Category: Market Action

Market Action

September 7, 2011

There were no surprises in the BoC release:

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economic outlook has deteriorated in recent weeks as several downside risks to the projection in the Bank’s July Monetary Policy Report (MPR) have been realized. The European sovereign debt crisis has intensified, a broad range of data has signalled slower global growth, and financial market volatility has increased sharply. Recent benchmark revisions show that the U.S. recession was deeper and its recovery has been shallower than previously reported. In combination with recent economic data, this implies that U.S. growth will be weaker than previously anticipated
…
Slower global economic momentum will dampen domestic resource utilization and inflationary pressures. The Bank expects total CPI inflation to continue to moderate as temporary factors, such as significantly higher food and energy prices, unwind. Core inflation is expected to remain well-contained as labour compensation growth stays modest, productivity recovers, and inflation expectations remain well-anchored.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. In light of slowing global economic momentum and heightened financial uncertainty, the need to withdraw monetary policy stimulus has diminished. The Bank will continue to monitor carefully economic and financial developments in the Canadian and global economies, together with the evolution of risks, and set monetary policy consistent with achieving the 2 per cent inflation target over the medium term.

There are rumours that the completely voluntary and not coerced in any way whatsoever Greek bond exchange offer might be in trouble:

Private sector participation in a Greek debt swap has so far reached the 75-percent mark, far below a 90 percent target, newspaper Imerisia reported on Wednesday without naming its sources.

Greece last month turned the screws on investors, saying it may not go ahead with the debt swap—a key part in a second bailout package to stave off the country’s bankruptcy—if holders of less than 90 percent of the bonds take part.
…
A Greek finance ministry official said it was too early to provide a take-up figure. “The process is ongoing, it is premature to give a percentage,” the official told Reuters on condition of anonymity.

Greece has asked bondholders to declare their interest in taking part in the debt swap by Friday. Greece expects to submit a final bond swap offer to investors in October, with a view to complete the exercise by the end of the same month.

As I have often noted, bankruptcy laws evolved over a period of 300 years. To their vast astonishment, the Europeans are finding that the re-write may take a little time :

The European Union is delaying proposals for senior bondholders of failing banks to take losses because the measures may spook investors at a time of market turbulence and they need more work, according to two people familiar with the situation.

Michel Barnier, the EU’s financial services commissioner, will unveil draft legislation on the measures in October at the earliest, said one of the people, who declined to be identified because negotiations on the proposals are continuing. The bondholder plans are part of broader proposals for orderly closure of failing lenders that the European Commission, the 27- nation EU’s executive arm, had intended to present this month.

World leaders in the Group of 20 nations are seeking to agree on measures to wind down failing lenders without the need for public bailouts.

There were no insider trading reports for YLO today, but I did learn that overlapping NCIBs are allowed which seems a little strange to me. The TMX reported no insider buying of YLO issues today.

It was a good day overall for the Canadian preferred share market, with PerpetualDiscounts losing 4bp, FixedResets gaining 10bp and DeemedRetractibles winning 26bp. Volatility picked up, skewed to the upside. Volume was a little above average.

PerpetualDiscounts now yield 5.29%, equivalent to 6.88% at the standard equivalency factor of 1.3x. Long-term Corporates now yield about 4.9% (maybe a little less?) so the pre-tax interest-equivalent spread is now about 200bp, the same as it was on August 31 as both yields have declined about the same amount.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.5349 %	2,161.5
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.5349 %	3,250.8
Floater	2.99 %	3.34 %	58,962	18.83	3	0.5349 %	2,333.8
OpRet	4.81 %	2.50 %	66,527	1.66	8	0.1304 %	2,450.1
SplitShare	5.37 %	0.07 %	54,860	0.47	4	0.1143 %	2,496.0
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.1304 %	2,240.4
Perpetual-Premium	5.62 %	4.64 %	126,079	0.47	16	0.1983 %	2,114.8
Perpetual-Discount	5.29 %	5.36 %	111,093	14.84	14	-0.0389 %	2,244.2
FixedReset	5.15 %	3.10 %	205,024	2.65	59	0.1049 %	2,329.6
Deemed-Retractible	5.04 %	4.59 %	251,901	4.56	46	0.2611 %	2,199.6

