Category: Market Action

The Fed will continue its monetization policy:

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 agreed today to increase policy accommodation by 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 securities as announced in June, 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.

There is also language about employment levels:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

Some people take this as an abandonment of the inflation mandate:

Gold jumped to a six-month high near $1,770 (U.S.) an ounce on Thursday, rising 2 per cent after the U.S. Federal Reserve launched an aggressive stimulus program and vowed it will keep buying assets until the outlook for jobs improves substantially.

The metal received a huge boost after the U.S. central bank tied its unconventional bond-buying directly to economic conditions, marking a significant shift in the direction of U.S. monetary policy.

Market watchers said the Fed was essentially shifting its focus to maximum employment at the expense of maintaining stable prices. The two objectives are often called the Fed’s dual mandate.

“They are emphasizing the growth mandate, and that means they don’t care about inflation other than giving lip service to it,” said Axel Merk, chief investment officer at Merk Funds, which has around $600 million in currency mutual-fund assets.

“The price of gold will do very well in the years to come,” Merk said.

Mr. Merk writes quite a bit about gold.

The equity guys were pleased:

U.S. stocks rose, sending the Standard & Poor’s 500 Index to its highest level since 2007, as the Federal Reserve said it will buy mortgage-backed securities to bolster the economy.

The S&P 500 rallied 1.6 percent to 1,459.99 at 4 p.m. in New York.

“It was a very powerful statement,” Kevin Caron, a market strategist at Stifel Nicolaus & Co. in Florham Park, New Jersey, said in a telephone interview. The firm oversees about $127 billion. “The Fed is going all in here, especially with their commitment to continue asset purchases until they see the desired result in the form of a lower unemployment rate. This statement removes a lot of uncertainty about the Fed’s commitment to maintaining price stability.”

The thugs at Telus have managed to stamp out an unfortunate bit of shareholder activism:

The debate over so-called empty voting has more fuel after a much-anticipated decision from a judge in the case of Telus Corp. and its fight against hedge fund Mason Capital, but there is still a lingering lack of clarity on just what is allowed.

Mason put on a trading position that would enable it to benefit from the failure of a Telus proposal to collapse the company’s dual class share structure on a one-for-one basis. Mason did it by buying shares of one class and selling short shares of the other class. The hedge fund’s hope is to force a conversion ratio that favours the shares that it bought, and it sought to call a shareholders meeting that would enshrine such a ratio in the articles of Telus.
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So how did Telus win? In large part because Mason’s shareholder requisition for a meeting did not properly identify the hedge fund as the real owner of the shares.

As far as I know, there’s no doubt in anybody’s mind that Mason owns a big chunk of Telus voting shares and wants to force a vote. But they didn’t fill out the forms properly. Gotcha! The particulars of the decision are that CDS, the registered shareholder, did not properly identify the beneficial owner.

[64] Assuming but not deciding that CDS can issue a requisition on behalf of aparticipant or beneficial shareholder, in my opinion the Requisition must identify thebeneficial shareholders behind the requisition so the directors can meet their dutiesunder ss. 167(2), (3) and (7). The subject Requisition fails to do so.

[65] In the circumstances, in my opinion, the directors were not obliged to send anotice of meeting as the Requisition does not comply with ss. 167(2) and (3).

Very little overall movement in the Canadian preferred share market today (although I retain a faint hope that the Fed will start buying Canadian preferred shares. Well, I did say it was a faint hope!), with PerpetualPremiums and DeemedRetractibles flat while FixedResets gained 1bp. Volatility was no great shakes. Volume was surprisingly low, considering that the new issues of ENB.PR.P and BPO.PR.T (today) and BAM.PF.B (yesterday) should be causing some portfolio shuffling. Maybe the Fed bought all the new issues?

The Great Regulatory Job Creation Scheme is gathering steam:

U.S. regulators are set to choose the first non-bank companies likely to be branded potential risks to the financial system, according to two people with knowledge of the plans.

The Financial Stability Oversight Council intends to request confidential data from as many as five U.S. firms at a meeting this month, said the people, who declined to be identified because the plans aren’t public. The request is a step toward deciding whether the companies should be subject to Federal Reserve supervision, including stress tests, higher capital levels and tougher liquidity requirements.

