Category: Market Action

U.S. Securities and Exchange Commission member Daniel Gallagher is favourably disposed towards a floating NAV for money-market funds:

Requiring money funds to have a fluctuating share price “is an attractive option that I am likely to support,” Gallagher, a Republican, said in an interview.
…
Gallagher said he couldn’t vote for Schapiro’s plan because its centerpiece was to make the funds hold extra capital. The cushion was too small to protect investors, Gallagher said, leading him to believe the money would be used as collateral in case the funds needed to borrow from the Federal Reserve.
…
Schapiro has argued that the funds’ $1 share price encourages investors to flee at the first sign of trouble. That’s because those who react quickly can sell their shares at $1 each even if the net asset value has dropped below that level.

The industry has maintained that a floating share price would make money funds unworkable for many investors by saddling them with new accounting and tax obligations. In addition, insurers, municipalities and other large users of money funds are often legally bound to invest assets they account for as cash in funds with a stable share price.

Schapiro gave up on her plan on Aug. 22 after three of the five commissioners — Republicans Gallagher and Troy Paredes, joined by Democrat Luis Aguilar — told her they wouldn’t vote to issue it for public comment. Her proposal spelled out two options, the capital cushion coupled with some restrictions on redemptions, or the floating share price.
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On Aug. 28, Gallagher and Paredes said they supported an alternative that would allow firms running money funds to prohibit withdrawals to stop investor flight in the event of a run. They backed Aguilar’s call for further study on whether new rules could cause investors to move money from money-market funds to other unregulated investments.

In the interview, Gallagher said his support of a floating share price was contingent on the SEC “fully understanding and addressing” the tax and accounting issues that could arise with the change. Gallagher said a fluctuating share price may need to be coupled with other protections, such as the freezing redemptions option that he and Paredes had suggested.

If anybody knows what the ‘capital used as collateral’ idea is all about, please let me know, because I haven’t the faintest notion regarding what is being implied. I think the redemption freeze idea is just plain stupid.

I am advised of a government checklist for choosing investment advisors:

Does your financial professional try to “time” the market?
•Financial professionals cannot forecast market changes successfully on a consistent basis. For most people, changing strategies or buying and selling investments frequently will just result in higher costs and more losses. The right financial strategy should do well without frequent changes, in good markets and bad.

Now, I’m not much of a fan of market timing, but nevertheless this seems a bit overreaching to me. We have a government agency pronouncing officially on the relative merits of investment strategies? It’s actually a little scary!

Good fiscal news federally, not so much provincially:

Ottawa’s cost-cutting measures have put it on a sound fiscal track for the future, but the provinces are left holding the bag, says Canada’s budget watchdog.
…
Mr. Page also judges the Canada Pension Plan and Quebec Pension Plan fiscally sound.

But the report, released Thursday, shows provinces and municipalities adding so much debt over the next 70 years or so they would resemble Greece and Italy if something is not done.

The report calculates that provinces and their municipalities have a fiscal gap of about 2 per cent of gross domestic product now – or $36-billion – and by 2086 will have debt worth 350 per cent of GDP. Meanwhile, Ottawa will be in a structural surplus.
…
While he has been critical of the Harper government in the past for failing to acknowledge it was in a structural deficit several years ago – for which he took personal blow-back – Mr. Page said Ottawa has acted to rectify the situation.

In the past two years, Finance Minister Jim Flaherty put a limit to growth on health transfers to provinces, essentially froze program spending for five years, and raised the age of eligibility for benefits under Old Age Security to 67 from 65.

The change in health transfers alone is responsible for about three-quarters of the provincial fiscal gap, Mr. Page says, or about $25-billion in fiscal room.

It was a good day for the Canadian preferred share market, with PerpetualPremiums gaining 4bp, FixedResets winning 19bp and DeemedRetractibles up 12bp. Volatility was muted. Volume was average.

I’m all in favour of a cap on leverage at banks … but a leverage cap of 12.5:1 seems quite extreme:

Banks should be required to reduce by half the amount they can borrow against equity to make the financial system safer, according to former Federal Deposit Insurance Corp. Chairman Sheila Bair.

Bair called for a “hard-and-fast” leverage ratio of 8 percent in “Bulls by the Horns,” her memoir of the financial crisis published this month. That’s double the 4 percent ratio U.S. banks must adhere to currently and more than twice the 3 percent called for by new global rules on bank capital.

Lenders could borrow about 13 times their equity, based on Bair’s suggestion, compared with 25 times under existing U.S. rules. Bair, 58, who stepped down from the FDIC last year, was a proponent of the Basel Committee on Banking Supervision introducing a simple leverage ratio, which ignores the riskiness of different loans in setting minimum capital requirements. While the Basel committee agreed on including such a ratio, European countries have balked at implementation.
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The Basel committee narrowed the definition of what counts as capital. It also devised a method of tallying assets for calculating leverage ratio that puts aside the different accounting standards used in the U.S. and Europe. The new method would increase the balance sheets of U.S. banks because of differences in how derivatives are treated.