Performance Highlights
Issue	Index	Change	Notes
FTS.PR.H	FixedReset	-2.47 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-07 Maturity Price : 23.38 Evaluated at bid price : 25.31 Bid-YTW : 2.91 %
POW.PR.D	Perpetual-Discount	-1.32 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-07 Maturity Price : 23.66 Evaluated at bid price : 23.94 Bid-YTW : 5.29 %
RY.PR.H	Deemed-Retractible	1.02 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-24 Maturity Price : 26.00 Evaluated at bid price : 26.84 Bid-YTW : 3.60 %
IAG.PR.F	Deemed-Retractible	1.13 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.95 Bid-YTW : 5.41 %
MFC.PR.C	Deemed-Retractible	1.15 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.00 Bid-YTW : 6.09 %
BNS.PR.Z	FixedReset	1.16 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.20 Bid-YTW : 3.16 %
PWF.PR.A	Floater	1.20 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-07 Maturity Price : 21.01 Evaluated at bid price : 21.01 Bid-YTW : 2.51 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BNS.PR.M	Deemed-Retractible	215,869	RBC crossed 194,600 at 25.20. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.15 Bid-YTW : 4.51 %
BMO.PR.J	Deemed-Retractible	91,790	RBC crossed blocks of 50,000 and 23,000, both at 25.15. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-02-25 Maturity Price : 25.00 Evaluated at bid price : 25.12 Bid-YTW : 4.44 %
SLF.PR.C	Deemed-Retractible	80,110	Desjardins crossed 59,900 at 21.90. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.90 Bid-YTW : 6.07 %
SLF.PR.D	Deemed-Retractible	70,347	TD crossed 50,100 at 21.83. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.83 Bid-YTW : 6.11 %
W.PR.J	Perpetual-Discount	56,030	National Bank crossed 50,000 at 25.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-07 Maturity Price : 24.68 Evaluated at bid price : 25.00 Bid-YTW : 5.68 %
IFC.PR.C	FixedReset	54,957	Recent new issue. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.04 Bid-YTW : 4.17 %
There were 35 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
FTS.PR.H	FixedReset	Quote: 25.31 – 25.80 Spot Rate : 0.4900 Average : 0.2970 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-07 Maturity Price : 23.38 Evaluated at bid price : 25.31 Bid-YTW : 2.91 %
IAG.PR.A	Deemed-Retractible	Quote: 23.06 – 23.48 Spot Rate : 0.4200 Average : 0.2751 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.06 Bid-YTW : 5.59 %
IGM.PR.B	Perpetual-Premium	Quote: 25.91 – 26.25 Spot Rate : 0.3400 Average : 0.2169 YTW SCENARIO Maturity Type : Call Maturity Date : 2018-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.91 Bid-YTW : 5.43 %
GWO.PR.M	Deemed-Retractible	Quote: 25.45 – 25.81 Spot Rate : 0.3600 Average : 0.2476 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.45 Bid-YTW : 5.56 %
CU.PR.A	Perpetual-Premium	Quote: 25.26 – 25.50 Spot Rate : 0.2400 Average : 0.1650 YTW SCENARIO Maturity Type : Call Maturity Date : 2012-03-01 Maturity Price : 25.00 Evaluated at bid price : 25.26 Bid-YTW : 3.84 %
TRP.PR.C	FixedReset	Quote: 26.06 – 26.43 Spot Rate : 0.3700 Average : 0.2975 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-07 Maturity Price : 23.52 Evaluated at bid price : 26.06 Bid-YTW : 2.93 %

Market Action

September 6, 2011

The US has a new plan to balance its books, remarkably similar to Europe’s:

Bank of America Corp. and JPMorgan Chase & Co. (JPM) were among 17 banks sued by the U.S. to recoup $196 billion spent on mortgage-backed securities bought by Fannie Mae and Freddie Mac.

The Federal Housing Finance Agency, on behalf of Fannie Mae and Freddie Mac, filed 17 lawsuits yesterday in New York state and federal courts and in federal court in Connecticut. The FHFA accuses the banks of misleading Fannie Mae and Freddie Mac about the soundness of the mortgages underlying the securities.

The UK government may have caught a sanity germ:

U.K. Prime Minister will seek a “significant watering down” of a planned overhaul in banking regulations because the new rules may hurt growth and spur lenders to quit the country, the Sunday Telegraph reported.

Cameron told senior cabinet officials that any proposals from the Independent Commission on Banking to split banks’ retail and investment units or require lenders to raise capital must be reviewed, the newspaper reported, citing unidentified officials. The government is concerned that HSBC Holdings Plc (HSBA) and possibly other banks may move operations away from the U.K. if planned “ring-fencing” rules are implemented, according to the Sunday Telegraph.

With respect to liquidity, here’s a report from the front lines:

Banks are seeking to retain their liquidity, making interbank lending more difficult, as funding from money and capital markets becomes harder to obtain, ABN Amro Group NV Chief Executive Officer Gerrit Zalm said.

Interbank borrowing for more than six months is also becoming problematic because banks are reluctant to lend to competitors with “big positions in weaker countries’ debt, for instance,” he said today on Dutch television program “Buitenhof.”
…
A demise of the euro would have “catastrophic” consequences for the Dutch economy, which sends about three- fourths of its exports to other euro-zone states, and “would cause a recession that would make the 1930s a trifle by comparison,” Zalm said.

Europe is getting more interesting by the day:

Finland is stepping up efforts to find a compromise with Europe on its collateral demands amid International Monetary Fund opposition to forcing Greece to give euro members extra security for new loans.
…
Europe’s efforts to contain its debt crisis risk unraveling as individual nations’ demands for collateral, Greece’s deteriorating economic predicament and wavering commitment to austerity packages from euro members such as Italy throw any recovery in doubt.
…
Finland’s anti-bailout party, which calls itself “The Finns,” last month polled as the country’s most popular, according to broadcaster YLE. The party saw its backing surge fourfold in the April election, making it parliament’s third- biggest. The party’s leader Timo Soini has railed against the costs of funding bailouts and rejects Europe’s ambition of preventing a Greek default.

“The European Union is breaking its own rules and Finland shouldn’t have anything to do with it,” Soini said last week. “This is a disaster. Finland should stay outside and oppose these measures.”

The Finns aren’t the only ones opposing a bail-out:

The Social Democrats, Germany’s main opposition party, took 36.1 percent to win yesterday’s election in Mecklenburg-Western Pomerania, while Merkel’s Christian Democratic Union had 23.3 percent, ZDF television projections showed. The result in the eastern state where Merkel’s election district is located means her national coalition has been defeated or lost votes in all six German state elections so far this year as voters resist her bid to prevent a euro-region breakup by putting more taxpayer money on the line for bailouts.

“Merkel’s CDU got beat in her home state, adding to the sense that opposition to any solution to a deepening crisis is growing,” Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in London, wrote in an e-mailed note.

