Category: Market Action

Richard W. Fisher gave a rather provocative speech last week titled The State of the West (With Reference to George Shultz, Eisenhower, Buzz Lightyear, George Strait, the San Francisco Fed and Adam and Eve) :

I’ll just say this: Our Congress—past and present—has behaved disgracefully in discharging its fiscal duty. Its members have not shown themselves to be true born leaders.
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The jig is up. Our fiscal authorities have mortgaged the material assets of our grandchildren to the nth degree. We are at risk of losing our political heritage of reaching across the aisle to work for the common good. In the minds of many, our government’s fiscal misfeasance threatens the world’s respect for America as the beacon of democracy.

Only the Congress of the United States can now save us from fiscal perdition. The Federal Reserve cannot. The Federal Reserve has been carrying the ball for the fiscal authorities by holding down interest rates in an attempt to stoke the recovery while the fiscal authorities wrestle themselves off the mat. But there are limits to what a monetary authority can do. For the central bank also plays a fiduciary role for the American people and, given our franchise as the globe’s premier reserve currency, the world. We dare not become the central bank counterpart to Congress by adopting a Buzz Lightyear approach of “To infinity and beyond!” by endlessly purchasing U.S. Treasuries and agency debt so as to encumber future generations of central bankers with Hobson’s choices when it comes to undoing what seems contemporarily appropriate.

So my only comment today regarding the recent federal elections is this: Pray that the president and the Congress will at last tackle the fiscal imbroglio they and their predecessors created and only they can undo.

This speech has been energetically attacked by Tim Duy, but only on the basis of timing:

What is it about fiscal policy that brings out the crazy?  Because it all seems pretty simple.  Joe Weisenthal hits the nail on the head:

The U.S. recovery has been remarkable on a comparative basis precisely for one reason: Because despite all of the rhetoric, the U.S. has completely avoided the austerity madness that's gripped much of the world.

Weisenthal points us to Ryan Avent and Josh Lehner, both showing in different ways the better post-recession outcomes experienced by the US compared to other economies.  Paul Krugman extends the argument by comparing the divergent path of Eurozone and US unemployment rates.  The key difference in policy – the US pursued a more aggressive fiscal policy and didn't pull back too quickly.  I don't think you can emphasize this point enough.   

Which brings us to the fiscal cliff (or slope, which is more accurate and avoids creating the false impression that all is lost come January 1).  The tax increases and spending cuts in place promise to repeat the mistakes of the UK and the Eurozone by pivoting too fast and too hard into the realm of fiscal austerity.  A solution to the fiscal cliff means smoothing the path to fiscal consolidation (optimally, with no austerity in the near term, but I don't see that as an outcome).

What I want to see from the politicians is sufficient changes to put the US into a structural surplus. Note the word “structural” – it does not mean diving off the fiscal cliff, although according to the Congressional Budget Office, even giving full effect to the fiscal cliff does not lead to a structural surplus; there is a projected deficit every year through 2022, the end of their horizon. Thus, while I would not like to see a sudden dive of the fiscal cliff, I feel that a path must be taken that goes beyond those projected measures (or equivalent) over the medium term.

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It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 12bp, FixedResets gaining 5bp and DeemedRetractibles off 1bp. Volatility continued to be low. FixedResets dominated a day of relatively low volume, perhaps influenced by a move towards the new FixedReset ETF, ZPR, which now claims to have $5.2-million under management and traded slightly under 40,000 shares today (at about $15 each, or a total of $0.6-million).

The intermediators are being disintermediated!

When PPR SA, the French owner of Gucci, sold a stake in its African distributor CFAO in August, it didn’t use an investment bank to handle the transaction.

Instead, the company turned to an in-house mergers and acquisitions team led by Charles de Fleurieu, 39, a former France Telecom SA M&A executive. “When we can, we do it on our own,” said group managing director Jean-Francois Palus, 51.
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Almost a third of completed European and U.S. M&A transactions this year were done in-house, according to data provided by Freeman Consulting, a New York-based research firm. For the U.S., that represents the largest adviser-free proportion of deals since 2003; for Europe, it’s the most since 2004.
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Big global investment banks have seen their revenue from advisory work fall 48 percent, to $6.48 billion, in the first nine months of 2012, compared with the same period in 2007, according to data compiled by Bloomberg.

