Category: Market Action

Today we had a demonstration of the Law of Conservation of Hardware Manufacturers. RIM had a good day:

RIM shares rallied 10 per cent on Thursday, as of late afternoon, sending them to their highest level since July. The jump followed an update on its BlackBerry 10 device on Wednesday: RIM is testing the new smartphone among 50 wireless carriers, marking a big step toward launching the product early next year – likely some time between January and April.

Scott Anthony of Bloomberg has some colour on why RIM isn’t dead yet:

RIM’s proprietary network and tightly interconnected system allow it to use data incredibly efficiently. Here’s one illustration. The other week I was on an 18-hour flight between Newark and Singapore. Singapore Airlines has started rolling out Internet connectivity on this flight. It isn’t cheap, running $1 per megabyte of data. I didn’t dare turn on my iPhone, or open up Outlook, but I thought going to Web mail would be safe. 15 minutes later I had a $15.30 bill. Then I remembered the Blackberry in my bag. I connected it to the WiFi network, and had roughly 14 hours of email connectivity. By the end of the trip my bill had gone from $15.30 to $15.45.

… and Sharp had a bad one:

Sharp Corp. (6753), the world’s worst- performing major stock, dropped in Tokyo trading after forecasting a record $5.6 billion full-year loss and saying there is “material doubt” about its ability to survive.

The shares fell as much as 5.3 percent to 160 yen and changed hands at 163 yen as of 10:00 a.m., extending this year’s decline to 76 percent, the worst performer among more than 1,600 companies in the MSCI World (MXWO) Index.

Sharp follows Panasonic Corp. (6752) in predicting losses worse than analysts estimated after losing ground to Samsung Electronics Co. (005930) in TVs. Sharp has failed to win a planned 67 billion-yen ($835 million) investment from Taiwan’s Foxconn Technology Group and has had difficulty selling commercial paper as it burns through cash.

Samsung is eating everybody’s lunch … for now:

Samsung Electronics Co. (005930), the world’s biggest maker of TVs and mobile phones, reported record profit that beat analysts’ estimates and forecast intensifying competition as the global economy slows.

Net income in the three months ended Sept. 30 rose 91 percent to 6.56 trillion won ($6 billion), the Suwon, South Korea-based company said in a statement today. That compares with the 6.25 trillion-won average of 27 analyst estimates compiled by Bloomberg.

Operating profit from telecommunications more than doubled as Samsung’s Galaxy devices widened their lead over Apple Inc.’s iPhone. Samsung shares dropped amid concern growth in smartphone demand may have peaked after Apple (AAPL) reported earnings that missed estimates and Microsoft Corp. released its Surface tablet, escalating competition for mobile devices.

There’s some bad news for Canadian capital spending:

Suncor Energy Inc.’s three major oil sands projects are facing delays as soaring costs and competitive oil markets force the energy giant to join the growing ranks of Canadian resource companies pulling back from expensive growth plans.

Canada’s largest oil company said its planned Voyageur upgrader is “struggling” to make financial sense, its undeveloped Fort Hills bitumen mine has likely been delayed by about a year, and the timetable for its Joslyn mine remains up in the air. As Suncor reviews the economics of all three projects, it sliced its 2012 budget by 11 per cent.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 8bp, FixedResets off 2bp and DeemedRetractibles gaining 3bp. Volatility picked up a little, but it’s still pretty quiet! Volume was a little below average.

It has been a good year for corporate bond issuance:

Corporate bond sales surged to $3.3 trillion this year, challenging the record in 2009, as investors sought higher-yielding alternatives to government securities and companies took advantage of borrowing costs at all-time lows.

General Electric Co. (GE), the biggest maker of power-generation equipment, led issuers this month with a $7 billion bond offering, according to data compiled by Bloomberg. Along with software provider Oracle Corp. (ORCL)’s $5 billion sale, they paced $347 billion of bond issuance in October, a record for the month, and left sales about $116 billion shy of the $3.4 trillion reached by this time three years ago.
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Yields on bonds sold by companies around the world fell to a record 2.676 percent on Oct. 15 from 3.981 percent at the end of last year, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index.

In the spirit of Hallowe’en, here’s an illustration from an absolutely fascinating article titled Animal Mind Control:

DBRS confirmed Valener at Pfd-2(low) (VNR.PR.A):

DBRS has today confirmed Valener Inc.’s (Valener) Cumulative Rate Reset Preferred Shares, Series A 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 (rated “A” by DBRS) of Gaz Métro inc. (GMi). GMi owns the remaining 71% of GMLP. GMLP’s core business is regulated natural gas distribution in Québec, which generates strong cash flow due to a supportive and stable regulatory environment. GMLP also benefits from cash flow diversification from its investments in energy distribution in Vermont and the pipeline business (see the rating report on Gaz Métro inc. dated October 31, 2012). Valener’s rating is one notch lower than the rating of GMi, reflecting its structural subordination to GMLP.

The assigned provisional rating is based on the following factors: (1) Strong and predictable cash flow from GMLP to Valener. GMLP has made cash distributions to its partners in an amount of over 90% of its net income, excluding non-recurring items, for most years over the last 20 years. (2) GMLP is expected to continue to maintain its distributions of at least 85% of its net income, excluding non-recurring items, as set out under the partnership agreement between Valener and GMLP (the Partnership Agreement). In the event that GMi, as general partner of GMLP, intends to distribute less than 85% of its net income, excluding non-recurring items, it would require the approval of at least 90% of GMi’s directors. (3) Valener’s non-consolidated debt-to-capital structure is expected to remain below 20%. If its non-consolidated debt leverage ratio is above 20%, Valener is expected to issue equity to bring the ratio back under the 20% threshold in a timely manner. (4) DBRS expects that the majority of Valener’s cash flow will be derived from GMLP. Any material investment carried out by Valener and not through GMLP could have a negative rating impact. (5) DBRS expects that Valener will maintain its 29% interest in GMLP and its pro rata representation on GMi’s board of directors.

