Category: Market Action

When does a recession become a depression? Ask the Greeks:

Greece’s economy shrank by 6.9 per cent in the third quarter of the year, compared with the same period in 2011.

The national statistics agency says that the decrease was less than the 7.2-per-cent drop estimated in November, based on new data that wasn’t available last month.

However, the Greeks have the answer – steal from bank shareholders:

Greece’s three biggest banks said they participated in the government’s 10 billion-euro ($13 billion) buyback of sovereign debt, the second hit to their bond holdings this year as the nation rushes to cut a debt load that threatens further international aid.

National Bank of Greece SA, the largest lender, Alpha Bank SA and Eurobank Ergasias SA said in statements to the Athens bourse today that their boards agreed unanimously to join the offer, which ended at 7 p.m. Athens time. No further details were provided.
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Stung by the biggest sovereign restructuring in history earlier this year, the Greek banks got a promise that they won’t be subject to any legal proceedings from shareholders for participating in the offer. Finance Minister Yannis Stournaras said today the banks would have legal indemnity from potential shareholder lawsuits.

The buyback is aimed at the 62 billion euros of new bonds issued when Greece restructured its privately held debt in March. Greek banks held about 15 billion euros of the bonds, while the country’s pension funds had 8 billion euros, according to a Nov. 27 draft report by the troika of the European Commission, European Central Bank and IMF.
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The prices offered for bonds maturing from 2023 to 2042 averaged 33.1 percent of face value, based on information in a statement from the Athens-based Public Debt Management Agency on Dec. 3.

There was a good, but not great, US Jobs number:

Total nonfarm payroll employment rose by 146,000 in November, and the unemployment rate edged down to 7.7 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in retail trade, professional and business services, and health care.

However:

The drop in the jobless rate, from 7.9 percent in October, wasn’t great news because of why it happened: More people dropped out of the labor force so they weren’t counted among the unemployed. The labor-force participation rate remains depressed more than three years after the end of the 2007-09 recession. If it were at normal levels, the unemployment rate would be substantially higher.

IIROC has released new rules on electronic trading:

The amendments expand on existing obligations under the Universal Market Integrity Rules (UMIR) by assigning IIROC-regulated dealers clear supervisory and gatekeeper responsibilities to protect against errors related to electronic trading. The changes will ensure that market participants have appropriate automated filters, testing of algorithms, and other risk management tools in place for handling orders before those orders enter the marketplace.

For “gatekeeper”, read “policeman”. Everybody’s a policeman! Yay!

DBRS confirmed BIG.PR.B and BIG.PR.C at Pfd-2:

The Class B Preferred Shares and Class C Preferred Shares yield 7.00% and 5.75% annually, respectively, on their issue price of $12 per Preferred Share and rank pari passu with respect to return of principal and payment of dividends. Holders of the Capital Shares are expected to receive all excess dividend income after Preferred Share distributions and other Company expenses have been paid.

DBRS last confirmed the rating of the Preferred Shares at Pfd-2 on December 7, 2011. Performance has been generally stable since the last rating confirmation, with the NAV of the Company fluctuating between $28 and $32. The current dividend coverage ratio is 1.6 times and the current downside protection (as of November 30, 2012) available to holders of the preferred shares is approximately 62.4%. The confirmation of the rating of the Preferred Shares is based primarily on the level of downside protection and dividend coverage available, as well as on the high credit quality and consistency of dividend distributions of the underlying names in the Portfolio.

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

As of September 30, 2012, the Portfolio consisted of 68% Canadian common stock, 22% REITs, 6% power generation and pipeline trusts and 3% Canadian preferred stock. Since the rating was last confirmed in December 2011, performance has been slightly negative. Downside protection available to holders of the Preferred Securities has slowly trended lower over the past year, falling from 23.9% on November 30, 2011, to 17.4% as of November 30, 2012. The yield on the Portfolio has also decreased slightly, causing the distribution coverage ratio to drop to 0.8 times (as of November 30, 2012). Despite the reduction, downside protection remains at levels sufficient for a Pfd-4 (low) rating. The rating on the Preferred Securities continues to be constrained by the large percentage of underlying securities in the Portfolio that are not rated by any rating agency and the grind on the Portfolio due to distributions exceeding income.

The redemption date for the Preferred Securities is March 31, 2015.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 10bp, FixedResets gaining 3bp and DeemedRetractibles off 1bp. Volatility was minimal. Volume was average.

DBRS confirmed Loblaws at Pfd-3:

Loblaw’s ratings continue to be supported by its strong market position, large scale, national diversification and industry-leading private labels. The ratings also continue to reflect the high level of, and intensifying competition in, Canadian food retailing.