Distrust may be a factor as companies grow increasingly skeptical about banks, said John Longworth, director general of the British Chambers of Commerce, which in an October report found that half of U.K. companies are leery of doing business with financial institutions.
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Siemens, Germany’s most acquisitive company during the past decade, used its own M&A staff for an agreement in July 2011 to acquire NEM and Nem Energy Services, Dutch makers of gas and steam power-plant parts, for 170 million euros ($218 million).

Banks might have earned almost 3 million euros in fees to advise Siemens on the deal, estimates Freeman based on transactions roughly that size. They may have missed out on as much as $55.5 million when BP, Europe’s second-largest oil company, used its 30-member in-house advisory team to sell Gulf of Mexico oil and gas properties to Plains Exploration & Production for $5.55 billion, announced in September.

DBRS confirmed BRN.PR.A at Pfd-2(low) – an issue which is not followed by HIMIPref™:

DBRS has today confirmed the rating of Pfd-2 (low) with a Stable trend for the Senior Preferred Shares of Brookfield Investments Corporation (Brookfield Investments or the Company).
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As a result of higher market values and the aforementioned new investments, the Company’s exposure to real estate investments decreased to 69.6% (on a market value basis as at September 30, 2012) from 83.5% in Q1 2011. Specifically, Brookfield Office Properties Inc. represents 41% of the Company’s investment portfolio on a market value basis.
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The rating also continues to be supported by the fact that: (1) Brookfield Investments’ senior debt does not exceed 10% of the market value of its portfolio, and (2) no dividends are paid to Brookfield Investments common shareholders, unless, after giving effect to such dividend, the asset coverage for the Brookfield Investments Senior Preferred Shares would be at least three times. Excess cash flows beyond the Senior Preferred Shares are available to Brookfield Investments as sole holder of the Junior Preferred Shares and as sole common shareholder. The Junior Preferred Shares rank subordinate to the Senior Preferred Shares with respect to the payment of dividends.

The rating also reflects the following challenges: (a) The principal amount of the Senior Preferred Shares may be repaid by liquidating the assets upon retraction by the holder. Since 29.9% of investments are in shares that are not publicly listed, the illiquidity of such investments could have negative implications for the value realized by the preferred shareholders. (b) As there are no restrictions on the contents of the underlying portfolio, volatile market conditions could cause significant reductions in the net asset value of the Portfolio Shares (especially common shares).

DBRS confirmed TRP and TCA at Pfd-2(low):

DBRS has today confirmed the ratings of TransCanada PipeLines Limited (TCPL or the Company) as listed below. DBRS has also confirmed the rating of the Preferred Shares of TransCanada Corporation (TCC) at Pfd-2 (low). The rating of TCC, which owns 100% of TCPL and holds no other material assets, is based on the credit strength of TCPL.
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The ratings and trends reflect the following DBRS expectations: (1) The decision with respect to the Company’s Canadian Mainline 2012 Tolls Application and Restructuring Proposal (the Restructuring Proposal) that is currently before the National Energy Board (NEB) will be such that the Company is allowed to continue to recover, and earn a reasonable rate of return on, all of the costs that were incurred in the construction of the Canadian Mainline. A decision is currently expected in late Q1 2013. (2) The Keystone XL Pipeline, approval of which has been repeatedly delayed, is approved by the United States Department of State in 2013 and construction is allowed to proceed, with an expected in-service date in late 2014 or early 2015. A decision is currently expected in Q1 2013. Should a negative decision result, DBRS expects TCC to mitigate the result with incremental projects of similar quality to support its overall business risk profile. (3) Despite an expected moderate weakening in 2013, TCPL maintains reasonably strong credit metrics in line with its targeted cash flow-to-debt ratio of at least 15% and cash flow-to-interest of at least three times (15.8% and 3.6 times on a DBRS-adjusted basis at September 30, 2012). DBRS expects increased diversification and reduced proportional exposure to the currently challenging natural gas pipeline segment, with major capital projects placed in service by 2015 as expected.

It was another day of gains for the Canadian preferred share market, with PerpetualPremiums and DeemedRetractibles both up 6bp, with FixedResets winning 15bp. Volatility was minimal, with two IAG issues bouncing back after going ex-dividend yesterday. Volume was low.

Olam is fighting back against Muddy Waters:

Olam International Ltd. (OLMIF), the world’s second-largest rice trader, filed a lawsuit against investment firm Muddy Waters LLC and its founder Carson Block after he questioned the commodity trader’s accounting methods.

The legal action was initiated in the High Court of Singapore following Block’s statements against the company at a conference in London on Nov. 19, Olam said yesterday in a regulatory filing. The suit, which couldn’t immediately be confirmed in the court, is for slander, libel and/or malicious falsehood, Olam’s spokesman Aditya Renjen said. He declined to comment on the size of the damages sought.