The assigned rating incorporates the limited control of Valener over GMLP due to its limited partnership status. However, this limited control is mitigated by the distribution protection clause in the Partnership Agreement, as mentioned above.

DBRS confirmed Power Corporation at Pfd-2(high) (POW.PR.A, POW.PR.B, POW.PR.C, POW.PR.D, POW.PR.F, POW.PR.G):

DBRS has today confirmed the long-term and preferred shares ratings of Power Corporation of Canada (POW or the Company) at A (high) and Pfd-2 (high), respectively. The trend on the ratings remains Stable. The credit strength of POW is directly tied to its 66.1% equity interest in Power Financial Corporation (PWF; see separate press release), which represents a substantial majority of the Company’s earnings and cash flow, as well as 82% of the Company’s estimated net asset value as of June 30, 2012. The Senior Debt rating of the Company is A (high), or one notch below the AA (low) rating on the Senior Debentures of PWF, reflecting the structural subordination of the holding company’s obligations.

The Company remains exposed to the advice-centered distribution model of protection and wealth management products and services through its indirect investment in PWF’s major subsidiaries, Great-West Lifeco Inc. (GWO) and IGM Financial Inc. (IGM). Correspondingly, it is vulnerable to the financial market and economic volatility that affects asset management fees, required actuarial reserves tied to equity markets, and the level of interest rates, as well as credit loss provisions.
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As the controlling shareholder of PWF, and, by extension, of GWO and IGM, POW defines the strategic vision for its financial services investments, while setting the “tone from the top” in terms of conservative management style and risk analysis and tolerance. The Company’s senior officers and delegates exercise a greater degree of influence through their active participation on the respective boards and board committees of POW’s various subsidiaries than is generally the case at more widely held companies. Such an integrated management and governance approach is seldom encountered, and it has served the Company’s stakeholders well.

On a stand-alone basis, POW’s financial profile is very conservative, with debt and preferred shares representing just 13.1% of capitalization, albeit up from 7.9% at year-end 2007. There is no double leverage in the Company’s capital structure as only shareholders’ equity, and not the proceeds from debt or preferred shares, is invested in the Company’s investment portfolio. Financial leverage appears to be used to fund a portfolio of cash and short-term investments and a modest level of working capital.

DBRS confirmed PWF at Pfd-1(low) (PWF.PR.A, PWF.PR.E, PWF.PR.F, PWF.PR.G, PWF.PR.H, PWF.PR.I, PWF.PR.K, PWF.PR.L, PWF.PR.M, PWF.PR.O, PWF.PR.P and PWF.PR.R):

DBRS has today confirmed the long-term and preferred shares ratings of Power Financial Corporation (PWF, the Company or the Group) at AA (low) and Pfd-1 (low), respectively. The rating trends remain Stable. The financial strength of PWF is largely derived from its controlling interests in two of Canada’s leading financial service providers: Great-West Lifeco Inc. (GWO – senior rating of AA (low)), one of the three largest life insurance concerns in Canada, and IGM Financial Inc. (IGM – senior rating of A (high)), one of the largest mutual fund complexes in Canada as measured by long-term assets under management (AUM) on June 30, 2012. These two interests, accounting for approximately 90% of the Company’s earnings, dividends and asset value, are a source of stable recurring earnings and cash flow. Under the strategic leadership of the Company, both GWO and IGM have become increasingly diversified as they have grown both organically and by acquisition. The Company has correspondingly increased its exposure to the wealth management business in all of its chosen geographies. Both of these subsidiaries, in turn, benefit from the Company’s hands-on governance, and risk-averse culture.
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Given an uncertain economic environment that could limit organic growth, DBRS expects that PWF will take advantage of its strong financial position to pursue small tactical acquisitions in the financial services arena. Pressures on regulatory capital adequacy could conceivably encourage a number of financial institutions to sell certain business lines at opportunistic prices, which would complement and leverage those of the Company. For example, achieving additional scale in Putnam through the acquisition of incremental AUM with a shared distribution channel would bring its financial results closer to the Company’s original target while supporting broader growth initiatives. That PWF retains the ability to consider such value-added acquisitions in the current environment is a testament to its conservative financial profile and its long-term perspective.
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The Company’s financial leverage has been maintained at the same level for the past ten years. At a 17.6% unconsolidated total debt ratio at the end of June 2012, the Company’s capitalization remains conservative, with no double leverage when the perpetual preferred shares are treated as permanent equity. Debt service coverage ratios are similarly strong at between 13 and 15 times on an operating earnings basis and between 8 and 9 times on a cash flow basis. Liquidity is not a source of concern, with close to $1 billion in cash and short-term securities at the holding company at June 30, 2012, in addition to stores of liquidity at both GWO and IGM with which to shore up regulatory capital or to facilitate potential strategic acquisitions. Such retention of liquid assets in the current uncertain economic environment reflects a unified and consistent approach to risk management across the organization. Financial flexibility is additionally enhanced by the proven access by the Company and its investee companies to capital markets funding, notably perpetual preferred shares.

