Category: Market Action

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”.

There is word of a crackdown on “algorithmic” traders:

Algorithmic traders and quant funds are under close scrutiny from a U.S. Securities and Exchange Commission enforcement team responsible for policing hedge funds, the unit’s co-chief said at securities law forum.

The SEC is “very much focused” on possible misconduct by traders who primarily use computer models to execute investment strategies, and more cases in those areas are likely, Bruce Karpati said today during a Practising Law Institute panel discussion in New York. Investigators are zeroing in on firms with “aberrational performance,” he said, without giving details on practices that are under scrutiny.

The February case in which Karpati’s asset-management team accused Axa Rosenberg Group LLC of causing $217 million in customer losses by concealing a coding error was “wake-up a call for all quant managers” to be fully forthcoming about the risks of their strategies, he said at the time. Axa paid $242 million to resolve the claims.

But the quoted example is about quantitative analysis:

In late June 2009, a BRRC employee discovered an error in the Model’s computer code that had been introduced in 2007 and that effectively eliminated one of the key components in the Model for controlling for certain types of risk. This employee later discussed his finding in a meeting with Rosenberg, BRRC’s Director, and a small group of BRRC employees who were working under Rosenberg’s guidance on an enhancement to the Model. Rosenberg directed the others to keep quiet about the error and to not inform others about it, and he directed that the error not be fixed at that time. Before and after discovery of the error, ARIM’s clients were expressing dissatisfaction with their portfolios’ underperformance. During the several months that Rosenberg and the BRRC employees concealed the error, ARG, ARIM, and BRRC failed to disclose the error, misrepresented the Model’s ability to control risk, and ascribed underperformance to market volatility and factors having nothing to do with the error. Due to Rosenberg’s directive, ARG’s Global CEO did not learn of the error as soon as he should have. The error was disclosed to the Global CEO in November 2009. The error impacted more than 600 client portfolios and caused approximately $217 million in losses. ARG disclosed the error to clients on April 15, 2010.

So it’s not all that clear whether the crackdown is on algorithms or quantitative analysis. Reporters generally don’t know the difference.

Carney has assiduously promoted the government line for the past three years – maybe he’ll be rewarded:

The Harper government is pushing for the Bank of Canada Governor to be the next chief of the Financial Stability Board (FSB), the group charged with co-ordinating the overhaul of international banking regulations on behalf of the Group of 20 nations.

It was a grisly day for the Canadian preferred share market, with PerpetualDiscounts off 15bp, FixedResets down 14bp and DeemedRetractibles losing 48bp. Volatility was relatively high, with a big tilt towards the downside. Volume was anemic – more like Christmas than the start of a new quarter.

Hurray for Solar Power!

The 15 mile-per-hour winds that buffeted northern Germany on July 24 caused the nation’s 21,600 windmills to generate so much power that utilities such as EON AG and RWE AG (RWE) had to pay consumers to take it off the grid.

Rather than an anomaly, the event marked the 31st hour this year when power companies lost money on their electricity in the intraday market because of a torrent of supply from wind and solar parks. The phenomenon was unheard of five years ago.

With Europe’s wind and solar farms set to triple by 2020, utilities investing in new coal and gas-fired power stations no longer face stable returns. As more renewables come on line, a gas plant owned by RWE or EON that may cost $1 billion to build will be stopped more often from running at full capacity. It may only pay for itself on days like Jan. 31, when clouds and still weather pushed an hour of power on the same-day market above 162 ($220) euros a megawatt-hour after dusk, in peak demand time.

Logically, increased volatility in the price of spot power will increase the price of spot power, as investors will seek a greater return on capital for their investment in power plants. Logically as well, volatile sources of power should be at the mercy of spot markets, while reliable sources of power get longer term assured contracts. Logic, however, is neither green nor precious, so this won’t happen.