A war of words between Olam and Block began when the Muddy Waters research director accused the Singapore-based company of booking profits on transactions before it’s clear how they would work out over time. Olam Chief Executive Officer Sunny Verghese said on Nov. 20 the statements were designed to panic shareholders of the company.

I see that Joe Fontana has been charged with fraud:

Mayor Joe Fontana is facing three criminal charges relating to a federal cheque that paid the deposit on the 2005 wedding reception for his son Michael, his lawyer says.

The charges of fraud, breach of trust by a public official and uttering forged documents were filed against him Wednesday by the Royal Canadian Mounted Police following an investigation of more than two months.

They relate to a $1,700 cheque issued by Public Works Canada that was used to pay the Marconi Club — a London social club. A copy of the stub from that cheque was obtained by QMI Agency and published five weeks ago. The invoice number on the cheque stub, dated April 6, 2005, matched that of the Marconi Club invoice issued about six months earlier.

A former Marconi Club manager told QMI Agency Fontana later produced a similar cheque for the $18,900 balance owing. He said he remembered the payment clearly because he had to chase Fontana six months to get it.

At the time, Fontana was a Liberal mMember of Parliament for London North Centre and federal minister of labour and housing. He was elected mayor here in late 2010 and is midway through his four-year term.

Fontana was my MP when I lived in London. I called him once to express my irritation with a call received from a federal agency that was trying to track down some other Hymas (not even a relation. They had no reason other than my name to call me) … I told him that I resented being considered an informer by government agencies on fishing expeditions. He got angry with me – perhaps he’d just returned from a ‘Bring the STASI to Canada’ meeting – and told me that I had a duty to help out my government.

Have a nice time with your defence, Joe! Remember your duty to help out your government!

It was a good day for the Canadian preferred share market, with PerpetualPremiums gaining 2bp, FixedResets up 9bp and DeemedRetractibles winning 27bp. Volatility was average. Volume was quite good and all the highlighted issues are FixedResets.

PerpetualDiscounts now yield 4.89%, equivalent to 6.36% interest at the standard equivalency factor of 1.3x. Long Corporates now yield a little over 4.25%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 210bp, a narrowing from the 220bp reported November 14 and equal to the spread paid by CIU with their recent 40-year deal.

Bernanke upped the stakes in the fiscal cliff negotiations:

Federal Reserve Chairman Ben S. Bernanke said that an agreement on ways to reduce long-term federal budget deficits could remove an impediment to growth, while failure to avoid the so-called fiscal cliff would pose a “substantial threat” to the recovery.

“Cooperation and creativity to deliver fiscal clarity — in particular, a plan for resolving the nation’s longer-term budgetary issues without harming the recovery — could help make the new year a very good one for the American economy,” Bernanke said today in a speech in New York. “The realization of all of the automatic tax increases and spending cuts that make up the fiscal cliff, absent offsetting changes, would pose a substantial threat to the recovery.”

One of the guys caught up in the SEC’s war against capital markets has come out OK:

Brian Stoker, who fended off regulators’ claims that he helped Citigroup Inc. (C) mislead investors in a $1 billion deal, has joined StormHarbour Securities LP in a sales position.

Stoker, 41, will focus on the sale of structured products such as collateralized debt obligations, or CDOs, and mortgage- backed securities, according to Sohail Khan, a StormHarbour managing principal and former Citigroup executive. Stoker started yesterday as a managing director and will have more responsibilities “over time,” Khan said.

The hire comes three months after a jury cleared Stoker of any wrongdoing in a $1 billion CDO offering Citigroup sold in 2007. The U.S. Securities and Exchanges Commission alleged that the New York-based bank failed to tell investors that it had picked about half of the CDO’s underlying assets and was betting they’d decline. Stoker, who helped to structure the deal, argued that he wasn’t responsible for the way the deal was pitched to investors.

As I have noted several times before, perhaps it would help if all future prospectuses contained twenty pages of legalese to the effect that all of a fund’s assets have been sold to it by somebody else.

Fabulous Fab is still awaiting vindication:

U.S. District Judge Katherine Forrest in Manhattan, who took over the case from her colleague Barbara Jones last month, rejected the SEC’s argument that a recent court decision made a $150 million note sale to Germany’s IKB Deutsche Industriebank AG sufficiently “domestic” to give her jurisdiction.

