Category: Market Action

Interesting article about the R&D Tax Credits:

Open Text Corp. chairman Tom Jenkins, who spent the past year investigating Canada’s R&D spending, said he was stunned at how little effort is spent figuring out what works, and what doesn’t.

That’s true of all government programmes – particularly securities regulation, I might say. If it sounds good, do it! is the slogan, and if you go back to something after five years and find out it’s done nothing – or made matters worse – in order to change the programme … well, that would look like you made a mistake, so don’t check.

Europe is having some success in gaining the ability to manipulate sovereign debt markets:

The European Union reached a deal as part of a short-selling law that will pave the way for an optional ban on naked credit-default swaps on sovereign debt.

Poland, which holds the rotating presidency of the EU, and lawmakers from the European Parliament, reached the accord at a meeting in Brussels, EU spokeswoman Chantal Hughes said.

Under today’s deal, traders may be prevented from buying CDS on government bonds unless they either own the sovereign debt or other assets whose price moves in tandem with it. Nations will have the right to opt out of the measure if they detect signs that it may affect their borrowing costs.
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German Finance Minister Wolfgang Schaeuble and lawmakers in the European Parliament have called for a ban on naked CDS trades on government debt over concerns the practice fueled the euro zone’s debt crisis. Germany already has restrictions on using swaps to bet on sovereign defaults.

Some European governments have also criticized the use of short selling to bet against bank stocks, arguing that the practice has roiled markets. Volatility that sent European bank stocks to two-year lows led France, Spain, Belgium and Italy in August to impose temporary bans on short selling that remain in force.

I’m not sure that this will have any effect – buying protection naked is simply a convenient way to short bonds. Sovereigns are, as a rule, fairly easy to borrow and therefore also fairly easy to short. Forward and Futures contracts are also generally available.

Moody’s cut Spain two notches:

Spain’s credit rating was cut for the third time since June 2010 by Moody’s Investors Service as Europe’s sovereign-debt crisis threatens to engulf the nation.

Moody’s reduced its ranking to its fifth-highest investment grade, cutting it by two levels to A1 from Aa2, with the outlook remaining negative, the rating company said in a statement today. Standard & Poor’s downgraded Spain on Oct. 14 to its fourth-highest investment grade after Fitch Ratings cut it to the same level on Oct. 7, the day it also downgraded Italy.

Spain continues to be vulnerable to market stress and event risk while already moderate growth prospects for the nation have been scaled back further, Moody’s said in the statement.

Tomorrow’s report will be greatly delayed because I’m going to go see Chess again. Yes, I know that when I reviewed it on October 7 I said I didn’t like the production … but six months ago when I heard it was coming to town, I decided that if I was going to wait twenty-five years to see a show, I was damn well going to see it twice.

It was a negative day for the Canadian preferred share market, with PerpetualDiscounts losing 18bp, FixedResets down 11bp and DeemedRetractibles off 6bp. Volatility was mild. Volume was heavy.

Say what you like about the Occupy Wall Street crowd, there can be no doubt about their realism and effectiveness:

About 1,000 people gathered in the heart of Toronto’s financial district beginning at 10 a.m. local time to protest inequality and advocate higher taxes for the wealthy. About an hour later, organizers began moving the demonstration to nearby St. James Park.

“To see people take action like this is amazing,” said Neal Hamell, a student from London, Ontario, who traveled to Toronto today to join the protests. “I’d like to see change. If this doesn’t do anything, then something is wrong with the world.”

I understand that on Wednesday they’re going to bring peace to the Middle East, but have not yet decided what to do in the afternoon.

Sparks are flying over the Tobin Tax:

German Chancellor Angela Merkel criticized governments including President Barack Obama’s administration for refusing to make the financial sector pay for the global financial crisis, and vowed to push for a financial transaction tax until it applies at least in Europe.

“It’s not acceptable that especially those outside the euro region, who are time and again pushing us to take broad- based action to manage the debt crisis, are at the same time flatly refusing to impose a financial transactions tax,” Merkel said at a labor union congress in the city of Karlsruhe yesterday. “I think this is not okay. We want, and we have to make, financial market participants contribute to the costs of crisis management.”

SLF is forecasting a big loss for 11Q3:

Sun Life Financial Inc. (TSX: SLF) (NYSE: SLF) announced preliminary estimates for the third quarter of 2011. The Company expects to report a loss of $621 million for the quarter. On an operating basis, the loss is expected to be $572 million. Results for the third quarter include losses related to substantial declines in both equity markets and interest rate levels, which particularly impacted the individual life and variable annuity businesses in SLF U.S. The third quarter was a period of exceptional market volatility. North American equity markets dropped by 12% – 14%, while yields on fixed income securities fell amid economic uncertainty in the European Union and U.S. monetary policy actions aimed at lowering interest rates on long-term treasuries. In the U.S., treasury rates reached historic lows, with 30-year yields down 146 basis points to 2.91%. Under the Canadian insurance accounting model, the future impact of September 30, 2011, market conditions is reflected in our current period results.

Losses from equity market and interest rate movements were at the high end of the ranges previously disclosed in the Company’s Management’s Discussion and Analysis for the second quarter of 2011. Key drivers which resulted in market impacts at the high end of the estimated ranges included uneven movements across the yield curve and the impact of large, simultaneous movements in both interest rates and equity markets. Updates to the Company’s actuarial methods and assumptions, which generally take place in the third quarter of each year, contributed approximately $200 million to the loss. Sun Life Assurance Company of Canada remains well capitalized, with a Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio that is estimated to be approximately 210% as at September 30, 2011.