Using Basel’s narrower capital definition, the two largest U.S. banks would have to raise about $100 billion of capital to comply with Bair’s leverage recommendation. JPMorgan Chase & Co. (JPM) would have a leverage ratio of 5.8 percent under the new capital definition, and No. 2 Bank of America Corp.’s would be 5.9 percent. Neither bank has yet reported what their ratios would be under the new Basel method of calculating assets.

At some point, we’re going to be so safe that nothing happens. An unchanging world of tick-boxes … the regulators’ dream.

The CDHowe Institute has issued a plea for more RRBs – More RRBs, Please! Why Ottawa Should Issue More Inflation-Indexed Bonds:

This Commentary explores the potential impact of a larger RRB issue over the next five years than Ottawa currently plans. Rather than the $2.4 billion annually now planned, we suggest $7.2 billion annually. We further recommend that two-thirds of the larger RRB issue have 10-year maturities rather than the 30-year maturities exclusively issued to date. A plausible estimate of the net interest savings on federal debt comes to $200 million in 2016/17 and $500 million over the period until then. We canvass a number of ways the federal government can ensure that this higher RRB issue does not hurt the depth and liquidity of the market for its nominal debt.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 18bp, FixedResets down 5bp and DeemedRetractibles gaining 1bp. Volatility was average. Volume was low.

PerpetualDiscounts (all three of them!) now yield 4.91%, equivalent to 6.38% interest. Long corporates now yield about 4.25% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 215bp, a sharp increase from the 200bp reported September 19.

Charles Plosser of the Philiadelphia Fed outlined his opposition to QE3, including one very good point:

Continued expansion of the Fed’s balance sheet has other costs as well. By greatly expanding the size of the Fed’s balance sheet, the new asset-purchase program will exacerbate the challenges that the Fed will face when it comes time to exit this period of extraordinary accommodation, risking higher inflation and harm to the Fed’s reputation and credibility. I have been a student of monetary theory and policy for over 30 years. One constant is that central banks tend to find it easier to lower interest rates than to raise them. Moreover, identifying turning points is difficult even in the best of times, so timing the change in the direction of policy is always a challenge. But this time, exit will be even more complicated and risky. With such a large balance sheet, our transition from very accommodative policies to less accommodative policies will involve using tools we have not used before, such as the interest rate on reserves, term deposits, and asset sales. Once the recovery takes off, long rates will begin to rise and banks will begin lending the large volume of excess reserves sitting in their accounts at the Fed. This loan growth can be quite rapid, as was true after the banking crisis in the 1930s, and there is some risk that the Fed will need to withdraw accommodation very aggressively in order to contain inflation. At this point, it is impossible to know whether such asset sales will be disruptive to the market. A rapid tightening of monetary policy may also entail political risks for the Fed. We would likely be selling the longer maturity assets in our portfolio at a loss, meaning that we may be unable to make any remittances to the U.S. Treasury for some years. Yet, if we don’t tighten quickly enough, we could find ourselves far behind the curve in restraining inflation.

The SEC has hardened its stance that investing has nothing to do with fundamentals:

A New York-based brokerage allowed overseas clients to run a scheme aimed at distorting stock prices by rapidly canceling orders, according to the U.S. Securities and Exchange Commission.

Clients of Hold Brothers On-Line Investment Services were “repeatedly manipulating publicly traded stocks” by placing and erasing orders in an illegal strategy designed to trick others into buying or selling, the SEC said today in a release. Hold Brothers, its owners, and the foreign firms Trade Alpha Corporate Ltd. and Demonstrate LLC agreed to settle allegations that the New York broker failed to supervise customers and pay $4 million in total SEC fines.

The SEC complaint targeted practices that abused high-speed computer trading on American equity venues. As high-frequency activity has grown in recent years, the agency’s efforts to stop fraudulent practices such as “layering” or “spoofing” have extended to the automated trading tactics.
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“The fairness principle that underlies the foundation of our markets demands that prices of securities accurately reflect a genuine supply of and demand for those securities,” Daniel M. Hawke, the chief of the SEC’s enforcement division’s market abuse unit, said in the statement. “The SEC will not tolerate any abusive practice that is designed to distort these natural forces.”

Bluffing is part of the trading game. A fundamental investor can often take advantage of the little boys’ games. But logic has no relevance to regulation.