Monday’s decision does not affect the rest of the SEC’s lawsuit against Tourre, which arose from charges filed against him and Goldman in April 2010.

In an astonishing developement, it appears Greece will need more debt write-offs before it stabilizes:

Greece’s debt cannot be cut to 120 per cent of GDP by 2020, the level deemed sustainable by the IMF, unless euro-zone member states write off a portion of their loans to Greece, a document prepared for finance ministers shows.

The 15-page document, circulated among ministers, the European Central Bank and the International Monetary Fund for a meeting that began on Tuesday and took more than 10 hours, sets out in black-and-white how far off-track Greece is in reducing its debt to the IMF-imposed target, from the current level of around 170 per cent of GDP.

Even more surprisingly, this resulted in the scheduling of an emergency meeting:

European finance ministers failed to agree on a debt-reduction package for Greece after battling with the International Monetary Fund over how to nurse the recession- wracked country back to fiscal health.

With creditors led by Germany refusing to put up fresh money or offer debt relief, the finance chiefs were unable to scrounge together enough funds from other sources to help alleviate Greece’s debt burden, set to hit 190 percent of gross domestic product in 2014.

More than 11 hours of talks broke up early today in Brussels with praise for the Athens government’s economic overhaul and a declaration that an accord on the financing package will wait at least until a hastily arranged meeting of the ministers on Nov. 26.

In today’s laugh from Ottawa, the Junior Republicans are accusing the Dippers of having sound economic policy, which they deny:

The Conservatives have a new line of attack when it comes to the NDP, using television panels and Question Period exchanges to claim the Official Opposition is advocating a GST hike.

The NDP say the Conservatives are lying.

It was a suddenly negative day for the Canadian preferred share market as it welcomed the new ETF (ZPR), with PerpetualPremiums losing 26bp, FixedResets down 21bp and DeemedRetractibles off 16bp. Volatility was average. Volume was a little above average.

Location, location, location!

Prices in the U.K. capital increased 1.2 percent to an average 483,709 pounds ($766,500), the operator of Britain’s biggest property website said in a report today. Properties in the city’s nine most expensive districts — where average prices exceed 600,000 pounds — surged 3.4 percent. Nationally, values fell 2.6 percent.
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London’s most expensive districts are attracting investors looking for safer investments and luxury-home values are now 16 percent higher than their previous peak in March 2008, according to property consultant firm Knight Frank LLP. International buyers accounted for 41 percent of London houses bought for at least 1 million pounds in September.

London continues to buck the trend nationally, according to Rightmove’s data. The decline in asking prices in England and Wales this month was the biggest in almost a year and left the average at 236,761 pounds. From a year earlier, national prices were up 2 percent versus an 8.8 percent gain in London.

Muddy Waters has blown another whistle:

Olam International Ltd. (OLMIF), the commodities trader part owned by Singapore’s state-owned investment company, plunged the most in four years in U.S. trading after short-seller Carson Block questioned the company’s accounting methods.

The supplier of 20 agricultural goods from cocoa to rubber halted its shares from trading in Singapore today, after it fell 21 percent in over-the-counter trading in New York yesterday, according to data compiled by Bloomberg. The company is booking profits on transactions before it’s clear how the deals will work out over time, Block said.

Olam is “dismayed at the nature and lack of substance” of Block’s comments and wasn’t contacted before by him or his Muddy Waters LLC research firm, Chief Executive Officer Sunny Verghese said in an e-mailed statement. He’s waiting for a report from Muddy Waters and “will strongly defend Olam’s excellent reputation for transparency and good governance,” he said.

Equities did well:

U.S. stocks rose, giving the Standard & Poor’s 500 Index its biggest advance in two months, amid better-than-forecast housing data and as President Barack Obama expressed confidence on a budget agreement with Congress.
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The S&P 500 rose 2 percent to 1,386.89 at 4 p.m. in New York. The benchmark gauge for U.S. equities gained 2.5 percent in two days, the most since July. The Dow Jones Industrial Average added 207.65 points, or 1.7 percent, to 12,795.96. Volume for exchange-listed stocks in the U.S. was 6.2 billion shares, about in line with the three-month daily average.

The Euro, not so much:

The euro slid versus most of its 16 major counterparts after Moody’s Investors Service stripped France of its top government bond rating, renewing concern the currency bloc’s debt crisis is deepening.

The 17-nation euro fell against the dollar and yen after Moody’s cut France by one grade to Aa1 and said its outlook remains negative.
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“France’s fiscal outlook is uncertain as a result of its deteriorating economic prospects,” Moody’s said in a statement dated yesterday. Moody’s downgrade of the nation follows similar action by Standard & Poor’s in January.