The Canadian preferred share market closed the month on a mixed note, with PerpetualDiscounts losing 10bp, FixedResets down 2bp and DeemedRetractibles gaining 11bp. Volatility was good. Volume was enlivened by the ENB.PR.B new issue but was otherwise very light.

PerpetualDiscounts now yield 5.35%, equivalent to 6.96% interest at the standard conversion factor of 1.3x. Long corporates now yield about 4.8%, so the pre-tax interest equivalent spread is now about 215bp, basically unchanged from the September 21 figure.

I’m speechless:

Stock traders are more egocentric and prone to lying than psychopaths, according to new research submitted to the Journal of Economic Psychology.

But psychopaths are better at getting what they want.

“Traders go out of their way to destroy the competition, even if they don’t get any economic benefit as a result,” says Thomas Noll, who conducted the research as part of his executive MBA at the University of St. Gallen in Switzerland.
…
Faced with a hypothetical choice between co-operating for everyone’s benefit and getting a predictable reward or cheating and possibly getting more for themselves, traders were more likely than psychopaths to cheat, said Noll.

As a result, psychopaths, who broke the rules occasionally, won the most, ordinary people, who almost always played by the rules and who co-operated, came in second, while traders, who didn’t care how their actions affected anyone else, cheated the most and won the least.

The story’s all over the ‘Net. I believe the source article, in German, is this one. The last paragraph of the Star article quoted above makes it sound like the game chosen was some version of Prisoners’ Dilemma. If that’s the case, and assuming that the game was set up like most others of that ilk, it seems unfair to refer to what is normally called “betrayal” as cheating – it’s a strategy, with some word or other attached to it, that’s all. Additionally, and again assuming that it’s a relatively normal PD-type game, one could just as easily call the betrayal/cheating choice one of risk minimization, in which case we’re no longer surprised that traders made the least amount of money, are we?

Another one bites the dust!

New Zealand lost its AAA grades on local-currency debt at Fitch Ratings and Standard & Poor’s, which both cited concerns about the nation’s fiscal burden. Benchmark government yields rose the most this year.

The outlook is stable after the long-term local-currency rating was reduced one level to AA+ and the foreign-currency rating was cut to AA from AA+, S&P said in a statement, matching actions announced yesterday by Fitch.
…
New Zealand’s net external debt of 83 percent of gross domestic product in U.S. dollar terms at the end of last year compares with the median of 10 percent for AA-rated nations, Fitch said. The current-account deficit, the widest measure of trade because it includes services and investment income, is likely to widen to 4.9 percent of GDP in 2012 and to 5.5 percent the following year, Fitch said.

“New Zealand’s high level of net external debt is an outlier among rated peers — a key vulnerability that is likely to persist as the current account deficit is projected to widen again,” Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch, said in the statement. Even so, the country “remains well-placed among the world’s highly-rated sovereign credits.”

The Canadian preferred share market was down today, with PerpetualDiscounts losing 21bp, FixedResets off 8bp andDeemedRetractibles down 1bp. Volatility was good. Volume was very low.

Three cheers, everybody! We’re saved! Spain and Italy have saved the world!

Italian and Spanish financial market regulators extended temporary bans on short selling of financial shares that were introduced last month in a bid to stem market volatility.

The European Securities and Markets Authority announced the extension by the two countries in an e-mailed statement. The Spanish ban will remain “until the market conditions allow it” to be lifted, the country’s financial regulator said in an e- mailed statement. Italy’s restriction, and another enacted by France in August, will both last until Nov. 11.

Amazingly, Europe is still in disarray:

The European Commission is resisting a push to impose bigger writedowns on banks’ holdings of Greek government debt than those agreed on at a July 21 summit, a European official said.

The commission, the European Union’s executive body, opposes ideas being floated by some government officials to get banks to accept bigger so-called haircuts and doesn’t want to have talks about any such attempt, the official said on condition of anonymity because the deliberations are private. Germany and the Netherlands are leading a drive by as many as seven euro-area countries for more private-sector involvement in the second Greek package, the Financial Times reported today.