The Company currently expenses hedging costs for variable annuities and segregated funds in the period in which they are incurred. In the fourth quarter of 2011, the Company plans to make a method and assumption change related to the valuation of its variable annuity and segregated fund liabilities whereby it will provide for the estimated future lifetime hedging costs of these contracts in its liabilities. This change is expected to result in a higher level of future earnings from in-force contracts than would be the case using the current methodology. The impact of this change on the net income of the Company in the fourth quarter will depend on interest rates and other market conditions as at December 31, 2011, as well as further refinements to the valuation methodology. If this change was made under current market conditions the expected one-time reduction in fourth quarter net income is estimated to be approximately $500 million. The impact of this change on the MCCSR ratio of Sun Life Assurance is expected to be positive, as the increase in variable annuity and segregated fund liabilities will reduce the amount of regulatory required capital for these products.

How ’bout those Germans, eh? Refusing to write Europe a blank cheque!

.Germany said European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit.

German Chancellor Angela Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today. The search for an end to the crisis “surely extends well into next year.”

Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of Europe’s emerging plan to avoid a Greek default, bolster banks and curb contagion. Providing a week to act, they set the Oct. 23 meeting of European leaders in Brussels as the deadline.

Lapdog Carney’s getting a lot of press, shilling for his political master.

Fortis Alberta issued 30-year paper at 4.54%.

It was a mixed day in the Canadian preferred share market, with PerpetualDiscounts winning 23bp, FixedResets up 2bp and DeemedRetractibles losing 13bp. Insurers figured prominently on the wrong side of the performance table, presumably due to Sun Life’s announcement. Volume was above average.

DBRS has released its 11Q3 Review of the SplitShares Market.

The Europeans may be facing reality:

European officials are considering writedowns of as much as 50 percent on Greek bonds, a backstop for banks and continued central bank bond purchases as key planks in a revamped strategy to combat the debt crisis, people familiar with the discussions said.

The Greek bond losses may be accompanied by a pledge to rule out debt restructurings in other countries that received bailouts, such as Portugal, to persuade investors that Europe has mastered the crisis, said the people, who declined to be identified because the negotiations will run for another week.

And you see that? They’ll pledge that this will be absolutely the last time! We’re saved!

However, they have take decisive steps to prove they’re the same old clowns:

The European Union may impose position limits for commodities derivatives and curbs on high- frequency trading as part of plans to overhaul the region’s financial-market rules.

The European Commission, the 27-nation EU’s executive arm, is seeking limits on the number of commodity derivative contracts “any given market members or participants can enter into over a specified period of time, or alternative arrangements” with the same impact, according to copies of proposals set for release on Oct. 20 that were obtained by Bloomberg News.
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Algorithmic and high-frequency trading can give rise to risks such as systems “overreacting” to market events and causing “volatility” according to the draft EU measures. These types of trading can also lend themselves to “certain forms of abusive behavior if misused.”

Planned measures include requiring high-frequency trading firms to prove that they have sufficient risk controls in place and to ensure that clients with direct access to the markets are “properly qualified.”

“Detailed organizational requirements regarding these new forms of trading” will be set out in subsequent EU laws, according to the documents. The EU also plans to list specific examples of trading strategies that should be banned and punished by regulators as market manipulation.

On market abuse, the EU proposals include ensuring that firms found guilty of illegal practices can be fined up to ten percent of annual sales, and that criminal sanctions can be used against traders.

“requiring high-frequency trading firms to prove that they have sufficient risk controls in place”! Hah! There’s a good little avenue for regulatory extortion right there! That is not a thing susceptible to proof – you show me a system that’s 99.999999% effective, then it’s a trivial matter for me to show you the 99.9999995 percentile. However, the demagoguery will serve to distract attention from the mess the politicians have made of sovereign finances, so who cares?

Now that his boss has provided the script, Lapdog Carney is eager to show his loyalty:

The Occupy Wall Street demonstrations and other expressions of frustration with the global economic and financial system highlight the need for policy makers to show they are serious about forcing change, Bank of Canada governor Mark Carney says.

This is all about protests across Canada, intended to raise awareness about what Good People the protesters are. I understand that afterwards they’re going to have a Slut Walk!

It was another strong day for the Canadian preferred share market, with PerpetualDiscounts winning 38bp, FixedResets up 26bp and DeemedRetractibles gaining 27bp. Volatility was good. Volume was a touch on the light side.

Back in 2005-07, Wall Street’s biggest problem was they just couldn’t write enough mortgages. Times have changed, and now their biggest problem is they can’t write enough mortgages (emphasis added):

Wall Street firms are in discussions to pool as much as $1.5 billion of property loans they’ve amassed this year after a slowdown left them unable to stockpile enough mortgages to sell as securities.

Citigroup Inc. (C), Deutsche Bank AG (DBK), Guggenheim Securities LLC, and UBS AG (UBSN) are among lenders in talks to bundle commercial mortgages to be sold as bonds during the fourth quarter, said people familiar with the talks. The firms want to clear their books before year-end and avoid risking drops in value by holding the debt, said the people, who declined to be identified because the plans are preliminary.
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Wall Street has arranged about $25.6 billion in commercial mortgage-backed securities this year, compared with about $11.5 billion in all of 2010, according to data compiled by Bloomberg. Sales plummeted to $3.4 billion in 2009 compared with a record $234 billion in 2007, the data show.