The confirmation also reflects DBRS’s view that Loblaw’s earnings profile should remain in the range acceptable for the current rating category, despite intensifying competition and a difficult consumer environment. DBRS expects top-line revenue will remain relatively flat in the near term, based on a modest increase in square footage and flat-to-negative same-store sales. EBITDA margins should remain under pressure as Loblaw could be forced to increase its use of promotional pricing to help drive traffic as competition intensifies (particularly with new openings of Wal-Mart Supercenters and Target stores) and the Company continues to invest in infrastructure upgrades. As such, DBRS expects EBITDA (on a comparable basis) will decline moderately or, at best, remain flat in the near term.
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DBRS will review all aspects of the [REIT spin-off] transaction upon closing. Should the proposed transaction close on terms and conditions that are not substantially in accordance with those outlined in the proposed plan provided to DBRS and/or Loblaw or the transaction experience material adverse changes, DBRS will consider the actual terms and a rating action could result.

DBRS confirmed Weston at Pfd-3.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets up 4bp and DeemedRetractibles off 9bp. Volatility was average. Volume was average.

It seems that the Financial Stability Oversight Council is getting annoyed at SEC footdragging on the MMF issue and has issued its own discussion paper:

Based on this proposed determination, the Council seeks comment on the proposed recommendations for structural reforms of MMFs that reduce the risk of runs and significant problems spreading through the financial system stemming from the practices and activities described above. The Council is proposing three alternatives for consideration:

• • Alternative One: Floating Net Asset Value. Require MMFs to have a floating net asset value (“NAV”) per share by removing the special exemption that currently allows MMFs to utilize amortized cost accounting and/or penny rounding to maintain a stable NAV. The value of MMFs’ shares would not be fixed at $1.00 and would reflect the actual market value of the underlying portfolio holdings, consistent with the requirements that apply to all other mutual funds.
• • Alternative Two: Stable NAV with NAV Buffer and “Minimum Balance at Risk.” Require MMFs to have an NAV buffer with a tailored amount of assets of up to 1 percent to absorb day-to-day fluctuations in the value of the funds’ portfolio securities and allow the funds to maintain a stable NAV. The NAV buffer would have an appropriate transition period and could be raised through various methods. The NAV buffer would be paired with a requirement that 3 percent of a shareholder’s highest account value in excess of $100,000 during the previous 30 days — a minimum balance at risk (MBR) — be made available for redemption on a delayed basis. Most redemptions would be unaffected by this requirement, but redemptions of an investor’s MBR itself would be delayed for 30 days. In the event that an MMF suffers losses that exceed its NAV buffer, the losses would be borne first by the MBRs of shareholders who have recently redeemed, creating a disincentive to redeem and providing protection for shareholders who remain in the fund. These requirements would not apply to Treasury MMFs, and the MBR requirement would not apply to investors with account balances below $100,000.
• • Alternative Three: Stable NAV with NAV Buffer and Other Measures. Require MMFs to have a risk-based NAV buffer of 3 percent to provide explicit loss-absorption capacity that could be combined with other measures to enhance the effectiveness of the buffer and potentially increase the resiliency of MMFs. Other measures could include more stringent investment diversification requirements, increased minimum liquidity levels, and more robust disclosure requirements. The NAV buffer would have an appropriate transition period and could be raised through various methods. To the extent that it can be adequately demonstrated that more stringent investment diversification requirements, alone or in combination with other measures, complement the NAV buffer and further reduce the vulnerabilities of MMFs, the Council could include these measures in its final recommendation and would reduce the size of the NAV buffer required under this alternative accordingly.

I like #3. SEC Commissioner Luis Aguilar, who has opposed meaningful reform, is hastily covering his ass by focussing on migration to unregulated funds:

The outflow of money fund assets to an unregulated market is a significant systemic risk concern, and can result in harm to our market and investors. As was stated by an SEC spokesperson, this was not a concern shared by the SEC staff.

However, the SEC staff’s recent report has now identified the issue of migration to unregulated products and is, for the first time, offering a more in-depth analysis. Moreover, the new Director of Investment Management, Norm Champ, who has experience with unregulated funds, has indicated to me that the staff is now actively considering this issue.

Additionally, both Secretary Geithner and FSOC have expressly raised the need to address the concern of money fund assets migrating to an opaque, unregulated market as a result of structural changes to money market funds.

The serious consideration by the SEC staff and FSOC of the potential migration of money fund assets to opaque, unregulated funds is also a welcome development.

The FSOC paper used the word “unregulated” exactly once:

The Council recognizes that regulated and unregulated or less-regulated cash management products (such as unregistered private liquidity funds) other than MMFs may pose risks that are similar to those posed by MMFs, and that further MMF reforms could increase demand for non-MMF cash management products. The Council seeks comment on other possible reforms that would address risks that might arise from a migration to non-MMF cash management products. Further, the Council is not considering MMF reform in isolation. The Council and its members intend to use their authorities, where appropriate and within their jurisdictions, to address any risks to financial stability that may arise from various products within the cash management industry in a consistent manner. Such consistency would be designed to reduce or eliminate any regulatory gaps that could result in risks to financial stability if cash management products with similar risks are subject to dissimilar standards.