Ackerman had some cheerful things to say about the markets:

The chief executive officer of Deutsche Bank AG (DBK), Josef Ackermann, said market conditions remind him of late 2008, and urged lawmakers to act to avoid a repeat of the financial crisis, which spawned the worst global recession since the Great Depression. Investors drove yields higher on the bonds of Greece, Portugal, Spain and Italy yesterday on doubts Europe’s leaders will be able to stop the sovereign debt contagion.
…
The Bloomberg Europe Banks and Financial Services Index of 46 stocks dropped almost 10 percent in the past two sessions, to the lowest level since March 31, 2009. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers soared 13 basis points to 259, according to JPMorgan Chase & Co. The difference between the three-month euro interbank offered rate, or Euribor, and the overnight indexed swap rate, a measure of banks’ reluctance to lend to each other, rose to 0.77 percentage point, the widest gap since April 2009.
…
Many European banks “obviously” wouldn’t be able to shoulder writedowns on sovereign debt held in their banking books based on market values, Ackermann said. Greek two-year notes traded yesterday at less than 50 percent of face value.

However, Greece is going to accellerate its reforms, so everything will be all right. Just don’t panic, OK! Dear God, don’t panic! STOP PANICKING THIS MINUTE, YOU NASTY SPECULATORS!:

Greece said it will accelerate austerity measures pledged in return for international financing as pressure mounted from European partners before the payment of a sixth tranche of bailout loans.

“Greece isn’t a pariah in the European Union or an open wound,” Finance Minister Evangelos Venizelos said from Athens on state-run NET Radio today. “Greece is an equal member of the European Union with deficit and debt problems. Greece can overcome these problems with these reforms.”

Venizelos said he received approval from the Cabinet today to immediately transfer state assets to a special fund for sale, place civil servants in a “reserve” system to retrain them and cut expenses, as well as merge and shut down dozens of government agencies that are a drag on spending.

Ackerman was also in the news for the latest IIF counter-attack against excessive regulation:

The study includes a series of scenarios and a considerable number of variables in determining the impact of the sum of financial regulatory measures. It estimated that all the measures combined will significantly boost the capital needs of banks relative to a base scenario – an additional capital requirement for banks in the leading industrial economies of $1.3 trillion by 2015, according to its central scenario, and this could push bank lending rates up by over 3 ½ percentage points on average for the next five years. The result could be 3.2 percent lower output by 2015 in these economies than would otherwise be the case. This would lead to about 7.5 million fewer jobs being created. The negative economic effects would likely fade in 2016 and beyond but, the maximum drag of reform on the global economy would be at a time when it is apparently least well placed to handle it.

Naturally, the regulators immediately countered:

Group of Seven finance ministers and central bankers will discuss financial regulation at a meeting Friday in Marseille, a Canadian Finance Department official told reporters Tuesday on a conference call.
…
The official said overly indebted countries in Europe and overly indebted households in the U.S. are the more important headwinds facing the global economy. Canada is relatively pleased with the progress the G20 is making on completing its regulatory program, and Finance is dismissive of the argument that demanding the banks to keep bigger financial cushions is hurting the economy.

If we had better financial regulation in 2007 and 2008, we might not be in the situation we are in now, the Canadian official said.

And if it rained lemonade we could all have a nice drink. So?

I believe that they’re probably both right: all else being equal, increased regulation on the contemplated scale will cause a depression, and that the IIF is being alarmist. I believe this because all else is not equal and never is. What is far more likely is that the banks, constrained by capital requirements, will simply reduce their lending business and there will be an increasing amount of disintermediation as corporations and governments go directly to the public markets. They might lend to small business, but they might also face increased competition in that sector from unregulated shadow banks.

So what will this lead to? It will lead to an ostensibly safer, but far more brittle financial system. Manulife got into trouble during the crisis, but were able to pump a huge amount of capital into their operating subsidiary on very short notice because the holdco was able to borrow billions from the banks on short notice. BofA was able to take over Merrill Lynch on short notice.

If capital regulation leads to lower bank flexibility in a crisis, watch out! We’ve all seen what a mess the politicians make of things when they make up new rules on the fly. It won’t be pretty.

YLO’s CFO has “stepped down”. That was sudden. There were no insider trading reports for YLO on SEDI today. Interestingly – and perhaps related to the hasty departure? – there was no insider trading of the preferreds reported by the TMX today either.

HSB is selling its Canadian retail brokerage:

As HSBC Holdings PLC (HCS-N26.440.100.38%) looks to shed costs from its global operations, the bank acknowledged it is in talks to sell part of its Canadian operations, but said a deal has not yet been reached.

After reports two weeks ago that the U.K.-based bank had opened the books on its Canadian retail brokerage to potential bidders, HSBC issued a statement Tuesday confirming the process. However, “no decision has yet been made to proceed with any transaction,” the bank said.

DBRS confirmed IGM on Friday:

DBRS has today confirmed the Unsecured Debentures rating of IGM Financial Inc. (IGM or the Company) at A (high) and the First Preferred Shares rating at Pfd-2 (high); the trends are Stable. IGM is one of the most consistently profitable financial services companies in Canada, reflecting a leading market position in the mutual fund manufacturing and distribution market through the operations of both Investors Group Inc. (IG) and Mackenzie Financial Corporation (Mackenzie). The rating is primarily based on the profitability, operating cash flow and business strengths of the Company’s IG subsidiary, while recognizing the complementary positive contribution of diverse products, brands and distribution channels offered through the Company’s Mackenzie and Investment Planning Counsel Inc. (IPC) business segments.
…
In addition to strong profitability, the Company’s credit rating also benefits from strong cash flows, which easily cover the upfront distribution costs of mutual fund sales; strong liquidity; and a conservative financial profile. Debt plus preferred shares-to-EBITDA was less than one time which is very conservative and a sharp improvement from year ago levels following a large debt maturity and growth in retained earnings. Over the past 12 months, the Company’s ratio of debt plus preferred shares-to-total capitalization fell from 29.1% to 25.7%, which remains appropriate for the rating.