Credit Suisse, which hasn’t offered a deal since sales revived in 2009, informed about 50 employees yesterday that their jobs were likely to be eliminated, said two people with knowledge of the matter, who declined to be identified because the matter isn’t public. The bank is keeping the division that trades the debt, the people said. Jack Grone, a spokesman in New York, for Switzerland’s second-largest bank, declined to comment.

You see that emphasis???? They want to avoid possible drops in value????? And so they want to sell it to their clients????? Betting against their clients????? Isn’t that EVIL?????? How dare they even dream of buying something from one party and selling it to another?????? Occupy Wall Street!

Fitch is warning of rating carnage:

UBS AG (UBSN), Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc had long-term issuer default grades cut by Fitch Ratings, which put more than a dozen other lenders on watch negative as part of a global review.

UBS’s long-term issuer default rating and its “support rating floor” were cut to “A” from “A+” on a “view that the one-notch uplift for close affiliation with the Swiss state is no longer warranted,” the ratings firm said in a statement. Lloyds and RBS were lowered two steps to A from AA- as Fitch said the U.K. is less likely to provide future support.

Fitch also placed viability ratings, and in some cases credit grades, on negative watch for seven global banks including Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) because of new regulations and economic developments. It put European banks such as Credit Agricole SA on watch, based on sovereign debt concerns and said it would review Bank of America Corp. (BAC)’s mortgage-litigation risks.

Placement of the seven global banks — also including Deutsche Bank AG (DBK), Credit Suisse AG, BNP Paribas (BNP) SA, Societe Generale (GLE) SA and Barclays Plc (BARC) — on watch “reflects Fitch’s view that these institutions’ business models are particularly sensitive to the increased challenges the financial markets are facing,” Fitch analysts wrote in a statement. “These challenges result from both economic developments, particularly in the euro area, as well as a myriad of regulatory changes.”

More dissent in the FOMC:

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said the central bank has put its credibility at risk by easing during a year in which inflation rose and unemployment fell.

“The committee’s actions at the last two meetings are inconsistent with a systematic pursuit of its communicated objectives,” Kocherlakota said today in a speech in Sidney, Montana. “It follows that these actions diminish the committee’s credibility and so reduce the effectiveness of future committee actions and communications.”

The speech marked the first time Kocherlakota has spoken about policy since opposing a Federal Open Market Committee decision to sell $400 billion of short-term Treasury securities and replace them with $400 billion of longer-term securities.

S&P downgraded Spain:

Spain had its credit rating cut one level by Standard & Poor’s as rising defaults threaten efforts to stem Europe’s sovereign-debt crisis and limit risks for the region’s banks.

The ranking slid to AA-, with a negative outlook, in the third reduction by S&P in three years. The ratings company announced the change in a statement.

“Despite signs of resilience in economic performance during 2011, we see heightened risks to Spain’s growth prospects,” S&P said in the statement. “The financial profile of the Spanish banking system will, in our opinion, weaken further, with the stock of problematic assets rising further.”

It was a good solid day for the Canadian preferred share market, with PerpetualDiscounts winning 22bp, FixedResets gaining 21bp and DeemedRetractibles up 17bp. Volatility was good, with SLF issues prominent on the plus side, contrary to recent experience. Volume was actually above average! RBC had a good day, shutting out the opposition as far as my block reporting goes.

The Kansas City Fed has released the Fall, 2011 edition of TEN Magazine, with an interesting article on farmland prices:

As crop prices pushed toward record highs in 2011, farmland values have followed. After slowing somewhat during the 2007-09 recession, cropland has surged since 2010, with values jumping 20 percent or more compared to a year earlier. In some cases, fertile land that sold for $6,000 an acre in 2009 is now going for $12,000 an acre.

But, this surge in farmland values has raised some concerns about its sustainability. Recent figures from the U.S. Department of Agriculture show that while farmland values have risen 40 percent since 2004, cash rents
have risen only 17 percent.

and another on the knock-on effects of payday-loan regulation:

However, restricting payday loans could lead to some inadvertent outcomes, says Kelly Edmiston, a senior economist at the Federal Reserve Bank of Kansas City, who recently researched the effects of payday loan restrictions. His research shows consumers without access to legal payday loans, for the most part, don’t use traditional credit as an alternative.

“This suggests these consumers don’t have access to short-term credit of any type or may end up turning to other options that are more costly than payday loans,” he says, citing over-the-limit credit card purchases, bounced checks, pawn brokers and loan sharks as examples.

My latest sure-fire money-making bumper-sticker idea is: “If payday loans are outlawed – only outlaws will make payday loans.” I’ll make a fortune, I tell you, a fortune!

Herman Cain, a front-runner for the Republican nomination is being criticized for not knowing in 2005 that there was a housing bubble. Was it forseeable? Some say yes. Some say no. What bugs me about the US is that they have so many smart guys doing all kinds of really good research on public policy issues – and none of this makes it into the political arena. Canadian political and regulatory decisions are also a pile of hopeless crap, of course, but since the research performed is also a pile of hopeless crap it doesn’t bother me so much.