The Kansas City Fed has a good review of deposit insurance:

The effect on the financial system of this emergency assistance and related risk-taking incentives is difficult to assess and measure. However, a unique circumstance in the 1930s provides an insight into how a piece of the federal safety net—federal deposit insurance—has altered the financial landscape. The vast majority of U.S. banks quickly became insured after the Federal Deposit Insurance Corporation (FDIC) began offering deposit insurance in 1934. Many state-chartered banks in Kansas, however, chose to remain uninsured. Why
did these Kansas banks think they could operate successfully without deposit insurance following the worst banking crisis in U.S. history?
Also, how did these banks differ from the banks that quickly adopted deposit insurance, and what might these differences tell us about
deposit insurance?

Another forthcoming article asks have cheques met their match?:

During the last decade, both demand-side and supply-side factors have contributed to a surge in new methods of making person-to-person (P2P) payments. On the demand side, the driving factors have been the emergence of new forums for commerce such as online auctions and the increasing desire by consumers to monitor and control payments. On the supply side, the main factors have been technological advancements such as faster Internet speeds, increased computing power and smartphones. Despite the surge in new P2P payment methods, studies show that consumers in the United States still prefer to make payments to other people with checks and cash. In fact, P2P payments by check are the only type of check payment that is still increasing. If consumers could be induced to use a digital alternative to P2P payments by cash and check, the efficiency and safety of the U.S. payments system might be enhanced.

It was a moderately good day for the Canadian preferred share market, with PerpetualPremiums winning 13bp, FixedResets gaining 4bp and DeemedRetractibles up 6bp. Volatility was minimal. Volume returned to low levels.

US regulators are in disarray regarding the MetLife / GE Capital deal. It’s too complex to summarize, so you’ll have to read the whole article.

Financial Repression is alive and well … there may be many forced buyers of sovereigns:

Under Dodd-Frank, as well as under Europe’s new Market Infrastructure Regulation (EMIR), asset management firms must abide but the same central clearing rules as the banks. For that reason, they will need a hefty amount of both cash and AAA-rated sovereign bonds to pledge as collateral. The problem, though, is that many of them aren’t ready for the new rules to be implemented in just a few months.

As the FT noted, a recent report from Moody’s projected that the collateral shortfall could fall between $700-billion (U.S.) and $1.2-trillion. Those figures are based on projections from places like the Chicago Mercantile Exchange, which is heavily engaged in swap clearing and estimates that its margins for interest rate swaps will be about 3 to 4 per cent for 10-year U.S. interest rate swaps and 9 to 10 per cent for a 30-year swap, according to Moody’s.

The fear is that once asset managers realize how big their collateral shortfall is, they’ll race out to buy things like Treasury bonds, which will push their yields even lower. Moody’s also worries that asset managers may put these bonds into segregated custodian accounts that prevent them from being re-used, effectively removing them from the market.

The Financial Times article is here; the Moody’s report is for subscribers only:

New over-the-counter (OTC) derivatives regulations will likely cause a surge in demand for liquid, high-quality government securities that are eligible as collateral to meet these requirements, says Moody’s Investors Service in a new Special Comment published today.

Increased collateral requirements for derivatives transactions will result in a sounder credit environment for the market as a whole; however, Moody’s says that lower yields on government securities resulting from their increased demand from regulatory requirements may lead to a shift in bond and money market fund allocations into riskier, lower credit-quality investments to seek higher yields.

The new report, entitled “Managed Funds: New OTC Regulations Will Boost Demand for Eligible Collateral” is now available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release.

Moody’s says that the regulations require central clearing for standardised derivatives and global standards on margins for uncleared trades. As the new regulations come into effect by the end of 2012, the demand for government securities will increase and exert downwards pressure on yields, which will lower returns for the funds that are mandated to invest in these securities.

Moody believes that the new regulations will exacerbate conditions that are already exerting pressure on yields, such as (i) government benchmark yields have fallen, some to negative territory, with a flight to quality; (ii) the supply of higher-rated investment-grade corporate, supranational and agency bonds remains limited; and (iii) the use of higher credit-quality corporate and agency bonds as eligible collateral is beginning to be seen in the market, although the level of usage remains low.

Canaccord, proud issuer of CF.PR.A and CF.PR.C is experiencing some difficulty:

Canaccord, one of Canada’s biggest independent securities dealers, is closing 16 branches and keeping 16. Canaccord is also cutting loose 35 advisory teams in the offices that remain. Toronto-based Canaccord lost about $6.5-million in the most recent quarter handling accounts for individuals, but will now “operate in a near break-even basis in current market conditions,” the firm said.