The Canadian preferred share market closed the month on a high note, with PerpetualPremiums up 12bp, FixedResets gaining 2bp and DeemedRetractibles winning 24bp. Given the surge, it was surprising that volatility was so muted. Volume was above average.

PerpetualDiscounts now yield 4.93%, equivalent to 6.41% interest at the standard equivalency factor of 1.3x. Long corporates are now at about 4.3%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now 210bp, a slight (and perhaps spurious) increase from the 205bp reported October 24.

Sandy did some damage:

Citigroup Inc. (C), the third-largest U.S. bank, said its offices at 111 Wall St. will be unusable for weeks after Hurricane Sandy battered lower Manhattan with water and power outages.

“The building experienced severe flooding and will be out of commission for several weeks,” Chief Executive Officer Michael Corbat wrote in a memo to employees today.

The New York-based firm is still assessing when buildings at 388 and 390 Greenwich St. can reopen, a process complicated by power and transit outages, he said.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 5bp, FixedResets off 3bp and DeemedRetractibles up 11bp. Volatility was non-existent. Volume was extremely low.

UBS is cutting way back on investment banking:

UBS AG (UBSN), Switzerland’s largest bank, will cut as many as 10,000 jobs companywide as the trading business shrinks, a person with knowledge of the plan said.

The bank had about 63,250 employees as of June 30, according to its most recent financial report, which means the staff cut could equal 16 percent. UBS already announced it is reducing risk-weighted assets at the investment bank by more than half from September 2011 levels, mostly in fixed income.

The plan will lead to a further reduction of as much as 100 billion Swiss francs ($107 billion) of risk-weighted assets, the person said. Much of the fixed-income operations will be put in a new unit that will hold non-core assets, and [investment-bank co-head Carsten] Kengeter will probably give up his current role to head the new unit, the person said.

There are threats of turmoil in Italy:

Former Italian prime minister Silvio Berlusconi said his party, the biggest in parliament, may end support for Premier Mario Monti’s government because its policies are deepening the country’s recession.

The People of Liberty party needs to consider that “with a no-confidence vote by us, we would determine a situation that would be interpreted in a certain way by the financial markets and would cause early elections,” Berlusconi, 76, told reporters yesterday near Milan. “We will consider these facts and decide whether to immediately withdraw our support of the government.”
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“It’s impossible to say what is in Berlusconi’s head now, but if he decides to end his support to Monti, early elections become almost inevitable,” said Roberto D’Alimonte, a professor of politics at Rome’s LUISS University. “Berlusconi would lose the elections anyway, but would likely get more votes thanks to an anti-austerity platform and that would increase his party’s bargaining power in the next parliament.”
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Monti is still implementing some of the steps aimed at containing debt and keeping the deficit under 3 percent of gross domestic product this year. Industrial output unexpectedly rose in August, signalling the recession may be easing and consumer confidence gained this month as the government announced tax cuts for the lowest earners to offset the effect of an increase on the value-added levy in 2012.

Government micro-management of the mortgage market is getting popular:

The monetary policy committee, led by Governor Stanley Fischer, cut the rate by a quarter-point to 2 percent, the Jerusalem-based bank said on its website today. None of the 24 economists surveyed by Bloomberg predicted the decision.
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The Bank of Israel also released, together with the rate decision, new draft directives aimed at cooling the mortgage market, which are expected to go into effect on Nov. 1. The directives limit mortgages to 70 percent of the value of the home, with the exception of new home buyers, who will be permitted to borrow up to 75 percent.

I will admit that I was inclined to be rather contemptuous of today’s shut-down of the NYSE – until I saw this picture from Manhattan:

Click for Big

This has had an effect on power supply:

Con Edison shut down power to parts of downtown Manhattan, including Wall Street and the nation’s financial nerve center, as the storm surge, boosted by high tide, sent saltwater pouring into its underground power network.
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About 250,000 customers in Manhattan were without power as of 9 p.m. on Oct. 29 local time after flooding in substations caused outages from the lower tip of the island to East 39th Street, the utility said in a statement. It may need to cut power in additional areas of downtown, as well as in parts of Brooklyn, Queens and the Bronx due to record tides and surge from Sandy,the utility said in a separate statement last night.

It was a day of very little price movement for the Canadian preferred share market, with PerpetualPremiums gaining 1bp, FixedResets down 3bp and DeemedRetractibles off 1bp. There was no volatility of note. Volume was low.

The Kansas City Fed has published an interesting paper by George A. Kahn titled Estimated Rules for Monetary Policy:

This article estimates policy rules over periods of favorable economic performance to derive benchmark rules that might be useful guides for future monetary policy. Section I describes two simple, nonestimated rules that have been proposed as guides for policy and examines how closely they describe the actual setting of policy over various periods. Section II identifies time periods over which macroeconomic performance has generally been favorable and estimates policy rules that describe how monetary policy responded to key indicators over these periods. Section III evaluates past and current policy relative to the estimated rule and gives a number of reasons why policymakers should remain cautious about blindly following any estimated rule.

There was a meeting today regarding Money Market Fund reform:

Investment managers including BlackRock Inc. (BLK) and Fidelity Investments, under pressure to pre- empt action by a new super-committee of regulators, are seeking to end an impasse over money-fund reform.

