Category: Market Action

I have mentioned before my admiration of the US regulatory governance model in which dissent is encouraged and publicized. SEC Commissioner Daniel M. Gallagher is outraged that the Volcker Rule has been finalized:

Regulators, including those that, like the SEC, are purportedly independent, have been commanded to “err on the side of doing a little more, and then correct it if you’ve gone too far” in implementing the mandates of Dodd-Frank.[3]

The nonchalant suggestion to “err on the side of” overregulation is fully in line with the staggering level of hubris reflected throughout this joint rulemaking process, which has culminated with a purely political insistence on a pre-year end vote. In contradiction of our procedural rules for voting on major rule releases, including the longstanding guideline that Commissioners should be given thirty days to review a draft before a vote, we were given in early November not the draft final rule itself, but 18 separate documents that we were told would make up the final rule, along with two lists of “interagency staff-level open issues.” On the evening of November 27th, the night before Thanksgiving and less than two weeks before today’s vote, we were presented with revised versions of those documents as well as a reminder that the “back-end” sections were still being negotiated and would be sent separately. Not until five days ago did we have anything even resembling a voting draft, giving us less than a week to review the nearly one thousand pages of the adopting rule. In short, under intense pressure to meet an utterly artificial, wholly political end-of-year deadline, this Commission is effectively being told that we have to vote for the final rule so we can find out what’s in it.
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Even in the era of never letting a serious crisis go to waste, however, the mere fact that proprietary trading makes a segment of our policy establishment nervous[7] surely is not sufficient justification to potentially destroy the market-making system central to the liquidity and proper functioning of our capital markets. Years from now, I fear, financial historians will marvel at how the Dodd-Frank Act forced regulators to proactively disadvantage American financial institutions as well as the strength and integrity of our capital markets to address such tangential – at best – matters as conflict minerals, resource extraction, and proprietary trading, but gave a complete pass to the main cause of the financial crisis — decades worth of disastrous federal housing policy.

Meanwhile, Commissioner Luis A. Aguilar demontrated again his complete lack of comprehension of the concept of principal trading:

Moreover, proprietary trading by banks poses investor protection risks. For example, as highlighted by Senator Merkley and Senator Levin, banks that engage in proprietary trading may gather information from their clients’ investment activities and exploit them.[5] Indeed, banks have, in the past, created and marketed products that were secretly designed to fail;[6] or used client trading information against client interests.[7]

S&P has a nice monograph out titled Digging Deeper Into The U.S. Preferred Market.

Exhibit 4 charts the 10-year correlation of preferred securities, as represented by the S&P U.S Preferred Stock Index, to other asset classes. It is important to note that preferred securities exhibit higher correlation with high-yield bonds and equities, which are more sensitive to credit, and lower correlation with investment-grade corporate and municipal bonds, which are more sensitive to interest rate risk. … Data from Sept. 30, 2003 to Sept. 30, 2013.

Correlations can vary greatly over time; it would have been more useful to provide rolling five-year correlations. The US preferred share index is about 85% financials. They consider slightly over half of the index to be investment grade.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 9bp, FixedResets gaining 19bp and DeemedRetractibles down 21bp. The Performance Highlights index is fairly lengthy, with numerous bounce-backs from yesterday’s excesses – particularly BAM issues, which dominated both the winning side of the Performance Highlights table and the volume highlights. Volume was very high.

No commentary today! I’m learning all about SMTP as part of the PrefLetter server migration!

The Canadian preferred share market took a pasting today, perhaps due to investors worrying over the weekend about the US jobs number and risk of tapering, but oddly the very lengthy Performance Highlights table is led downwards by low-coupon FixedResets, that one might think would fare relatively better given a general rise in interest rates. Volume was extremely high.

Nice US job numbers!

The jobless rate dropped to a five-year low of 7 percent in November as American employers added more workers than forecast, boosting speculation the Federal Reserve may start scaling back stimulus as soon as this month.

The 203,000 increase in payrolls followed a revised 200,000 advance in October, Labor Department figures showed today in Washington. Joblessness fell from 7.3 percent.
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The Labor Department’s household survey showed more people were entering the labor force. The so-called participation rate rose to 63 percent in November, the first gain since June. A month earlier it fell to 62.8 percent, the lowest level since March 1978.

Factories took on the most workers since March 2012, employment in construction accelerated and payrolls in transportation and warehousing picked up, today’s figures showed.

Job gains have combined with cheaper gasoline, stock-market gains, higher home values and more available credit to fuel demand for big-ticket goods such as automobiles.
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Factories added 27,000 jobs, helped by a pickup at automakers, after a 16,000 gain in October. Construction firms took on 17,000 workers.