Follow the leader, part 1:

Research In Motion Ltd. (RIMM), the maker of the BlackBerry smartphone struggling to revive falling sales, surged as much as 7.4 percent on speculation that activist investor Carl Icahn is buying a stake in the company.

Follow the leader, part 2:

Warren Buffett’s determination that Berkshire Hathaway Inc. (BRK/A) shares are cheap enough to buy back may mean the Standard & Poor’s 500 Index is also a bargain.

Some Wisconsin school districts bought an investment that went down – even after they leveraged their investment by nearly 6x! Fear not, gentle readers, the SEC is Putting Things Right:

According to the SEC’s order instituting administrative proceedings, RBC Capital marketed and sold to trusts created by the school districts $200 million of credit-linked notes that were tied to the performance of synthetic collateralized debt obligations (CDOs). The school districts contributed $37.3 million of district funds to the investments with the remainder of the investment coming from funds borrowed by the trusts. The sales took place despite significant concerns within RBC Capital about the suitability of the product for municipalities like the school districts. Additionally, RBC Capital’s marketing materials failed to adequately explain the risks associated with the investments.

RBC Capital agreed to settle the SEC’s charges by paying a total of $30.4 million that will be distributed in varying amounts to the school districts through a Fair Fund.

The SEC also wants to ensure that nasty old volatility isn’t too volatile:

The Securities and Exchange Commission began an overhaul of rules adopted after the Crash of 1987 designed to shut down the stock market during periods of volatility, proposing that curbs be triggered when the Standard & Poor’s 500 Index falls 7 percent.

The changes would switch the index used for the circuit breakers to the S&P 500 from the Dow Jones Industrial Average, according to proposals submitted by U.S. equities exchanges and the Financial Industry Regulatory Authority. The duration of the halts, which also pause trading in stock futures, would be shortened, according to a summary of the proposals from the SEC.

S&P 500 declines of 7 percent, 13 percent and 20 percent from the prior day’s close would set off halts across all markets, narrowing the current thresholds of 10 percent, 20 percent and 30 percent, according to the SEC.

Regulators are sticking to their guns on capital surcharges:

Global regulators may make adjustments to how they calculate capital surcharges for the world’s biggest banks after largely agreeing to maintain plans for levies of as much as 2.5 percent at meetings today in Basel, Switzerland, according to three people familiar with the talks.

The Basel Committee on Banking Supervision today discussed how to respond to criticisms from banks including BNP Paribas SA and Citigroup Inc. (C) that the measures are flawed and may stymie the financial system’s recovery, according to the people, who couldn’t be identified because the discussions are private.

Regulators at the meeting acknowledged that some complaints made by lenders on the method for calculating the surcharges may be partly valid and require further study, two of the people said. Surcharges would be applied to as many as 28 banks if the current proposals were already in place, the Basel committee has said.
…
Under the surcharge proposals, lenders whose failure could send shock waves throughout the financial system would face stricter minimum capital requirements of 1 to 2.5 percentage points of core reserves. This would be on top of an already- announced tripling in the amount of core capital that all internationally active banks must hold.

The levies would be calculated using a methodology based on banks’ size, interconnectedness, complexity, global reach, and the ability of other firms to take over their activities if they fail.

Readers will remember that I favour capital surcharges, but not one that is directed solely at a defined list of Globally Significant Financial Institutions. Apply it to all banks on a progressive basis is my position.

Greece managed to avert immediate disaster:

Greek Prime Minister George Papandreou won parliamentary backing for a property tax to meet deficit-reduction targets required to avoid default.

Papandreou’s Socialist Pasok party won the vote in Athens late today by 155 to 142 after Finance Minister Evangelos Venizelos told Greeks they face economic collapse if they don’t plug a budget gap that is exceeding the target set in a bailout, putting an 8 billion-euro ($11 billion) aid payment due next month at risk.
…
The property levy, to be collected via electricity bills, will provide an annual yield of 1.1 percent of GDP.