Officials from several firms, as well as representatives from the Investment Company Institute, the industry’s trade group, are scheduled to meet with the Securities and Exchange Commission and Treasury Department officials today to discuss proposals for a potential compromise, BlackRock spokeswoman Bobbie Collins and Fidelity spokesman Vincent Loporchio said today. The industry helped block a plan in August that was backed by SEC Chairman Mary Schapiro.
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BlackRock, the world’s largest asset manager, has held talks previously with SEC staff over a proposal that would include temporary withdrawal restrictions when money funds are under stress, said two people familiar with the matter, who asked not to be identified because the discussions were private.

BlackRock published an outline of its plan in a Sept. 27 paper, proposing that money funds, under some circumstances, impose “stand-by liquidity fees” on investors who withdraw money. The fee would be triggered only when a fund’s liquidity failed to meet existing minimums, or when a fund’s mark-to- market share value dipped below a certain level.

The BlackRock proposal is titled Money Market Funds: A Path Forward:

Circuit Breakers. Build in circuit breakers to all MMFs to limit runs in the time of a crisis. We believe these should take the form of stand-by liquidity fees (SLFs). We recommend these have the following features:
a) Objective triggers. The SLFs would not be active during times of normal market functioning. They would be triggered when a fund has fallen to half the requirement for NAV rounding or to one quarter the required liquidity levels based on the standards set above. In the case of US Rule 2a-7 MMFs, this means that the SLFs would be triggered when the fund fell below a mark-to-market NAV of 99.75 or when its 1-week liquidity fell below 7.5%.

b) The amount of the fee is a simple calculation. We recommend the amount of the fee charged when the SLFs are in force to be twice (2x) the difference between the mark-to-market NAV and $1. As an example, if the mark-to-market NAV fell to 99.70%, the fee would be 60 basis points (30 bps x 2). The rationale for this fee is to create a positive cycle as clients redeem in place of a negative cycle. As each client redeems and leaves behind twice the deficit, the NAV for the remaining shareholders is strengthened. In a run today, redeeming shareholders can weaken the fund as they leave and the NAV begins to spiral downward further accelerating the run. With SLFs in place, the NAV would improve as people who leave are charged a fee, which would create a natural brake on a run, and investors remaining in the fund would be protected from the behavior of those who redeemed.

c) Let clients choose. The SLF model gives clients a choice in a crisis, based on straight-forward economic incentives. Clients that truly need liquidity (e.g., to meet the payment of salaries and pensions) can get it, but they must pay a price for it. If a client can wait for their liquidity, they can attempt to preserve the value of their shares by staying put and redeeming once the SLFs are lifted. This is a model similar to the one BlackRock employed in working with the State of Florida on a government cash pool that was experiencing mass redemptions in 2007.

d) Closure to redemptions. Fund boards should have the right to close funds to redemptions in extreme circumstances, as they currently do in the US. Fund Boards should also be given the discretion to end the SLFs after an appropriate recovery of the fund, and after a determination that it is in the shareholders’ interests to do so.

e) Payment to clients that stayed. Any amount of liquidity fees gathered by the fund would be retained in the fund to restore the NAV to $1 (or par). If there were an excess liquidity fee in the fund, it would be paid to all shareholders of record on the last day in which the SLFs were in force. This way, those shareholders that stayed with the fund in the difficult time, as well as those who invested or reinvested and thereby helped “boost” the fund, would receive a benefit for the risk they took.

I think this is nonsensical. The single-issuer limit is 5% and it will be remembered that lightning can strike at any time. Let’s look at Primary Reserve Fund’s buck-break:

In a new sign of market turbulence, managers of a multibillion-dollar money market fund said on Tuesday that customers might lose money in the fund, a type of investment that has long been considered as safe and risk-free as a bank savings account, The New York Times’s Diana B. Henriques writes.

The announcement was made by the Primary Fund, which had almost $65 billion in assets at the end of May. It is part of the Reserve Fund, a group whose founder helped invent the money market fund more than 30 years ago.

The fund said that because the value of some investments had fallen, customers now have only 97 cents for each dollar they had invested.

So if I’m to be allowed to access my ninety-seven cents, you’re going to charge me a fee of three cents? That doesn’t sound like much of a MMF to me! Or the alternative is to leave the funds locked in for a whole freakin’ year while it earns enough interest to crawl back to par.

The other phrase of interest in the proposal is Fund Boards should also be given the discretion to end the SLFs after an appropriate recovery of the fund, and after a determination that it is in the shareholders’ interests to do so. Huh? I thought there were supposed to be “Objective triggers“! Objective triggers but subjective reversals? It would be most interesting to nail down just what they have in mind.

So, this is just another attempt by the MMF industry to put lipstick on the pig. Sorry, folks, but when you lend money, there’s always a chance you won’t get it back, no matter how high the credit rating, no matter how short term the loan. All the regulatory ticky-boxes in the world won’t change that simple fact. The risk needs to be covered by capital.

I’ve said it before, I’ll say it again: MMFs are banks. They need to be regulated like banks.

The slowness in finding tenancies for the World Financial Centre played a major role in the DBRS trend change for BPO. The company is taking decisive action:

Lower Manhattan’s World Financial Center, the 8 million-square-foot complex near the Hudson River, will soon have a new identity as owner Brookfield Office Properties Inc. (BPO) seeks to attract a shifting mix of tenants.

By late next year, the property will be known as Brookfield Place, said Mitchell Rudin, the company’s president of U.S. commercial operations. The landlord has already started the process, with its website referring to the new name under the current one.

