Category: Market Action

Boyd Erman made some good points on mortgages yesterday:

Imagine the federal government lauding cellphone carriers for keeping rates high, or airlines for declining to match each other’s fare cuts. There would be an outcry. Yet Finance Minister Jim Flaherty congratulates banks for not competing to offer the best loan price on what will likely be the biggest purchase most Canadians’ ever make, their home, and nobody can gin up much outrage.
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Mortgage debt seems to becoming one of those perceived ills, like booze and cigarettes, where the government not only regulates how they can be sold, but sets minimum prices aimed at preventing people from overindulging. If that’s the case, maybe the government ought to come right out and say it.

I don’t agree with everything he said, but by and large – well done, Mr. Erman!

I mentioned the Too-Big-To-Fail subsidy on March 11 and complained that the banks’ rebuttal of estimates of the subsidy’s size was not available. Well, it has finally been released:

the Financial Services Forum, the Financial Services Roundtable, The Clearing House, Securities Industry and Financial Markets Association, and the American Bankers Association, released the following policy brief in response to questionable assertions of a “taxpayer subsidy” to large banks. The following points should be kept in mind:

• The recent estimation that large banking companies enjoy a subsidy worth $83 billion is based on a flawed methodology, and on the extrapolation of stale and unreliable financial market data collected before passage of the Dodd-Frank Act.
• An IMF analysis completed in 2010 – before passage of Dodd-Frank – estimated the cost of funding advantage enjoyed by large banking companies to be only “about 20 basis points on average.”
• Several more recent studies indicate that, since the passage of Dodd-Frank, any cost of funding advantage has been dramatically reduced or even eliminated. In fact, two recent studies conclude that markets are now imposing a cost of funding premium on large banks of up to 35 basis points.

Bloomberg’s editors continue the debate:

Finally, the two papers by Cyree and Balasubramnian represent good-faith efforts that the authors readily admit are far from ideal. They found that big banks’ borrowing costs increased relative to those of small banks in the second half of 2010, and attributed the change to Dodd-Frank’s elimination of the subsidy. They employed data on 30 banks, only 11 of which were not too big to fail, a small sample that might have skewed the estimated funding advantages of the bigger institutions. Also, their statistical controls could have missed important factors — such as the brewing European debt crisis — that might have had a differential effect on the borrowing costs of the biggest banks.

As Cyree put it: “I can’t tell you that this is strictly due to Dodd-Frank.”

Of course, no statistical study is perfect, particularly when dealing with something as difficult to estimate as the bank subsidy. That said, a paper by three economists — Viral Acharya of New York University, Deniz Anginer of Virginia Tech and A. Joseph Warburton of Syracuse University — looked at a larger sample of financial institutions and found that the too-big-to-fail subsidy amounted to almost $100 billion in 2010, the year Dodd-Frank was signed into law. The paper also included a separate test, which looked at bond yields immediately before and after the House and Senate reconciled their versions of the bill. It suggested that Dodd-Frank might have actually increased the subsidy.

One thing Bloomberg pointed out was a cheap-shot by the bank lobbyists:

Given these analytic shortcomings, it is not surprising that the title page of the paper bears a boxed disclaimer stating in bold font: “This working paper should not be reported as representing the views of the IMF.”

Bloomberg points out:

The disclaimer is standard boilerplate for IMF working papers.

I’m not aware of any central-bank-style research that does not carry such a disclaimer. The banks’ attempt to make it appear to be a deliberate distancing of the IMF from the research does nothing but harm their own credibility.

It would appear that there are now so many regulators they can’t all be hired by banks, so they’re widening the net:

A series of proposed rule changes from the country’s securities regulators would make hostile takeover bids harder to pull off, tightening a regime critics say has rendered corporate Canada easy hunting grounds for U.S. hedge funds.

On Wednesday, the Canadian Securities Administrators (CSA), which is the umbrella group for Canada’s provincial market watchdogs, officially unveiled its proposal to lower the “early warning” stock ownership threshold that forces would-be hostile takeover bidders to disclose their holdings in a target company. As previously reported in The Globe, bidders would have to go public after acquiring 5 per cent of a target company’s shares, down from 10 per cent. The CSA says the change would improve “market transparency.”

And on Thursday, the CSA will formally unveil a long-awaited proposal that would strengthen what are known as “poison pills”: tactics used by boards of directors to try to fend off hostile takeover bidders. The plan would see securities regulators allow companies to use poison pills indefinitely, provided they are approved by shareholders at the most recent annual meeting or at a special meeting held in the face of a hostile bid.

It was a mild day for the Canadian preferred share market (except for RON.PR.A!), with PerpetualPremiums flat, FixedResets off 4bp and DeemedRetractibles down 5bp. Volatility was muted. Volume was average.

PerpetualDiscounts now yield 4.82%, equivalent to 6.27% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.35%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 210bp, unchanged from the figure reported on March 6.

The What-Debt? government has given more help to its buddies at Air Canada:

The federal government has approved Air Canada’s request for a reprieve from funding its pension deficit, but has imposed a host of conditions – including a freeze on executive pay and a ban on dividends or share repurchases.

The deal requires the airline to make contributions to the plan of at least $150-million a year totalling at least $1.4-billion over seven years. The special contributions would be on top of the current service payments required by the pension plan.

More micro-managing and more interference in labour relations! This follows a suspension of the right to strike and protection from competition.

It was a fine day for the Canadian preferred share market, with PerpetualPremiums up 9bp, FixedResets winning 20bp and DeemedRetractibles gaining 7bp. Volatility was minimal. Volume was high.