DBRS also confirmed twenty-two SplitShares:

The Preferred Shares were last confirmed in August 2010. Equity performance was generally positive from July 31, 2010, to March 31, 2011; however, net asset values (NAVs) dropped over the past few months as global equity markets were negatively affected by concerns over the European sovereign debt crisis and the U.S. debt ceiling deadline. High volatility levels intensified following the downgrade of the U.S. long-term debt rating below AAA by one major rating agency. Notwithstanding the current volatility and sharp drop in markets over the past few months, the current levels of protection available to the Preferred Shares are commensurate with the ratings assigned. The rating confirmations are also based on longer-term performance and structural features of the Issuers that benefit the Preferred Shares. Other key rating factors are the credit quality and diversification of each Portfolio; the amount of distributions paid to the Capital Shares; and the expected maturity date of the Preferred Shares of each Issuer.

Frankly, I’m a little surprised at some of the names in the confirmation list! FFN.PR.A still at Pfd-3(low)? NAVPU was only 13.10 at August 31, presumably a little less now. When it was last confirmed 2010-8-10 the NAVPU was 13.73.

Today’s red-hot investment idea is: buy stock in producers of mosquite repellant and producers of anti-mosquite-borne-disease drugs. Our beloved morons on Toronto City Council have decreed mandatory downspout disconnection, so today I finally got around to booking an appointment with a contractor who can do it without injuring himself or toppling the house over, like I would. I was told that a lot of people aren’t redirecting their downspouts, they’re just capping them – so (a) the eavestroughs will just overflow when full and (b) we’re going to have a lot of standing water in the future. It’s interesting to note the similarity to what I believe will be the unintended consequences of increased bank capital regulation, and the fact that regulators, in general, are incapable of thinking things through; but the situation does suggest my red-hot investment idea. Never say I don’t do enough for you guys!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 20bp FixedResets losing 3bp and DeemedRetractibles gaining 7bp. Not much volatility. Volume was abysmal.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	-0.3806 %	2,150.0
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.3806 %	3,233.5
Floater	3.01 %	3.35 %	58,687	18.80	3	-0.3806 %	2,321.4
OpRet	4.82 %	2.92 %	66,787	1.66	8	-0.0290 %	2,446.9
SplitShare	5.38 %	0.07 %	55,236	0.48	4	-0.0727 %	2,493.1
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0290 %	2,237.5
Perpetual-Premium	5.63 %	4.80 %	127,929	1.10	16	-0.0296 %	2,110.6
Perpetual-Discount	5.29 %	5.37 %	127,152	14.82	14	0.2010 %	2,245.1
FixedReset	5.15 %	3.15 %	212,765	2.68	59	-0.0257 %	2,327.1
Deemed-Retractible	5.05 %	4.62 %	249,887	5.95	46	0.0725 %	2,193.9

Performance Highlights
Issue	Index	Change	Notes
POW.PR.A	Perpetual-Premium	-1.30 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-06 Maturity Price : 24.85 Evaluated at bid price : 25.06 Bid-YTW : 5.67 %
BAM.PR.K	Floater	-1.25 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-06 Maturity Price : 15.75 Evaluated at bid price : 15.75 Bid-YTW : 3.37 %
BAM.PR.X	FixedReset	-1.03 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-06 Maturity Price : 22.78 Evaluated at bid price : 24.11 Bid-YTW : 3.70 %
IAG.PR.A	Deemed-Retractible	1.32 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.00 Bid-YTW : 5.62 %

Volume Highlights
Issue	Index	Shares Traded	Notes
IFC.PR.A	FixedReset	61,890	RBC bought blocks of 11,800 and 10,600 from Nesbitt, both at 24.95. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.97 Bid-YTW : 3.95 %
BNS.PR.R	FixedReset	54,195	RBC crossed 50,000 at 25.13. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 26.11 Bid-YTW : 3.26 %
TD.PR.I	FixedReset	41,645	RBC crossed 40,000 at 27.44. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-31 Maturity Price : 25.00 Evaluated at bid price : 27.39 Bid-YTW : 3.03 %
IFC.PR.C	FixedReset	28,550	Recent new issue. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.00 Bid-YTW : 4.19 %
RY.PR.W	Perpetual-Discount	20,530	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-06 Maturity Price : 24.38 Evaluated at bid price : 24.71 Bid-YTW : 4.98 %
BNS.PR.N	Deemed-Retractible	18,461	YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-28 Maturity Price : 25.50 Evaluated at bid price : 26.02 Bid-YTW : 4.70 %
There were 14 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
BAM.PR.J	OpRet	Quote: 26.40 – 27.23 Spot Rate : 0.8300 Average : 0.6233 YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2018-03-30 Maturity Price : 25.00 Evaluated at bid price : 26.40 Bid-YTW : 4.61 %
CM.PR.P	Deemed-Retractible	Quote: 25.54 – 26.00 Spot Rate : 0.4600 Average : 0.3050 YTW SCENARIO Maturity Type : Call Maturity Date : 2012-10-29 Maturity Price : 25.00 Evaluated at bid price : 25.54 Bid-YTW : 4.06 %
POW.PR.A	Perpetual-Premium	Quote: 25.06 – 25.40 Spot Rate : 0.3400 Average : 0.2205 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-06 Maturity Price : 24.85 Evaluated at bid price : 25.06 Bid-YTW : 5.67 %
CIU.PR.A	Perpetual-Discount	Quote: 23.51 – 23.99 Spot Rate : 0.4800 Average : 0.3662 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-06 Maturity Price : 23.06 Evaluated at bid price : 23.51 Bid-YTW : 4.90 %
GWO.PR.I	Deemed-Retractible	Quote: 22.48 – 22.78 Spot Rate : 0.3000 Average : 0.1919 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.48 Bid-YTW : 5.80 %
RY.PR.H	Deemed-Retractible	Quote: 26.57 – 27.00 Spot Rate : 0.4300 Average : 0.3339 YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-24 Maturity Price : 26.00 Evaluated at bid price : 26.57 Bid-YTW : 4.22 %