A preliminary reading of a gauge of French manufacturing will probably indicate contraction for a ninth-straight month in November, according to the median estimate of economists surveyed by Bloomberg News before the figures are released on Nov. 22. A similar index for services may indicate shrinkage for a fourth consecutive period, a separate poll showed.

The perennial national security regulator revival is going through another whirl:

Three of Canada’s largest provinces are leading a revived effort to create a single agency to oversee the country’s securities markets, an initiative that comes nearly one year after the Supreme Court’s rejection of a national regulator.

I’ve been saying for at least ten years that a truly national securities regulator will not happen. So what? Create a voluntary, opt-in, national regulator. Even if it’s just Ontario and Prince Edward Island, I’m still better off – marginally, to be sure, but measurably – than I am now.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 8bp, FixedResets off 1bp and DeemedRetractibles gaining 14bp. Volatility was very low. Volume was below average.

The US gift to the farmers’ lobbyists will continue:

President Barack Obama’s administration rejected a request from the governors of eight U.S. states to waive requirements for blending corn-based ethanol into gasoline, said a person familiar with the decision.
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This year’s U.S. corn harvest is forecast at 10.725 billion bushels, the smallest in six years because of the drought. About 4.5 billion bushels will be used to make ethanol in the year starting Sept. 1, or about 42 percent of the 2012 crop, the USDA estimated on Nov. 9.

If it was about being nice little goody-greens, they’d make the ethanol from Brazilian sugar beets or sugar cane. But it has nothing to do with the environment.

Canaccord Financial, proud issuer of CF.PR.A and CF.PR.C, was confirmed at Pfd-3(low), Trend Negative, by DBRS:

DBRS has today confirmed its rating of the Preferred Shares of Canaccord Financial Inc. (Canaccord or the Company) at Pfd-3 (low). The Negative trend, which was assigned in December 2011 following the announcement of the Company’s $400 million acquisition of Collins Stewart Hawkpoint plc (CSHP), is being maintained. Initially, the Negative trend was assigned to reflect the relatively large size of the Collins Stewart acquisition, financing uncertainty and integration risk, given the uncertain ambient market environment. The Company’s second issue of preferred shares in April 2012 ($100 million), combined with some excess working capital, allowed the Company to repay the $150 million short-term credit facility drawn to fund part of the $244 million cash portion of the acquisition cost, which addresses most of the financing concern. The integration appears to be proceeding smoothly, notwithstanding over $35 million in associated restructuring cost provisions, mitigated by good potential for realizing expense and revenue synergies in the Company’s U.K. and U.S. operations. The weak market environment nevertheless continues to be a source of concern for DBRS.
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The nature of the Company’s products and services, as well as the natural resource orientation of its client base, expose it to a great deal of revenue volatility related to economic and market cycles, including both capital and commodity markets. Normally, the adverse impact of such market exposures and associated revenue volatility on earnings and cash flow would be mitigated by the Company’s flexible cost base and the absence of operating leverage. Even though the Company has made strategic investments to diversify away from these market exposures while actively addressing its cost base, the current market environment is especially unfavourable for the broker-dealer industry, depressing earnings and cash flow below what DBRS believes should be sustainable in the long run. While DBRS applauds the strategic and expense initiatives taken by the Company to date, the level of uncertainty surrounding the Company’s industry makes it inappropriate to remove the Negative rating trend at this time.

HSBC Bank Canada, proud issuer of HSB.PR.C, HSB.PR.D and HSB.PR.E was confirmed at Pfd-2(high) [Review Negative] by DBRS:

DBRS has today confirmed the ratings of HSBC Bank Canada (HSBC or the Bank) and related entities, including the Bank’s Long-Term Deposits and Senior Debt rating at AA and its Short-Term Instruments rating at R-1 (high). All ratings remain Under Review with Negative Implications.

On July 20, 2012, DBRS placed all the ratings of HSBC Bank Canada and related entities Under Review with Negative Implications following the rating action of Under Review with Negative Implications on the ratings of HSBC Holdings plc (the Parent). Under DBRS’s global bank rating methodology, HSBC Bank Canada has been assigned a support assessment of SA1, reflecting expected timely support from the Parent, of which HSBC Bank Canada’s ratings are largely based on. DBRS anticipates resolving the ratings review on HSBC Bank Canada once the review has been completed for HSBC Holdings plc.