It was quite a strong day for the Canadian preferred share market,with PerpetualDiscounts winning 61bp, FixedResets up 23bp and DeemedRetractibles gaining 41bp. With numbers like that, there can be no surprise that the Performance Highlights table is lengthy today – but there was one loser! Volume soared, all the way back up to average levels.

PerpetualDiscounts now yield 5.41%, equivalent to 7.03% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 5.0%, so the pre-tax interest equivalent spread (also called the Seniority Spread) is now about 205bp, a sharp plunge from the 240bp reported on October 5, with bond yields up 20bp and interest-equivalent preferred yields down about 15bp.

Yo-ho-ho and a bottle of rum! Buried treasure!:

If you’re looking for a safe place to put your investments, Chad Venzke has a suggestion: Dig a hole in the ground four feet deep, pack gold and silver in a piece of plastic PVC pipe, seal it, and bury it.

The 30-year-old central Wisconsin resident trusts no one but himself to store and protect his gold and silver—not banks, not investment funds, and certainly not the government. It’s precisely because of this suspicion of institutions that he invests in those metals to begin with. In case of emergency, “you always want to have your precious metals within arms reach,” he says.
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From mid-2010 to mid-2011, U.S. investors bought up more than 100 tonnes of physical gold coins and bars, up from 15.2 tonnes in 2007, according to the World Gold Council.
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For those storing gold and silver in or around their home, the most immediate danger isn’t a crisis or a dip in metal prices. It’s theft. The FBI, which tallies the theft of precious metals and jewelry in one category, says $1.6 billion was stolen in 2010, up 51 percent from 2005. Just 4.2 percent of the lost loot was recovered last year.

Metal detectors are a big worry. Basic detectors can find metal on the surface or in the first 12 inches to 14 inches below ground, depending on soil conditions, says Louis Mahnken Jr., a sales representative for Kellyco Metal Detectors in Winter Springs, Fla. That’s why Venzke advises burying it at least four feet deep. There are online debates about the best way to frustrate such thieves, including using scrap metal as decoys or hiding metal by covering it underground with asbestos or mirrors.

Still, this makes more sense to me than some of the other options. I don’t understand some investors, who want gold due to a fear of total collapse of the financial system, then buy an ETF based on futures contracts. There may be a lot of slips between the cup and those lips!

Civil servants working on implementation of the proprietary trading ban have come up with a civil-service solution – concentrate more responsibility at the top than can possibly fit:

Chief executive officers and directors of Wall Street banks would have to personally approve compliance with a ban on proprietary trading under the so-called Volcker rule, according to a draft of the proposal.

Financial regulators would require senior management to establish detailed programs for ensuring their banks are following the new rules, according to the 288-page proposal dated Sept. 30 and labeled “confidential and predecisional.” A copy was obtained by Bloomberg News.

Each bank’s CEO and board would be “responsible for setting an appropriate culture of compliance” and the board would be responsible for ensuring compensation structures are aligned with the rule, according to the draft.
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The draft, which has a 205-page preamble and an 83-page text, is being written by four federal agencies and is scheduled to be released for comment on Oct. 11 by the Federal Deposit Insurance Corp.

Coming up next: a requirement that CEOs publicly attest that every single on of their employees is morally pure and kind to small furry animals; any violations found will result in jail time.

There are also concerns that the Volcker Rule will reduce the profitability of fixed-income trading:

Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under a Volcker rule proposal that may outlaw so-called flow trading, according to brokerage analyst Brad Hintz.

The draft proposal, written by regulators including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corp., forbids market-makers who trade debt securities for customers from amassing positions “in expectation of future price appreciation,” Hintz, of Sanford C. Bernstein & Co., wrote today in a note to investors. “Thus flow trading may be prohibited.” Such a move would cut fixed-income revenue by 25 percent and reduce profit margins by 18 percent, Hintz estimated.
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Fixed-income traders have become more reliant on reaping revenue from price moves in the market because the profit margins from buying and selling to clients, known as the bid- offer spread, have shrunk in recent decades, Hintz wrote.

“As bid-offer pricing narrowed, the Street increased risk- taking when facilitating client trades, which enabled them to respond quickly and profit from changing demand conditions,” Hintz wrote. “By deploying balance sheet to amass inventory ahead of demand, flow trading allowed the firms to partially offset the deteriorating economics in pure execution.”

Less profitability means less capital will be deployed means thinner, more brittle markets. But nobody cares.

The Federal Reserve released, and is seeking comment on, the proposed rule – all 298 pages of it.

The BoC has released a working paper by Bruno Feunou and Roméo Tedongap titled A Stochastic Volatility Model with Conditional Skewness:

We develop a discrete-time affine stochastic volatility model with time-varying conditional skewness (SVS). Importantly, we disentangle the dynamics of conditional volatility and conditional skewness in a coherent way. Our approach allows current asset returns to be asymmetric conditional on current factors and past information, what we term contemporaneous asymmetry. Conditional skewness is an explicit combination of the conditional leverage effect and contemporaneous asymmetry. We derive analytical formulas for various return moments that are used for generalized method of moments estimation. Applying our approach to S&P500 index daily returns and option data, we show that one- and two-factor SVS models provide a better fit for both the historical and the risk-neutral distribution of returns, compared to existing affine generalized autoregressive conditional heteroskedasticity (GARCH) models. Our results are not due to an overparameterization of the model: the one-factor SVS models have the same number of parameters as their one-factor GARCH competitors.