Market Action

September 2, 2011

The SEC has a new policy: Prove you’re not a crook!:

U.S. securities regulators have taken the unprecedented step of asking high-frequency trading firms to hand over the details of their trading strategies, and in some cases, their secret computer codes.

The requests for proprietary code and algorithm parameters by the Financial Industry Regulatory Authority (FINRA), a Wall Street brokerage regulator, are part of investigations into suspicious market activity, said Tom Gira, executive vice president of FINRA’s market regulation unit.

“It’s not a fishing expedition or educational exercise. It’s because there’s something that’s troubling us in the marketplace,” he said in an interview.
…
It has alarmed some traders who are afraid their “secret sauce” — intellectual property sometimes developed over years and at great cost — could get into the wrong hands, especially when SEC and FINRA examiners leave for the private sector.

Having the code and insider knowledge of what works and what doesn’t will help the employment prospects of regulatory personnel, which is of course the whole purpose of regulation.

Now that the IMF and the ECB hold a lot of Greek bonds, there’s unprecedented concern about bondholder rights:

The International Monetary Fund opposes European plans to force Greece to put up collateral in its second rescue, said four people with direct knowledge of the matter.

The use of collateral, a concession to win Finland’s backing for 109 billion euros ($155 billion) of loans pledged by euro leaders in July, would deny the IMF priority creditor status and violate Greek bondholders’ rights, said the people, who declined to be named because the talks are in progress.

IMF objections threaten to snag Europe’s crisis-management effort after aid of 256 billion euros for Greece, Ireland and Portugal failed to restore order.
…
Greece’s predicament deepened today with the forecast of a worsening economic contraction and a two-week suspension of a European-IMF economic review mission to give the government time to plot a pro-growth course. Two-year Greek yields rose today above 47 percent, a euro-era record.

Banking in the US is more interesting than in Canada:

Mortgage rates near historic lows have sparked a refinancing boom that has U.S. lenders struggling to handle the surge.
…
The lending logjam extends to the nation’s biggest banks, which fired thousands of mortgage workers after interest rates rose in November through February, chilling refinancing demand. Now, the time needed to close a loan has as much as doubled to 60 days, according to Wilson and other bankers, and lenders are holding some mortgage rates higher than they could be to slow the torrent of customers, data show.

Refinancing applications are up 83 percent from this year’s low in February, according to an index compiled by the Mortgage Bankers Association, a Washington-based trade group. After topping 5 percent that month, the average rate on 30-year fixed loans fell two weeks ago to 4.15 percent, the lowest in surveys dating back to 1971 by Freddie Mac, the second-largest U.S. mortgage-finance company.

How about a double dip?

The Labor Department said U.S. payrolls were unchanged last month, the weakest reading since September 2010 and worse than the median economist forecast that called for growth of 65,000. Stocks sank and Treasuries surged in August as investors bet that the odds of a recession had increased. Markets reversed course toward the end of the month amid speculation the Federal Reserve would act to spur growth.

There’s more!

Bearish bets against the S&P 500 rose to a nine-month high as short sellers increased speculation stocks may decline. The proportion of S&P 500 shares outstanding sold short on Aug. 29 rose to 3.03 percent, the most since the end of November and up from 2.37 percent at the beginning of August, according to New York-based Data Explorers, which provides research on short sales and stock lending. Short selling of the gauge reached a three-year high of 5.52 percent in August 2008, before the index sank to a 12-year low in March 2009.

The yield curve, or the difference between two- and 30-year Treasury debt, narrowed to 312 basis points, the least in a year, as the jobless data bolstered the view that Fed Chairman Ben S. Bernanke will be inclined to take addition steps beyond the two previous rounds of debt buying, known as quantitative easing, or QE.

and even more!

Treasuries rose, pushing 10-year note yields below 2 percent, as the government’s payrolls report showed no jobs were added in August, stoking speculation that the Federal Reserve will increase its purchases of longer- maturity debt.

U.S. 30-year yields fell to the lowest in since January 2009 as U.S. employment data were the weakest reading since September 2010.
…
The 10-year note yield fell 14 basis points, or 0.14 percentage point, to 1.99 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.125 percent security maturing in August 2021 rose 1 9/32, or $12.81 per $1,000 face amount, to 101 8/32. The yield touched 1.9806 percent.

Thirty-year bond yields fell 20 basis points to 3.30 percent and two-year note yields rose two basis points to 0.20 percent.

20bp on thirty-year paper? That’s like about maybe three bucks on price!

I think that at some point the regulators are going to have to do something about the more patronizing manipulation rules, by which I mean “repeal”. Tony Ianno got in trouble for high-closing:

In agreeing to the settlement, he now faces a range of sanctions from the regulator, including a five-year cease trading order that only allows him to conduct limited trading through his Registered Retirement Savings Plan.

He also faces a five-year ban on serving as a director or officer of a publicly-traded company and is also prohibited from serving as a company promoter during that time.