So the Fed will have to hire more regulators to administer the expanded mandate and then more regulators to replace the old regulators who have been hired by the affected companies at fat salaries. It’s win-win!

Wow! The US Mortgage almost-agencies have a radical new business model!

Edward J. DeMarco, the overseer of taxpayer-supported Fannie Mae (FNMA) and Freddie Mac, said the firms need to increase the fees they charge to guarantee mortgages in states where it’s costlier for them to deal with bad debt.

Can you imagine? Charging for services based on expected costs? I think Mr. DeMarco should get the Nobel Prize in Economics.

It was another day of little movement for the Canadian preferred share market, with PerpetualPremiums down 3bp, FixedResets gaining 4bp and DeemedRetractibles off 2bp. Volatility was minimal. Volume was average – which is a huge improvement from recent levels, probably helped along by the BAM.PF.B new issue.

PerpetualDiscounts (all three of them!) now yield 4.92%, equivalent to 6.40% interest at the standard equivalency factor of 1.3x. Update Long Corporates now yield about 4.4%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 200bp, sharply tighter than the 215bp reported September 5.

There’s a new wrinkle in the financial repression chronicles:

JPMorgan Chase & Co. (JPM) and Bank of America Corp. are helping clients find an extra $2.6 trillion to back derivatives trades amid signs that a shortage of quality collateral will erode efforts to safeguard the financial system.

Starting next year, new rules designed to prevent another meltdown will force traders to post U.S. Treasury bonds or other top-rated holdings to guarantee more of their bets. The change takes effect as the $10.8 trillion market for Treasuries is already stretched thin by banks rebuilding balance sheets and investors seeking safety, leaving fewer bonds available to backstop the $648 trillion derivatives market.

The solution: At least seven banks plan to let customers swap lower-rated securities that don’t meet standards in return for a loan of Treasuries or similar holdings that do qualify, a process dubbed “collateral transformation.” That’s raising concerns among investors, bank executives and academics that measures intended to avert risk are hiding it instead.

Adding to the concern is the reaction of central clearinghouses, which collect from losers on derivatives trades and pay off winners. Some have responded to the collateral shortage by lowering standards, with the Chicago Mercantile Exchange accepting bonds rated four levels above junk.

The potential reward for revenue-starved banks is an expanded securities-lending market that could generate billions of dollars in fees. JPMorgan and Bank of America, which have the biggest derivatives businesses among U.S. bank holding companies with a combined $140 trillion of the instruments, are already marketing their new collateral-transformation desks, people with knowledge of the operations said.

As discussed on August 31, directed lending to the government is a form of financial repression.

The US has to force people to buy its bonds! The outlook isn’t getting any better:

Moody’s warned Tuesday it could strip the United States of its coveted triple-A credit rating if Congress fails to produce a budget that will bring down the federal debt burden.

“Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the U.S. government’s Aaa rating and negative outlook,” the ratings firm said in a statement.

If the negotiations lead to specific policies that produce a stabilization and then downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable, it said.

“If those negotiations fail to produce such policies, however, Moody’s would expect to lower the rating, probably to Aa1.”

Moody’s said it was unlikely it would keep the Aaa rating with a negative outlook into 2014.

“The only scenario that would likely lead to its temporary maintenance would be if the method adopted to achieve debt stabilization involved a large, immediate fiscal shock – such as would occur if the so-called ‘fiscal cliff’ actually materialized – which could lead to instability,” it said.

There was very little movement in the Canadian preferred share market today, with PerpetualPremiums and FixedResets both gaining 3bp; DeemedRetractibles were off 2bp. Volatility was average. Volume improved a little, but was still below what I would call ‘average’ levels; but on a brighter note, RBC owned the board today, with no other dealer mentioned in the Volume Highlights.

There are rising expectations for low rates forever:

Just six months ago, money market traders expected the Federal Reserve to raise interest rates by the end of 2013. Now, they see borrowing costs staying at record lows for about three more years as the economic outlook worsens.

Bond market measures from overnight index swaps, which indicate no increase in the federal funds rate until mid-2015, to a 62 percent decline in a measure of volatility in government bonds signal that rates will stay near zero for longer. The gap between two- and five-year Treasury yields, which decreases when traders expect benchmark rates to remain subdued, is more than 50 percent narrower than its average since 2008.