Shaw Communications, proud issuer of SJR.PR.A, was confirmed at Pfd-3 by DBRS:

DBRS has today confirmed Shaw Communications Inc.’s (Shaw or the Company) Issuer Rating at BBB, Senior Notes rating at BBB, and Preferred Shares rating at Pfd-3; the trends remain Stable. The confirmation reflects the view that the Company’s earnings profile remains reasonable for its current rating category, based on its incumbent position in Western Canada, large subscriber base and industry-leading operating margins, while acknowledging that intensifying competition is placing increasing pressure on the Company’s cable television and broadband subscriber base. DBRS notes that slowing top-line growth in recent periods is also somewhat offset by the fact that key credit metrics remain reasonable for the current rating category.

Shaw’s revenue growth rate decelerated to 5.4% in F2012 versus almost 10% in prior years as Shaw’s broadband Internet and home phone subscriber growth was partially offset by declines in cable TV subscribers. The Company’s TV segment lost 70,000 basic cable subscribers (predominantly to TELUS Corporation) over the period while Internet and home phone subscriber growth decelerated compared to prior years. That said, consolidated operating margins remained relatively stable at 43%, resulting in EBITDA growth of 4% to $2.1 billion. Shaw’s financial profile remains relatively stable and consistent with the current rating category as operating income/cash flow generation and debt levels have remained fairly steady. Gross debt-to-EBITDA decreased slightly to 2.47 times (x) for F2012 from 2.56x the prior year.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 1bp, FixedResets gaining 6bp and DeemedRetractibles flat. Volatility was low. Volume was very low – have we hit the Christmas slump yet?

It will be interesting to learn all the unintended consequences:

As France begins collecting its financial-transactions tax this month, it is becoming evident that President Francois Hollande’s levy is hitting all but the people it was aimed at: speculators.

Hollande, who called finance his “main adversary” during his election campaign, pushed through in August a 0.2 percent transaction tax on share purchases, making France the first and only country so far in Europe to have such a levy. Many investors have been escaping the tax using so-called contracts for difference, or CFDs, offered by prime brokers that let them bet on a stock’s gain or loss without owning the shares.

“The target was supposed to be finance with a capital F, which is sort of a black box,” said Jacques Porta, who helps manage $627 million at Ofi Patrimoine in Paris. “Instead, we are punishing small investors who aren’t to blame and already are frightened off by losses in the market.”

How about an update on bank bonds?

Case in point: a new report from Moody’s Investors Service found that bank debt issues around the world have been chopped in half since the onset of the financial crisis. After peaking at roughly $2.4-trillion (U.S.) a quarter in 2007, banks globally are now issuing unsecured debt that amounts to just half that.

First it was North American issues – chiefly the U.S. – that plummeted in 2008 and 2009, and more recently it’s been European banks, particularly those on the periphery of the euro zone. The only area of the world seeing an uptick in issuance right now is Asia, where long-term bank debt issues are up 6 per cent over the 12 months ended Sept. 30. (Canada on its own is also faring well.)

The drop-off has a few implications. Chiefly, it affects how much money the banks can lend. For that reason, it’s sparked a push for deposits as a cheap source of funds.
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The slowdown also gives the banks an incentive to ramp up their covered bond offerings.
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To understand just how much covered bond spreads have tightened, making them more favourable, in 2009 they blew out to roughly 240 basis points in the U.K. Now they’re back to about 60 basis points.

With the election out of the way, the Keystone pipeline of TCA and TRP is in the news again:

Environmentalists are reviving their noisy 2011 anti-pipeline campaign, with a demonstration scheduled for Sunday outside the White House, and they have pointed to the decision on the Keystone pipeline as a key test of the President’s resolve to battle climate change during his second term. Former U.S. vice-president Al Gore this week urged Mr. Obama to kill the Keystone XL project.
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On Thursday, TransCanada got a boost when the Building & Construction Trades and the American Petroleum Institute each called on Mr. Obama to move quickly to approve the controversial project, which will carry 1.1-million barrels per day of oil-sands bitumen from Alberta and lighter oil from North Dakota’s Bakken fields to the U.S. Gulf Coast.

Julie Dickson gave a speech titled Substance over Form at the 2012 Life Insurance Invitational Forum, but there wasn’t much in it:

Just as many now recognize that it was a mistake to believe that low rates would be a short-term, transitory phenomenon, it would also be a mistake to assume that we could never again be faced with very high interest rates.