Those able to plough through that will also be interested in Christoersen, P., Heston, S., and Jacobs, K., (2009) The Shape and Term Structure of the Index Option Smirk: Why Multifactor Stochastic Volatility Models Work So Well,” Management Science, 55 (12), 1914{1932.

Everybody should buy equities! Merkel and Sarkozy are going to save the world!

The S&P 500 has rebounded about 8 percent from a 13-month low on Oct. 3 amid optimism that European leaders will succeed in taming the debt crisis and as economic data topped estimates. German Chancellor Angela Merkel and French President Nicolas Sarkozy said yesterday they will deliver a plan to recapitalize European banks and address the Greek debt crisis by the Nov. 3 Group of 20 summit.

Here’s a cheerful story on malware in USAF Predator drones:

The virus, first detected nearly two weeks ago by the military’s Host-Based Security System, has not prevented pilots at Creech Air Force Base in Nevada from flying their missions overseas. Nor have there been any confirmed incidents of classified information being lost or sent to an outside source. But the virus has resisted multiple efforts to remove it from Creech’s computers, network security specialists say. And the infection underscores the ongoing security risks in what has become the U.S. military’s most important weapons system.

“We keep wiping it off, and it keeps coming back,” says a source familiar with the network infection, one of three that told Danger Room about the virus. “We think it’s benign. But we just don’t know.”

The new Nobel laureates in economics are bearish on Europe:

New York University’s Thomas J. Sargent and Princeton University’s Christopher A. Sims shared the 2011 Nobel Prize in Economic Sciences for their work in sorting out cause from effect in the economy and policy.
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The two economists voiced pessimism about the outlook for the 17-member euro zone at a joint press conference at Princeton University in New Jersey.

Sims called the foundation of the monetary regime “precarious” because of the lack of a unified fiscal authority that can issue bonds and raise taxes. The departure of one or more nations from the union would not resolve that, he added.

“The prospects for the euro are dim” if the region can’t find a way to share its fiscal burden, Sims said.

Sargent likened the situation facing the euro zone to that which the U.S. confronted early in its history, when the 13 states were each running their own economic policies and issuing their own debt. “The difficult thing is the politics,” he said.

Politics are also the trouble now in the U.S. as well, Sims suggested. There’s broad agreement among economists on what strategy the U.S. should follow, he said: adopt a plan to deal with the budget deficit while avoiding fiscal stringency in the short-run and maintaining an accommodative monetary policy.

The FDIC is rebuilding its reserves:

U.S. bank failures through 2015 will drain $19 billion from the Federal Deposit Insurance Corp. fund for covering losses from shutdowns, the agency said in an update of its reserve ratio projections.
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The fund, pushed into deficit by the wave of failures stemming from the 2008 credit crisis, turned positive as of June 30 after seven consecutive quarters of negative balances.
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Under current projections, FDIC assessment rates will boost the insurance fund to 1.15 percent of insured deposits in 2018, according to the agency’s statement. The regulator is required by the Dodd-Frank Act to increase the ratio to 1.35 percent by Sept. 30, 2020.

Today’s report shows that the FDIC may have gone farther than it needed to in increasing assessments, according to James Chessen, chief economist for the American Bankers Association.

“The FDIC had set aside $17.7 billion for possible bank failures losses at the start of 2011, twice what the actual losses are likely to be this year,” Chessen said in a statement. “Banks are paying $13.5 billion in yearly premiums to the FDIC, which is far in excess of the yearly costs expected by the FDIC over the next several years.”

Looks pretty good compared to CDIC funding:

The target range for the amount of ex ante funding is currently between 40 and 50 basis points of insured deposits—which translates into a range of between $2,410.0 million to $3,012.5 million based on insured deposits as at April 30, 2010. The reported amount as at March 31, 2011, was $2,213.5 million, representing 37 basis points of insured deposits (March 31, 2010: $1,958.1 million representing 33 basis points of insured deposits at April 30, 2009).

… especially since the size of the Canadian banking system is so much larger relative to GDP than is the case in the States – or most other places. The Ministry of Finance has been drinking too much of its ‘strong regulatory framework’ Kool-Aid and some day – hopefully not in my lifetime, but that’s just pious hope – the lack of disaster preparation is going to bite all of us in the ass.

DBRS has released its Unified Interest Rate Model for U.S. RMBS Transactions, which looks most interesting; unfortunately I have not yet had time to give it the attention it deserves.

FCS.PR.B has been confirmed at Pfd-3(low) by DBRS:

DBRS has today confirmed the rating of Pfd-3 (low) on the 6.25% Preferred Securities (the Preferred Securities) issued by Faircourt Split Trust (The Trust).
…
From October 2010 to August 2011, the performance of the Trust was fairly stable, with downside protection fluctuating between 32% and 40%. The Trust’s net asset value (NAV) experienced downward pressure in September 2011 and the current downside protection available to holders of the Preferred Securities was approximately 27% (as of September 30, 2011). Today’s rating confirmation of the Preferred Securities is based on (1) the downside protection available; (2) testing of NAV floors for targeted and special distributions; and (3) the diversification of the underlying assets included in the Portfolio.