It was an off day for the Canadian preferred share market, with PerpetualPremiums and FixedResets down 7bp, while DeemedRetractibles lost 9bp. Volatiltiy was average, all on the downside. Volume continued at holiday levels.

US Payrolls weren’t very encouraging:

Payrolls rose less than projected in August and the unemployment rate was unexpectedly driven down by Americans leaving the labor force, boosting the odds of additional Federal Reserve easing to spur a faltering recovery.

The economy added 96,000 workers after a revised 141,000 increase in July that was smaller than initially estimated, Labor Department figures showed today in Washington. The median estimate of 92 economists surveyed by Bloomberg called for a gain of 130,000. The jobless rate fell to 8.1 percent.

European banks still aren’t doing very well:

ECB President Mario Draghi said yesterday the central bank will lend against assets in dollars, pounds and Japanese yen, as well as in euros, reopening a program that ran for two years following the September 2008 bankruptcy of the U.S. investment bank. The ECB also eased borrowing against government-issued or guaranteed assets by dropping rating requirements.

Investors’ reluctance to lend to banks in countries where bond yields soared has forced those banks to fund at the ECB. Spanish banks borrowed 375.5 billion euros ($476 billion) from the central bank as of the end of July, sucking collateral out of a government bond market that totals about 690 billion euros, according to data compiled by Bloomberg.

The ECB’s 1 trillion-euro longer-term refinancing operations in December and February took collateral out of the market, in particular in Spain and Italy, whose banks were the biggest borrowers. ECB bond buying as part of its new Outright Monetary Transactions program will pile more pressure onto a market that is already “highly illiquid,” said Chris Clark, a strategist at ICAP Plc, the largest broker of transactions between banks.

“There’s so little Spanish paper that hasn’t been lodged at the ECB that pretty much every single bond has gained a very significant premium to borrow,” he said. “If the ECB buys more bonds, it may dry up liquidity in the Spanish government bond market even more. These looser collateral rules will help.”

Apropos of which, Fitch Ratings has a most interesting report titled U.S. Money Fund Exposure and European Banks: Shift to Japan Continues:

U.S. prime money market funds (MMF) continued to increase their exposure to Japanese banks, which as of end-July represent 12.3% of total MMF holdings or a 118% increase on a dollar basis since end-May 2011 (see Shift to Japan Continues chart and Change in Exposure [on a Dollar Basis] table). This exposure exceeds aggregate MMF allocations to eurozone banks, which increased moderately since the prior reporting period and now constitute 8.5% of total MMF assets, still 76% below end-May 2011 levels on a dollar basis. This “disengagement” between MMFs and eurozone banks appears to be persisting, as MMF risk aversion continues and both eurozone banks and their regulators seem cautious towards this potentially volatile form of funding. Aggregate MMF allocations to European banks outside of the eurozone also grew with allocations to Nordic, Swiss, and U.K. banks all rising since end-June on a dollar basis. Outside of Europe, MMF allocations to Canadian banks declined slightly, while exposures to Australian banks remained constant over the same period. However, since end-January 2012, MMF exposures to Australian banks have declined by roughly 25%, consistent with efforts by these banks to gradually reduce their use of short-term wholesale funding. U.S. banks remain the largest single-country exposure at 12.4% of MMF assets as of end-July.

I am pleased to announce the existence of a prominent adult investor:

Mark Cuban, owner of the Dallas Mavericks basketball team, wrote a post on his blog in response to a column in which Andrew Ross Sorkin of the New York Times pinned the blame on David Ebersman, Facebook’s chief financial officer. Cuban said:

“I bought and sold FB shares as a TRADE, not an investment. I lost money. When the stock didn’t bounce as I thought/hoped it would, I realized I was wrong and got out. It wasn’t the fault of the FB CFO that I lost money. It was my fault. I know that no one sells me shares of stock because they expect the price of the stock to go up. So someone saw me coming and they sold me the stock. That is the way the stock market works. When you sit at the trading terminal you look for the sucker. When you don’t see one, it’s you. In this case it was me.”

Amazing, isn’t it?

There’s a (very US-centric) article on preferred shares in the Wall Street Journal, titled Playing ‘Preferred’ Shares.