The change reflects the smaller role finance plays in lower Manhattan as Brookfield faces vacancies at the site. Bank of America Corp. is leaving almost 3 million square feet (279,000 square meters) inherited with its 2009 takeover of Merrill Lynch & Co., which was based at the property. Its leases expire next year in what Green Street Advisors Inc.’s Michael Knott calls a “perfect real estate storm” because it coincides with two new towers at the nearby World Trade Center becoming available and a broader slowdown in leasing by financial firms.

Jonathan Weil makes an interesting point about the BofA / Countrywide fraud lawsuit:

Prosecutors are suing under a statute called the False Claims Act, which imposes liability on those who defraud the federal government. Curiously, the suit is seeking damages for acts that Countrywide Financial Corp. committed before Fannie and Freddie were seized by the government — back when U.S. officials were adamant that Fannie and Freddie didn’t have any implicit government guarantee. (Bank of America bought Countrywide in July 2008.)
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During testimony before Congress in 2003, then-Treasury Secretary John Snow explicitly denied there was any implicit government guarantee of Fannie or Freddie: “We do not believe there is any government guarantee, and we go out of our way to say there is not a government guarantee,” he said. “We need to be on guard against this perception. It is a perception. It is not, in our view, a reality.”

Here’s a quote from U.S. Representative Barney Frank, one of the companies’ most vocal supporters in Congress, in 2003: “There is no guarantee. There’s no explicit guarantee. There’s no implicit guarantee. There’s no wink-and-nod guarantee. Invest and you’re on your own.”

Of course, now we’re being asked to believe that Countrywide was defrauding the government in 2007 and early 2008 when it was ripping off Fannie and Freddie — in spite of the government’s vehement insistence that Fannie and Freddie weren’t backed by the government in any way.

Laws, schmaws! There’s headlines to be made and bank-bashing to be done!

There has finally been a grain of common sense written about MPs pensions:

Speaking in the Senate Wednesday, Alberta Senator Grant Mitchell said Western industrialized democracies have made huge efforts to pay their politicians well enough to discourage corruption.

“All of our MPs are above reproach, but the pressures of not making enough money can become an issue and that is why [take-home salary] needs to be maintained at a certain level,” Mitchell said.”We could talk about brown paper bags with cash in it, because there is pressure all the time. That is why pay needs to be absolutely adequate.”

Although he acknowledged he was taking an unpopular position and one for which he could be left “politically vulnerable,” Mitchell went on to make several points against Conservative plans to increase pension contributions for MPs and senators — legislation that was fast-tracked because of Liberal support in the House of Commons.

Mitchell addressed the issue of contribution rates and the decline of take-home pay, but I consider the issue of pension receipts to be more important. If we have an unpopular government six months away from an election that they’re going to lose – and lose badly – do we really want the cabinet to be wondering how they’re going to make ends meet after defeat? There doesn’t even have to be an explicit quid pro quo – just a little … friendliness.

For instance, how about this Conservative thug:

Conservative MP Dean Del Mastro suggests that the government should look at ending anonymous comments on news articles as a way to combat online bullying.

“One of the best ways to end on-line and electronic bullying, libel and slander would be to force people posting hurtful comments to properly identify themselves,” Del Mastro wrote Thursday on Facebook. “This morning I read comments on a news story posted on an electronic news publication, many of them could only be described as hateful rants. The common denominator is that none of them identified the person that wrote them; this strikes me as something that parliament should address.”

I have a degree of contempt for those who post anonymously on the Internet, but no rational person will join Del Mastro in his efforts to make it an offense under the Criminal Code and use all the enormous powers of the state to punish those who do so. At least, no rational Western person. It’s quite popular in China.

Libels? Slanders? With a court order you can already track down mean people who say mean things. Even Constable Adam Josephs of the Toronto Police knows that, as discussed on October 18, 2010.

It was a moderately good day for the Canadian preferred share market, with PerpetualPremiums winning 12bp, FixedResets up 4bp and DeemedRetractibles gaining 1bp. Volatility was nothing special. Volume was well above average.

Nothing happened today.

It was a steady day for the Canadian preferred share market, with PerpetualPremiums and FixedResets both up 3bp, while DeemedRetractibles gained 2bp. Volatility was muted. Volume was average – but the top two traders were issues that rarely see any play at all! Nice tickets for RBC, if they were able to get full commission on them!

Today’s FOMC statement was accomodative:

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
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To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Jerome H. Powell; Sarah Bloom Raskin; Jeremy C. Stein; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen. Voting against the action was Jeffrey M. Lacker, who opposed additional asset purchases and disagreed with the description of the time period over which a highly accommodative stance of monetary policy will remain appropriate and exceptionally low levels for the federal funds rate are likely to be warranted.

The Globe published a nice essay on What-Debt’s muscleheaded nationalism:

State-owned enterprises have been active participants in the global economy for decades. In fact, they drive 70 per cent of activity in the global energy sector.

Canada knows a thing or two about so-called SOEs. Not so very long ago we had Petro-Canada, Canadian National and Air Canada. We still have Canada Post, which acquired Purolator Courier to compete with UPS and FedEx. We own “Crown corporations,” such as Ridley Terminals (for which I used to be chairman), which fulfills no discernible public policy purpose other than to generate profits for their owners, the taxpayer.

The apparent indigestion being caused by the CNOOC-Nexen and Petronas-Progress deals has nothing to do with their size or even the “strategic” nature of their industries. There is nothing strategic to Canada in either Nexen or Progress. The real issue is who the investors are and where they come from.

And in other Ottawa news:

The Conservative government no longer has targets for erasing Canada’s federal debt, which grew by $125-billion since the recession.