Additionally, Mr. Ianno has agreed to pay $50,000 toward the costs of the OSC investigation in addition to another voluntary payment of $50,000, OSC Senior Litigation Counsel Alexandra Clark Alexandra Clark told the hearing

I’m glad the extra $50,000 was voluntary, and not extorted from him or anything like that.

In March 2010, the OSC alleged the one-time parliamentarian broke securities laws by artificially inflating the share price of Covalon Technologies Ltd., a junior biotechnology firm. Mr. Ianno had purchased roughly 4 million of Covalon’s common shares in transactions worth $7.6-million at various times in 2007 and 2008.
…
The OSC has said the lion’s share of Mr. Ianno’s share purchases were made on margin, meaning they were purchased using credit provided by various brokerage firms. Those loans were then secured against the value of the shares.

According to the OSC’s original statement of allegations, Mr. Ianno purportedly engaged in inappropriate trading of Covalon shares as he faced some 27 margin calls from eight different brokerages.

Specifically, he was accused of making frequent end-of-day purchases through multiple brokerage accounts that often resulted in increases in Covalon’s stock price.

Well, the “multiple brokerage accounts” part is something of a red flag, but high-closing was always hard to police and nowadays it’s getting worse. You can expect professionals to know the rules, but now there are hundreds of thousands of retail guys with market access that’s only very lightly filtered.

High closing has no effect on the valuation of the stock and no effect on the long-term price of the stock. By taking it so seriously, the regulators are pandering to momentum players when in fact their efforts should be directed towards protecting value investors. If you want to do something about high closing, then (a) stop using closing prices for margin and valuation purposes and use the closing quote and (b) give retail access to algorithms so that if somebody puts in a high bid at 3:59:55, there’s a good chance it will be executed at 3:59:55.015

There were no new fillings on the YLO MTN buyback today, but the usual basket of preferred shares was reported by the TMX as insider purchases. There has been no response from the company to my inquiry regarding their apparent exceeding of the maximum annual limit on their NCIB.

The Canadian preferred share market was fairly quiet in advance of the long weekend, with PerpetualDiscounts up 2bp, FixedResets down 1bp and DeemedRetractibles winning 8bp. Volatility was low. Volume was almost non-existent.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	-0.2089 %	2,158.2
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.2089 %	3,245.9
Floater	3.00 %	3.32 %	58,582	18.86	3	-0.2089 %	2,330.3
OpRet	4.82 %	2.93 %	67,825	1.68	8	0.2226 %	2,447.6
SplitShare	5.37 %	0.07 %	57,519	0.49	4	-0.1555 %	2,494.9
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.2226 %	2,238.1
Perpetual-Premium	5.63 %	4.75 %	129,009	1.11	16	0.0406 %	2,111.3
Perpetual-Discount	5.30 %	5.37 %	106,732	14.82	14	0.0150 %	2,240.6
FixedReset	5.15 %	3.14 %	214,693	2.66	59	-0.0129 %	2,327.7
Deemed-Retractible	5.06 %	4.67 %	252,635	7.89	46	0.0822 %	2,192.3

Performance Highlights
Issue	Index	Change	Notes
HSB.PR.C	Deemed-Retractible	-1.10 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.06 Bid-YTW : 5.21 %
ELF.PR.F	Perpetual-Discount	1.00 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-02 Maturity Price : 22.84 Evaluated at bid price : 23.13 Bid-YTW : 5.81 %
BMO.PR.K	Deemed-Retractible	1.43 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-11-25 Maturity Price : 25.50 Evaluated at bid price : 26.20 Bid-YTW : 4.29 %

Volume Highlights
Issue	Index	Shares Traded	Notes
RY.PR.A	Deemed-Retractible	66,626	RBC crossed 50,000 at 24.97. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.95 Bid-YTW : 4.51 %
RY.PR.D	Deemed-Retractible	57,951	RBC crossed 50,000 at 24.75. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.75 Bid-YTW : 4.66 %
IFC.PR.C	FixedReset	42,275	Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.03 Bid-YTW : 4.23 %
CM.PR.J	Deemed-Retractible	34,765	National crossed 20,000 at 25.10. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.02 Bid-YTW : 4.56 %
SLF.PR.H	FixedReset	34,400	Recent new issue. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.81 Bid-YTW : 3.98 %
SLF.PR.D	Deemed-Retractible	33,180	Desjardins crossed 16,000 at 21.90; Scotia crossed 10,000 at 21.89. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.88 Bid-YTW : 6.07 %
There were 13 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
BAM.PR.R	FixedReset	Quote: 25.61 – 25.96 Spot Rate : 0.3500 Average : 0.2638 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-02 Maturity Price : 23.36 Evaluated at bid price : 25.61 Bid-YTW : 4.10 %
BAM.PR.J	OpRet	Quote: 26.50 – 26.98 Spot Rate : 0.4800 Average : 0.3967 YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2018-03-30 Maturity Price : 25.00 Evaluated at bid price : 26.50 Bid-YTW : 4.53 %
HSB.PR.C	Deemed-Retractible	Quote: 25.06 – 25.31 Spot Rate : 0.2500 Average : 0.1823 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.06 Bid-YTW : 5.21 %
PWF.PR.O	Perpetual-Premium	Quote: 25.64 – 26.00 Spot Rate : 0.3600 Average : 0.2939 YTW SCENARIO Maturity Type : Call Maturity Date : 2018-10-31 Maturity Price : 25.00 Evaluated at bid price : 25.64 Bid-YTW : 5.49 %
BNS.PR.Z	FixedReset	Quote: 24.90 – 25.44 Spot Rate : 0.5400 Average : 0.4776 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.90 Bid-YTW : 3.41 %
TRP.PR.C	FixedReset	Quote: 25.87 – 26.17 Spot Rate : 0.3000 Average : 0.2379 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-02 Maturity Price : 23.47 Evaluated at bid price : 25.87 Bid-YTW : 3.14 %