Canaccord was put on Trend-Negative by DBRS last December:

Benefiting from revenue and expense synergies associated with larger and more diversified operating platforms, the Company is well-positioned to grow its revenues and earnings substantially when the global capital markets stabilize. In the meantime, the more stable wealth management and advisory revenues of Collins Stewart add favourable diversification to the Company’s overall business risk profile, which otherwise remains concentrated in the small and mid-cap Canadian equity markets. While the Pfd-3 (low) rating with a Stable trend assigned to the Canaccord preferred shares in June 2011 took into account anticipated volatility associated with broker-dealers, this material acquisition in the current uncertain economic and market environment introduces an additional degree of risk that cannot be ignored. The ambiguity regarding longer-term take-out financing was also a consideration in assigning a Negative trend at this time.

AltaGas, proud issuer of ALA.PR.A, was confirmed at Pfd-3 by DBRS:

DBRS has today confirmed the rating on the Medium-Term Notes (MTNs) and the Issuer Rating of AltaGas Ltd. (AltaGas or the Company) at BBB and on the Preferred Shares – Cumulative at Pfd-3, all with Stable trends. The confirmation reflects: (1) continuing progress on the Company’s goal to grow and diversify earnings and cash flow while reducing its business risk; (2) mitigation of cost overrun risks on its major growth projects and (3) a reasonable financing plan for the 2011 to 2014 growth phase, supported by strong liquidity.

On August 30, 2012, AltaGas acquired SEMCO Holding Corporation (SEMCO), the sole shareholder of SEMCO Energy, Inc., a regulated public utility company with natural gas distribution and storage operations in Michigan and Alaska (see DBRS press release dated February 1, 2012, for details). DBRS expects the overall impact of the acquisition on AltaGas’s credit profile to be modestly positive, with improvement in AltaGas’s business risk profile through the addition of relatively low-risk, regulated natural gas distribution and storage assets in Michigan and Alaska being partly offset by a negative impact on key credit metrics.

DBRS estimates that, with the SEMCO acquisition and related financing, combined with the $144 million common share offering completed on November 15, 2011, and the December 20, 2011, Pacific Northern Gas Ltd. (PNG) acquisition, total debt-to-capital ratio would rise from 47% as at September 30, 2011, to 55% on a pro forma basis as at June 30, 2012, and its cash flow-to-debt ratio would drop from 20% to 12%.

As noted previously, DBRS expects some deterioration in the Company’s key credit metrics during its growth phase from 2011 to 2014, with recovery expected toward the end of the period as cash shortfalls are to be primarily funded by debt. DBRS expects AltaGas to manage the construction period risks (e.g., cost overruns, completion delays, large financing requirements and potential deterioration of credit metrics) for all of its projects, and the PNG and SEMCO acquisitions, within the context of its current BBB rating and total debt-to-capital ratio in the low-to-mid-50% range, with cash flow-to-debt in the high-teens to low-20% range, as calculated by DBRS. If the Company’s ratios do not move closer to the above-noted ranges (from the pro forma levels) over the near to medium term, its credit ratings could come under negative pressure.

It was a mildly positive date for the Canadian preferred share market, with PerpetualPremiums up 5bp, FixedResets winning 6bp and DeemedRetractibles gaining 3bp. Volatility was negligible. Volume was high! Yes, high! It’s been a long time since it was last possible to say that!

More regulation! It appears a Senate committee wants to ban hedging:

A U.S. Senate panel probing the multibillion-dollar trading loss by JPMorgan Chase & Co. (JPM) plans to unveil its findings at a hearing this year to press regulators to tighten the Volcker rule, according to three people briefed on the matter.

Staff members of the Permanent Subcommittee on Investigations, headed by Senator Carl Levin, have interviewed JPMorgan officials as well as examiners and supervisors at the institution’s regulator, the Office of the Comptroller of the Currency, said the people, who spoke on condition of anonymity because the inquiry isn’t public.

One focus of the queries is whether JPMorgan’s wrong-way bets on derivatives would have been permitted under regulators’ initial draft of the Volcker ban on proprietary trading, the people said. The lender lost $5.8 billion on the trades in the first six months of the year.

Levin of Michigan and Senator Jeff Merkley of Oregon, both Democrats, inserted the trading ban into the 2010 Dodd-Frank Act, leaving the details largely up to regulators. The senators have said that the JPMorgan loss highlights a loophole in the regulators’ draft that would allow banks to continue hedging their portfolio risks, and they said it should be closed.

It will be interesting to see how far that goes. If you buy a big block of 29-year Treasuries from a client, will you be allowed to sell 30-year Treasuries to hedge? How about futures on 30-year Treasuries? My continuing question is – has anybody given the slightest thought to just where we’re going on all this? What does the perfect world look like? Or are things just going to be banned willy-nilly, on the grounds that more regulation is better regulation?

Canadian inflation is at low levels:

The Bank of Canada is running out of reasons to raise interest rates anytime soon.

Consumer prices rose 1.2 per cent in August from a year earlier, Statistics Canada reported Friday, compared with 1.3 per cent in July. That’s comfortably below the central bank’s target of 2 per cent. At the same time, wholesalers are struggling. Statscan said in a separate report that wholesale trade plunged 0.6 per cent in July, to $49.5-billion. Most Bay Street analysts were expecting a small gain.