Finance Minister Jim Flaherty confirmed Wednesday that the recession has derailed Ottawa’s long-term debt plans and new targets won’t be set until the government starts posting yearly surpluses again – which is not forecasted to happen for three more years.

Too bad we don’t have a structural surplus of $10-billion p.a. any more. Oh, well…

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 2bp, FixedResets up 6bp and DeemedRetractibles gaining 3bp. Volatility was almost non-existent. Volume was quite heavy.

PerpetualDiscounts now yield 4.92%, equivalent to 6.40% interest at the standard equivalency factor of 1.3x. Long corporates are at about 4.35% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now at about 205bp, slightly (and perhaps spuriously) wider than the 200bp reported October 17.

The BoC rate statement was dovish:

Core inflation has been lower than expected in recent months, reflecting somewhat softer prices across a wide range of goods and services. Core inflation is expected to increase gradually over coming quarters, reaching 2 per cent by the middle of 2013 as the economy gradually absorbs the current small degree of slack, the growth of labour compensation remains moderate and inflation expectations stay well-anchored. Total CPI inflation has fallen noticeably below the 2 per cent target, as expected, and is projected to return to target by the end of 2013, somewhat later than previously anticipated.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. Over time, some modest withdrawal of monetary policy stimulus will likely be required, consistent with achieving the 2 per cent inflation target. The timing and degree of any such withdrawal will be weighed carefully against global and domestic developments, including the evolution of imbalances in the household sector.

RBC & TD announced major acquisitions:

Royal Bank of Canada and Toronto- Dominion Bank (TD) announced purchases today of almost $20 billion in combined assets from U.S. companies to bolster profit ahead of a slowdown in domestic consumer lending.

Royal Bank, the nation’s largest lender, plans to buy Ally Financial Inc. (ALLY)’s Canadian auto-finance and deposit business in a deal that Ally said will generate $4.1 billion for the Detroit- based lender. Toronto-Dominion agreed to acquire Target Corp. (TGT)’s $5.9 billion U.S. credit-card portfolio for an amount equal to the gross value of the outstanding loans at the time the deal is completed, the firms said.

DBRS commented on the TD / Target deal:

The acquired credit card portfolio is stated to have credit quality in line with industry benchmarks. The quality of credit card clients is believed to be above average in regards to credit risk characteristics. The acquisition will have a moderate impact on capital, with the Bank expecting to see a 20 basis point decrease in its Tier 1 capital ratio and a 14 basis point drop in its Basel III common equity Tier 1 (CET1) ratio upon closing of the transaction. The drop in capital metrics still positions TD comfortably in regards to regulatory limits, with the Bank reporting a CET1 ratio of 7.7% at July 30, 2012, well above the regulatory requirement of 7% targeted for the first quarter of 2013.

… and on the RBC / Ally deal:

The net investment for RBC is $1.4 billion after deducting excess capital.Including the excess capital, and subject to certain closing adjustments, will result in total consideration of approximately $3.1 to $3.8 billion, depending on the dividend taken out by the seller prior to closing. The transaction is expected to generate earnings in the first 12 months after closing of $120 million after tax (excluding integration costs, amortization of intangibles and transaction costs, which are expected to be approximately $50 million). The Basel III common equity Tier 1 ratio is estimated to decrease by approximately 30 to 40 bps immediately following the close of the acquisition, but to remain in excess of 8%. The deal is subject to closing conditions, including regulatory approvals, and is expected to close in the first calendar quarter of 2013.

There was a downdraft in the Canadian preferred share market today, with PerpetualPremiums and FixedReset both off 9bp and DeemedRetractibles losing 14bp. Volatility was negligible. Volume was well above average and only of the highlighted issues (ENB.PR.N) was affected by the recent TXPR rebalancing.

There is some long overdue musing that CMHC might be privatized:

Ottawa has made a series of quiet changes to bolster the oversight of CMHC in recent years: adding to its board of directors the deputy minister of finance and the deputy minister of human resources and skills development, as well as putting the Crown corporation under the official eye of the country’s banking regulator.

“This is all about financial stability, because [CMHC is] a very important part of the market and of the financial stability picture in Canada, and it’s kind of been off on its own track,” Mr. Flaherty said.

Ultimately, he would like to see the government get out of the mortgage insurance business. “The history of CMHC has to do with providing adequate housing for veterans after the Second World War, and it’s become something rather grander,” he said.

‪“I think in the next five or ten years the government needs to look at getting out of some businesses that we’re in that we don’t need to be in.”

There’s a good opportunity for hedge funds and brokers:

The Volcker rule could cut profit at the biggest U.S. banks twice as much as earlier estimates if regulators take a strict stance on limiting proprietary trading, Standard & Poor’s said.

“We currently estimate that the Volcker rule could reduce combined pretax earnings for the eight largest U.S. banks by up to $10 billion annually, up from our initial $4 billion estimate two years ago,” S&P said today in a statement announcing a new report on the issue.
…
“The implementation of the Volcker rule could have favorable implications for the credit profiles of some of the largest U.S. banks, such as reducing trading portfolio risk,” S&P said. “This risk mitigation could lessen revenue and earnings volatility, which we would view favorably.”

What-Debt?’s seeming intention to fight the next election on muscleheaded nationalism is causing some concern:

The federal government’s surprise move to block the $6-billion takeover of Progress Energy Resources Corp. is adding to growing concerns about a “Canadian discount” that weighs on share prices and frustrates companies’ ability to raise capital and do deals.

Investors reacted swiftly on Monday to the rejection of the bid for Progress by Malaysia’s Petronas . Progress shares dropped more than 9 per cent, while other energy shares sank sharply.

