Category: Market Action

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

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

There was a meeting today regarding Money Market Fund reform:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For instance, how about this Conservative thug:

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

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

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

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

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

Nothing happened today.

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

Today’s FOMC statement was accomodative:

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

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

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

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

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

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

And in other Ottawa news:

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

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

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

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

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

The BoC rate statement was dovish:

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

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

RBC & TD announced major acquisitions:

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

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

DBRS commented on the TD / Target deal:

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

… and on the RBC / Ally deal:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

There are also opportunities for private equity:

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

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

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

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

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

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

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

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

Canadian inflation is quiescent:

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

This has led to calls for a rate cut:

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

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

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

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

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

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

Sell.

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

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

IIROC has found another opportunity for expansion:

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

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

It’s a big market:

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

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

DBRS confirmed Weston at Pfd-3:

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

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

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

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

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

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

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

The latest news in Big Brother Regulation is LIBOR reform:

The Treasury said in London today that it will enshrine in law the way Libor is set, create a criminal offense for those who misreport it and give regulators the power to oversee the setting of the rate and other financial-industry benchmarks.
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The FSA will encourage more banks to submit quotes as part of the revamp, Wheatley, an FSA managing director, said last month, and could force uncooperative banks to submit quotes with its new powers.

Sounds great, eh? Criminalize mistakes – and, presumably, make the survival of the bank dependent upon every single employee being completely pure at all times – and then, because only a lunatic would get involved in business on such terms, make it mandatory. Oh, it will take a lot of well paid regulators to enforce this one!

The government is egged on by eggheads:

First, by forcing banks to commit to their quotes—actually trade at them when given the opportunity—banks need only make an honest market determination. They only need their army of lawyers when, for some reason on a given day, they decide they want to make a trade outside of the range they’ve quoted. This is a parsimonious method for ensuring accurate and reliable quotes.

Clearly, the authors have never actually traded anything. Quotes for bonds, to take just one example, can change dramatically in the course of a single telephone call. If such a rule is put in place, spreads will be as wide as allowed by law.

DBRS confirmed BPO Properties (proud issuer of BPP.PR.G, BPP.PR.J and BPP.PR.M):

DBRS has today confirmed the Issuer Rating of Brookfield Canada Office Properties (BCOP) at BBB with a Stable trend and has also confirmed the Issuer Rating and Cumulative Redeemable Preferred Shares rating of BPO Properties Ltd. (BPO Properties) at BBB and Pfd-3, respectively, with Stable trends.

The confirmations follow the change in Brookfield Office Properties Inc.’s (BOP) trends to Negative from Stable. Although BCOP and BPO Properties benefit from their close association with BOP, particularly from property and asset management agreements, the ratings are not directly linked at this level. DBRS believes that the current ratings of BCOP and BPO Properties continue to reflect the solid operating performance of the Canadian office portfolio and steady financial credit metrics. That said, DBRS would become concerned if BOP’s credit risk profile continued to deteriorate beyond the ratings of BCOP and BPO Properties.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 5bp, FixedResets down 5bp and DeemedRetractibles flat. Volatility was very low. Volume was average.

Nothing happened today.

It was a poor day for the Canadian preferred share market, with PerpetualPremiums losing 10bp, FixedResets off 3bp and DeemedRetractibles down 7bp. Volatility was muted. Volume more than made up in strength what it lacked in breadth – probably related to the TXPR index changes.

PerpetualDiscounts now yield 4.93%, equivalent to 6.41% interest at the standard conversion factor of 1.3x. Long corporates now yield about 4.4%, so the pre-tax interest-equivalent spread is now about 200bp, a sharp narrowing from the 225bp reported October 10.

Commodity Futures Trading Commission Democratic Commissioner Bart Chilton’s recent speech contained some ominous points:

Here’s the thing: our futures markets were never established to be gaming at gambling houses. Leave that to Amarillo Slim and Poison Ivey Phil (that’s still not his name, but I like it). Leave the gaming to the poker players and the gamblers—thank you very much. How smooth was that transition? See, I did have a point. But there’s more: A new car! No, not that. These markets were established to discover prices to benefit consumers and manage risk. We can’t overlook that. Once we forget that, we have lost our way.