Moody’s points out that the stock of US investment grade corporate bonds is heavily weighted towards lesser credits:

It would be remiss not to add that the risk profile of the US investment-grade corporate bond market also has risen considerably. Given how the share of investment-grade bonds outstanding rated either A3 or Baa has soared from year-end 2007’s 31% to year-end 2012’s record 62%, it’s unlikely that the investment-grade bond yield spread might quickly return to its medians of the two previous recoveries of 103 bp for industrial companies and of 78 bp for financial companies. According to Barclays Capital, these spreads were recently at 135 bp for the industrials and 138 bp for the financials. (Figure 8.)

In conclusion, this very much remains a subpar recovery of above-average risk. What happens to business sales and profits will not only determine the durability of the latest equity rally, it will also have much to say about whether or not Treasury bond yields rise and credit spreads narrow.

Click for Big

The Too-Big-To-Fail Banks, not surprisingly, claim there is no Too-Big-To-Fail subsidy:

Lobby groups for the largest U.S. banks pushed back against claims that they remain too big to fail, rebutting assertions by lawmakers and regulators that they enjoy a “taxpayer subsidy” because of their size.

The Dodd-Frank Act, passed by Congress in response to the 2008 credit crisis, greatly diminished whatever advantage the biggest lenders held over smaller rivals, five industry groups wrote today in a brief on the issue. Senator Elizabeth Warren, a Massachusetts Democrat, used outdated information when she raised the matter at a hearing last month, the groups said.

“There is substantial evidence that the market recognizes the impact Dodd-Frank has had on investor expectations,” the Clearing House, Financial Services Forum, Financial Services Roundtable, Securities Industry and Financial Markets Association and American Bankers Association said in their brief. “Given the sizable costs associated with new regulations, together with the new orderly liquidation framework, any purported TBTF-related funding advantage has clearly been reduced or even eliminated.”

I can’t find the actual brief, even when looking at tweets from the Financial Services Roundtable – the links don’t work. Perhaps they’re waiting for the recipients to publish it before making it public.

Bloomberg published a good article on complexity:

A highly unusual collaboration between economists and scientists offers an important insight for those who want to fix the world’s crisis-prone financial system: There’s no simple way to understand a complex network.

This month’s issue of the research journal Nature Physics features a handful of papers in which physicists, other natural scientists and leading experts in economics and finance — including prominent banking regulators and Nobel Prize-winning economist Joseph Stiglitz — put their minds together to figure out finance. What the scientists bring to the table is experience in studying networks, bewildering tangles of interlinked and interdependent things such as an ecological food web or the Internet.
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Fifty years ago, ecologists interested in the stability of food webs at first mistakenly concluded that more complexity — more species and a greater density of links among them — would tend to make an ecosystem more stable. This turned out to be wrong. Later work by noted ecologist Robert May demonstrated that while healthy ecological networks are rich and diverse, too much complexity tends to make them unstable and prone to collapse. Loosely speaking, networks with too much complexity can go wrong in too many ways.

One of the papers referenced was by Caccioli, Marsili and Vivo, titled Eroding market stability by proliferation of financial instruments:

We contrast Arbitrage Pricing Theory (APT), the theoretical basis for the development of financial instruments, with a dynamical picture of an interacting market, in a simple setting. The proliferation of financial instruments apparently provides more means for risk diversification, making the market more efficient and complete. In the simple market of interacting traders discussed here, the proliferation of financial instruments erodes systemic stability and it drives the market to a critical state characterized by large susceptibility, strong fluctuations and enhanced correlations among risks. This suggests that the hypothesis of APT may not be compatible with a stable market dynamics. In this perspective, market stability acquires the properties of a common good, which suggests that appropriate measures should be introduced in derivative markets, to preserve stability.

This basic thesis has been known for some time. One of the reasons the US long bond futures contract was designed the way it was – with Cheapest To Deliver options for the seller, as well as a certain amount of leeway in delivery times – was to make it more complex. More complexity makes it harder to analyze, which encourages liquidity since there will be a range of views regarding the fair price of the instrument given the same data from the physical market.