DBRS confirmed MFC:

DBRS has today confirmed its ratings on Manulife Financial Corporation (Manulife or the Company) and its affiliates, including The Manufacturers Life Insurance Company, its primary operating company. The rating trend is Stable.
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While DBRS is prepared to acknowledge that, barring a major economic crisis, the Company has probably hit its nadir, it does not believe that the lost profitability associated with the U.S. operation will recover quickly, especially since the former earnings levels benefited from favourable equity markets and a more favourable interest rate environment. DBRS is also mindful that the Company’s core earnings performance is dampened by hedging costs, reduced earnings opportunities related to potential recovery in capital markets, and more competitive market conditions. The Company has indicated that it also expects to take another material charge in Q3 2012 related to changes in actuarial assumptions driven by new standards of practice and the ambient macroeconomic environment, though much of this specific charge will relate to products and policy liabilities that are not part of the Company’s current growth plans. Other sources of potential earnings volatility relate to the indeterminate policyholder behaviours that are not addressed by current hedging activity, and a possible additional write down of goodwill reflecting the adverse interest rate environment.

At the Company’s current level of core earnings as DBRS defines them, fixed charge coverage ratios are below 5x with a core return on equity (ROE) of about 10%, well below the greater than 10x coverage and greater than 15% ROE reported prior to the onset of the 2008 financial crisis. Without the heft of the Company’s business franchises in Canada, Asia and the United States, such ratios and the accompanying earnings volatility would not be consistent with the DBRS quantitative criteria for Company’s rated at the current levels. Should these business franchises deteriorate, there could be negative rating implications.
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To meet its regulatory capital requirements over the same period of market disruption, the Company has raised over $14 billion in net capital through market issues of common and preferred shares, reduced cash dividends and senior and subordinated debt issues. Correspondingly, the Company has consistently reported strong regulatory capital ratios, as its financial leverage ratios (total debt plus preferred as a proportion of capitalization) have increased to 32.2% from 17.1% in 2007, and remain above the Company’s 25% target. The Company reported an MCCSR ratio of 213% for the period ending June 30, 2012, which is among the strongest ratios in the industry and well above a reasonable minimum level, especially given the Company’s risk-mitigating hedges for which the regulatory ratio gives no credit. However, given the unstable economic environment regulatory uncertainty associated with Solvency II, IFRS accounting for Insurance Contracts and Employee Benefits and OSFI’s and the Canadian Institute of Actuaries requirements regarding required capital for variable annuity guarantees, DBRS feels that the relatively high regulatory capital ratios are prudent at this time.

DBRS also confirmed GWO:

DBRS has today confirmed the ratings of Great-West Lifeco Inc. (GWO or the Company) and its affiliated operating subsidiaries, including the Claims Paying Ratings at The Great-West Life Assurance Company, The Canada Life Assurance Company and London Life Insurance Company; all trends are Stable. The existing ratings for the Company and its operating subsidiaries reflect the continuing strong financial performance and the notable absence of earnings volatility associated with recent exogenous market factors. Stable earnings are a testament to the Company’s diversification by product and geography, as well as its conservatism with respect to embedded product risks, actuarial assumptions and asset quality.

Like its major peers, the Company is anchored by Canadian operations that benefit from an oligopolistic industry structure, which limits the worst of price competition.
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The MCCSR ratio of the Company’s major regulated operating subsidiary has hovered just over 200% for the last two years. While this is lower than that of some major competitors, it reflects the Company’s lower-risk asset portfolio and insurance liabilities, and does not include $825 million of cash at the holding company that could easily be advanced to the regulated entities in the form of capital, if required. With longer experience as a shareholder-owned company, GWO has traditionally operated with higher financial leverage than most of its Canadian peers, a reflection of its debt-financed mergers and acquisitions activity and the historical attention paid to the efficient use of shareholder capital. At 32.2% at the end of June 2012, the Company’s total debt plus preferred has come into alignment with that of the peer group, as Great-West has reduced financial leverage and de-mutualized competitors have increased theirs. Fixed-charge coverage ratios at GWO nevertheless remain healthier than those of its peers, reflecting stronger profitability. The Company is actively retiring capital instruments issued at its operating companies in order to have a higher proportion of capital issuance at the holding company level, which will serve to reduce its double leverage ratio. In short, DBRS considers the Company’s financial leverage and capital position to be consistent with the current rating category, as long as it continues to operate conservatively.