The government’s decision immediately reminded investors of previous high-profile deals in Canada that fell apart amid government or regulatory scrutiny, and has created uncertainty about the bid for Calgary’s Nexen Inc. by China’s CNOOC Ltd. The Conservative government created waves two years ago when it blocked BHP Billiton’s $38.6-billion (U.S.) attempt to acquire Potash Corp. of Saskatchewan. And just last week, the federal telecommunications regulator rejected BCE Inc.’s bid to acquire Astral Media Inc. in a shocking decision.

There are rumours that the oligarchy will extend its control over the Canadian economy:

Royal Bank of Canada is on the verge of buying Ally Financial’s Canadian arm.

The sale is part of a global restructuring that Ally first announced in May. Early in the auction process General Motors Co. described itself as the “natural buyer”, as Ally was previously owned by GM and was once known as General Motors Acceptance Corp.

However, GM said it would only go so far to bring the assets back under its belt, and despite its attempts, RBC is now the lead bidder, according to someone familiar with the auction. Talks are now in advanced stages.

There are also opportunities for private equity:

KKR & Co. (KKR), TPG Capital and Goldman Sachs Capital Partners (GS), which took the former TXU Corp. private five years ago in the largest leveraged buyout in history, have paid themselves $528.3 million in fees, even as the electricity provider teeters toward a near-term bankruptcy or restructuring.

The payments consist of a $300 million charge for advising on the buyout, annual management fees totaling $171 million and as much as $57.3 million for consulting on debt deals, the Dallas-based company now called Energy Future Holdings Corp. said in regulatory filings. The private-equity firms’ fees are as much as 25 times greater than average, based on data from law firm Dechert LLP and researcher Preqin Ltd.
…
The fees from Energy Future may allow KKR, TPG and Goldman Sachs to extract cash without infringing on the Delaware Limited Liability Company Act, which limits distributions from a firm if all its liabilities exceed the fair value of its assets, according to Chapter 18 of the law.

The Globe and Mail’s education series has climbed on the most asinine bandwagon
yet – molly-coddling university students:

For Grade 12 students preparing university or college applications, getting into the right school is the only goal. Few 17-year-olds have thought much about how they will manage the demands of postsecondary courses, or about dropout rates that show one in seven students won’t finish their studies.

But what if schools could pinpoint which students were most likely to run into trouble and offer them extra support before their experiences turned sour?

At the University of Ottawa, researcher Ross Finnie has been experimenting with a custom-tailored, low-cost statistical model that can identify the students most likely to abandon their studies and offer them help as soon as possible.

As a once and future employer, I don’t want to hire little babies who need help and support. This is the real world. I want graduates who have prospered in an environment where nobody is getting paid to be nice to them.

It was a good day for the Canadian preferred share market, with PerpetualPremiums gaining 10bp, FixedResets winning 16bp and DeemedRetractibles up 13bp. Volatility was minor. Volume was very heavy.

Canadian inflation is quiescent:

Canada’s annual inflation rate stayed at 1.2 per cent, matching the previous month and May for the lowest level in more than two years.
…
For the annual inflation rate, the agency said an increase in prices for gasoline and electricity were the main contributors, but they were offset by declines in the cost of purchasing motor vehicles and women’s clothing.
…
The Bank of Canada’s core rate, which measures underlying price pressures by excluding volatile items such as gasoline, declined three-tenths of a point to 1.3 per cent.

This has led to calls for a rate cut:

There could be several causes of these low bond yields – and none of them are pleasant. It may be that bond markets expect the Bank of Canada to undershoot its 2 per cent inflation target for the foreseeable future. It may be that alternative investments in Canada are such losing propositions that people are willing to accept low or even negative real returns. Finally, there may be a flight to quality here, with Canada being seen as a safe haven in a world full of economic turmoil. It is likely a combination of all three.

Bond markets are screaming loud and clear that worldwide demand remains low, and, in the medium-term, inflation is likely to stay under the Bank of Canada’s target. On Tuesday, the Bank of Canada will be giving its interest rate announcement. Given the current economic data and low inflation, the prudent move for Mark Carney is to lower the overnight rate by 25 basis points.

Top-producing brokers in the US are dancing as fast as they can:

Many senior advisers at brokerage arms of major banks say they are considering jumping ship for the first time, frustrated by problems plaguing their parent companies, from credit rating downgrades to staff cutbacks to bothersome technology changes.
…
So far in 2012, advisers who managed nearly $50-billion (U.S.) in client assets have left top U.S. brokerages Morgan Stanley Wealth Management and Bank of America Merrill Lynch, an already high figure that is expected to grow, industry experts say.

Twelve teams that each managed more than $1-billion in client assets have moved in 2012. In a typical year, fewer than a handful of teams that size switch firms, experts said.
…
Late last year, when Bank of America’s stock price plunged, UBS Wealth Management Americas offered Merrill advisers signing bonuses that were about 30 per cent higher than normal, said financial services recruiter Alan Reed. UBS added at least 24 veteran Merrill Lynch advisers who managed roughly $4.4-billion in client assets..

Meanwhile, these super-brokers may have a wonderful fourth quarter:

Sell.

That’s the message from some financial advisers, who are telling wealthy clients that the remainder of 2012 amounts to a last-chance sale on federal tax rates. Taxes are set to rise in January in the U.S., pushing the top rate on dividends to 43.4 percent from 15 percent and the top rate on capital gains to 23.8 percent from 15 percent.
…
Federal taxes on ordinary income will rise to as much as 39.6 percent from 35 percent. Long-term capital gains rates will increase to a maximum 20 percent from 15 percent, plus an additional 3.8 percent for high-income earners as a result of the 2010 health-care law.