Venizelos also announced an additional 20 percent wage cut, on top of 15 percent for the civil service and 25 percent in the wider public sector. Pensions are being reduced 4 percent on average, in addition to previous cuts of 10 percent. A lowering of the tax-free threshold to 5,000 euros will mean higher taxes for all Greeks.

More than 74 percent of 1,002 Greeks polled by Rass for To Paron newspaper opposed the property tax. The poll also showed that 59 percent believed Papandreou’s government won’t be able to avert a default. The survey had a 3.1 percentage point margin of error. Papandreou’s government trails the opposition party in all polls.

As far as I can tell, the official position right now is that Greece won’t default as long as investors take sufficient completely voluntary write-downs:

Financial stocks pared gains as the Financial Times reported that some euro-area countries are demanding private creditors take bigger writedowns on their Greek bond holdings.
…
The Financial Times reported that as many as seven of the 17 nations using the euro believe private creditors should absorb bigger losses on their Greek bond holdings, a division that may threaten an agreement reached with private investors in July. The paper cited unnamed senior European officials.

Richard Fisher of the Dallas Fed gave a speech explaining his dissent on Operation Twist:

In the interest of time, I will not dwell on the decision to reinvest proceeds in the agency and mortgage-backed markets. Since the beginning of this year, the spreads between mortgage-backs and Treasuries have been widening and have accelerated, especially lately, to levels last seen in early 2009. This decision, while not expected by the markets, was acceptable for me as a tactical way to provide limited assistance to the mortgage market at little cost. The decision to embark on an “Operation Twist,” however, was a strategic decision where I did not feel the benefits outweighed what I perceived to be the costs. So, I will dwell on that difficult decision.
…
The FOMC seeks to drive down the cost of capital for businesses in order to induce them to invest more in expansion and create more jobs. Implicitly, the program may also lift short-term rates, albeit mildly given the expectation that rates at the short end will remain at “exceptionally low levels” through mid-2013, perhaps providing some relief to money market funds that, in searching for yields sufficient to cover their costs, have been invested in foreign bank paper now considered by many analysts to be somewhat toxic.
…
The Dallas Fed tracks 178 items in the consumer basket through a constantly updated series dating back to 1977. Using this data, we calculate what we call a “trimmed mean” analysis of personal consumption expenditures (PCE) in order to ascertain the level of inflation affecting real consumers. This is my preferred compass for charting the direction of inflation. It presently suggests that headline inflation will decline from its current level—just shy of 3 percent as measured by the PCE and 3.75 percent as measured by the Consumer Price Index—to 2 percent, a level that the majority of the committee believes a tolerable target. Thus, while I remain on constant watch for signs of inflationary impulses, I believe the most urgent issue is job creation and the reduction of the scourge of unemployment.

I believe, however, that there is significant risk that the policies recently undertaken by the FOMC are likely to prove ineffective and might well be working against job creation.
…
Before every FOMC meeting, I survey a select group of 30 or so private business and banking operators, imparting no information about monetary policy but listening carefully to their perspectives on developments in the economy as seen at the ground level. For weeks leading up to the meeting, there was speculation in the financial markets and in the press that an Operation Twist was being contemplated. I received an earful of opinions on these rumors. What I gleaned from those conversations was as follows:

Embarking on an Operation Twist would provide an even greater incentive for the average citizen with savings to further hoard those savings for fear that the FOMC would be signaling the economy is in worse shape than they thought. They might view an Operation Twist as setting the stage for a new round of monetary accommodation―a QE3, if you will. Such a program was considered redundant by business operators given their surplus of undeployed cash holdings and bankers’ already plentiful excess reserves. In addition, such a program might frighten consumers by further driving down the yields they earn on their savings and/or lead to long-term inflation that would erode the value of those savings;