The extra report Aguilar was whining about has been published: Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher:

Third, the Commissioners asked how money market funds would likely have performed during the events of September 2008 had the 2010 reforms been in place at the time. The effect of heightened liquidity standards on fund resiliency, given specific levels of capital losses and redemption activity, is examined using money market fund portfolio holdings in September 2008. The findings indicate that funds are more resilient now to both portfolio losses and investor redemptions than they were in 2008. That being said, no fund would have been able to withstand the losses that The Reserve Primary Fund incurred in 2008 without breaking the buck, and nothing in the 2010 reforms would have prevented The Reserve Primary Fund’s holding of Lehman Brothers debt.

Well, of course. The only thing that’s going to allow a fund to maintain par value in the face of a significant default is capital. Duh!

Special dividends are all the rage:

So far this quarter, U.S. companies have pledged more than $21-billion (U.S.) in one-off dividends – and that’s not including early payment of regular ones. Shareholders receiving them will be able to book the gains at the 15-per-cent tax rate currently in place rather than the worst-case 39.6 per cent scheduled to go into effect next year if President Barack Obama and Congress don’t agree on an alternative rate.
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If this quarter’s special dividends alone were instead paid out next year with the highest feasible tax rates in force, the U.S. government’s coffers would be at least $5-billion heavier in a few months’ time.

Enbridge Inc. was confirmed at Pfd-2(low) by DBRS:

The ratings reflect (1) a relatively strong business risk profile, (2) pressure on the Company’s near-to-medium-term credit metrics and (3) results under the 10-year Competitive Tolling Settlement (CTS) effective July 1, 2011.

RioCan Real Estate Investment Trust was confirmed at Pfd-3(high) by DBRS:

following the Trust’s announcement that that it has entered into a purchase and sale agreement (the Agreement) to acquire a $1.1 million portfolio of Canadian retail properties, including five regional malls and three grocery-anchored unenclosed shopping centres.

The properties are currently owned by Primaris Retail REIT (Primaris). Pursuant to the Agreement, RioCan will acquire a 100% interest in six properties and a 50% interest in two properties. The Agreement is in support (and subject to completion) of the proposed offer to acquire Primaris by a KingSett Capital-led consortium (the Offer), which was announced earlier today.

The confirmation is based on the fact that the potential acquisition, totaling $1.1 billion, would represent only approximately 10% of RioCan’s current total assets. In addition, the target properties are considered to be good quality assets that are well located in major Canadian markets.

In terms of financing, the potential acquisition would be funded with $635 million of new fully-underwritten debt financing commitments from The Toronto-Dominion Bank and the assumption of $499 million of debt. While this would temporarily increase leverage to approximately 49% total debt-to-capital, RioCan has stated its intention to repay a meaningful portion of the incremental debt within six to nine months, primarily with proceeds from asset sales. Despite the increase in leverage, DBRS believes RioCan’s EBITDA coverage ratio (including capitalized interest), with the additional operating income generated from the targeted properties, should stay close to 2.5 times (x), a level well within the range acceptable for the current rating category.

I continue to be fascinated by the concept of converting atmospheric CO₂ into usable energy, preferably by using sunlight as the energy source. Now I learn that there’s a project at my alma mater delving into that very thing. My alma mater wants money from me … I suggest that they simply ask the Ontario government to stop blowing cash on second rate solar technology and plough the money into research that might lead to something that actually works.

I urge all readers to remember that Christmas is a time to give to the less fortunate. And who could be less fortunate than the owner of a telemarketting firm?:

The Cancer Society’s 2010 contract with InfoCision for a telemarketing campaign called Notes to Neighbors estimated the charity would receive 44 percent of the money raised. Solicitors used scripts, approved by the Society, falsely claiming that 70 percent of the money raised would go to the charity.

That year, InfoCision kept 100 percent of the $5.3 million it raised for the charity, according to Cancer Society filings with the IRS and the state of Maine.

The American Diabetes Association approved a script the same year for use by InfoCision telemarketers.

“Overall, 75 percent of every dollar received goes directly to serving people with diabetes and their families,” the script says.

The Association’s fundraising contract for that period estimated the Association would receive just 15 percent, with the rest going to InfoCision.

Other of the nation’s largest health charities, including the American Heart Association, the American Lung Association and the March of Dimes, have hired InfoCision during the past decade. The telemarketer brought in a total of $425.5 million for more than 30 nonprofits from 2007 to 2010, keeping $220.6 million, or 52 percent, according to state-filed records.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 8bp, FixedResets off 6bp and DeemedRetractibles gaining 5bp. Volatility was average. Volume was above average, dominated by recent issues.

PerpetualDiscounts now yield 4.87%, equivalent to 6.33% interest at the standard conversion factor of 1.3x. Long corporates now yield about 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 215bp, unchanged from the November 28 report.

Global banks are moving more into asset management but there are problems:

Global banks, forced by regulators to reduce their dependence on profits from high-risk trading, have rediscovered the appeal of the mundane business of managing money for clients.