In practice, markets are never perfectly liquid. The very fact that information can be aggregated into prices, requires that prices respond to trading (see e.g. [6] for evidence on FX markets or [5] for equity markets). In other words, it is because markets are illiquid that they can aggregate information into prices. Liquidity indeed is a matter of time scale and volume size [4, 5]. This calls for a view of financial markets as interacting systems. In this view, trading strategies can affect the market in important ways. Both theoretical models and empirical research, show that trading activity implied by derivatives affects the underlying market in non-trivial ways [10].
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The aim of this paper is to contrast, within a simple framework, the picture of APT with a dynamical picture of a market as an interacting system. We show that while the introduction of derivatives makes the market more efficient, competition between financial institutions naturally drives the market to a critical state characterized by a sharp singularity. Close to the singularity the market exhibits the three properties alluded to above: 1) a strong susceptibility to small perturbations and 2) strong fluctuations in the underlying stock market. Furthermore 3) while correlations across different derivatives is largely negligible in normal times, correlations in the derivative market are strongly enhanced in stress times, when the market is close to the critical state. In brief, this suggests that the hypothesis of APT may not be compatible with the requirement of a stable market.
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But it is precisely because these models are simple that one is able to point out why theoretical concepts such as efficient or complete markets and competitive equilibria have non-trivial implications. The reason being that these conditions hold only in special points of the phase diagram where singularity occurs (phase transitions). It is precisely when markets approach these ideal conditions that instabilities and strong
fluctuations appear [13, 14]. Loosely speaking, this arises from the fact that the market equilibrium becomes degenerate along some directions in the phase space. In a complete, arbitrage-free market, the introduction of a derivative contract creates a symmetry, as it introduces perfectly equivalent ways of realizing the same payoffs. Fluctuations along the direction of phase space identified by symmetries can grow unbounded. Loosely speaking, the financial industry is a factory of symmetries, which is why the proliferation of financial instruments can cause strong fluctuations and instabilities. In this respect, the study of competitive equilibria alone can be misleading. What is mostly important is their stability with respect to adaptive behavior of agents and the dynamical fluctuations they support and generate.
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It has been recently suggested that market stability appears to have the properties of a public good [22]. A public good is a good i) whose consumption by one individual does not reduce its availability for consumption by others (non-rivalry) and ii) such that no one can be eectively excluded from using the good (non-excludability). At the level of the present stylized description, the expansion in the repertoire of traded assets introduces an externality which drives the market to unstable states. This suggests that systemic instability may be prevented by the introduction of a tax on derivative markets, such as that advocated long ago for foreign exchange markets by Tobin [23], or by the introduction of “trading permits”, similar to those adopted to limit Carbon emissions [25]. The stabilizing effect of a Tobin tax has already been shown within a model of a dynamic market which is mathematically equivalent to the one presented here [24].
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The proliferation of financial instruments makes the market look more and more similar to an ideal arbitrage-free, efficient and complete market. But this occurs at the expense of market stability. This is reminiscent of the instability discussed long ago by Sir Robert May [20] which develops in ecosystems upon increasing bio-diversity13. For ecologies this result is only apparently paradoxical. Indeed the species which populate an ecosystem can hardly be thought of as being drawn at random, but are rather subject to natural selection. Indeed, on evolutionary time scales stability can be reconciled with bio-diversity, as shown e.g. in Ref. [21]. The diversity in the ecosystem of financial instruments has, by contrast, been increasing at a rate much faster than that at which selective forces likely operate.

While I suspect that a Tobin Tax might indeed work, it’s rather a blunt instrument. Far better to allow selective forces to operate, by allowing bankruptcies and firing incompetents. But nobody ever lost his job in the financial industry for incompetence.

Closer to home, Moody’s is taking care to be cautious:

A severe economic shock, such as the kind that hit Japan in the early 1990s and California and Nevada in 2006, could knock Canadian housing prices down by 44%, according to a formula devised by Moody’s Investors Service to rate securities linked to mortgages.

Such a decline would be driven primarily by the phenomenal upswing in Canadian home prices over the past decade, Moody’s said.

While house prices in Spain could plummet by a more severe 52%, Canada joins Spain, as well as the United Kingdom and Australia, in the ratings agency’s assessment of countries where growth in housing prices over the past 10 years has driven their values away from sustainable market fundamentals and into “overheated” territory.

… but TD emphasizes the central distribution of probabilities:

Canada’s real estate bonanza of the past decade has come to end and the long-term trend as one of the most profitable places to invest is also not encouraging, a new research paper from the TD Bank argues.

The “special report” from one of Canada’s largest banks makes the case that gains in housing prices have been exceptionally strong over the last 10 years, even when accounting for a sharp drop during the 2008-09 recession. But now is the time for a bit of a payback.

The report does not predict a collapse in house prices as some analysts have suggested. In fact, it sees prices rebounding after a few years of a correction to as high as eight per cent.

However, the longer term trend is for home price gains to average about two per cent over the next 10 years — flat once inflation is taken into account, says TD chief economist Craig Alexander.
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The problem with the housing collapse scenario, says Alexander, is that typically a sharp correction needs a trigger in terms of a steep increase in interest rates or unemployment, both of which appear unlikely at this point.
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Somewhat surprisingly, the report predicts Vancouver and Toronto, along with Victoria, Edmonton and Calgary will continue to outpace the national average in terms of home prices over the next 10 years.

Vancouver and Toronto are regarded as cities with the most inflated prices — despite recent corrections — but TD argues that the two cities will realize the biggest influx of immigrants, so demand will remain higher. The Alberta cities will do well because of both population growth and higher than average income growth.

Alexander says the two biggest factors in trend home prices are population growth and housing formation, which both favour Toronto and Vancouver.

CU Inc., proud issuer of CIU.PR.A, CIU.PR.B and CIU.PR.C was confirmed at Pfd-2(high) by DBRS:

DBRS has today confirmed the Issuer Rating, Commercial Paper, Unsecured Debentures & Medium-Term Notes and Cumulative Preferred Shares of CU Inc. (CUI or the Company) at A (high), R-1 (low), A (high) and Pfd-2 (high), respectively, all with Stable trends. The rating confirmations are based on CUI’s low business risk, which stems from the regulated nature of its operations supported by a reasonable regulatory environment; strong portfolio of diversified regulated businesses; and solid financial profile.

The Company’s business risk profile is viewed as strong as all of its earnings are generated from regulated electricity and gas businesses, which operate under a relatively stable, albeit evolving, regulatory framework.
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CUI is the highest rated publically owned utility and continues to grow through its investments in low risk assets. The Company has a conservative strategy of funding a significant portion of its capex with internally generated cash flows, conservative dividend payouts and equity injections from its parent (Canadian Utilities Limited; rated “A”). CUI has a proven track record of funding equity in a timely manner to remain in line with its regulatory capital structure. DBRS expects the parent to continue to provide support to CUI, if needed.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 4bp, FixedResets up 10bp and DeemedRetractibles down 8bp. Volatility was below average. Volume was average.

The US reported a good jobs number:

ob growth surged last month as automakers, builders and retailers pushed the unemployment rate to a four-year low, defying concerns that budget battles in Washington would harm the economic expansion.