As I never tire of pointing out, risk cannot be eliminated, only transformed or shifted. Any time you have a capital asset – perhaps your own house – that has benefits to be realized in the future, there is risk. You can transfer the risk of fire to the insurance company. You can transfer the risk of price declines to the bank, with a low deposit, non-recourse mortgage. But the risk is constant.

I agree that futures markets were established to manage risk (I’m not so sure about the “benefit consumers” part!). A commodities market will benefit ultimate buyers and ultimate sellers by allowing them to fix a price. But these terminal users won’t conveniently arrive at the market at the same time, or share the same views on what price is appropriate when they do … so these ultimate transactions are mediated by speculators, aka gamblers.

I confess I got sidetracked by this part of the speech:

At one point, it sort of brought to mind the Sabre Dance. Remember that one (written by Armenian composer Aram Khachaturian in 1942)? It’s that plate-spinning song where an act spins a large number of plates on teeny tiny poles (the world record in 108 plates). Can’t ya just hear it?

Huh? So I found Sabre Dance on YouTube. Ah! I know that song – how can you possibly not know that song? Wikipedia informs me that it is from the ballet Gayane, which I will have to make a point of seeing some day. But plate spinning? Aha! Mr. Chilton is showing his age!

Brenn was a master at the art of plate spinning, a classic circus act that relies on the gyroscopic effect. Brenn’s routine consisted of spinning five glass bowls on four foot-long sticks all the while spinning eight plates on the tables holding the spinning glass bowls. Seem like too much? Intermittently, he also managed to balance a tray carrying glasses and eggs and in one swoop would remove one of the trays causing an egg to fall into each glass.

Aiming to keep the audience at the edge of their seats, he would also carry a separate tray lined with glasses and spoons in front of them. With a simple flip, every spoon would magically fall into a glass.
…
His act was almost always performed to Khachaturian’s “Sabre Dance,” a piece of music that is now identified by many people with the skill of multi-tasking.

Sadly, I could not find a video of Brenn’s act with the Sabre Dance music. I wonder how much household crockery got broken after each of his appearances? Maybe his show was sponsored by a large crockery company.

Boy, this “Internet” thingy is a real time sink. Back to our regularly scheduled snarky comments on regulators’ speeches – Mr. Chilton wants the ability to approve or forbid market prices based on whether or not he can rationalize them:

Since 2008, I’ve been working to get these limits in place because, and this is supported with many studies, excessive speculation can push prices around. Nobody can rationalize nearly $150 a barrel oil in 2008 based solely upon supply and demand. It cannot be done. Well, Dodd-Frank required that we implement limits to curtail excessive speculation that can lead to unfair prices.

Sadly, he did not share the results of his interviews with buyers of oil at near $150/bbl in 2008, nor did he provide any hints of responses obtained when he asked people who were long but did not sell. However, this is mere idle curiosity. He’s a regulator, you know, part of the team of adult supervisors, and if he doesn’t know the rational price of a market instrument, who does?

He wants lots and lots of regulation:

There are some things, however, that we should do and promptly. Cheetahs—HFTs—were not even mentioned in Dodd-Frank. There was not one word about them. The new law was passed and signed just shortly after the Flash Crash in May of 2010. By then it was too late to put any techno-language in the law. Heck, we didn’t even yet know all of the ramifications of the Flash Crash.

Nevertheless, we need some market protections and a balanced approach to seeking safer markets while not going all in. Here’s my list:

1. Cheetah Registration: They need to be registered. That’s sort of a pedestrian first step. Can you believe they aren’t even mandated to be registered with us? If they are not registered, we can’t command their books and trading records. They gotta be registered.

2. Testing: They should be required to test their programs before they are unleashed in a live production trading environment. Most of the big cheetahs do this already.

3. Kill Switches: It should be compulsory to have kill switches in the event that cheetah programs go feral. I am pleased that the Securities and Exchange Commission (SEC), some exchanges and my Agency are working on that.

4. Wash Blocker Technology: Cheetahs should also be required to create pre-trade risk controls with available wash blocker technology to prevent wash—or cross—trading (that’s trading with themselves). After all, those trades are illegal in the United States. But, as it stands now, things are moving so fast in this gizmo-gadget trading world that some cheetahs claim they don’t even know when wash trades occurs—if their dancing with their self. That’s not a fantastical answer when regulators start asking questions.