Market Action

September 1, 2011

The goose that laid the golden eggs is looking a little green around the gills:

Banks in Europe are exploring ways to cut costs by routing more of their trades and other business through overseas subsidiaries, a plan that may shift tax revenue away from London and loosen European regulators’ influence over the lenders.
…
Banks could record as much as 30 percent of the value of their trades through Hong Kong, Singapore and other jurisdictions instead of hubs such as London and New York without running into trouble with regulators, Matten said. Such a move would hurt traditional hubs such as London because assets are treated for tax and regulatory purposes in the country where they are booked. It would also allow banks to sidestep the U.K. bank levy, introduced last year to raise 2.5 billion pounds ($4.1 billion) from lenders operating in Britain, as well as any financial transaction tax imposed by the European Union.

Haresh Sapra, professor of accounting at the University of Chicago Booth School of Business, writes an interesting piece on Bloomberg titled More Transparency May Hurt Markets:

Standard setters have argued that fair-value accounting would alleviate information asymmetry between insiders and outsiders. Yet insiders of many financial institutions have complained that rather than enhancing market discipline, fair- value accounting would introduce volatility into their reported numbers, thereby inducing suboptimal decisions.
…
The recent financial crisis is a case in point. When liquidity started drying up, some banks began to sell their illiquid loans, putting downward pressure on prices. Anticipating the fall in prices, other banks started selling their loans and prices declined further, leading more banks to sell their loans. The effects were so severe that prices no longer reflected fundamentals but rather the amount of cash or liquidity available to buyers in the market.

If information asymmetry were the only friction between insiders and outsiders, the feedback effect would be weak or even nonexistent and prices would play their proper role of providing market discipline. But in strategic environments with multiple imperfections, market participants who try to extract the informational content of current prices distort this very content by adding an extra, nonfundamental component to price fluctuations.

As a result, the choice of an appropriate measurement regime amounts to a dilemma between ignoring price signals — as one would in a historical-cost regime — and relying on their degraded versions, as would be done in a fair-value regime.

Fabulous Fab, the man being persecuted by the SEC for acting as a broker, is in the news again:

Goldman Sachs Group Inc. (GS) trader Fabrice Tourre, accused of misleading investors in a collateralized debt obligation, said in a court filing that IKB Deutsche Industriebank AG (IKB)’s alleged $150 million investment was actually made by two Jersey-based companies.

Tourre wants to take testimony of witnesses at Loreley Financing (Jersey) No. 29 Ltd. and Loreley Financing (Jersey) No. 30 Ltd., according to the filing yesterday in federal court in Manhattan. The U.S. Securities and Exchange Commission has said Duesseldorf, Germany-based IKB made the investment in the CDO, Abacus 2007-AC1.

“Discovery in this matter thus far has shown, however, that IKB’s alleged $150 million investment was, in fact, made by” the Jersey-based companies, Tourre’s lawyers wrote in the filing.
…
“I think what they’re trying to establish here is they have sophistication piled on top of sophistication to show that this was a well-reasoned investment by, yet again, a sophisticated institution,” Jacob S. Frenkel, a former Securities and Exchange Commission lawyer now in private practice in Potomac, Maryland, said in a phone interview today.

The Canadian preferred share market started the month on a happy note, with PerpetualDiscounts winning 25bp, FixedResets up 21bp and DeemedRetractibles gaining 6bp. Volatility was a little bit better than usual, skewed towards positive returns. Volume was low.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.1069 %	2,162.7
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.1069 %	3,252.7
Floater	2.80 %	2.54 %	24,854	20.95	4	0.1069 %	2,335.1
OpRet	4.89 %	2.88 %	65,988	0.16	9	-0.1119 %	2,442.2
SplitShare	5.37 %	0.07 %	58,137	0.49	4	0.0104 %	2,498.8
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.1119 %	2,233.2
Perpetual-Premium	5.65 %	4.76 %	130,690	0.65	14	0.0605 %	2,110.4
Perpetual-Discount	5.33 %	5.37 %	98,408	14.76	16	0.2482 %	2,240.3
FixedReset	5.13 %	3.14 %	207,725	2.66	60	0.2063 %	2,328.0
Deemed-Retractible	5.06 %	4.68 %	260,969	7.99	46	0.0569 %	2,190.5

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.O	OpRet	-1.70 %	YTW SCENARIO Maturity Type : Option Certainty Maturity Date : 2013-06-30 Maturity Price : 25.00 Evaluated at bid price : 25.46 Bid-YTW : 4.47 %
GWO.PR.G	Deemed-Retractible	-1.32 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.72 Bid-YTW : 5.32 %
SLF.PR.G	FixedReset	1.00 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.25 Bid-YTW : 3.41 %
TRI.PR.B	Floater	1.14 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-01 Maturity Price : 22.01 Evaluated at bid price : 22.25 Bid-YTW : 2.35 %
HSB.PR.C	Deemed-Retractible	1.28 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.34 Bid-YTW : 5.07 %
GWO.PR.J	FixedReset	1.36 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2013-12-31 Maturity Price : 25.00 Evaluated at bid price : 26.86 Bid-YTW : 2.50 %
CIU.PR.A	Perpetual-Discount	1.51 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-01 Maturity Price : 23.05 Evaluated at bid price : 23.50 Bid-YTW : 4.90 %
FTS.PR.H	FixedReset	1.56 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-01 Maturity Price : 23.58 Evaluated at bid price : 26.00 Bid-YTW : 2.96 %