Employment rose 236,000 last month after a revised 119,000 gain in January that was smaller than first estimated, Labor Department figures showed today in Washington. The median forecast of 90 economists surveyed by Bloomberg projected an advance of 165,000. The jobless rate dropped to 7.7 percent, the lowest since December 2008, from 7.9 percent.

This was echoed in Canada:

Canada’s see-sawing labour force swung back into job-creation mode in February, with a net 50,700 people finding work. Most of those new hires were aged 55 or older — continuing a trend from January.

There’s a kerfuffle about revolving door regulation in the US:

“There’s a basic resistance to seeing things from the investor point of view,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “It all goes back to the same thing — the degree to which the industry dominates this whole conversation.”

It’s a cultural problem as Roper sees it: Regulators and the regulated operate in a setting where people with the same pedigree move back and forth between government and private- sector jobs and outside views carry little weight. SEC spokesman Kevin Callahan said in an e-mail that investor protection is at the core of all the agency’s actions, and that until an investor advocate is appointed, existing SEC offices are performing the roles required by Dodd-Frank.

A study released last month by the Project on Government Oversight, a nonprofit watchdog group, stirred up a discussion about the revolving door of lawyers who alternate between government and industry, where they defend banks and brokers. Sorting through documents filed by 419 SEC alumni who had recently left the agency, the Project found 2,000 cases in which alumni planned to represent a client or an employer before the SEC between 2001 and 2010.

That’s a lot of meetings among lawyers who used to work down the hall from one another, but who now — officially, anyway — are adversaries. In the view of SEC critics, it is part of the clubby state of affairs that pushes government watchdogs and banks to see things the same way. Callahan said that the U.S. Government Accountability Office studied the revolving-door issue and concluded that the SEC’s controls were as strong as those of other government agencies. What a relief.

The problem is not so much that these guys know each other; I suspect that this helps as much as it hurts in terms of lawyers having a known reputation and encourages a little more frankness than might otherwise be the case. The problem is that the regulatory guys are representing their current employer against their future employer.

Instead of addressing the issues, the SEC is busily enforcing Brazilian laws:

A published report says the Brazilian operations of Brookfield Asset Management Inc. are under investigation by the U.S. Securities and Exchange Commission over allegations that it used bribes to get approval for construction deals.

The Wall Street Journal report said the SEC is expected to interview former Brookfield executive Daniela Gonzalez, who worked in its Sao Paulo unit, over allegations she made.

The Great White Fathers at the SEC evidently believe that Brazilian savages can’t enforce their own laws.

Fitch downgraded Italy:

Fitch Ratings-London-08 March 2013: Fitch Ratings has downgraded Italy’s Long-term foreign and local currency Issuer Default Ratings (IDR) to ‘BBB+’ from ‘A-‘. The Outlook on the Long-term IDRs is Negative. Fitch has simultaneously affirmed the Short-term foreign currency IDR at ‘F2’ and the common eurozone Country Ceiling for Italy at ‘AAA’.
KEY RATING DRIVERS
The downgrade of Italy’s sovereign ratings reflects the following key rating factors:

– The inconclusive results of the Italian parliamentary elections on 24-25 February make it unlikely that a stable new government can be formed in the next few weeks. The increased political uncertainty and non-conducive backdrop for further structural reform measures constitute a further adverse shock to the real economy amidst the deep recession.
– Q412 data confirms that the ongoing recession in Italy is one of the deepest in Europe. The unfavourable starting position and some recent developments, like the unexpected fall in employment and persistently weak sentiment indicators, increase the risk of a more protracted and deeper recession than previously expected. Fitch expects a GDP contraction of 1.8% in 2013, due largely to the carry-over from the 2.4% contraction in 2012.
– Due to the deeper recession and its adverse impact on headline budget deficit, the gross general government debt (GGGD) will peak in 2013 at close to 130% of GDP compared with Fitch’s estimate of 125% in mid-2012, even assuming an unchanged underlying fiscal stance.
– A weak government could be slower and less able to respond to domestic or external economic shocks.

Spend-Every-Penny continued his centrally planned micromanaging approach to banking:

Canada’s Finance Minister has taken his battle against a housing bubble an extraordinary step further, issuing rare praise for the country’s banks for not matching Bank of Montreal’s cut-rate mortgage.

Jim Flaherty said Friday he also spoke with BMO this week after it cut its five-year, fixed-rate mortgage last weekend to 2.99 per cent, expressing how troubled he was by the cut from 3.09 per cent.

“I spoke with them about that this week and expressed my concern … in two ways,” Mr. Flaherty told reporters in Ottawa.

There is not any mention in the article of the FedGov’s policy of pouring gasoline onto the housing market fire by increasing the amount of federal mortgage insurance available through the CMHC.

Norway’s Sovereign Wealth Fund returned 13.4% last year. The fund has recently formalized its rebalancing policy and has returned +2.57% p.a. real return since 1998; note, however that this does not appear to be as good as the OTPP returns. If a pension plan wants good returns, it needs a captive asset manager.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 3bp, FixedResets down 12bp and DeemedRetractibles gaining 2bp. Volatility was nil. Volume was on the high side of average.

I have a little difficulty with the definition of “skilled workers” in the following but it’s nice to see people who can actually do things in demand:

After spending years searching for enough crude to pump, the U.S. oil and natural gas industry now is struggling to find and pay for enough skilled workers to tap the abundant supply in shale rock, putting $100 billion in planned petrochemical projects at risk.