Deutsche Bank AG (DBK) is now counting on the fund unit it failed to sell to help boost return on equity, a measure of profitability. UBS AG (UBSN) is paring investment banking as it focuses on overseeing assets for wealthy clients. Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC), three of the five biggest U.S. banks, are considering expanding asset- management divisions as they seek to grab market share from fund companies such as Fidelity Investments.
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Banks will need to overcome the perception that they sometimes push their own funds and improve their middle-of-the- pack performance as money managers if they want to attract assets from investors. Goldman Sachs’s stock and bond mutual funds have trailed about 61 percent of their respective peers on average over the five years ended Sept. 30, and about 52 percent over the past three years, according to data from Morningstar Inc. in Chicago. JPMorgan’s mutual funds have been beaten by 42 percent of rivals over the past five years, while Wells Fargo’s have lagged behind 44 percent, the Morningstar data show.
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As recently as 2000, brokers, banks and insurers dominated the rankings of global asset-management firms, accounting for six of the top 10 spots based on assets, according to data from trade publication Pensions & Investments. Today, they hold four of those positions as the balance shifted to BlackRock Inc. (BLK), Vanguard Group Inc. and Fidelity. The four banks and insurance companies on the list collectively have about $5.5 trillion in assets compared with more than $11 trillion for the rest.

The decline reflects a combination of poor performance, the rise of mutual-fund sales through fee-only independent advisers rather than bank-owned brokerages and the impact of a mutual- fund trading scandal uncovered by then-New York Attorney General Eliot Spitzer in 2003. The inquiries into improper trading led to increased regulation, raised operating costs and resulted in more than $4 billion in penalties to firms including Bank of America Corp. (BAC), Merrill Lynch & Co. and Citigroup Inc. (C).

The Boston Fed has published a discussion paper titled A Psychological Perspective of Financial Panic:

In spite of large number of financial crises, often depicted as episodes of financial panic, the notion of panic in financial markets is not very well understood. Many have argued that in order to understand financial crises, and in particular panic events, we need to go beyond classic economic arguments. This paper is an effort in that direction, in which we attempt to give a psychological account of panic and of panic in financial markets in particular, by discussing uncertainty, the desire for predictability and control, the illusion of control, and confidence. We suggest how one might incorporate these psychological insights into existing economic models.

There’s been a development in the Rochdale Securities scandal:

The FBI on Tuesday arrested David Miller, a former Rochdale Securities trader whose outsized, unauthorized purchases of Apple stock in October nearly sank his firm.

U.S. prosecutors in Connecticut charged Miller with wire fraud, alleging he lied about his trading of Apple shares ahead of the tech giant’s Oct. 25 earnings announcement.

According to a criminal complaint filed in federal court on Monday, Miller bought Apple shares for himself and then reported to Rochdale the trade was for a customer who would bear the risk if it lost money.

Miller would have been able to walk away with a profit for himself had Apple’s share price risen, but it fell. As a result, Rochdale was left unexpectedly owning more than a million and a half shares of Apple and had to sell them for a $5 million loss.

According to the complaint, Miller also pretended to be a representative of a client’s firm and told another broker-dealer to sell Apple shares, supposedly on behalf of the firm.

The Canadian preferred share market had a day of modest gains today, with both PerpetualPremiums and DeemedRetractibles gaining 5bp while FixedResets were up 6bp. Volatility was average. Volume was on the high side of average.

Fitch Ratings (my favourite CRA) didn’t win an account recently – so they decided to win some political brownie points instead:

The recently closed CSMC Trust Mortgage Corp 2012-CIM3 (‘CIM3’) transaction has insufficient credit enhancement to achieve a ‘AAA’ rating, according to Fitch Ratings.
While asked to provide feedback, Fitch was ultimately not selected to rate the transaction, the ninth new issue prime RMBS transaction completed in 2012. Fitch believes it has a more conservative credit stance regarding this transaction. In fact, at 5.85%, the credit enhancement available to the ‘AAA’ rated A-2 class is more than 15% lower than any Fitch rated prime RMBS transaction issued since 2008. Fitch’s estimated credit enhancement (‘CE’) for the senior class A-1 and A-2 notes was 8%.

The collateral attributes of the CIM3 pool are consistent with those Fitch would consider representative of a high credit quality prime portfolio. That said, the 5.85% CE available to the A-2 class is not sufficient in Fitch’s view to fully address the risks associated with the pool, including concentrations in geographies whose property prices remain well above what Fitch believes are sustainable values.

A key component of Fitch’s analysis is to reduce home prices to their sustainable value prior to applying its market value decline (MVD) stresses. Six of the top ten MSA’s represented in the transaction were applied base MVD’s over 20% including Washington-Arlington-Alexandria that accounts for 17.3% of the pool.

They didn’t say who won the deal but Bloomberg did:

The AAA ratings assigned by Standard & Poor’s in a mortgage-bond deal by Credit Suisse Group AG (CSGN) are too high, Fitch Ratings said for the second time this year.
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Rating companies have stepped up their public criticism of competitors’ grades on securitized debt after investors and lawmakers accused them of lowering standards to win business as issuers practiced so-called ratings shopping during the credit boom. A report by a Senate panel last year described the industry as engaging in “a race to the bottom,” before the bubble began to burst in 2007 and sparked a global financial crisis.