The opportunity for individuals to transfer up to $5.12 million — or $10.24 million for couples — free of estate taxes and gift taxes also is set to expire at the end of the year and drop to $1 million. Legislation enacted in 2010 raised the lifetime estate-and-gift-tax exclusion for 2011 and 2012.

IIROC has found another opportunity for expansion:

Canada’s securities industry regulator is calling for tougher oversight of the Canadian version of Libor.

In an emailed statement, a spokesperson for the Investment Industry Regulatory Organization of Canada (IIROC) said that while it isn’t aware of any problems with the Canadian Dealer Offered Rate, or Cdor, “[r]ecent experiences with LIBOR have pointed to a need for increased scrutiny of such survey-based reference rates.”
…
[IIROC vice president of public affairs] Ms. [Lucy] Becker said that when IIROC’s review is complete — she did not say when that might happen — the results will be submitted to “relevant stakeholders” including Canadian regulators and government agencies.

It’s a big market:

Essentially a Canadian version of Libor, the Canadian Dealer Offered Rate is the rate at which Canadian banks lend to one another based on bid prices for bankers’ acceptances.

The bankers’ acceptance market itself is relatively small, but Cdor is used as a benchmark for a whole raft of loans, floating rate notes, interest rate swaps and derivatives that are the life-blood of this country’s financial market. In total we’re talking about $6-trillion dollars worth on any given day, according to Louis Gagnon, a finance professor at Queen’s University’s School of Business and a former risk manager at Royal Bank of Canada.

DBRS confirmed Weston at Pfd-3:

DBRS has today confirmed the ratings of the Notes & Debentures of George Weston Limited (Weston or the Company) and the Issuer Rating at BBB, the Preferred Shares at Pfd-3 and the Commercial Paper at R-2 (high), all with Stable trends. The confirmation of the ratings is based on the stable operating performance of Weston Bakery, the stable ratings of Loblaw Companies Limited (Loblaw; see separate press release), in which Weston holds a 63% stake, and the Company’s significant cash resources, which are expected to be used toward growth opportunities. The ratings continue to be supported by the Company’s strong brands and above-average operating efficiency, while reflecting the volatile input cost environment and the mature nature of the bakery industry.
…
DBRS believes that Weston has the ability to maintain its current BBB rating and a financial profile commensurate with the current rating category (i.e., ultimate gross debt-to-EBITDA of up to 2.5 times (x) or net debt-to-EBITDA of up to 2.0x).

DBRS will continue to monitor Weston’s decisions on the deployment of its remaining cash, cash equivalents and short-term investments, and will assess the potential impact on the Company’s credit risk profile at such time.

As for the short-term rating, Weston’s liquidity profile remains commensurate with the R-2 (high) rating category, based on its long-term rating, positive free cash flow generating capacity, high level of cash and marketable investments, and manageable debt and maturity schedule.

The credit risk profile of Loblaw remains relatively stable, with a long-term rating of BBB and short-term rating of R-2 (middle). The ratings for Weston at BBB and R-2 (high) reflect its operating businesses and financial risk profile, both on a stand-alone basis, as well as consolidated with its ownership interest in Loblaw. As such, if there is any change in Loblaw’s ratings, it will not necessarily affect the ratings of Weston.

DBRS confirmed Loblaw at Pfd-3, proud issuer of L.PR.A:

DBRS has today confirmed Loblaw Companies Limited’s (Loblaw or the Company) Issuer Rating, Medium-Term Notes and Debentures ratings at BBB, its Cumulative Redeemable Second Preferred Shares, Series A rating at Pfd-3, and its Commercial Paper rating at R-2 (middle). All trends remain Stable. The confirmation of the ratings is based on Loblaw’s stable financial profile, while recognizing that the Company’s earnings profile will remain under pressure in the near to medium term due to intensifying competition combined with a difficult consumer environment. The ratings continue to be supported by Loblaw’s strong market position, large scale, national diversification, and industry-leading private labels. The ratings also reflect the high level of and intensifying competition in food retailing, particularly with the emergence of new non-traditional players (i.e., Wal-Mart Stores, Inc. (Wal-Mart) and Target Corporation (Target)), and high levels of union penetration.
…
DBRS believes that Loblaw will maintain a financial profile commensurate with the current rating based on the Company’s free cash flow generating capacity and moderate debt levels. Cash flow from operations should continue to track operating income and decline modestly to the $1.3 billion to $1.4 billion range in 2012 and 2013, while capex requirements should remain at elevated levels through 2013 and begin to moderate somewhat thereafter. Dividend policy is expected to remain consistent with recent practice, which DBRS expects should result in free cash flow before changes in working capital in the range of breakeven to $150 million. Therefore, while the Company has the potential to improve its credit metrics by applying free cash flow and cash-on-hand to debt reduction, DBRS believes that Loblaw may use these sources of cash to invest in growth and/or return value to shareholders over the longer term. As such, DBRS expects that balance sheet-debt levels and key credit metrics should remain in a range acceptable for the current rating category.

It was a mildly positive day for the Canadian preferred share market, with PerpetualPremiums up 11bp, FixedResets gaining 2bp and DeemedRetractibles flat. Volatility was non-existent. Volume was heavy, with the TXPR Revision effective at Monday’s opening.