The main constraints to the rating are (1) The Trust’s dependence on the value and dividend policies of the securities in the investment portfolio and (2) the reliance on the manager to generate a high yield on the investment portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

The 6.25% Preferred Securities are scheduled to mature on December 31, 2014.

It was a strong day for the Canadian preferred share market, with PerpetualDiscounts winning 24bp, FixedResets gaining 3bp and DeemedRetractibles up 10bp. Volatility was good, mostly towards the upside. Volume was pathetic. Doesn’t anybody trade anymore?

Even the Occupy Wall Street clowns will admit some benefit from business and globalization:

Liberatos Pizza, a few blocks south, has been taking orders from supporters around the world to have its $15 “OccuPie” delivered to the protesters. Owner Telly Liberatos said since Sept. 18 he’s sold hundreds of the 18-inch pies, lined with pepperoni around the perimeter and through the diameter.

“I have nothing to do with the protest,” Liberatos said. “I don’t take sides. It was a very slow summer. I’m trying to run my business.”

The September jobs number was not a disaster:

American employers added more workers in September than forecast and figures for the prior two months were revised higher, easing concern the economy is tipping into another recession.

Payrolls rose by 103,000 after a 57,000 gain in August, the Labor Department said today in Washington. The median forecast in a Bloomberg News survey of economists called for an increase of 60,000. The figures reflected the end of a strike at Verizon Communications Inc. (VZ) that brought 45,000 people back to work. The jobless rate held at 9.1 percent.

Treasuries fell as the report added to evidence the world’s largest economy is maintaining its expansion. The pace of job growth is still too slow to push down the unemployment rate as companies hold back on hiring amid the debt crisis in Europe, political gridlock in the U.S. and a decline in stock prices.

The BoC has released a discussion paper by Wei Dong and Deokwoo Nam titled Exchange Rates and Individual Good’s Price Misalignment: Some Preliminary Evidence of Long-Horizon Predictability:

When prices are sticky, movements in the nominal exchange rate have a direct impact on international relative prices. A relative price misalignment would trigger an adjustment in consumption and employment, and may help to predict future movements in the exchange rate. Although purchasing-power-parity fundamentals, in general, have only weak predictability, currency misalignment may be indicated by price differentials for some goods, which could then have predictive power for subsequent re-evaluation of the nominal exchange rate. The authors collect good-level price data to construct deviations from the law of one price and examine the resulting price-misalignment model’s predictive power for the nominal exchange rates between the U.S. dollar and two other currencies: the Japanese yen and the U.K. pound. To account for small-sample bias and data-mining issues, inference is drawn from bootstrap distributions and tests of superior predictive ability (SPA) are performed. The slope coefficients and R-squares increase with the forecast horizon for the bilateral exchange rates between the U.S. dollar and the Japanese yen and the U.S. dollar and the U.K. pound. The out-of-sample SPA tests suggest that the authors’ price-misalignment model outperforms random walks either with or without drift for the U.S. dollar vis-à-vis the Japanese yen at the 5 per cent level of significance over long horizons.

Fitch cut Italy by a notch:

Italy had its foreign and local currency long-term issuer default ratings cut to ‘A+’ from ’AA-’ by Fitch Ratings, which cited concerns about the nation’s vulnerability to the “Euro zone crisis.”

The outlook is negative.

Fitch cut Spain two notches:

Spain had its credit rating cut two levels by Fitch Ratings, which cited the “intensification” of the euro crisis, slower Spanish growth and regional finances as risks to the nation’s debt outlook.

Fitch cut its rating to AA- from AA+, the company said in a statement today from London. The outlook is negative. Fitch cited similar reasons for also downgrading Italy one level to A+, while maintaining Portugal at BBB-, saying it would complete a review of that ranking in the fourth quarter.

Spain’s rating, which was AAA until 2010, has now been lowered twice by Fitch as the deepest austerity measures in three decades fail to convince investors the nation can stem the surge in its debt burden. Moody’s Investors Service also warned on Oct. 4 “all but the strongest euro-area sovereigns” are likely to see further downgrades, as it cut Italy’s rating for the first time in almost two decades.

Some investment funds are doing OK:

Princeton University’s investments returned 22 percent in the past fiscal year, matching the performance of Yale University, the top-performing Ivy League school so far this year.

The endowment was valued at $17.1 billion as of June 30, the Princeton, New Jersey, school said today on its website.
…
The fund at Yale, in New Haven, Connecticut, gained 22 percent, while investments at Harvard University, the world’s richest school, increased 21 percent.

Over the past decade, Princeton’s investments generated an average annual gain of 9.8 percent, compared with the 9.3 percent increase of Stanford University and the 9.4 percent return of Harvard.

There’s some action in the Maple / TMX deal:

There’s finally some activity around Maple Group Acquisition Corp.’s bid for TMX Group.

After near silence for the past few months, Maple announced on Friday that it has submitted applications for review to four provincial regulators (Ontario, Quebec, British Columbia and Alberta) and that it expects these bodies to hold public hearings in December, with decisions released in early 2012. If that time line holds, the rulings will come about a year after London Stock Exchange Group first announced its deal with TMX.

Spin it out, boys!

There’s some weeping over the turn-out in the Ontario election:

Although it could be weeks before elections officials provide a the final tally, back-of-envelope calculations suggest the turnout in Thursday’s Ontario provincial election may have dropped to an unprecedented and dispiriting low.