I am perplexed to learn that the SEC is studying decimalization:

The Securities and Exchange Commission today announced that its staff will host a roundtable early next year to discuss the impact of decimal-based stock trading on small and mid-sized companies, market professionals, investors, and U.S. securities markets.

The roundtable will be held on Feb. 5 at the SEC’s Washington, D.C., headquarters, and will be open to the public and webcast live on the SEC’s website. Information on the agenda and participants will be issued shortly.

This has been given some focus by the SEC Report to Congress on Decimalization:

One of the IPO Task Force’s conclusions is that changes in the market structure of U.S. capital markets toward a low-cost, frictionless environment characterized by electronic trading has favored highly liquid, very large capitalization stocks at the expense of smaller capitalization stocks. According to the IPO Task Force Report, the impact of decimalization has been twofold. First, market structure changes associated with decimalization favor short-term trading strategies over long-term fundamental strategies. For smaller public company stocks with lower liquidity, the lack of fundamental strategies results in trading volume that is too low “to make money for the investment bank’s trading desk.” The IPO Task Force Report argues that this lack of profitability undermines the incentive for underwriters to take smaller companies public.

Second, the IPO Task Force Report states that “decimalization . . . put the economic sustainability of sell-side research departments under stress by reducing the spreads and trading commissions that formerly helped to fund research analyst coverage.” The IPO Task Force Report also argues that analyst coverage has significantly shifted away from smaller capitalization stocks towards highly liquid, larger capitalization stocks, reflecting the change in financial institution focus.9 In particular, the IPO Task Force Report suggests that analyst coverage of smaller public companies has become unprofitable both because of the Global Analyst Research Settlement in 2003, which prohibited the direct compensation of research analysts through investment banking revenue, and the advent of decimalization, which reduced spreads that formerly helped fund analyst coverage. Thus, the IPO Task Force Report concludes, less analyst coverage of smaller capitalization companies means that less information on these stocks is generated, which, in turn, reduces market interest in these stocks.

In many ways this echoes my criticism of the concept of exchange trading for bonds: transparency sounds wonderful, but it leads to a shallower and more brittle market than OTC. However, my perception is that the big problem for smaller companies is the immense cost of prospectus preparation and compliance with regulation for public companies; I think the SEC would be better advised to fix that first, prior to fiddling with market mechanics.

The Nobel Foundation is reaching for yield:

The Nobel Foundation, which this year lopped 20 percent off its cash prizes, is planning to invest more money through hedge funds to boost its returns and restore the award to its previous size.

“When we look at the analysis we see that we can get more return with less risks by doing that,” Executive Director Lars Heikensten said in an interview at the Nobel Foundation’s Stockholm headquarters yesterday. “If we can choose hedge funds that we trust, then we can get better returns for given risks.” The fund “probably shouldn’t” be fully invested in debt securities, he said.

Audit fees and expenses are going up:

Accounting firm Ernst & Young LLP has been accused by regulators of failing to properly scrutinize the books of failed forestry company Sino-Forest Corp., marking a rare case of auditors facing allegations of wrongdoing by the Ontario Securities Commission.

The case was announced Monday just as lawyers for Sino-Forest’s shareholders were also revealing they had reached a record $117-million settlement with E&Y late last week. The settlement is the largest class-action lawsuit payment by an audit firm in Canadian history.

Both developments are expected to have a broad impact on the work of auditors, especially those working for companies like Sino-Forest who trade on Canadian stock exchanges but have all their operations based in another country.

The Canadian preferred share market drifted very slightly upward today, with PerpetualPremiums and DeemedRetractibles up 2bp while FixedResets gained 4bp. There was a surprising amount of volatility, heavily skewed to the upside. Volume was below average.

I have long been amused that monetary loosening intended to provoke investment in productivity enhancing endeavors has instead had the result of inflating housing bubbles; and now Citibank says there’s another problem:

Worldwide quantitative easing may be making investors richer rather than encouraging business investment, according to Citigroup Inc. (C)

Fulfilling the goals of central bankers such as Federal Reserve Chairman Ben S. Bernanke, ultra-low interest rates and bond purchases are encouraging investors to buy stocks. Policy makers’ intent was that asset prices and wealth would rise, encouraging consumers and businesses to spend more.

The sticking point is the particular equities investors are favoring, Robert Buckland, Citigroup’s London-based chief global equity strategist, said in a Nov. 21 report. His research suggests they tend to choose companies that issue dividends and buy back shares rather than those that invest in the economy.

It was a modest day in the Canadian preferred share market, with PerpetualPremiums up 4bp while FixedResets and DeemedRetractibles both gained 2bp. Volatility was low but entirely comprised of losers. Volume was high.

And that’s it for another month!

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 7bp, FixedResets off 2bp and DeemedRetractibles gaining 6bp. Volatility was minimal. Volume was above average.