As an integral component of Power Financial Corporation’s group of companies, GWO benefits from its parent’s financial support and its strong governance and risk management controls and procedures, which reinforce the conservative bottom-line focus of the Company.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 6bp, FixedResets off 2bp and DeemedRetractibles up 4bp. Volatility was minimal. Volume remained at holiday levels.

The European Central Bank is going to purchase sovereigns:

As announced on 2 August 2012, the Governing Council of the European Central Bank (ECB) has today taken decisions on a number of technical features regarding the Eurosystem’s outright transactions in secondary sovereign bond markets that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. These will be known as Outright Monetary Transactions (OMTs) and will be conducted within the following framework:
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Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years.

No ex ante quantitative limits are set on the size of Outright Monetary Transactions.

Creditor treatment The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.

Sterilisation The liquidity created through Outright Monetary Transactions will be fully sterilised.

Transparency Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis. Publication of the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.

Pari passu treatment for ECB holdings would be a pleasant change … provided one can count on the Europeans to keep their word.

Jason Heath writes a piece in the Financial Post regarding a CDHowe report on Annuities:

But the C.D. Howe report is really interest-rate agnostic — focused more on reasons other than interest rates that Canadians are not opting for annuities. Among those reasons: poor annuity market infrastructure and pricing; non-integration of insurance, banking, pension and tax regulations; insufficient annuity product options; and a lack of government websites and resources to assist in our decisionmaking.

The CDHowe commentary by Norma L. Nielson is titled Annuities and Your Nest Egg: Reforms to Promote Optimal Annuitization of Retirement CapitalRetiring. I’ve scanned it – it follows the basic Financial Economist reasoning that Liquidity Value = 0, therefore Annuities = Good. I was particularly struck by the suggestion:

In some cases, public policymakers decide there is a need to subsidize one group at the expense of another. State social security systems may incorporate a significant element of wealth transfer from the rich to the poor, for example. In the case of decumulation products, it may be determined that it is socially desirable to provide gender-neutral annuities; i.e., for men to subsidize women.

Interesting report from a relatively free-market airline business:

Qantas Airways Ltd. (QAN)’s decision to drop a 17-year pact with British Airways (IAG) in favor of a deal with Dubai-based Emirates reveals the potential for fast-growing Gulf carriers to shatter the established airline order.

The 10-year accord, announced yesterday, will lead Qantas to scrap its revenue-sharing pact with British Airways to gain access to 70 Emirates destinations. While the Australian carrier will carry on code-sharing with BA, the move puts in doubt the standing of the Oneworld global alliance the pair helped form.

Too bad we won’t even let Emirates fly here as much as they like! But it’s just another example of the extent to which competition and efficiency is stifled in Canada. When politicians (such as Junior Minister Carney) say “Productivity!”, I say “Milk.”

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 1bp, FixedResets down 8bp and DeemedRetractibles off 2bp. Volatility was minimal. Volume remained very low.

The BoC stood pat:

In Canada, while global headwinds continue to restrain economic activity, underlying momentum remains at a pace roughly in line with the economy’s production potential. Economic growth is expected to pick up through 2013, with consumption and business investment continuing to be its principal drivers, reflecting very stimulative financial conditions. Business investment remains solid. There are tentative signs of slowing in household spending, although the household debt burden continues to rise. Canadian exports are projected to remain below their pre-recession peak until the beginning of 2014, reflecting the dynamics of foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

Core inflation has been softer than expected in recent months but, with the economy operating near its production potential, it is expected to return, along with total CPI inflation, to 2 per cent over the course of the next 12 months.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. To the extent that the economic expansion continues and the current excess supply in the economy is gradually absorbed, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate, consistent with achieving the 2 per cent inflation target over the medium term. The timing and degree of any such withdrawal will be weighed carefully against domestic and global economic developments.

Transalta bought a power plant and issued equity:

TransAlta Corporation (TransAlta) (TSX: TA; NYSE: TAC) announced today that its wholly owned subsidiary has entered into an agreement with Fortescue Metals Group Ltd. (Fortescue) (ASX: FMG) to acquire its 125 megawatt (MW) dual-fuel Solomon power station for U.S. $318 million.