Engineers and similar professionals earned an average $183,000 to $285,000 in 2012 depending on their position and background, a 20 percent to 50 percent jump since 2009, NES Global Talent data show. Wages in energy and mining have grown at nine times the rate of all industries since 2008, and starting salaries for petroleum engineering graduates are about $98,000, up 9.7 percent since 2008, according to PayScale Inc.
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Chevron Phillips expects to employ 10,000 engineers and construction workers to build an ethylene plant and two plastics factories outside Houston at a cost of $5 billion. Chevron is racing competitors such as Dow, Exxon Mobil Corp. and a half dozen other companies that have announced plans to build plants for converting gas into ethylene, the most used petrochemical, on the Gulf Coast.

To me, “skilled workers” means tradesmen – electricians, plumbers, mechanics – not engineers, who I think of as “professionals”. But no matter.

John Paulson, whose successful bet against sub-prime made him a fortune and attracted a lot of assets, is the poster-boy for performance chasing:

John Paulson posted an 18 percent decline in his Gold Fund last month as a slump in the metal, after more than a decade of gains, undermined efforts by the billionaire hedge-fund manager to rebound from two years of losses in some strategies.
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Paulson is being hurt as gold fell for the fifth straight month, its longest slump in 16 years. The manager told clients in 2012 his Gold Fund would beat his other strategies over five years because the metal was the best hedge against inflation and currency debasement as countries pump money into their economies. Falling gold stocks helped fuel losses last year in the manager’s $4.9 billion event-driven Advantage funds and the Gold Fund, and he also made wrong-way bets that Europe’s debt crisis would worsen.

The latest New Big Thing in junk bonds is Covenant Arbitrage, which is the cool way to say “reading the prospectus”:

The hundreds of pages of tedious documents that govern every corporate bond sold are suddenly a hot commodity as traders look for an edge with the biggest bull market ever in junk debt slowing.

Chesapeake Energy Corp. (CHK)’s $1.3 billion of 6.775 percent notes climbed to a record 104.5 cents on the dollar in a wager that the natural gas producer has run out of time to repurchase the debt at par, or 100 cents, as allowed by the debt’s covenants. Plano, Texas-based J.C. Penney Co. (JCP)’s 7.125 percent notes due 2023 have risen 9 percent this month, even as the rest of its debt plummets, in a bet the retailer will be forced to repay the issue early because of a covenant breach.
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Investors began pushing up the price of Chesapeake’s 2019 notes last month to take advantage of “sloppy” language in the deal documents, according to Covenant Review’s [founder Adam] Cohen. Those securities rose above par even though the bond covenant has a redemption provision based on a March 15 date. The debt has since declined to 103.5 cents.

Some traders believe that the company is wrong that it can redeem the notes at par and that Chesapeake would have to pay a substantial premium if it wanted to repurchase them, Cohen said. If a so-called make-whole call provision were triggered, the company would have to pay bondholders as much $400 million in addition to the principal amount of the notes.

“The value of litigating the position may be high enough to make a little legal spending on a narrow issue worthwhile,”
Cohen wrote in a March 1 report. “Hiring a law firm to challenge the narrow issue of a par call would be relatively inexpensive.”

Jim Gipson, a spokesman for Oklahoma City-based Chesapeake, said he couldn’t immediately comment.

I quite agree with the conclusion of this article comparing US and Canadian mutual fund fees:

Over the longer term, fund investors should be asking regulators to allow the sale of U.S.-domiciled funds in Canada. While a common regulatory regime similar to the UCITS system in Europe (which allows funds to be sold throughout the European Union) may not be possible between Canada and the United States, fund regulation between the two countries is not so different as to prohibit the creation of a passport system.

Such a move would give Canadian fund investors more choice and more access to economies of scale, which could only translate into further reductions in the cost disparity between the two countries.

However, we have a mercantilist regulatory environment in Canada: US funds are disallowed in a tit-for-tat move taken in reaction to the SEC’s ban on US investment in Canadian funds. “You’re screwing your consumers, eh?” shout our red-faced regulators while practicing for their next job interviews. “Ha! We’ll just screw our consumers MORE! That’ll show you!”

What is it about university administration that attracts the brain-dead?

Scholarship programs funded by some of the nation’s biggest donors, including Gates, Coca-Cola Co. and Michael Dell, are taking aim at practices used by wealthy colleges, such as Boston College, which has a $1.65 billion endowment, Amherst, with a $1.64 billion fund and Barnard, with $216.4 million. They say the schools hurt poor and minority students by rescinding aid once they find out they have awards from outside sources or by banning use of the funds to cover some student contributions.
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Letting students like Brindis use outside grants to cover the contribution “would be unfair to all the other ones who didn’t win the Gates,” [Boston College director of student financial strategies Bernie] Pekala said.

Similarly at Amherst College, a wealthy liberal arts school in Massachusetts, students can’t use outside scholarships to pay their “summer contribution,” which can run as high as $1,600, said Tom Parker, dean of admission and financial aid.

“Here’s the conundrum. You want to treat everybody as equally as you can,” Parker said. “Morally it’s a difficult question.”

Um … isn’t the whole point of scholarships to discriminate on the basis of ability?

It was a day of highly segmented gains for the Canadian preferred share market, with PerpetualPremiums up 3bp, FixedResets winning 27bp and DeemedRetractibles gaining 1bp. This may be due to the market absorbing the TRP.PR.D monster issue, or it may not. Volatility was high and dominated by – you guessed it – winning FixedResets. Volume was very high.