Insurers will remember what happened in the 1980s, when rates spiked to historically high levels and the insurers’ business model came under pressure, as policyholders found life policies with savings features unattractive and decided to turn to banks for savings products. (You may recall that this led to the expression, “Buy term and invest the rest.”)
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Let me switch to banking for a minute to expand on this point. Lately, I have seen a number of articles suggesting that Basel III is too complex and that Basel III capital calculations cannot be relied upon. I think such thinking is misguided. OSFI’s view is that Basel III can be relied upon – if proper risk management and governance at financial institutions is in place, and if supervisors are active and diligent in their work of overseeing Basel III implementation. Combined with a leverage ratio, Basel III, properly implemented, will fundamentally enhance financial stability. It might be better for people to focus more on the quality of supervision, and focus less on Basel III complexity.

As we point out in the Life Insurance Regulatory Framework, OSFI expects to consult significantly with industry over the coming years so that major regulatory capital changes can be implemented by 2015. Risk management will form a big part of that consultation.

Naturally, future employment prospects of OSFI personnel are not forgotten:

OSFI recognizes that small- to medium-sized companies, or those of less complexity with predictable and diversifiable risk, may not be able to afford a dedicated CRO to lead the risk management function. In these cases, we accept that the individuals responsible for risk management can also be performing other functions. But even in small, less complex businesses, we want to see a risk management process on which the board of directors, the CEO, senior management team, and policyholders can rely. As an example, we would want the board to meet in camera with the person who owns the risk management role as part of his or her responsibilities.

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

There’s an interesting straw in the wind for junk bonds:

Investors yanked a record volume of cash from BlackRock Inc.’s exchange-traded fund that buys junk bonds as the notes lose value for the first month since May.

The $16.3 billion fund reported an outflow of 2.4 million shares yesterday, equal to about $218.9 million, according to data compiled by Bloomberg. That’s the biggest daily withdrawal in the five-year history of the iShares iBoxx High Yield Corporate Bond Fund, the largest of its kind.

The five largest junk-bond ETFs, which allow investors to speculate on the securities without actually owning them, have lost $1.97 billion of assets since Sept. 20 as investors wager that a four-year rally in the debt is running out of steam. High-yield bonds in the U.S. are losing 0.14 percent this month after posting 12.9 percent returns this year through October, according to Bank of America Merrill Lynch index data.

Regulation is wonderful:

Since 1998, ABS [the non-profit American Bureau of Shipping] has hired four former Coast Guard admirals as executives. They include retired Admiral Robert Kramek, who led the Coast Guard as commandant from 1994 to 1998. It was Kramek who signed an agreement with ABS in 1995 that expanded the nonprofit’s powers to inspect independently owned ships on the Coast Guard’s behalf.

In June 1998, three years after Kramek signed that inspection agreement, ABS hired him as president of its Americas division.

Jack Devanney, a retired executive of companies that own ships that used ABS services, says this revolving door is bad for ship safety.

“When you give Kramek a nice job, you’re sending a message to all the Coast Guard guys that they’ve got a second career at ABS,” says Devanney, who has a Ph.D. in management science from the Massachusetts Institute of Technology. “If you rock the boat, that opportunity’s not going to be available to you.”

S&P has released a fascinating report titled A Tale Of Two Countries: U.S. And Canadian Banks’ Contrasting Profitability Dynamics:

Profit dynamics for a company or an industry are highly sensitive to shifting operating and regulatory conditions and, as a result, are likely to change over time. Profits are important because they can be a significant generator of capital–for the companies that retain them in a meaningful amount. A careful review of bank profitability in both the U.S. and Canada indicates that Canadian banks have been more profitable than their U.S. counterparts in recent years. This gap has widened in the postcrisis years. This is partly because of Canadian banks’ higher leverage that largely arises from structural differences. We also note that the leverage ratio gap between the U.S. and Canada is sensitive to definition. Alternative definitions of leverage ratio for U.S. banks, for example using Standard & Poor’s adjusted common equity to adjusted assets, also show that U.S. banks have lower leverage than Canadian banks, but the gap is much smaller.
…
As for Canada, the Office of the Superintendent of Financial Institutions (OSFI) will issue a new Basel III capital guideline before the end of 2012–for implementation in the first fiscal quarter of 2013. Of the 29 G-SIBs that the Financial Stability Board (FSB) identified in November 2011, none were Canadian banks. However, there are plans to identify domestic systemically important banks (D-SIBs) and recommend that a capital surcharge be applied to them. But Canadian banking regulators have not offered any detailed views on this yet. Therefore, we anticipate Canadian banks, on average, will continue to have higher leverage than U.S. banks, particularly the largest and most complex. We believe that at least part of the tolerance for higher leverage may be due to the accumulation of relatively low-risk weighted assets, like government-insured mortgages

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It was another mixed day for the Canadian preferred share market, with PerpetualPremiums up 3bp, FixedResets gaining 2bp and DeemedRetractibles off 1bp. Volatility was non-existent. Volume was low.