In connection with the acquisition, TransAlta also announced today that it has entered into an agreement with a syndicate of underwriters, led by CIBC and RBC Capital Markets as bookrunners, under which the underwriters have agreed to purchase from TransAlta and sell to the public 19,250,000 Common Shares. The purchase price of Cdn $14.30 per Common Share will result in gross proceeds to TransAlta of approximately Cdn $275 million.

DBRS calls it credit-neutral:

Overall, DBRS views this transaction as credit neutral.

(1) BUSINESS RISK PROFILE – Negative
Based on its preliminary review, DBRS views the proposed acquisition as negative with respect to TAC’s business risk profile. Although the PPA reduces earnings and cash flow volatility, the PPA is with a weaker counterparty. FMG Solomon operates in a cyclical industry and is significantly exposed to pricing volatility and geographic and product concentration risk. However, given the relative size of the Project’s incremental cash flow to TAC’s cash flow from operations (approximately 5% of fiscal 2011 cash flow from operations), the proposed acquisition is viewed as non-material to TAC’s overall business risk profile.

(2) FINANCIAL RISK PROFILE – Positive

Based on DBRS’s review of the proposed acquisition and financing strategy, pro forma the proposed acquisition and equity offering (i.e., post-acquisition), DBRS estimates an improvement in TAC’s key credit metrics. DBRS expects the Company to fund the majority of the proposed acquisition with common equity, which will improve the Company’s capital structure going forward. The proposed acquisition is also expected to generate annual incremental cash flow of approximately $40 million for TAC under a stable PPA framework. Pro forma post-acquisition (including TAC’s preferred shares issuance on August 10, 2012; see the related DBRS press release on August 10, 2012), DBRS estimates that the debt-to-capital ratio will be approximately 54% and that the interest coverage and cash flow-to-debt ratios will improve modestly.

The equity guys seem less impressed:

Following the news, TransAlta’s stock skidded 57 cents or 3.9 per cent to $14.11 (Canadian) on the Toronto Stock Exchange – the lowest closing price since March, 2000.

TransAlta’s dividend yield is now 8.2 per cent – a level some analysts view as unsustainable without an uptick in power prices.

TLM was confirmed at Pfd-3(high) by DBRS:

DBRS has today confirmed the ratings of the Unsecured Debentures & Medium-Term Notes and Cumulative Redeemable Preferred Shares for Talisman Energy Inc. (Talisman or the Company) at BBB (high) and Pfd-3 (high), respectively, both with Stable trends. The confirmation reflects the Company’s reasonable reserve and production growth profile and geographically diverse operations, but also considers the Company’s high level of exposure to North American natural gas and high capital expenditure relative to cash flow.
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DBRS anticipates that Talisman will be free cash flow negative for 2012 (approximately $1.4 billion) due to aggressive capital spending ($3.6 billion) and continued weak North American gas pricing. This is expected to be funded, in part, by asset sales (approximately $2.5 billion to date). DBRS anticipates that future cash flow deficits will be funded with asset sales as well as debt issuances.

It was a negative day overall for the Canadian preferred share market, with PerpetualPremiums flat, FixedResets losing 11bp and DeemedRetractibles off 1bp. Volatility was low. Volume continued very low.

PerpetualDiscounts – all three of them – now yield 4.95%, equivalent to 6.44% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.3%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 215bp, unchanged from August 29.

There are some indications of the size of QE3:

Federal Reserve Bank of San Francisco President John Williams called for additional bond purchases by the Fed to spur economic growth that would be open- ended and total at least $600 billion.

High unemployment and inflation below the Fed’s 2 percent target “would argue for additional accommodation now,” Williams said today in an interview on Bloomberg Television from Jackson Hole, Wyoming. “I would like to see something that has a measurable effect on job growth. That would be arguing for a pretty large program” that’s “at least as large as QE2,” or the second round of quantitative easing, he said.

The fiscal cliff in the US pales beside the Spanish one:

Spanish Prime Minister Mariano Rajoy said the country is unable to fund itself at the current cost of borrowing and needs sacrifices such as higher taxes to restore its national standing.

“If we do this we will start to recover confidence as a serious country that does what it says,” Rajoy said today in a speech to members of his People’s Party at Soutomaior Castle in Galicia. “At the moment we can’t finance ourselves at the prices of the market.”