The earning power of banks, both large and small, would come under additional pressure by suppressing the spread between what they can earn by lending at longer-term tenors and what they pay on the shorter-term deposits they take in;
Pension funds would have to reassess their potential returns, with the consequence that public and private direct-benefit plans would have to set aside greater reserves that might otherwise have gone to investments stimulating job creation;
Expanding the holdings of the Fed’s book of longer-term debt would likely compound the complexity of future policy decisions. Perversely, the stronger the economy, the greater the losses the Fed would incur as interest rates rise in response and the prices of those longer-term holdings depreciate. The political incentive to hold rates down might then become stronger precisely when we want to initiate tighter monetary policy. This concern, of course, would be a good news/bad news issue: The good news is that it would stem from a stronger economy; the bad is that might hurt our maneuverability and, in doing so, might undermine confidence in the Fed to conduct policy independently.

One other factor gave me pause and that was, and remains, the moral hazard of being too accommodative. For years, I have been arguing that monetary policy cannot solve the problem of substandard economic performance unless it is complemented by fiscal policy and regulatory reform that encourages the private sector to put to work the affordable and abundant liquidity we are able to create as the nation’s monetary authority.

I’ve decided that Fisher is my favourite FOMC member:

Federal Reserve Bank of Dallas President Richard Fisher said the central bank’s independence is under attack from both ends of the political spectrum in Congress, and he singled out two of the critics by name.

“We are being attacked from the right and from the left, and I don’t see much difference between a certain congressman from Texas named Ron Paul and a certain congressman from Massachusetts named Barney Frank,” Fisher said in response to audience questions after a speech in Dallas. Paul is a Republican and Frank is a Democrat.
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“I don’t see any difference between them,” Fisher said, referring to Frank and Paul. “They believe we have too much independence. They believe that Congress should be in charge of monetary policy.”

There has been an odd credit rating action on BMO covered bonds:

• We have affirmed at ‘AAA’ our ratings on Bank of Montreal Global Public Sector Covered Bond Programme and all series issued under it.
• The outlook for all of the covered bonds issued under the program is stable.
• We have subsequently withdrawn our ratings on Bank of Montreal’s covered bond program and all the series issued under it, at the issuer’s request.

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Today’s rating actions follow a review of the most current asset and cash flow information the issuer has provided to us. The data we analyzed were as of July 31, 2011. As of that date, the cover pool comprised approximately C$7.263 billion of mortgage assets. There are currently three series of covered bonds outstanding in an equivalent amount of approximately C$5.066 billion.
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As a result of this analysis, we have determined the maximum potential rating uplift for BMO’s covered bond program to be six notches above BMO’s long-term issuer credit rating of ‘A+’. This is based on a program categorization of “2” and an ALMM classification of “low”.

This seems very odd; but I can’t find any discussion of this move anywhere.

Happy news for 53-year-olds:

In a cross section of prime borrowers, middle-aged adults made fewer financial mistakes than either younger or older adults. We conclude that financial mistakes follow a U-shaped pattern, with the cost-minimizing performance occurring around age 53.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 9bp, FixedResets down 4bp and DeemedRetractibles up 8bp. These figures might lead one to expect volatility to be low, but one might be wrong! Volume was low, but RBC scored a shut-out for the blocks reported.

Julie Dickson gave a speech to the Economic Club of Canada titled The Lasting Impact of the Crisis on the Global Financial System but said nothing new.

One of the lessons of the Flash Crash was that dealer capital, which would make markets with a time horizon of a week, was being replaced with much more evanescent High Frequency Trading capital, which has an intra-day time horizon. This was strongly deprecated at the time. We may therefore look on with admiration at the latest proposals to implement the Volcker Rule:

U.S. banks would have to change the way they compensate traders involved in market-making activities under one of the proposed restrictions of the so-called Volcker rule, according to a draft circulating among regulators.