Evan Soltas writes an interesting piece on Bloomberg titled Misconceptions 101: Why College Costs [in the US] Aren’t Soaring:

What has happened is a shift toward price discrimination — offering multiple prices for the same product. Universities have offset the increase in sticker price for most families through an expansion of grant-based financial aid and scholarships. That has caused the BLS measure to rise without increasing the net cost.

Wealthier families now pay more than ever to send their children to college. But for much of the middle class, the real net cost of college has not changed significantly; for much of the poor, the expansion of aid has increased the accessibility and affordability of a college education.

Data from the College Board show effectively no change in real net tuition and fees for dependent students at four-year public or private universities whose families are in the lower-two income quartiles. There also have been some increases in the real cost of room and board, but for families with below-average income, the rise has been on the order of 20 percent over 20 years.

At four-year public universities, the average sticker price for tuition and fees has risen 127 percent in real terms, from $3,810 in 1992 to $8,660 in this academic year. But only $990 of this $4,850 increase in sticker price, or 20 percent, is due to increases in net cost. The remaining 80 percent is price discrimination.

At four-year private universities, the story is the same. From 1992 to 2012, their average sticker price rose $12,020, or 70 percent, after inflation. Only 28 percent of this increase, or $3,370, has come from net cost; 72 percent of the increase is in the sticker price only.

In other words, the universities are now part of the tax system. Is this supposed to be good? I’m all in favour of merit-based scholarships and grants – but that’s not what is being defended. I also note that the increase in real net cost is about 25% over the past twenty years; it is not clear how this increase is justified.

Co-operators General Insurance Company was confirmed by DBRS at Pfd-3(high):

The Company is the cornerstone of The Co-operators Group Limited, a co-operative financial services organization with complementary interests in life insurance and investment management. As part of a larger financial services group, the Company enjoys a strong franchise in the co-operative space, which ranks it among the top five providers of general insurance products in Canada. The Company is positioned to benefit from recent management initiatives to reduce costs, contain underwriting risk and cultivate deeper customer relationships. The Company is demonstrating the discipline to pull back from unprofitable business even at the cost of lost revenue. More customer segmentation and differential pricing create a more favourable platform for improved future profitability.
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In line with the improvement in underwriting profitability, return on equity has recovered to low double digits, which is in line with the Company’s targets. Investment income remains pressured by lower interest rates, although realized gains in market values of securities have supported investment results in recent periods. Financial leverage remains modest, with the preferred shares representing just 17.4% of capitalization. The corresponding fixed-charge coverage ratio has averaged between seven and eight times, which is strong for the rating category. The Company’s consolidated regulatory minimum (MCT) capital ratio is 269%, which is well in excess of the Company’s minimum target of 180% ($437 million of excess capital). Strong regulatory capital ratios at its major operating subsidiaries permit the regular flow of dividends up to the Company which, in addition to its own operating earnings, are available to meet its preferred share obligations. Liquidity is generally not a concern in the general insurance industry as premiums are written and invested in relatively liquid assets.

There’s an interesting article on Bloomberg about accountability of anti-piracy troops.

It was a day of very little movement for the Canadian preferred share market, with PerpetualPremiums and DeemedRetractibles both gaining 1bp and FixedResets up 2bp. Volatility was low. Volume was a little above average.

PerpetualDiscounts now yield 4.89%, equivalent to 6.36% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 215bp, a small (and perhaps spurious) increase from the 210bp reported November 21.

There is some chatter about London’s decline as a financial centre:

Investment bankers and traders at European banks should expect at least a 15 percent cut in pay this year, while U.S. lenders may leave compensation unchanged, three consultants surveyed by Bloomberg said. That’s because bonus pools at European banks may be reduced by as much as half, while those at U.S. firms, which can cushion the impact of falling fees in the region with earnings from home, may fall 20 percent, they said.

“The real split is coming, and we will see the quantum divide this year,” said Tom Gosling, a partner at PricewaterhouseCoopers LLP in London, referring to the difference in pay between the two financial centers. “U.S. regulators don’t have the same obsession with pay structures that European regulators have.”

While lower pay for all bankers reflects what may be a temporary drop in business, cuts at European lenders probably will be structural rather than cyclical, cementing a two-tier system, said John Purcell, chief executive officer of Purcell & Co., a London search firm. They also could spur some employees to relocate, according to recruitment company Astbury Marsden.

It’s not clear yet, but the latest Greek bail-out might work:

European finance ministers eased the terms on emergency aid for Greece, declaring after three years of false starts that Europe has found the formula for nursing the debt-stricken country back to health.

In the latest bid to keep the 17-nation euro intact, the ministers cut the rates on bailout loans, suspended interest payments for a decade, gave Greece more time to repay and engineered a Greek bond buyback. The country was also cleared to receive a 34.4 billion-euro ($44.7 billion) loan installment in December. Greek bonds rose.

“This has been a very difficult deal,” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Brussels after chairing a 13-hour meeting that ended early today. “All initiatives decided upon today will bring Greece’s public debt clearly back on a sustainable path.”

