager bonuses as they continue to tussle over details of the plans.

Legislators are weighing changes to draft measures approved by the assembly’s economic and monetary affairs committee earlier this year that would ban managers of so-called UCITS funds from receiving bonuses worth more than their fixed pay and crack down on performance fees, Sven Giegold, the parliament’s lead lawmaker on the dossier, said today in an e-mail.
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UCITS, or Undertakings for Collective Investment in Transferable Securities, had more than 6 trillion euros ($7.8 trillion) under management as of April 2012, according to the European Commission. The funds are regulated at EU level and have the right to operate throughout the 27-nation bloc if they meet minimum oversight and investor-protection standards.

The big US exchanges can no longer compete in the marketplace, so they have come up with a bold, innovative strategy: outlaw competition:

Three large U.S. stock exchanges are lobbying for new limits on dark pools and other competitors, arguing that too much trading has become hidden on private venues that create more cost and volatility in public markets.

Chief executive officers of NYSE Euronext (NYX) Inc., Nasdaq OMX Group Inc (NDAQ) and Bats Global Markets Inc (BATS). have met in Washington over the past two months with lawmakers and the Securities and Exchange Commission. They’ve asked for a rule that could divert more orders to exchanges rather than trading in dark pools or within a broker’s inventory.

The exchanges say that more than a third of all stock transactions now occur without pre-trade prices being made public, up from 16 percent in January 2008. They are pressing the SEC to make market restructuring a priority as the agency resets under its new chairman, Mary Jo White.

“We are protecting the sanctity of the public quote, and you can expect us to continue to protect it with meetings we’ll be having and raising awareness of the issue in a very public way,” NYSE CEO Duncan Niederauer said in an interview.

I think it’s very noble of Niederauer to protect the sanctity of his fat salary.

DBRS has submitted a pugnacious comment letter to the SEC:

Section 939F of the Dodd-Frank Act directs the Commission, by rule, to establish a new system for the assignment of NRSROs to rate structured finance products as the Commission determines is necessary or appropriate in the public interest or for the protection of investors. In other words, the Commission must make a threshold determination regarding the public interest and the protection of investors before engaging in any new rulemaking on assigned credit ratings.[Footnote] If the threshold determination is made, the SEC must implement the system described in Exchange Act Section 15E(w) — a Dodd-Frank provision that was never enacted — unless the SEC determines that another system would better serve the public interest and the protection of investors.

While panelists at the Roundtable discussed many of the ways in which a Section 15E(w) system would not serve the public interest or the protection of investors, scant attention was paid to the threshold question as to whether any rulemaking is necessary and appropriate in this situation. DBRS continues to believe that the answer to this question is a resounding no.
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In order to cross the threshold to permissible rulemaking here, the Commission must find that the panoply of recently adopted and still-to-be-adopted NRSRO requirements is insufficient to protect investors, and that even with all of the publicly available information about rating methodologies and performance history, investors are incapable of evaluating the relative quality of NRSROs and their credit ratings and therefore, need the government to do it for them.
Since the last batch of proposed Dodd-Frank rules has yet to be implemented, DBRS submits that the Commission cannot make the required “necessary and appropriate” findings at this time.

Footnote reads: The consequences of neglecting threshold determinations in Dodd-Frank rulemaking are illustrated by International Swaps & Derivatives Ass’n. v. U.S. Commodity Futures Trading Commission, 887 F. Supp. 2d 259 (D.D.C. 2012). In this case, the court vacated and remanded to the CFTC for further proceedings a derivatives position limits rule that the CFTC had adopted pursuant to the Dodd-Frank Act. In so doing, the court rejected the CFTC’s contention that its rulemaking was mandated by the statute without regard to whether such rulemaking was necessary or appropriate. Although the court found the phrasing of the Dodd-Frank amendment to the Commodity Exchange Act to be ambiguous (hence the reason for the remand), no such ambiguity exists in Section 939F. It is clear that the SEC is to adopt a rule establishing a system for the assignment of credit ratings only upon a determination that such a system is necessary and appropriate in the public interest or for the protection of investors.