5. Compliance Reports: I’ve also recommended that there be periodic compliance reports from the cheetahs and that the senior executives sign their names and are held accountable for any false or misleading information. The days of “he said, she said” responsibility in financial markets needs to end.

6. Penalties: Finally, and this goes to accountability, also. If there is another flash crash where people are damaged (they lose money) due to a rogue cheetah, I think there need to be steep consequences. And when I say consequences, I’m talking not just for the firm, but for individuals at the firm. If the cheetahs want to be involved in the high-flying, incomprehensible gambling world, okay, but if you cause harm to markets and consumers, we shouldn’t stand for it.

The only “consumers” hurt during the Flash Crash were those idiots who implemented their own little algorithm – a stop loss order. Why is Chilton so bent on protecting the the users of idiotic trading algorithms?

The sternest measure Chilton et al. have taken recently is to protect public utilities from themselves since, naturally, mere public utilities can’t be expected to have a clue about what they’re doing. This protection is forseen to have the usual consequence:

Among the toughest rules that are scheduled to kick in next week is one that requires traders to begin counting their swaps transactions to see if they reach an $8 billion threshold, which tags them as a “swap dealer.” Such firms face the toughest rules, like capital requirements to back trades.

But firms that have only $25 million in total swaps trading with public utilities also get tagged. The aim of this lower threshold was to protect public utilities, by toughening up oversight of banks that deal with them.

But the lawmakers raised concerns voiced by utilities that the threshold will deter banks from trading with them at all, limiting their ability hedge risk and forcing them to pass higher costs on to consumers.

“These new rules will harm America’s economic engine by impairing many of the companies that provide vital financing to consumers and American businesses,” they wrote.

Sources familiar with the matter say the CFTC is reviewing this and other issues posed by the Oct. 12 deadline.

If you want to eliminate public markets, insist on making them safe. It’s a bit like demanding cool sunlight and dry rain. If there are egregiously punitive fines for naughtiness in the course of certain business … that business will not be done at all, for the bosses know that man is born to trouble as the sparks fly upward.

It was a strong day for the Canadian preferred share market, with PerpetualPremiums up 15bp, FixedResets winning 22bp and DeemedRetractibles gaining 12bp. Volatility was average, which is surprising given the size of the move. Volume was below average.

Statistics Canada has revised estimated productivity growth substantially downwards:

The latest revisions mean the Canada-U.S. gap is now wider – 0.8 percentage points per year from 1981 to 2012, up from 0.7 per cent.

Fortunately, this is not expected to affect milkfare, subsidies of pulp mills, Ontario’s solar energy programme or regulation.

In a startling development, common shareholders are still allowed to vote on corporate business:

In Telus’s case, the company is up against Mason Capital, which owns almost one-fifth of the company’s voting stock. Mason has also sold short millions of [non-voting] shares, leaving it a very slim net long interest. Mason is using the votes on the shares it owns to fight Telus’s plan to consolidate the two classes of stock into a single class on a one-for-one basis. Mason wants a ratio that favours the voting stock.

Telus argues that Mason has no real interest in the overall health of the company, making Mason an empty voter. Mason, of course, disagrees. It has on its side one of the people who coined the term, who points to the fact that Mason has an economic interest in the share collapse’s success or failure.

The Court of Appeal for British Columbia ruled Friday that “there is no indication that it [Mason] is violating any laws, nor is there any statutory provision that would allow the court to intervene on broad equitable grounds. To the extent that cases of ‘empty voting’ are subverting the goals of shareholder democracy, the remedy must lie in legislative and regulatory change.”

I can’t understand why any common shareholder would vote in favour of this, diluting their vote with no compensation and I quite agree that Mason cannot logically be described as an empty voter in this instance.

To my mind, a much more serious problem is owners of common who also have a long position in the non-voting shares. In the bond world, this is known as debt decoupling, where as bondholder you vote for a bad deal so that your Credit Default Swaps will pay more.

It was a negative day for the Canadian preferred share market, with PerpetualPremiums losing 8bp, FixedResets off 2bp and DeemedRetractibles down 7bp. Volatility picked up, with Floaters jumping up and insurance-related issues getting hit …. but it was not the world’s biggest deal. Volume was low.