The Bank of Canada statement held no surprises:

Canada’s economy grew by 0.6 per cent at annual rates in the fourth quarter of 2012, with solid growth across most domestic components of GDP offset by a sharp reduction in the pace of inventory investment. The Bank expects growth in Canada to pick up through 2013, supported by modest growth in household spending combined with a recovery in exports and solid business investment. With a more constructive evolution of imbalances in the household sector, residential investment is expected to decline further from historically high levels. The Bank expects trend growth in household credit to moderate further, with the debt-to-income ratio stabilizing near current levels. Despite the expected recovery in exports, they are likely to remain below their pre-recession peak until the second half of 2014 owing to restrained foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

Total CPI inflation has been somewhat more subdued than projected in the January MPR as a result of weaker core inflation and lower mortgage interest costs, which were only partially offset by higher gasoline prices. Low core inflation reflects muted price pressures across a wide range of goods and services, consistent with material excess capacity in the economy. Core and total CPI inflation are expected to remain low in the near term before rising gradually to reach 2 per cent over the projection horizon as the economy returns to full capacity and inflation expectations remain well-anchored.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2 per cent inflation target.

The Financial Post points out:

In their statement, policymakers said that given the “continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required.”

That replaces the phrase “the timing of any such withdrawal is less imminent than previously anticipated,” which has accompanied recent rate announcements.

ETFs are a marvellous way for liquidity seeking investors to invest in illiquid markets. But friction works both ways:

Exchange traded funds have transformed the gold market. Since the first fund was launched nearly a decade ago, the products have become so successful in offering a simple way for investors to buy physical gold that they have acquired the nickname “the people’s central bank.”

But what happens when the people’s central bank decides to sell?

That is the question now haunting the bullion market. Since the start of January, gold ETFs have dumped 140 tonnes of gold. February saw the largest monthly outflow of gold from ETFs on record.

The sell-off is partly a reflection of broader negative sentiment towards gold, as investors become more confident in the global economy and put their money into riskier assets such as equities. Prices have slid 12 per cent since October to less than $1,580 (U.S.) an ounce, and are down 18 per cent from their record nominal high in 2011.

This taxonomy of sales traders made me laugh:

5.) Low Man –If I sneezed he’d say “bless you,” if I was tired and hung over he’d worry he’d done something wrong. He worked extremely hard, but the problem was he didn’t get a lot of respect from his own desk.

6.) The Man – He’d answer the phone “250k up – what do you want to do?” Management loved him—he was the busiest guy on Wall Street. All you had to do was ask him. He’d get business done and wears his firm’s crest on his sleeve. He worked for one of the white-shoe investment banks and had gone to one of the best schools. He wound up as an equity sales trader because he wasn’t smart enough to do something more difficult, but he always spun it that it was his choice to trade.

7.) Family Man – He’d been passed over for several promotions, and was often caught off the desk calling his wife to discuss the twins’ science project. He’d accepted the ceiling in his career; Family Man was honest, calm and genuinely cared about doing the right thing. He tended to whisper.

8.) Script Man – Every morning he’d call at the exact time using the exact voice from the day before. Early in his career he’d been confused about the business, so he decided to keep it simple. He never cracked a joke in his entire career

This characterization of entrepreneurs was interesting:

Some of the common characteristics that “turn out to be accurate predictors of entrepreneurial success” go back to when they were teenagers, said the release about the study, which looked at longitudinal data of more than 12,000 men and women.

Among them: the entrepreneurs had high IQs, came from stable families, had parents earning higher than average salaries, and they showed greater self-esteem, the release said.

But they also “exhibited aggressive behaviour and got in trouble as teenagers,” said one of the researchers, Ross Levine, a professor at the Haas School of Business at the University of California at Berkeley, in the release about the study, which he carried out with Yona Rubinstein of the London School of Economics and Political Science.

“This is the person who wasn’t afraid to break the rules, take things by force or even be involved in minor drugs.”

I mentioned BNS.PR.Y BNS.PR.P yesterday with reference to its imminent Exchange Date and the lack of guidance in the bank’s earnings release. The Financial Post has more:

John Nagel, head of the preferred share trading group at Desjardins Securities the firm that help design the rate reset pref, is also waiting anxiously, though he believes BNS should call the deal. “Half the people I have spoken to think they will call the issue; the other half think BNS will leave it out there because the rate [for the bank] is reasonable.”

If BNS doesn’t redeem, Nagel argues for investors there is better value in opting for the floating rate prefs, both from an initial absolute yield and the expectation that rates will rise over the next five years.

Nagel does have a point about floating rate: three month bills are averaging 0.96% while five-year Canadas are currently at 1.31% – it won’t take much of a nudge for the bills to average more than 1.31% over the next five years. Nagel has been previously quoted as favouring the Floating Rate option.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiumgs gaining 3bp, FixedResets off 5bp and DeemedRetractibles down 7bp. Volatility was minor. Volume was quite high.

PerpetualDiscounts now yield 4.87%, equivalent to 6.33% interest at the standard conversion factor of 1.3x. Long corporates now yield about 4.25%, so the pre-tax interest equivalent spread (in this context, the “Seniority Spread”) is now about 210bp, unchanged from February 27.

The Europeans are backing away from austerity:

European finance ministers opened the way for looser budget policies after a backlash against austerity thrust Italy into political limbo and shattered months of relative stability in European markets.

Italy’s deadlocked election, France’s refusal to make deeper budget cuts and protests against the shrinking of the welfare state across southern Europe escalated the rebellion against the German-led prescription for fighting the debt crisis.

Economic strains “may also justify in a certain number of cases reviewing deadlines for the correction of excessive deficits,” European Union Economic and Monetary Commissioner Olli Rehn told reporters late yesterday after a meeting of euro-area finance ministers in Brussels.

Meanwhile, there is chatter that loose money is required in Canada:

Hedge funds are amassing record bets against the Canadian dollar on speculation the Bank of Canada will drop its bias toward raising interest rates, putting it in unison with the rest of the Group of Seven nations.