Rajoy was addressing supporters in his home region on the same day that increases to value-added tax take effect. Spanish households already are squeezed by unemployment at close to 25 percent and austerity measures that will be equal to 15 percent of gross domestic product by 2014.

Covered bonds are in the news!

Investors could earn juicy yields buying beaten-up covered bonds secured on Spanish mortgages. The snag is that no one can really tell what would happen in a covered bond default.

It’s hard not to be tempted by the yields on offer on some Spanish mortgage covered bonds, securities that rank alongside senior debt, but have a priority claim on the banks’ real estate loans. Take Bankia, the soon-to-be-recapitalized lender, whose such bonds maturing in May 2018 are yielding almost 9 per cent, according to Thomson Reuters prices, about three percentage points more than Spanish government securities.
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Take Bankia. At the end of the first quarter, each euro of its covered bonds was backed by 2.08 euros worth of residential and commercial real estate loans according to Moody’s. Assume a stressed scenario similar to the Irish housing downturn, as modelled by Fitch Ratings. The collateral would still fetch enough to cover 111 per cent of the debt, even after deducting expected losses from defaults and assuming each loan had to be sold for 70 cents of its nominal value, according to a Breakingviews analysis.

Still, there are reasons to be wary. First, the amount of collateral backing the bonds is not set in stone; it would reduce over time before default, say if a bank issued lots of covered bonds to the European Central Bank. Second, it’s hard to see who would buy the loans in an extreme, systemic crisis. Losses could be even steeper if Spain left the €.

The Canadian preferred share market started the month on a sour note, with PerpetualPremiums off 1bp, FixedResets losing 8bp and DeemedRetractibles down 5bp. Volatility was average, but dominated by Enbridge which announced a new issue today. Volume was extremely low, also dominated by Enbridge.

Bernanke’s Jackson Hole speech carried a warning and a promise:

Second, fiscal policy, at both the federal and state and local levels, has become an important headwind for the pace of economic growth. Notwithstanding some recent improvement in tax revenues, state and local governments still face tight budget situations and continue to cut real spending and employment. Real purchases are also declining at the federal level. Uncertainties about fiscal policy, notably about the resolution of the so-called fiscal cliff and the lifting of the debt ceiling, are probably also restraining activity, although the magnitudes of these effects are hard to judge. It is critical that fiscal policymakers put in place a credible plan that sets the federal budget on a sustainable trajectory in the medium and longer runs. However, policymakers should take care to avoid a sharp near-term fiscal contraction that could endanger the recovery.
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Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

It’s good to know that there is one defender of shareholder rights in this world of cooperative games:

New York-based Mason, which controls just fewer than 20 per cent of Telus’s voting shares, announced Friday that it is calling its own meeting of Telus’s shareholders.

The purpose of the meeting, scheduled for 10 a.m. local time on Oct. 17 in Burnaby, B.C., is to give investors a chance to vote on the hedge fund’s proposal to give voting shareholders a “minimum” premium in the event that Telus completes a share-consolidation transaction.

It’s easy to be a rugged fiscal conservative when times are good. But what will happen in Alberta now?:

Alberta is veering toward a deficit as high as $3-billion this year, more than three times larger than expected, as a slump in oil prices forces the government to find ways to slash spending.

Finance Minister Doug Horner, who delivered the first-quarter fiscal update Thursday, blamed a shaky global economy and said Alberta’s bottom line for 2012-13 has been hammered by weak royalties from bitumen and conventional oil, and low land lease sales to energy producers.

S&P warns that financial repression is not a panacea:

When faced with the painful task of balancing budgets, some governments–we believe–will increasingly be tempted to use instead administrative controls over their monetary systems to lower interest rates below the level at which they would otherwise settle. In other words, they will repress their financial systems to mitigate the premium investors require when inflation expectations become more entrenched. In Standard & Poor’s Ratings Services’ opinion, financial repression creates distortions whose costs exceed the benefits of lower interest rates, until a government’s creditworthiness has become very weak. Under our criteria, this course of action would have mixed effects on sovereign ratings (see “Sovereign Government Rating Methodology And Assumptions,” published June 30, 2011, on RatingsDirect).
High-rated sovereigns likely would suffer because resorting to financial repression would imply an inability or unwillingness to undertake stronger fiscal or structural measures to improve economic dynamics. Sovereigns that we rate lower would benefit from lower interest costs, though this would provide only a small uplift because financial repression would also diminish their economic growth prospects. Both effects would likely be part of broader trends that could have an even more determinate impact on ratings.
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What Is Financial Repression?Financial repression refers to actions that governments and central banks take to depress real interest rates and to increase demand for their own paper. This creates an inefficient allocation of credit, which hinders the financing of economic activity. Ronald McKinnon and Edward Shaw coined the term (2). The work of Carmen Reinhart (3) has partly informed our views on financial repression. Here are some examples.