These figures imply Canada’s economy is sputtering. The wholesale numbers, combined with weak factory data last week, suggest third quarter growth will be weak. And little economic growth suggests little inflation. Krishen Rangasamy, a senior economist at National Bank Financial in Montreal, says third-quarter inflation is running well behind the pace that the Bank of Canada was expecting: 1.1 per cent for the headline number, compared with the central bank’s current estimate of 1.2 per cent; and, more importantly, core inflation, which deducts volatile food and energy prices, is tracking 1.4 per cent v. the Bank of Canada’s estimate of 1.9 per cent.

S&P has a cheerful recession scenario:

The Downside Case (20%-25%): We All Fall Down

In our double-dip scenario, a recession takes hold in the fourth quarter of this year. The U.S. enters into a recession as the ongoing political wrangling of U.S. lawmakers over fiscal policy results in the failure of the government to agree on a sound budget deficit-cutting plan before 2013. Despite central bank efforts, the eurozone continues to be broadsided by fiscal austerity and its political backlash, a deep recession, financial system turmoil, and a loss of investor and consumer confidence. And emerging Asian economies continue their slowdown, amplifying the U.S. recession as exports take a hit.
The recession lasts until the second quarter of 2013, but political uncertainty in Europe and the U.S. and government austerity keep the recovery very weak. Despite tensions in the Middle East, the global slowdown pushes oil prices lower, down to $77 per barrel in the first quarter of 2013 from $94 per barrel in second-quarter 2012.
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As businesses rein in hiring, the unemployment rate rises to 8.8% in 2013 and peaks above 9% the following year. Rising unemployment will put an even tighter squeeze on consumers. Nonfarm productivity contracts by 1.0% in the fourth quarter and by 0.8% in 2013.
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The slumping economy, political wrangling, weak exports, and higher costs of federal retirement and health care programs all have an impact on the budget deficit. Congress’ reluctance to compromise forces an austere fiscal policy. After widening to $1.14 trillion in 2012, the deficit narrows to $970 billion in fiscal 2013 as a result of the automatic sequestration. The damage in the first quarter causes policymakers to agree on extending the expiring measures one more year. But, deficit hawks convince policymakers to let them expire in 2014. Additional austerity further slows the recovery.

The 10-year Treasury note yield falls to averages of 1.7% and 1.3% in 2012 and 2013, respectively, as investors rush to safety. The current account deficit narrows to $353 billion in 2013, from the record $801 billion in 2006, on lower prices and weak domestic demand for most imports.

The result is another recession before the recovery is complete

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 3bp, FixedResets down 7bp and DeemedRetractibles up 4bp. There was no volatility. None. Zip, zero, zilch. Volume was low.

Fitch has joined the the cooling housing market bandwagon:

Canadian home sales activity slowed in August, due in part to steps taken by the government to tighten mortgage lending standards, which took effect in July. In Fitch Ratings’ view, these early signs of a cooldown in the housing market could be generally positive for the stability of the Canadian banking system and the sustainability of economic growth, though the full extent and pace of the housing correction remains unclear.
…
Although a correction in housing prices and a slowdown in residential construction spending would have some negative effects on economic growth in the near term, the introduction of more stringent mortgage regulations should help limit the impact of excess leverage on mortgage performance and bank balance sheets.

Reduced near-term risks of a housing bubble are likely to ease pressure on the Bank of Canada to tighten monetary policy, supporting the economic outlook at a time when weakening global growth and monetary stimulus in the U.S. would make it very difficult for the central bank to tighten credit conditions. Our current base case assumes that Canadian growth will remain steady at 2.2% annually through 2014.

But it takes two to make a market!

Get ready for a Canadian housing crash.

That’s the forecast from the folks at research firm Capital Economics, who say the collapse in house prices will feed into economic weakness and cause the Bank of Canada to back track on its insistence that the next move in domestic interest rates will be up.

“Home sales have slumped in recent months, not just in response to the tightening of mortgage lending standards. We fear this adjustment is only just starting and anticipate that the resulting excess supply of homes for sale will eventually drive home prices down by as much as 25 per cent,” the firm says in a note to clients.

Meanwhile, QE3 is having the intended primary effect:

Mortgage rates for 30-year U.S. loans tumbled, matching the lowest level on record and keeping borrowing costs down as the real estate market improves.

The average rate for a 30-year fixed mortgage fell to 3.49 percent in the week ended today from 3.55 percent, Freddie Mac said in a statement. It matched a record reached in July. The average 15-year rate slid to 2.77 percent from 2.85 percent, a new low, according to the McLean, Virginia-based company.