Of the roughly 8.5 million citizens who were eligible to vote, about 4.1 million, or 48 per cent, appear to have cast ballots. This despite fine weather across the province.

Here’s a bold solution: give us some leaders who aren’t morons and some policies that aren’t nonsense. Then it might be worth voting. However, we in Ontario now have the best possible result: legislative log-jam, no more Big Bold (albeit moronic) Ideas … for a while, anyway.

This post was delayed because I went to see Chess, the Musical last night. Twenty-five years I’ve been waiting for that show to come to Toronto. Twenty-five years! Loved the music, loved the book, hated the production. The costume designer was inspired by a low-budget Gay Pride parade and to see the Arbiter prancing around topless like he was the Queen of May was more disconcerting than interesting. Having the chorus play instruments themselves was just an annoying affectation. The show’s blockbuster number, “One Night in Bangkok”, was sung without zip and the staging … well, somebody should whisper in the director’s ear that the overwhelming majority of theatre-goers do not find homo-erotica particularly erotic. I certainly don’t. Sorry, buddy, but the queens you used did not excite me. Thumbs down. Well … perhaps in another twenty-five years, there’ll be a production in Toronto worth seeing.

It was a quiet day for the Canadian preferred share market, with PerpetualDiscounts up 6bp, FixedResets down 5bp and DeemedRetractibles gaining 8bp. Volatility was good. Volume was very low.

More worries!

Canadian pension funds saw their funding problems grow dramatically in the third quarter as bond yields tumbled while stock markets went into decline.

Pension consulting firm Mercer said its pension health index slipped to 60 per cent funding at the end of September from 71 per cent at the end of June and 75 per cent at the end of March. The index measures the change in funded status of a typical pension plan with average asset allocations.
…
[Mercer’s pension guy] Mr. [Scott] Clausen said the decrease in bond yields contributed to about 8 percentage points of the drop in the pension health index in the third quarter, while declining investment returns accounted for the other 3 percentage point decline.

There’s a big round of quantitative easing in the UK:

Bank of England Governor Mervyn King has lost faith in European governments’ ability to resolve the region’s debt crisis.

The central bank yesterday announced its biggest stimulus since the depths of the recession, citing “vulnerabilities” related to the euro-area turmoil. King said the move, the first loosening of U.K. monetary policy since 2009, was a response to what may be the worst financial crisis ever.
…
King’s refusal to wait for European governments signals determination to shield the U.K. from a crisis that threatens to tip Britain’s biggest trading partner into recession. It also shows concern that failure to protect bank funding markets risks recreating conditions that led to the collapse of Lehman Brothers Holdings Inc. three years ago.

The U.K. central bank, which left its benchmark interest rate at a record-low 0.5 percent, raised the ceiling for so- called quantitative easing to 275 billion pounds ($421 billion) from 200 billion pounds. That’s the biggest expansion since the first round of stimulus in March 2009. Only 11 of 32 economists in a Bloomberg News survey predicted the increase.

DBRS confirmed BBD at Pfd-4.

S&P changed the outlook on TD from positive to stable:

• We are revising the outlook on Toronto-Dominion Bank (TD Bank) to stable
  from positive based on our expectations that a weak Canadian economic recovery will provide more challenging operating conditions than had previously been expected.

• TD Bank continues to experience consistent and strong core operating performance from domestic operations with a growing contribution from its U.S. retail bank.
• We are affirming our ‘AA-/A-1+’ counterparty credit ratings on TD Bank
  and related entities.

S&P changed the outlook on RY from positive to stable:

• We are revising the outlook on Royal Bank of Canada to stable from
  positive for a potential upgrade based on our expectations that a weaker Canadian economic recovery will provide more challenging operating conditions than had previously been expected.

• We are affirming our ‘AA-/A-1+’ counterparty credit ratings on RBC and related entities.

Either nothing happened today, or I was busy. One or the other.

Well, I noticed one thing:

The University of Toronto is the lone Canadian school to crack the top 20 in the Times Higher Education World University Rankings, which many consider higher education’s most influential global rating system.
…
Two other flagship Canadian schools made noteworthy gains, with the University of British Columbia jumping to 22nd place from 30th, and McGill University rising to 28th from 35th.
…
McMaster University (65), the University of Alberta (100) and the University of Montreal (104) all improved their standing, while the University of Victoria slipped from 130th to 177th after entering the top 200 for the first time last year.

Queen’s University, which had refused to submit data in past years, chose to participate and placed 173rd. The University of Ottawa was Canada’s other new entrant, at 185th. Dalhousie University and Simon Fraser University both fell out of the top 200 after coming in 193rd and 199th respectively last year.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 13bp, FixedResets winning 28bp, while DeemedRetractibles were down 11bp – the last being heavily influenced by SLF issues which dominated the downside of the Performance Table. Volatility was quite good, but volume continued to be below average.

PerpetualDiscounts now yield 5.53%, equivalent to 7.19% interest at the standard equivalency factor of 1.3x. Long Corporates continue to yield about 4.8% (maybe a little under) so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 240bp, a sharp rise from the 215bp recorded on September 30, due entirely to weakness in PerpetualDiscounts.

Shades of ’08!

The cost to protect the debt of Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS) surged to the highest levels since the weeks after Lehman Brothers Holdings Inc.’s bankruptcy as concern intensified that Europe’s debt crisis will infect the global banking system.