It was a violently mixed day for the Canadian preferred share market, with PerpetualPremiums losing 17bp, FixedResets gaining 3bp and DeemedRetractibles down 13bp. Volatility was low. Volume was high.

Julie Dickson gave a speech to the Institute of Internal Auditors:

This is not due to any particular incident, but rather seems to reflect a range of factors. Audit firm regulators such as the Canadian Public Accountability Board (CPAB), – and its counterparts around the world – which were largely set up in reaction to Enron, are up and running. And as usually happens when there is someone looking over your shoulder, these audit regulators are finding issues in external audits that require attention, such as a lack of professional skepticism on the part of external auditors.

Isn’t that amazing? Hire some nit-pickers, and they’ll nit-pick. Incredible.

Another poor day for the Canadian preferred share market, with PerpetualPremiums losing 16bp, FixedResets down 15bp and DeemedRetractibles off 12bp. The performance highlights table is only of average size, but is comprised entirely of losers. Volume was on the high side of average.

During the Credit Crunch, I wondered why CIT Group wasn’t an attractive takeover target. Now, nearly five years later, the speculation is spreading:

A Canadian lender such as Toronto-Dominion Bank could profit by using low-cost deposits to fund CIT’s high-yielding commercial loans, Palmer said. Analysts including Bert Ely at
Ely & Co. have said CIT could be a good match with San Francisco-based Wells Fargo & Co. (WFC), given the bank’s involvement in similar markets such as factoring and small-business lending. Factoring involves buying receivables at a discount from manufacturers to provide them with cash.

New York City may bring its pension management in-house:

New York City’s $140 billion retirement system pays Wall Street money managers about $360 million a year, the only one of the 11 biggest U.S. public-worker pensions that refuses to manage any assets internally. Larry Schloss, the city’s chief investment officer, says the practice must end.

Schloss, 58, points to Ontario’s C$130 billion ($126 billion) teachers’ pension fund, which has returned an average 9.6 percent annually on its investments since 2003 — 1.6 percentage points better than New York’s funds. The Canadian system reaped those gains mostly without paying outside asset managers. Schloss says the same in-house approach could work in New York.
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The 38 staff members in the city comptroller’s Bureau of Asset Management oversee five funds for police, firefighters, teachers, school administrators and civil-service workers. They get paid an average of $100,000 a year, less than the median base salary of a first-year Harvard MBA graduate. They farm out asset management to more than 300 firms.

In-house management is definitely the way to go for funds that have the size to justify it – and NYC’s $140-billion meets that criteria! It isn’t a panacea, though – you do have to be careful that you hire actual asset managers, not salesmen. And of course, having hired actual asset managers, being unafraid to fire them.

DBRS confirmed Valener Inc, proud issuer of VNR.PR.A, at Pfd-2(low):

DBRS has today confirmed Valener Inc.’s (Valener or the Company) Cumulative Rate Reset Preferred Shares, Series A rating at Pfd-2 (low), with a Stable trend. The rating is based on the credit quality of Valener’s 29%-owned Gaz Métro Limited Partnership (GMLP), which guarantees the First Mortgage Bonds and Senior Secured Notes (rated “A”) of Gaz Métro inc. (GMi), and Valener’s low non-consolidated leverage. GMi owns the remaining 71% of GMLP.

Approximately 70% of GMLP’s EBITDA is from its relatively stable regulated natural gas distribution business in Québec, which operates under a supportive regulatory regime. GMLP also benefits from cash flow diversification from its investments in regulated energy distribution businesses in Vermont and the pipeline business (see the rating report on Gaz Métro inc. dated May 31, 2013). Distributions from GMLP have sufficiently covered Valener’s preferred dividends and interest and operating expenses. Valener’s rating is one notch lower than the rating of GMi, reflecting its structural subordination to GMLP.