After 240 billion euros in loan pledges and the biggest writedown of privately held debt failed to turn Greece around, the creditor governments led by Germany proclaimed the latest fix just as they grappled with swelling financing needs in Cyprus and a potential aid request by Spain, the fourth-largest euro economy.

To compensate for this little bit of progress, the Europeans have gone completely nuts on Credit Rating Agencies:

Credit ratings companies face curbs on when they can assess government debt and restrictions on their ownership under draft plans agreed on by European Union officials and legislators.

Lawmakers from the European Parliament and Cyprus, which holds the rotating presidency of the EU, also agreed today to allow investors to sue ratings companies if they lose money because of malpractice or gross negligence.
…
[ EU financial services chief Michel] Barnier proposed the tougher ratings rules after warnings from nations including France and Germany that downgrades of sovereign debt had deepened the bloc’s fiscal crisis. Barnier said last year that ratings companies were guilty of “serious mistakes” and shouldn’t be allowed to “increase market volatility” through ill-timed or unjustified downgrades.
…
On sovereign debt ratings, lawmakers and officials agreed that each credit rating firm must pick three days a year when they would be allowed to give so-called unsolicited assessments of governments’ creditworthiness, according to Jean-Paul Gauzes, a lawmaker involved in the talks. Ratings firms may get a chance to issue unsolicited ratings outside those dates if they could justify it to regulators.
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The EU also plans to block any investor from owning stakes of more than 5 percent in more than one rating company, Gauzes said in an interview after the meeting.
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The commission said that it will weigh further steps to regulate the credit ratings market, including the creation of a “European credit rating agency.” Officials will report on the possible step by 2016, it said.

All this sounds like a really good reason for CRAs to set up shop well outside the EU.

I wonder if they will declare the OECD to be illegal?

The OECD slashed its global growth forecasts on Tuesday, warning that the debt crisis in the recession-hit euro zone is the greatest threat to the world economy.

In light of the dire economic outlook, the Organization for Economic Cooperation and Development urged central banks to prepare for more exceptional monetary easing if politicians fail to come up with credible answers to the debt crisis.
…
Cutting its estimates, the OECD forecast that the euro zone economy would contract 0.4 per cent this year and another 0.1 per cent next year, only returning to growth in 2014 with a rate of 1.3 per cent.

Maybe that’s related to the bad press for long sovereigns:

Given the overheated market, it’s understandable why Michael Sabia, chief executive of the Caisse, told the Financial Times on Tuesday that he is planning to lower his institution’s $58.8-billion allocation to fixed-income investments by at least $7-billion next year. And why [Boston-based fund manager] GMO, a highly regarded money manager, told the FT it has “given up” on long-dated sovereign debt.

But if big institutions are starting to pull out of fixed income investments, ordinary Canadians are continuing to pile in. As of the end of October, retail investors had poured a net $16.3-billion into bond funds so far in 2012 – almost three times as much as in the same period in 2011 – while redeeming a net $11.5-billion from equity funds, according to the Investment Funds Institute of Canada.

The Caisse hasn’t always been the best proxy for smart money, but GMO has. Headed by the famed investor Jeremy Grantham, it shifted its portfolios to a high cash position in late 2007, just before the credit crisis mushroomed, and also managed to avoid being sucked in by the Internet bubble in the late 1990s.

Now, GMO is holding 40 per cent of its assets in cash, according to the FT. Canadians thinking it’s high time they added more bonds to their portfolios should think twice; there may be safer places to keep that money.

Why is it so expensive to go to school in the US?:

At universities nationwide, employment of administrators jumped 60 percent from 1993 to 2009, 10 times the growth rate for tenured faculty. “Administrative bloat is clearly contributing to the overall cost of higher education,” says Jay Greene, an education professor at the University of Arkansas. In a 2010 study, Greene found that from 1993 to 2007, spending on administration rose almost twice as fast as funding for research and teaching at 198 leading U.S. universities.

It was a negative day for the Canadian preferred share market, with PerpetualPremiums down 5bp, FixedResets losing 18bp and DeemedRetractibles off 3bp. Volatility was average, but all negative. Volume was well above average.

Lapdog Carney got a better job:

Bank of Canada Governor Mark Carney was unexpectedly named head of the Bank of England as the U.K. government looked abroad for a candidate untainted by financial turmoil to lead the beefed-up central bank.

Carney, a 47-year old former Goldman Sachs Group Inc. managing director, will become the first foreigner to run the 318-year-old institution as it absorbs new powers to oversee banks. He’ll replace Mervyn King from July as policy makers pursue record-low interest rates and asset-buying to propel the economy from its first double-dip recession since the 1970s.
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“Carney is a surprise choice but he is a highly respected central banker,” said Philip Shaw, an economist at Investec Securities in London. “The Canadian banking system is widely regarded to be in good shape because of the Bank of Canada’s approach to regulation ahead of the credit crisis, and this may have been a factor in his appointment.”