Contracts on Morgan Stanley, the New York-based owner of the world’s largest retail brokerage, soared 92 basis points to a mid-price of 583 basis points as of 4:30 p.m. in New York, the highest since October 2008, according to London-based data provider CMA. Those on Goldman Sachs increased 65 basis points to a mid-price of 395.

Traders pushed the cost of protecting banks and U.S. companies higher after German Finance Minister Wolfgang Schaeuble opposed moves to increase the scale of the euro rescue fund, complicating efforts to prevent a Greek default. Swaps on Bank of America Corp. (BAC) jumped to a record and a measure of U.S. corporate credit risk rose to the most since May 2009.

Knock-on effects are everywhere!

Real estate investment trusts that buy U.S. mortgage debt tumbled to the steepest losses since December 2008, on concern that their main source of financing will be roiled by European bank woes.

Mortgage REITs including Annaly Capital Management Inc. (NLY) and American Capital Agency Corp. (AGNC) dropped as much as 6 percent today, according to a Bloomberg index tracking 33 shares. Losses over the past two days reached as much as 11.1 percent, the biggest fall in almost three years. The shares pared today’s declines to 2.6 percent at 1:50 p.m. in New York.

France and Belgium pledged today to support Dexia SA after the bank’s board met to discuss a possible break-up as Europe’s sovereign-debt crisis reduced its ability to obtain funding. While the repurchase-agreement, or repo, market for government- backed mortgage bonds that many REITS rely on for funding is in “good” shape, it may face pressure if European banks need to retrench, American Capital President Gary Kain said.

Moody’s slashed Italy’s rating three notches:

Italy’s credit rating was cut by Moody’s Investors Service for the first time in almost two decades on concern that Prime Minister Silvio Berlusconi’s government will struggle to reduce the region’s second-largest debt amid chronically weak growth.

Moody’s lowered Italy’s rating three levels to A2 from Aa2, with a negative outlook, the New York-based company said in a statement yesterday. The action comes after Standard & Poor’s downgraded Italy on Sept. 20 for the first time in five years. Italy was last cut by Moody’s in May 1993.

Italy gave final approval last month to a 54 billion-euro ($72 billion) austerity plan aimed at balancing the budget in 2013 that convinced the European Central Bank to buy the nation’s bonds. While the purchases initially brought down bond yields by about 100 basis points, Italy’s borrowing costs remain near record highs because of euro-area debt crisis contagion.

DBRS confirmed ALA.PR.A at Pfd-3:

DBRS has today confirmed the rating on the Medium-Term Notes (MTNs) and Preferred Shares – Cumulative of AltaGas Ltd. (AltaGas or the Company) at BBB and Pfd-3, respectively, both 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 relative business risk; (2) proactive mitigation of cost overrun risks on its major growth projects; and (3) a prudent financing plan for the 2011 to 2014 growth phase supported by a strong liquidity position. However, DBRS expects some deterioration in the Company’s key credit metrics during the above-noted construction period, with recovery toward the end of the period as expected cash shortfalls are to be primarily funded by debt.

First National, proud issuer of FN.PR.A, has a timing problem:

First National Financial Corporation (TSX: FN) (the “Company” or “FNFC”) today announced its revenue and income before income taxes for the quarter ended September 30, 2011 will both be decreased by approximately $18 million due to realized and unrealized losses on financial instruments. The losses pertain to instruments used for interest rate hedging purposes on mortgages pending securitization. From an economic perspective, to the extent the value of these hedges was unfavourable at September 30, 2011, the value of the hedged mortgages has increased; however, unlike the hedge losses that have been accounted for fully in the third quarter of 2011, the increased value of the mortgages will be recognized as earned over the five- and 10-year terms of the mortgages.

DBRS is unconcerned:

DBRS has today reviewed the announcement by First National Financial Corporation (FNF; rated BBB and Pfd-3 with Stable trends) that third-quarter revenue and pre-tax income would be reduced by approximately $18 million as a result of realized and unrealized losses on financial instruments. There are no rating implications at this time.

While the reduction in pre-tax income is material (it suggests Q3 2011 earnings will be approximately one-third of Q2 2011 earnings), DBRS views the reduction as an accounting timing issue only. Specifically, the value of the vehicle used to hedge interest-rate risk declined (which under International Financial Reporting Standards (IFRS) is reported in the current period), offset by an equivalent increase in the value of the underlying mortgage assets (which will be recognized in earnings over the life of the asset).

The unusually large size of the unrealized loss is related to the reduction in long-term interest rates during the quarter. There are no regulatory capital implications because FNF is not regulated by the Office of the Superintendent of Financial Institutions (OSFI).

Thomson Reuters, proud issuer of TRI.PR.B is locking in current rates for a while:

Standard & Poor’s Ratings Services today said it assigned its ‘A-‘ debt rating to New York-based information solutions provider Thomson Reuters Corp.’s US$350 million 3.95% senior unsecured notes due 2021. We understand that Thomson Reuters will use the proceeds to repay borrowings under its commercial paper program.

It was a very nasty day for the Canadian preferred share market, with PerpetualDiscounts losing 104bp, FixedResets down 59bp and DeemedRetractibles off a mere 53bp. Naturally, the volatility table is quite long today! On a brighter note, one of these entries was a gain! Volume improved from “practically non-existent” to “lousy”.