The Canadian preferred share market slid into month end, with PerpetualPremiums down 14bp, FixedResets losing 19bp and DeemedRetractibles off 11bp. Good volatility, comprised entirely of losers including, oddly enough, a large contingent from Canadian Utilities. Perhaps the CU.PR.G recent new issue has caused some indigestion? Volume was very high, with the highlights comprised almost entirely of FixedResets, the only exception being the CGI new issue.

And that’s it for another month!

S&P has a negative outlook on Ontario:

• •In our view, Ontario continues to have a large, wealthy, and well-diversified economy; ongoing transfer payment support from the federal government for various social programs; adequate liquidity support; and exceptional access to capital markets.
• •We are affirming our ratings, including our ‘AA-‘ long-term and ‘A-1+’ short-term issuer credit ratings on the province.
• •The negative outlook reflects our view regarding the minority legislature’s ability in the next one to two years to meet what we view as aggressive cost containment targets necessary for the debt burden to peak in fiscal 2015 as planned.

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The provincial government estimates that real GDP growth slowed to 1.6% in 2012 from a 1.8% gain in 2011. The government is forecasting real GDP growth to advance at a more tepid pace of 1.5% in 2013.
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Ontario’s large budgetary deficits since the recession have significantly boosted its debt burden. At the end of fiscal 2013, Ontario’s tax-supported debt totaled C$259.7 billion, representing 230% of consolidated operating revenues (or about 39% of GDP). This is a sharp increase from 134% of consolidated operating revenues in fiscal 2008. Owing to the still-large after-capital deficits expected for fiscal 2014, the province projects its tax-supported debt burden will increase further to 235% of projected consolidated operating revenues (or about C$271.3 billion) this year, which represents an improvement from its forecast level in the fiscal 2013 budget. However, in our opinion, the rate of growth of Ontario’s debt burden remains a concern, as it is already at the high end of the range for similarly rated domestic and international peers.

The negative outlook reflects our view that there is at least a one-in-three likelihood that we could lower the long-term rating one notch in the next year.

Additionally, DPS.UN is officially defunct:

DBRS has today discontinued the stability rating on the retractable units (the Units) issued by Diversified Preferred Share Trust following completion of its restructuring into an open-end mutual fund on May 24, 2013.

The announcement of the conversion was discussed on PrefBlog.

Of far greater interest was a new visitor to my garden:

Click for Big

Click for Big

It was another negative day for the Canadian preferred share market, with PerpetualPremiums losing 15bp, FixedResets off 6bp and DeemedRetractibles down 9bp. Volatility was minimal – the only highlight is RY.PR.H, which was called today. Volume was high.

Nothing happened today.

PerpetualDiscounts now yield 4.94%, equivalent to 6.42% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.16% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 225bp, a slight increase from the 220bp reported May 15.

A more severe drop for the Canadian preferred share market today, with PerpetualPremiums down 10bp, FixedResets off 6bp and DeemedRetractibles losing 22bp. Volatility was good, skewed to the downside. Volume was very high.

Great news! The Ontario Securities Commission is poised to use its awesome power for some good old-fashioned top-down social engineering:

Ontario is crafting new rules requiring public companies to set targets for the number of women in senior roles, a move with national implications that could reverse Canada’s decline in global standings for gender diversity in the corporate world.

Laurel Broten, Ontario’s minister responsible for women’s issues, revealed in an interview that the provincial government is working with the Ontario Securities Commission on ways to compel companies to set goals for boosting the number of women sitting as corporate directors, as well as in senior management.

It was a distinctly negative day for the Canadian preferred share market, with PerpetualPremiums down 9bp, FixedResets losing 15bp and DeemedRetractibles off 5bp. A distinct tilt in the Performance Highlights table towards losing FixedResets was lead by ENB issues, which are experiencing competitition from an attractive new issue. Volume was high.

Nothing happened today.

It was a directionless day for the Canadian preferred share market, with PerpetualPremiums flat, FixedResets gaining 2bp and DeemedRetractibles up 3bp. Volatility was minimal. Volume was light, with the highlights comprised entirely of FixedResets.