The rule, which aims to ban most proprietary trading by banks with federally insured deposits, would exempt trades related to market-making as long as the activity met at least seven standards, or principles. One principle would be that traders get paid from fees and the spread of the transactions rather than the appreciation or profit from their positions, according to a copy of the draft reviewed by Bloomberg News.
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A forced change to pay structure “could have the effect of driving people out of the regulated industry to the unregulated industry,” said Douglas Landy, a partner at Allen & Overy LLP who once worked at the Federal Reserve Bank of New York.

The regulators could, if they so desired, seek to re-sharpen the lines between investing and trading by imposing surcharges on aged positions in the trading book. But that wouldn’t sound so tough.

It might be the right thing to do, to move longer-term market-making out of the banks and into the hedge funds. I don’t know. My problem is that I don’t think anybody else knows, either. Or cares. Except maybe Dealbreaker.

TransAlta Corporation, proud issuer of TA.PR.D, was confirmed at Pfd-3 by DBRS:

DBRS has today confirmed the ratings of TransAlta Corporation’s (TAC or the Company) Unsecured Debt/Medium-Term Notes and Preferred Shares at BBB and Pfd-3, respectively, both with Stable trends. The confirmation reflects the Company’s strong cash flow generated by its generation facilities, which are subject to legislatively mandated Alberta power purchase agreements (APPAs), longer-term power contracts on its non-regulated facilities and its diversified generation portfolio.

TAC’s credit profile and ratings are supported by its highly contracted diversified portfolio of assets. TAC currently has approximately 70% of its capacity contracted over the next seven years, with over 95% contracted for 2011 and up to 90% for 2012, in line with its stated objective of having at least 75% of its capacity under medium- and long-term contracts with creditworthy counterparties, thus reducing the Company’s cash flow volatility. DBRS remains comfortable with this strategy as it allows TAC to participate in any upside potential to improving market conditions.
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As the Company starts to generate more cash flow from new assets placed in service in 2011 and 2012, DBRS expects that on a normal course basis, the Company’s adjusted net debt-to-capital should remain below 50% and cash flow-to-debt will remain in the 25% range, levels that DBRS considers adequate for the rating, given the largely contracted fleet. The Company had $2.0 billion in committed credit facilities as of June 30, 2011, of which $0.8 billion was available.

At this time, DBRS remains comfortable with the Company’s disciplined growth strategy, financial flexibility and adequate liquidity. It is expected that TAC will maintain a low-to-moderate risk profile, underpinned by a more diversified and contracted portfolio of assets. DBRS expects the Company to continue to finance growth in line with its credit metrics.

Gold did not do well:

Gold fell, capping the biggest three-session slump since 1983, and silver closed below $30 an ounce on investor sales to cover losses in other assets.
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Gold futures for December delivery fell $45, or 2.7 percent, to settle at $1,594.80 an ounce at 1:36 p.m. on the Comex in New York, extending the three-session slide to 12 percent, the most since March 1983. Earlier, the price plunged as much as $104.80 to $1,535, the lowest for a most-active contract since July 8. The all-time high earlier this month was $1,923.70.

In October 2008, gold tumbled 18 percent as the most-severe slump since the Great Depression spurred losses in global equity and commodity markets. The metal jumped 23 percent in the next two months.

Silver futures for December delivery fell 12.5 cents, or 0.4 percent, to $29.976. Earlier, the price touched $26.15, the lowest since Nov. 18. In electronic trading after the settlement, the metal topped $30. On April 25, the price reached a 31-year high of $49.845 on April 25.

On Sept. 23, CME Group Inc., the owner of the Comex, trading margins on gold futures by 21 percent and boosted the minimum cash deposit for silver by 16 percent, effective today.

The Canadian preferred share market put in a good day’s work, with PerpetualDiscounts up 10bp, FixedResets gaining 8bp and DeemedRetractibles winning 14bp. Volatility was quite good, but volume was light.