Low borrowing costs, spurred in part by the Federal Reserve’s purchase of mortgage securities, have aided a housing-market recovery after the worst downturn since the 1930s. Sales of existing homes climbed to a two-year high in August, the National Association of Realtors reported yesterday. Single-family housing starts rose to the fastest annual rate since April 2010, the Commerce Department said.

Unauthorized trading or unauthorized losses?

Kweku Adoboli’s lawyers said UBS AG had a culture that overlooked trading limits and other rules as long as employees made money.

Adoboli lawyer Charles Sherrard said the bank became “more aggressive in terms of its desire to make profits” in 2011, while cross-examining one of Adoboli’s former bosses at a fraud trial in London today.

IOSCO has found another regulatory job-creation rationale:

The same lack of oversight that enabled traders to manipulate the London interbank offered rate plagues other benchmarks around the globe, according to a group of international securities regulators.

Fewer than half of the benchmark interest rates surveyed in the U.S., Europe and Asia were based on actual transactions, according to a confidential International Organization of Securities Commissions discussion paper obtained by Bloomberg News. Instead, the rates were calculated by methodologies that were unclear, not transparent and only rarely subject to specific regulatory standards or obligations, the group said.

It was an uneven day for the Canadian preferred share market, with PerpetualPremiums up 11bp, FixedResets winning 12bp and DeemedRetractibles flat. Volatility was muted but uniformly positive. Volume was low.

Inflation expectations can become self-fulfilling, which worries Richard Fisher:

Federal Reserve Bank of Dallas President Richard Fisher said the central bank’s third round of large-scale asset purchases has led to an increase in market expectations for higher inflation without more job creation.

“I do not see an overall argument for letting inflation rise to levels where we might scare the market,” Fisher said on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays and Vonnie Quinn. “We have seen a sharp rise in inflation expectations. If you let this get out of hand, then I think we will have a market reaction.”
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Measures of expected future inflation “have ramped up pretty quickly,” Fisher said. The five-year, five-year forward breakeven rate, which projects the pace of price increases starting in 2017, rose to 2.88 percent on Sept. 14, the day after the FOMC decided on QE3. That was up half a percentage point from July 26.

Congress’s inaction on fiscal policy and excessive government regulation are holding back businesses from spending on hiring and investment, Fisher said in a later Bloomberg Television interview. The Fed’s stimulus efforts, or so-called quantitative easing, won’t work because the central bank can’t address those obstacles to growth, he said.

There might be another SEC attempt to destroy the public bond market:

The U.S. Securities and Exchange Commission should scrutinize corporate bond markets to determine if retail investors can find fair prices, said Commissioner Daniel Gallagher.

Gallagher, a Republican on the five-member commission that regulates securities trading, called for the agency to look at the imbalance of information available to retail investors and institutional traders in a speech today at a financial-markets conference hosted by Georgetown University’s McDonough School of Business in Washington.

“Retail investors continue to face significant headwinds in the bond markets,” Gallagher said. “Unlike their large institutional counterparts, retail investors generally have less expertise in the basics of bond trading and cannot tap into large dealer networks for quotes in order to shop around for the best prices available.”

Gallagher said the SEC issued a report this year on the state of the municipal securities market and should consider a similar effort with the corporate bond market, “given how large and important that market has become.” That doesn’t necessarily mean more regulation, he said.

You know what regulators mean when they say a study won’t necessarily mean more regulation, don’t you? I don’t have to spell it out for you, do I?

Westcoast Energy, proud issuer of W.PR.H and W.PR.J, has been confirmed by DBRS at Pfd-2(low):

DBRS has today confirmed the Unsecured Debentures, First Preferred Shares and Commercial Paper ratings of Westcoast Energy Inc. (Westcoast or the Company) at A (low), Pfd-2 (low) and R-1 (low), respectively, all with Stable trends. The rating actions incorporate DBRS’s expectation that Westcoast’s significant capex program (projected to be $1.2 billion in 2012, including only $426 million spent through June 30, 2012, and likely to remain elevated in the medium term), will result in negative free cash flows and pressure its credit ratios, as incremental financing will likely come from increased long-term debt issuance.
…
The Company’s financial profile remains relatively strong despite rising capex related to its medium-term growth program. Increasing earnings and cash flow from expansions placed in service to date have resulted in relatively strong credit ratios. Westcoast should generate sufficient cash flow to meet a significant portion of its capex and dividend payments going forward, with manageable funding needs at both Union Gas Limited and the Company. Westcoast’s consolidated credit metrics will likely continued to be pressured over the medium term as a result of its significant growth capex, although the metrics are underpinned by Westcoast’s mostly low-risk and regulated operations and will likely remain within the parameters of the current ratings.

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

PerpetualDiscounts now yield 4.93%, equivalent to 6.41% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.4%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 200bp, unchanged from the September 12 report.