PerpetualDiscounts now yield 4.91%, equivalent to 6.38% 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 220bp, a slight (and perhaps spurious) increase from the 215bp reported November 7.

Today’s inspiring photograph has been taken from the website of a company owned by a distant relative.

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It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 1bp, FixedResets off 5bp and DeemedRetractibles gaining 3bp. Volatility was low. Volume was relatively heavy, with quite a few issues breaking the 100,000 barrier as the RBC desk did land-office business.

Bloomberg has an interesting bit of gossip about algorithmic trading:

Wall Street’s credit-derivatives traders, who before the financial crisis commanded $2 million of annual pay, are being replaced by machines as banks cut costs and heed new regulations.

UBS AG (UBSN), Switzerland’s biggest bank, fired its head of credit-default swaps index trading, David Gallers, last week, with no plan to fill the position, according to two people familiar with the matter. Instead, the bank replaced Gallers with computer algorithms that trade using mathematical models, said the people, who asked not to be identified because moves are private.

UBS joins Barclays Plc (BARC), Credit Suisse Group AG (CSGN) and Goldman Sachs Group Inc. (GS) in using computer programs to trade financial instruments that once generated some of their biggest fees. With regulators preparing rules under the 2010 Dodd-Frank financial reform that will push swaps toward exchange-like systems to improve transparency, credit dealers are going digital as automated trading makes humans too expensive.

What makes the trend so interesting is that there should be an equilibrium reached at some point. Most – not all – traders know nothing about the markets and they’re not paid to know anything about the markets. They’re paid to know lots of people who trade and who will give good old Bob the order because Bob made a really good point about that story in Wall Street Journal the other day.

But one thing that’s happening is the buy-side culture is shifting – slowly – to electronic execution. So the old-line salesmen are losing clients to the electronic execution vendors. There will be some disruption as all this plays out, but sales (as opposed to technical wizardry) will be as important in the future as it has been in the past.

I’ve complained in the past that the concept of “first mover advantage” as it relates to hedge fund returns is a red herring … there’s at least one guy who agrees with me:

Investors and other industry observers say that for perhaps the first time since the phrase hedge fund entered the lexicon, hot or gimmicky strategies aren’t worth investing in at all. It’s the manager that counts.

“It’s a return to the roots of the hedge-fund industry, when it was a small group of highly talented stockpickers and fundamental investors,” says John Bailey, founder and chief executive of Spruce Private Investors, which invests in 30 different hedge funds for foundations and endowments.

It’s not so much “first mover advantage” in this or anything else, really: it’s more that some smart guys found a niche, made stupid amounts of money … and were promptly copied by every glib smiley-boy in town.

It was stunning when European corporates started trading through sovereigns. This is gobsmackery on a grand scale:

Bonds of Exxon Mobil and Johnson & Johnson are trading with yields below those of comparable Treasurys, a sign that investors perceive them as a safer bet. It is a rare phenomenon that some market observers said could be the beginning of a new era for debt markets. It could ultimately mean some companies will borrow at lower rates than the U.S. government.

For now, just a handful of relatively short-term bonds yield less than comparable Treasury bonds.

The banks’ role as secret policemen is causing problems:

U.S. banks in Colorado and Washington state, where voters last week legalized recreational marijuana use, shouldn’t disregard federal laws that consider pot sales criminal, a bank regulator said today.

“I think institutions have to protect themselves,” said Daniel Stipano, acting chief counsel of the Office of the Comptroller of the Currency, at an anti-money laundering conference today run by the American Bankers Association. “The problem is that it remains a crime under federal law.”

The Bank Secrecy Act requires banks to file suspicious- activity reports if they suspect customer’s involvement in federal crimes. It’s meant as a protection against U.S. financial institutions being used to launder illegal gains from criminal activity.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 7bp, FixedResets up 6bp and DeemedRetractibles off 6bp. Volatility picked up a little, with IAG on the downside (although both issues made the “Wide Spreads” report and all trades were well above the closing bid) and PWF on the upside. Volume was ridiculously pathetic.