Directed lending to the government Governments can offer incentives to financial institutions to allocate a portion of their assets to government debt. For example, low or no capital charges against government debt can make it more attractive to hold than other assets for a bank trying to satisfy a capital ratio. Favoring government paper over other paper for central bank operations can also increase its demand. Minimum pension fund allocations to government securities would be another example of directed lending to the government. When these macro prudential rules change, they can change the demand for government paper. When existing balances of pension funds are redirected or when bank capital or liquidity requirements are changed to favor additional holdings of government debt, it can be a sign of worsening conditions for the sovereign

Good news! Increased regulation is having the desired effect!

Under changes made by the Dodd-Frank Act, the annual rate changes for fees paid under Section 6(b) of the Securities Act of 1933 and Sections 13(e) and 14(g) of the Securities Exchange Act of 1934 must take effect on the first day of each fiscal year. Therefore, effective Oct. 1, 2012, the Section 6(b) fee rate applicable to the registration of securities, the Section 13(e) fee rate applicable to the repurchase of securities, and the Section 14(g) fee rates applicable to proxy solicitations and statements in corporate control transactions will increase from $114.60 per million dollars to $136.40 per million dollars. The Section 6(b) rate is also the rate used to calculate the fees payable with the Annual Notice of Securities Sold Pursuant to Rule 24f-2 under the Investment Company Act of 1940.

Harvard has a current scandal regarding possible mass cheating in a class titled “Introduction to Congress. I would have thought that would get them all As!

The Canadian preferred share market closed the month on a happy note, with PerpetualPremiums gaining 4bp, FixedResets winning 8bp and DeemedRetractibles up 2bp. Volatility was minimal. Volume was ugly, pathetic and bad.

Nice piece from the New York Fed by Robert Battalio, Hamid Mehran, and Paul Schultz titled Market Declines: What Is Accomplished by Banning Short-Selling?:

In 2008, U.S. regulators banned the short-selling of financial stocks, fearing that the practice was helping to drive the steep drop in stock prices during the crisis. However, a new look at the effects of such restrictions challenges the notion that short sales exacerbate market downturns in this way. The 2008 ban on short sales failed to slow the decline in the price of financial stocks; in fact, prices fell markedly over the two weeks in which the ban was in effect and stabilized once it was lifted. Similarly, following the downgrade of the U.S. sovereign credit rating in 2011—another notable period of market stress—stocks subject to short-selling restrictions performed worse than stocks free of such restraints.
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Our analysis of the empirical evidence from the United States suggests that the bans had little impact on stock prices. Even with the bans in place, prices continued to fall. At the same time, the bans lowered market liquidity and increased trading costs. On the latter point, we estimate that the ban raised total trading costs in the U.S. equities options market by $500 million in the period between September 18 and October 8, 2008.
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The equity markets provide telling evidence of the costs imposed by short-sale bans. In their multivariate analysis, Boehmer, Jones, and Zhang (2009) find that the 2008 short-sale ban in the United States was associated with a 32 basis point increase, on average, in relative effective bid-ask spreads for the banned stocks. For the 404 financial stocks that were subject to the ban for its duration—September 18 through October 8, 2008—the increase in spreads represents an increase in liquidity costs of more than $600 million.

David Berman comments in the Globe:

All of which suggests that short-sellers are far from being enemies of normal market activity – and banning their activities is unlikely to turn bear markets into bull markets, or even provide much-needed stability when stocks are falling .

One commenter on the Globe piece writes:

There were more sellers than buyers then, so obviously stocks went down. Short sellers would have made it even worse. How dumb does one have to be to miss that obvious fact

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Quite right, short sellers will indeed increase the speed of loss … until the market reaches it clearing price. Short sellers assist the market to reach the clearing price faster.

Sorry this is so late, folks! But better late than never!