TD says the housing bubble is yesterday’s news:

TD Economics has gradually reduced its estimate of the overvaluation in Canada’s house prices, as the growth in people’s disposable income picks up while the market stagnates.

The quarterly economic forecast that the bank released Tuesday pegs the current overvaluation in the market at 10 per cent. It had previously estimated that prices were 15 per cent too high, and then suggested a range of 10 to 15 per cent.

Rick Waugh says the same thing:

Canada’s housing market is “at worst” destined for a soft landing, the head of one of the country’s largest banks predicted Tuesday.

Speaking in Toronto, Bank of Nova Scotia chief executive officer Rick Waugh said even though there is a housing bubble in Canada, he doesn’t expect the residential real estate market to crash.

I don’t have figures on how good either party is at predicting house prices.

The slow-motion bank run (is that a jog?) in Europe continues:

An accelerating flight of deposits from banks in four European countries is jeopardizing the renewal of economic growth and undermining a main tenet of the common currency: an integrated financial system.

A total of 326 billion euros ($425 billion) was pulled from banks in Spain, Portugal, Ireland and Greece in the 12 months ended July 31, according to data compiled by Bloomberg. The plight of Irish and Greek lenders, which were bleeding cash in 2010, spread to Spain and Portugal last year.

The flight of deposits from the four countries coincides with an increase of about 300 billion euros at lenders in seven nations considered the core of the euro zone, including Germany and France, almost matching the outflow. That’s leading to a fragmentation of credit and a two-tiered banking system blocking economic recovery and blunting European Central Bank policy in the third year of a sovereign-debt crisis.

It was a quiet day for the Canadian preferred share market, with PerpetualPremiums off 1bp, FixedResets up 4bp and DeemedRetractibles gaining 2bp. Volatility was muted. Volume was below average.

Let’s all reach for yield!

Rates on U.S. high-yield corporate bonds fell below 7 percent for the first time last week, according to Bank of America Merrill Lynch index data.

Average borrowing costs for speculative-grade companies from Sprint Nextel Corp. (S) to HCA Holdings Inc. (HCA) dropped to an unprecedented 6.965 percent Sept. 14 from 7.07 percent the day earlier, Bank of America Merrill Lynch’s U.S. High Yield Master II index data shows. The gauge was at 8.54 percent at year-end and 8.79 percent a year ago, the index data show.

There’s a good editorial on Bloomberg about licensing:

The average cosmetologist in the U.S. trains for 372 days before earning a license. The average emergency medical technician spends 33 days in training. From this, one might conclude that Americans are obsessed with primping but tragically unprepared for emergencies.

Actually, the disparity merely confirms what a muddle the process of occupational licensing is. In 1952, fewer than 5 percent of U.S. workers required a state license. By 2006, according to a survey that year by the Gallup Organization, 29 percent of workers said they needed a government-issued license to do their job.

It’s a serious concern for civil liberties: governments should be in the business of prohibitions – with the growth in licensing, they are in the business of permissions.

Bloomberg’s editors have been on a hot streak lately, bringing to my attention a reckless change in US pension law:

So Congress changed the discounting rules, allowing companies to choose discount rates based on a 25-year average of corporate bond yields instead of using an average of just two years.
…
Meanwhile, companies that go bankrupt will tend to have accrued larger unfunded liabilities. The bulk of those liabilities are covered by the Pension Benefit Guaranty Corp., a federal agency backstopped by taxpayers.

The pension legislation also raised the premiums that companies pay into the agency, which, in theory, should offset costs to taxpayers. But Congress counted the increased premiums as funds available to pay for highway construction, essentially double-counting the money.

This relief of pension funding obligations will undermine the solvency of pension funds in part to address a problem that doesn’t exist. Companies protest that they can’t afford to adjust to sharply falling discount rates. The costs they face, however, are a mix of costs they should have been able to control and costs they do control.

In the first category is any increase in unfunded pension liabilities due to lower discount rates. It’s true: Given the crashing bond yields of recent years, without relief, pension funds would be told to start holding many more assets. But the flip side of falling yields is that bond prices have risen significantly.

If a pension plan invested in bonds with maturities matching its obligations — that is, enough 10-year bonds to cover the payments due in 10 years, and so forth — the value of its holdings should have risen enough to cover its added asset needs. Only companies that chose not to properly match their maturities are left closing a gap.

But immunizing liabilities is BORING!

Spanish banks are slowly but surely bleeding deposits:

Spanish banks, already hooked on cheap European Central Bank loans, are hemorrhaging deposits as the government debates whether to seek a bailout.