Futures contracts wagering on a decline in the Canadian dollar versus its U.S. counterpart held by so-called leveraged funds totaled C$6.3 billion ($6.1 billion) in the week ended Feb. 26, according to Citigroup Inc., citing U.S. Commodity Futures Trading Commission figures. Overall, the data showed traders reversed bets on a rise in the Canadian currency during the five-day period for the first time in eight months.

Weak exports and record debts are eroding growth in the world’s 11th-largest economy, with the slowest expansion forecast this year since 2009. Bank of Canada Governor Mark Carney remains the lone central-bank head in the G-7 suggesting a rate increase. BlackRock Inc. and State Street Canada are among the fixed-income managers speculating that Carney may drop his tightening bias when the central bank meets tomorrow, making Canadian-dollar denominated assets less attractive to international investors.

Loose money is government policy – why, look at the 12Q1 Scotia Investor Presentation! 58% of their $188-billion mortgage portfolio is government insured. Thank you, Federal Junior Republicans!

One of the words that can generally be relied upon to turn brains into much is “privacy” (another is “kiddie-porn”). It was nice to see the word being used to eliminate a little stupid red tape:

Ontario’s privacy commissioner has ordered the LCBO to stop collecting personal information from people who buy alcohol through wine clubs.

Ann Cavoukian’s decision came after a wine club complained that the Liquor Control Board of Ontario required it to provide the names, addresses, phone numbers and selections of everyone taking part in bulk orders.
…
“The LCBO has not provided my office with much more than anecdotal or hypothetical evidence to support its position that the illegal resale of liquor by wine clubs in this province is so problematic that it necessitates the collection of the personal information of club members who purchase wine through their clubs,” she wrote last week.

Scotia’s 12Q1 Quarterly Press Release did not contain a statement of intent to redeem BNS.PR.P, a FixedReset, 5.00%+205 that will reset 2013-4-30 at a yield currently forecast to be 3.25% if not called. Make of that what you will.

It was a very uneven day for the Canadian preferred share market, with PerpetualPremiums gaining 1bp, FixedResets winning 29bp and DeemedRetractibles up 10bp. Lots of volatility, comprised almost entirely of FixedReset winners. Volume was extremely high, helped along by the CU 4.50% Straight new issue and the CPX 4.50%+315 FixedReset new issue – and, doubtless, continued shuffling after the closing of TRP.PR.D yesterday.

Mark Gimein writes an interesting piece titled The Reason Wall Street Got So Rich in Two Charts:

The New York City data, though, are compelling. University of Chicago economists Steven N. Kaplan and Joshua Rauh have theorized that the main reason for the rise in Wall Street pay is that “asset managers, investment bankers, lawyers, and top executives now apply their talent to much larger pools of assets.” The bonus charts support that explanation.

You can argue about whether there’s something special about those folks, or whether they’ve just gotten lucky. You can’t argue with the math, which shows unequivocally that income at the top is growing because essentially the same number of people are splitting greater profits.

Next week I expect I’ll take a more careful look at this, moving beyond New York City. There are other factors to consider, like the drop in the city’s share of industry employment from about 30 percent in 1992 to 21 percent now. Nonetheless, I suspect the general principle that the jobs at the top of the economic ladder are becoming ever more lucrative as their industries scale up without adding staff will hold up. If so, that reveals some truths uncomfortable for both sides in the debate over incomes at the top. For the harshest critics of Wall Street. the fewer employees/more profits explanation isn’t exactly the cloak-and-dagger conspiracy they might wish for.

On the other hand, for those who think that all is just hunky-dory on the inequality front, this isn’t exactly a pleasing result either. Fewer people sharing more profits means Wall Street employees may be more “productive” — but not in any way that non-economists understand that word. It’s not that they work harder or have somehow gotten vastly smarter. It’s just that it doesn’t take many more people to do a $300 million deal than a $50 million. That basic fact does a lot to explain why incomes on Wall Street have grown. It doesn’t do anything to make it seem fair.

Fitch is gloomy on Canadian housing prices:

Canadian home prices are overvalued by about 20 per cent, Fitch Ratings says.

The rating agency’s estimate of how inflated prices are was included Monday in details of a new financial model that it is proposing to use to estimate the potential losses on pools of residential mortgages, which form the backbone of a number of securities that Fitch rates.

Naturally, every sleazebag politician in town is blaming the banks:

>Finance Minister Jim Flaherty is issuing a warning to the country’s banks, as stiff competition for mortgage customers is prompting lenders to cut rates heading into the key spring home-buying season.

“My expectation is that banks will engage in prudent lending – not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States,” Mr. Flaherty said in a statement to the Globe on Sunday, after Bank of Montreal reduced its price on five-year fixed-rate mortgages to 2.99 per cent from 3.09 per cent.

Of course the lending will be prudent, chum – given that you are providing virtually unlimited mortgage insurance.

A new fund has started marketting …. North American Preferred Share Advantage Fund:

The Portfolio will be managed by Fiera Capital Corporation (“Fiera” or the “Portfolio Manager”).

In order to seek to achieve the Fund’s objectives, the Fund will invest the net proceeds of the Offering as follows: (i) at least 20% and up to 100% of the Fund’s assets, together with borrowings under the Fund’s loan facility or prime brokerage facility, will be invested in an actively managed, diversified portfolio consisting principally of Canadian preferred shares (the “Canadian Preferred Share Portfolio”); and (ii) the remainder of the Fund’s assets will be invested to provide leveraged, tax-advantaged exposure to the U.S. Preferred Share Portfolio.
…
Fiera is one of the largest independent money managers in Canada with over $58 billion in assets under management as of December 31, 2012, including over $36 billion in fixed income assets. Fiera is also one of the largest preferred share managers in Canada with approximately $1.75 billion in preferred securities.