In announcing his selection and seeking to get ahead of any criticism about his decision to look overseas for talent, Chancellor of the Exchequer George Osborne described Carney as “quite simply the best, most experienced and most qualified person in the world to do the job.”

Mr. Shaw will doubtless be surprised to learn that the BoC does not, in fact, regulate banks in Canada – that’s what OSFI pretends to do – as Dickson was very quick to point out:

“Mr. Carney brings tremendous credibility in this new role and I will miss his counsel as a member of the team of government agencies in Canada that work together in support of a sound and stable financial system.”

Now we are all on tenterhooks: will Carney be able to read Osborne’s handwriting properly when drafting speeches? Osborne & Cameron remind me of another political pair:

David Cameron has ruled out George Osborne giving up his political strategy role to focus on being Chancellor.

Despite fierce criticism of Mr Osborne for grim economic figures, the Prime Minister told colleagues that Downing Street and the Treasury working hand in hand was a ‘strength, not a weakness’.

But Lord Ryder, a former Tory chief whip, has claimed both men are ‘obsessed with management of 24-hour news’ and called for there to be a ‘full-time’ Chancellor.

Revenge of the nerds?:

Having left the heavy-lifting to technology companies until early this year, San Francisco’s non-tech employers are playing a growing role in the city’s labor recovery. Positions in everything from retail to construction to hospitality now comprise about 75 percent of the city’s job growth, helping the Northern Californian hub add jobs at among the fastest rates in the nation and reduce its unemployment rate to 6.5 percent.

San Francisco’s experience is also seen in broadening expansions in other U.S. technology centers such as Seattle and Boston, easing concerns that innovation would create work for only the most highly-skilled and highly-paid while others get left behind. Every new technology job in a city creates five additional local jobs outside the sector over time, according to an analysis by Enrico Moretti, an economics professor at the University of California, Berkeley.

“People were missing the big picture,” said Moretti, author of “The New Geography of Jobs” published in May. “Tech cannot offer jobs to the average worker, but every software engineer attracted to Twitter will indirectly support many more service jobs. My research suggests that this multiplier effect is particularly large for high-tech jobs.”

The OSC has released OSC Staff Notice 33-738: 2012 OSC Annual Summary Report for Dealers, Advisers and Investment Fund Managers. The associated NOTICE AND REQUEST FOR COMMENT ON PROPOSED AMENDMENTS TO NATIONAL INSTRUMENT 31-103
REGISTRATION REQUIREMENTS, EXEMPTIONS AND ONGOING REGISTRANT OBLIGATIONS AND TO COMPANION POLICY 31-103CP REGISTRATION REQUIREMENTS, EXEMPTIONS AND ONGOING REGISTRANT OBLIGATIONS June 14, 2012 (2nd Publication) Cost Disclosure, Performance Reporting and Client Statements states:

(v) Percentage return calculation method

We are proposing to mandate that registrants use the dollar-weighted method in calculating the percentage return on a client’s account or portfolio, in order to promote consistency and comparability in investor reporting from one registrant to another.

We had previously considered permitting registrants to choose between a time-weighted and dollar-weighted performance calculation method. We have decided to mandate the dollar-weighted method because it most accurately reflects the actual return of the client’s investments. This is in keeping with one of the main themes of the project — allowing investors to measure how their investments have performed.

Time-weighted methods are generally used to evaluate the registrant’s performance in managing an account, as the returns are calculated without taking into consideration any external cash flows. These methods isolate the portion of an account’s return that is attributable solely to the registrant’s actions. The philosophy behind time-weighted methods is that a registrant’s performance should be measured independently of external cash flows, because contributions and withdrawals by an investor are out of the registrant’s control.

– – – – – – – – – – – – – – – – – – – –

Issue for comment

We invite comments on the benefits and constraints of the proposal to mandate the use of the dollar-weighted method, in particular as they relate to providing meaningful information to investors.

We are not prohibiting the use of the time-weighted method, but if a registered firm uses such a method, it must be in addition to the dollar-weighted calculation.

Given the very well known tendency of investors to make bad timing decisions , this will probably result in a decline of most honestly reported performance figures. There is no indication as yet as to whether mutual funds will be bound by the same rules.

Some Ontario lawyers are saying there are too many lawyers:

In another vote Thursday, the council responded to a critical shortage of articling positions by creating an alternative path to the profession. It calls for four months of extra classroom education as well as an unpaid, co-op work placement.

During debate, some council members expressed misgivings about the competency of many students flocking to a legal career.

“The law schools are now sending us flood upon flood of students,” said lawyer Bradley Wright. “Because no one fails any more, being accepted into first-year law school guarantees you a call to the bar. … Just show up at the door and you will be accepted into our profession.”

I’ll believe it when prices come down.

The Canadian preferred share market suffered a small decline today, with PerpetualPremiums and FixedResets down 7bp and DeemedRetractibles off 2bp. Volatility was non-existent. Volume was average and dominated by ENB issues in the wake of the new issue announcement.