Households and companies drained 26 billion euros ($34 billion) from Spanish bank accounts in July, driving the ratio of loans to deposits among lenders to 187 percent from 183 percent in December and 182 percent a year earlier, according to data compiled by the Bank of Spain.
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There is “a clear underlying trend of accelerating deposit decline,” Nomura’s Quinn wrote in a Sept. 4 report. Term deposits by households fell 6.9 percent in July from a year earlier, while those of companies fell 24 percent, which “points to continued deposit declines in the future,” he said.

It was a mixed day for the Canadian preferred shares market, with PerpetualPremiums gaining 4bp, FixedResets up 3bp and DeemedRetractibles down 6bp. Volatility was muted. Volume returned to “lousy”.

As I have often complained, there is a growing trend in securities administration la-la-land to treat creditors according to who they are rather than what they have. The receiver’s response to a Lehman creditor is another example:

Defunct brokerage Lehman Brothers Inc., which hasn’t paid institutional creditors a dime of its $25 billion hoard after four years in liquidation, is being urged to settle fights with affiliates and pay up.
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Elliott Management Corp., a New York hedge fund, demanded in June that brokerage trustee James Giddens sell securities and pay an initial $3.2 billion soon. Giddens responded this week, saying Elliott is a “claims trader” and doesn’t share other customers’ interests. Yesterday, two creditor groups sided with Elliott, with an unofficial group in favor of giving Giddens just 60 days to resolve claims with a European affiliate. The official group didn’t set a deadline.
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By March 30, Giddens had $25.4 billion of securities in hand, Elliott said. By selling securities, he could pay almost 26 cents on the dollar of allowed claims totaling $12.2 billion, while still reserving enough money for disputed claims, the hedge fund said.

Goldman Sachs Group Inc. (GS) disagreed, saying customers should get the securities in their accounts, which may be worth more than money poured from a cash pool.

Giddens shouldn’t be treating traders differently from other customers, said Joseph Sarachek, managing director of claims trading at CRT Capital Group LLC, which buys and sells distressed debt.

“There is really no basis in law,” he said. “In the long run, this will hurt liquidity in the marketplace.”

One problem, of course, is that receiverships are a very nice meal ticket for all involved, except the creditors. The company can’t fight back!

DBRS confirmed Brookfield Renewable Energy Partners, proud guarantor of BRF.PR.A:

DBRS has today confirmed the ratings of Brookfield Renewable Energy Partners L.P. (BREP or the Company) and its related security instruments, including the Company-guaranteed Senior Unsecured Debentures and Notes at BBB (high) and Class A Preference Shares, Series 1 at Pfd-3 (high). All trends are Stable. The ratings reflect BREP’s lower-risk renewable generation mix supported by a high level of long-term contracted output, geographical diversification and operating efficiency. Constraints on the ratings include earnings and cash flow volatility resulting from fluctuation in hydrology and wind resources, high dividend payout ratios despite continued high growth-capital spending, and structural subordination to project-level debt. DBRS expects BREP to fund any material acquisition in the future and refinance maturing project debt with non-recourse project-level debt and equity to maintain a reasonable financial profile for the assigned rating category.

The credit metrics of BREP are within range for the current rating profile. Operating cash flow remains well in excess of maintenance capital expenditure requirements. However, significant growth capex and dividends have resulted in free cash flow deficits, which have been funded with a reasonable mix of debt and equity. As a result, leverage has remained relatively stable.

Additionally, DBRS confirmed IGM Financial, proud issuer of IGM.PR.B:

DBRS has today confirmed the ratings of IGM Financial Inc.’s (IGM, or the Company) Unsecured Debentures at A (high) and the First Preferred Shares at Pfd-2 (high). Trends for both are Stable.

IGM is one of the most consistently profitable financial services companies in Canada, reflecting a leading market position in the mutual funds manufacturing and distribution market through the operations of both Investors Group Inc. (IG) and Mackenzie Financial Corporation (Mackenzie). The rating is primarily based on the profitability, operating cash flow and business strengths of the Company’s IG subsidiary, while recognizing the complementary positive contribution of diverse products, brands and distribution channels offered through Mackenzie and Investment Planning Counsel Inc.

In addition to strong profitability, the Company has a conservative financial profile. Debt plus preferred shares-to-EBITDA was less than 1x in 2011, which is conservative, and the Company’s ratio of debt plus preferred shares-to-total capitalization remains appropriate for the rating, at just over 25%. While IG’s redemption rates are better than the industry average, the continuing net mutual fund redemptions at Mackenzie are not yet a major concern in determining IGM’s rating.

As a member of the Power Financial Corporation (Power) group of companies, IGM benefits from the additional financial flexibility of having a strategic shareholder and the associated strong governance and risk avoidance management model typical of Power subsidiaries.

It was a good day for the Canadian preferred share market, with PerpetualPremiums and DeemedRetractibles gaining 10bp and FixedResets winning 11bp. Volatility was average. Volume was average.