“Independent” is a bit of a stretch:

Fiera Capital Corporation (TSX: FSZ) (“Fiera” or the “Firm”) ) and National Bank of Canada (“National Bank” or the “Bank”) (TSX: NA) announced today the closing of the transaction under which Fiera will acquire substantially all of the assets of Natcan Investment Management Inc. (“Natcan”) from the Bank for $309.5 million subject to reduction (“the Acquisition”). In return, the Bank, through Natcan, will receive 19,732,299 Class A subordinate voting shares of the share capital of Fiera (the “Class A shares”) as well as a cash payment of $85,553,219.
…
The 19,732,299 Class A Shares (the “Consideration Shares”) over which the Bank exercises control and direction represent approximately 56.11% of the issued and outstanding Class A Shares and 35% of the total number of Class A Shares and Class B special voting shares in the capital of Fiera issued and outstanding. The Bank also received an option to acquire additional Class A Shares of Fiera at a market price determined on the day of exercise, equal to 2.5% of total shares outstanding at the end of September in each of 2013 and 2014. If the options are fully exercised, the Bank will own 40% of the outstanding shares of Fiera. The Bank will also be entitled to protect its ownership in Fiera pursuant to anti-dilution rights

It was a good solid day for the Canadian preferred share market, with PerpetualPremiums gaining 2bp, FixedResets up 8bp and DeemedRetractibles winning 10bp. Volatility was average, skewed to the upside; volume was below average but dominated by FixedResets, presumably due to the TRP.PR.D new issue.

Nothing happened today.

There was a solid gain for the Canadian preferred share market today, with PerpetualPremiums up 11bp, FixedResets winning 14bp and DeemedRetractibles gaining 3bp. Volatility was average. Volume was average.

Christine Harper of Bloomberg brings forward an interesting view on the effect of Basel III:

Investors such as Joshua Siegel, founder and managing principal at New York-based StoneCastle Partners LLC, see bigger changes at the other end of the spectrum. Small banks will seek mergers because their management teams are aging and new regulations are too costly to bear, he says.

“If you need one major overriding theme of the industry in the next three, five, seven, 10 years: massive consolidation, thousands of banks,” says Siegel, whose firm managed $5.1 billion as of the end of last year and invests in small banks. In the U.S., “I do see probably anywhere from 2,000 to 4,000 banks being swallowed up, and what you’ll see then is a more- concentrated system.”

JPMorgan’s Dimon, a critic of regulations he views as unnecessary or excessive, has recently touted the benefits. He told Citigroup analysts this month that new rules will help banks such as JPMorgan, the largest in the U.S., win market share from smaller competitors, the analysts wrote in a report.

In Dimon’s view, they wrote, the changes will “make it more expensive and tend to make it tougher for smaller players to enter the market, effectively widening JPM’s ‘moat.’”

The new rules, it turns out, may be doing more to shield banks from competition than to make them safer.

US state pension funds are getting desperate; some of them may start blowing their brains out on hedge funds:

South Carolina’s $27 billion pension dove into private equity and hedge funds in 2008, hoping to increase returns that were at the bottom tenth of public- employee retirement funds.

Five years and $1.2 billion in fees later, its annualized gain of 1.3 percent still trails the median among public pension-systems, according to data compiled by Wilshire Associates Inc. In neighboring Georgia, the $53.5 billion teachers’ pension buys only stocks and bonds. It paid money managers $119.5 million over the same period and its annualized returns of 2.95 percent were in the top quartile.

U.S. public pensions, confronting an $800 billion funding gap for promises to retirees and chasing 8 percent annual returns amid slow growth and historically low interest rates, have turned to riskier investments in private equity, hedge funds and real estate.
…
No state has rushed into the loosely regulated investment pools as South Carolina has. As of June 30, the pension had invested 56 percent of its portfolio with firms including Goldman Sachs Group Inc. (GS), Bridgewater Associates LP and Apollo Global Management LLC. (APO)

DBRS confirmed HSE.PR.A at Pfd-2(low) Stable:

Husky’s financial profile remained stable in 2012. Husky maintains debt-to-capital and debt-to-cash flow ratios below its targets of 25% and 1.5 times (x), respectively. Integrated operations provided a partial natural hedge against pricing volatility in North American upstream operations. A modest free cash flow deficit in 2012 was largely a result of increased capex spending. Similar free cash flow deficits are anticipated until 2014, when cash flow contributions from growth pillars – namely, the oil sands, Atlantic Canada and Asia-Pacific – commence. DBRS believes the Company’s current liquidity is sufficient to fund cash flow shortfalls over the near term with minimal impact on credit metrics.

Key challenges facing the Company include: (1) managing its high-cost, long-lead-time capital projects, as significant spending is anticipated to fund growth plans (Husky targets 5% to 8% production growth per year through 2017). Incremental cash flow from these projects is not expected in the near term, which could result in pressure on the balance sheet, particularly during periods of significant, prolonged pricing declines. (2) Production is highly weighted toward North American operations (97% at 2012), which subjects Husky to both volatile North American crude oil prices and continued depressed North American natural gas prices (31% of production in 2012). (3) Credit metrics at the high end of Husky’s target ranges are aggressive for the rating category. Should credit metrics deteriorate above 30% debt-to-capital and/or 2.0x debt-to-cash flow, either due to unsuccessful growth in production despite higher capital spending, or prolonged pricing declines, DBRS would consider taking negative rating action.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums off 2bp, FixedResets down 9bp and DeemedRetractibles gaining 5bp. Volatility was average. Volume was high.

And that’s a wrap for another month!