Average hourly earnings increased by 0.2 percent to $24.15 in November from the prior month, and climbed 2 percent over the past 12 months. The average work week for all workers climbed six minutes to 34.5 hours last month.

The energy sector has also been a bright spot for hiring, as America experiences an oil and natural gas boom.

BSD.PR.A was confirmed at Pfd-4(low) by DBRS:

As of December 5, 2013, the Portfolio consisted of 77% Canadian common stock, 20% REITs and 2% Canadian preferred stock. Since the rating was last confirmed in December 2012, performance has been relatively flat. Downside protection available to holders of the Preferred Securities fell to 13% in June 2013 but has since recovered, rising to approximately 20% at the end of November 2013 (similar to November 2012 levels). The yield on the Portfolio has decreased slightly, causing the distribution coverage ratio to drop to 0.75 times (as of November 29, 2013). The rating on the Preferred Securities continues to be constrained by the large percentage of underlying securities in the Portfolio that are not rated by any rating agency and the grind on the Portfolio due to distributions exceeding income.

I made a minor update to the November 29 Tracking Error, regarding ZPR’s valuation methodology and technical issues.

It was a mixed, mostly negative day for the Canadian preferred share market, with PerpetualDiscounts off 18bp, FixedResets gaining 2bp and DeemedRetractibles down 21bp. There was a good amount of volatility, mostly negative, led downwards by SplitShares, oddly enough. Volume was high.

It was another negative day for the Canadian preferred share market, with PerpetualDiscounts losing 17bp, FixedResets down 11bp and DeemedRetractibles flat. Volatility was modest. Volume was high.

More good news for fixed-income investors …:

The Bank of Canada says deep discounting by retailers is spreading disinflation – a byproduct of more consumers crossing the border to shop and the arrival here of U.S. chains such as Target Corp.

The central bank left its key overnight interest unchanged at 1 per cent Wednesday, citing a heightened risk of even lower inflation. The bank blamed excess supply in the economy and heightened competition in the retail sector, which it said are proving to be “more persistent than anticipated.”

Canada isn’t yet facing deflation – outright falling prices. But inflation is now running disquietingly below the Bank of Canada’s 2-per-cent target, and outside its acceptable range of 1 to 3 per cent. Consumer prices rose at a meagre annual rate of just 0.7 per cent in October, and economists expect inflation to remain similarly dormant in the months ahead.

The good news didn’t impress the Canadian preferred share market, with PerpetualDiscounts down 25bp, FixedResets off 17bp and DeemedRetractibles losing 34bp. The performance highlights table is comprised entirely of losers. Volume was very high.

PerpetualDiscounts now yield 5.62%, equivalent to 7.31% 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 250bp, a minor (and perhaps spurious) widening from the 245bp reported November 27.

Still doing some catching up … there’s a lot of catching up to do! I don’t think there will be much commentary for a little while yet!

It was a negative day for the Canadian preferred share market, with PerpetualDiscounts off 13bp, FixedResets losing 24bp and DeemedRetractibles down 15bp. This compares favourably again with the TXPR and TXPL indices which were down 33bp and 45bp, respectively. Something peculiar is going on indeed! Volatility was high, with FixedResets prominent among the losers, led downward by ENB issues, which may have been affected by today’s new issue announcement, or their superb performance in the last two days of November … or both, since the two phenomena probably have a least some relationship! Volume was high.

Today’s excuse for the lack of commentary is month-end. Good enough?

It is interesting to note that TXPR and TXPL were down 38bp and 40bp, respectively, according to the Toronto exchange. These large moves are not consistent with what I am seeing in my bid-based, investment-grade indices. I will be fascinated to learn if the apparent ZPR tracking error, discussed in my review of November’s MAPF performance, is confirmed; my nickel is on the scenario that it will be, that their tracking error for early December is normal, and that TXPR and TXPL reverse their late November blip. But only a nickel!

It was a negative day for the Canadian preferred share market, with PerpetualDiscounts losing 24bp, FixedResets down 7bp and DeemedRetractibles off 6bp. Volatility was average, skewed to the downside. Volume was above average.

Foreshortened again, late again … but I hope next week will be better …

Thank heavens November is finally over!

Another foreshortened market report, but I’m hoping to finish the importation of posts soon!

Well, I haven’t done anything more on the missing posts, but I do know that they all exist quite happily on the old server. They will be imported eventually – but probably not today.

So, in another foreshortened commentary …

PerpetualDiscounts now yield 5.54%, equivalent to 7.20% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.75% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 245bp.