Volume Highlights
Issue	Index	Shares Traded	Notes
IFC.PR.C	FixedReset	134,028	Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-30 Maturity Price : 25.00 Evaluated at bid price : 25.00 Bid-YTW : 4.26 %
SLF.PR.D	Deemed-Retractible	104,896	Nesbitt crossed 100,000 at 21.90. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.91 Bid-YTW : 6.05 %
MFC.PR.D	FixedReset	62,816	Nesbitt crossed 49,300 at 27.05. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-19 Maturity Price : 25.00 Evaluated at bid price : 27.14 Bid-YTW : 3.29 %
RY.PR.A	Deemed-Retractible	53,320	Nesbitt crossed 14,000 at 24.94; RBC crossed 10,000 at 24.96. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.91 Bid-YTW : 4.53 %
TD.PR.K	FixedReset	43,096	Scotia crossed 25,000 at 27.35. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-31 Maturity Price : 25.00 Evaluated at bid price : 27.33 Bid-YTW : 3.10 %
SLF.PR.H	FixedReset	35,900	Recent new issue. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.79 Bid-YTW : 3.99 %
There were 21 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
PWF.PR.A	Floater	Quote: 20.75 – 22.15 Spot Rate : 1.4000 Average : 1.1897 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-01 Maturity Price : 20.75 Evaluated at bid price : 20.75 Bid-YTW : 2.54 %
GWO.PR.G	Deemed-Retractible	Quote: 24.72 – 25.16 Spot Rate : 0.4400 Average : 0.3230 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.72 Bid-YTW : 5.32 %
NA.PR.N	FixedReset	Quote: 26.02 – 26.55 Spot Rate : 0.5300 Average : 0.4222 YTW SCENARIO Maturity Type : Call Maturity Date : 2013-08-15 Maturity Price : 25.00 Evaluated at bid price : 26.02 Bid-YTW : 3.36 %
BAM.PR.O	OpRet	Quote: 25.46 – 25.95 Spot Rate : 0.4900 Average : 0.3891 YTW SCENARIO Maturity Type : Option Certainty Maturity Date : 2013-06-30 Maturity Price : 25.00 Evaluated at bid price : 25.46 Bid-YTW : 4.47 %
BMO.PR.Q	FixedReset	Quote: 25.21 – 25.49 Spot Rate : 0.2800 Average : 0.1866 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.21 Bid-YTW : 3.27 %
CIU.PR.C	FixedReset	Quote: 25.01 – 25.49 Spot Rate : 0.4800 Average : 0.4065 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-09-01 Maturity Price : 23.18 Evaluated at bid price : 25.01 Bid-YTW : 3.02 %

Market Action

August 31, 2011

Yesterday I reported on the optimistic accounting at BNP Paribas. The Danes are cracking down on optimism:

The Financial Supervisory Authority will restrict the flexibility it gives banks to calculate writedowns under international financial reporting standards, FSA Director General Ulrik Noedgaard said in an interview in Copenhagen. The regulator wants to curb “an optimistic approach” to writedowns displayed by some banks, he said.

Amagerbanken A/S and Fjordbank Mors A/S collapsed this year after the FSA told the two regional lenders to write down 1.9 billion kroner ($371 million) more in property and farming loans than stated in their accounts. The insolvencies triggered the European Union’s first senior creditor losses within a resolution framework, and prompted Moody’s Investors Service in May to downgrade six Danish banks, including Danske Bank A/S, the country’s biggest. Proper accounting could have helped deal with the losses in a less disruptive way, Noedgaard said.

This one will drive the slogan-chanters nuts:

Standard & Poor’s is giving a higher rating to securities backed by subprime home loans, the same type of investments that led to the worst financial crisis since the Great Depression, than it assigns the U.S. government.

S&P is poised to provide AAA grades to 59 percent of Springleaf Mortgage Loan Trust 2011-1, a set of bonds tied to $497 million lent to homeowners with below-average credit scores and almost no equity in their properties. New York-based S&P stripped the U.S. of its top rank on Aug. 5, saying Washington politics were making the country less creditworthy.
…
S&P has awarded AAAs to more than $36 billion of securities in the U.S. this year that were created by bankers who continue to gather thousands of loans, bundle them into bonds of varying risk and pay ratings firms a fee to assign credit rankings.

The ambulance-chasers are after Sino-Forest … and anybody else they can blame for their investment:

Sino-Forest Corp. (TRE-T4.81—-%), the TSX-listed Chinese forestry company whose shares have collapsed following fraud allegations, repeatedly misrepresented its financial statements, backdated stock options and engaged in unusual and undisclosed related-party transactions, according to fresh allegations levelled in a proposed class-action lawsuit seeking more than $7-billion in damages.

The notice of action, filed on behalf of a group of Sino-Forest shareholders who purchased shares in various offerings between 2007 and 2011, is seeking more than $6.5-billion in damages from Sino-Forest, its top management, directors, and auditors Ernst & Young LLP, as well as the Beijing office of Pöyry Consulting Co. Ltd., which published reports about the size and value of the company’s forestry assets.

A host of investment banks … that underwrote Sino-Forest’s equity offerings were also named as proposed defendants in the action, which seeks an additional $824-million related to the stock sales.

Say what you like about US Republicans, they’re rugged individualists who scorn government hand-outs:

When Texas billionaire Harold Simmons wanted to build a radioactive waste dump, one data point that would loom large in the permitting process wasn’t required on the application: He is a major donor to Governor Rick Perry.
…
Perry has a public record of rewarding his political donors with jobs and state contracts. He has appointed about 4,000 people — including many donors — to commissions, boards and other posts, according to Texans for Public Justice, an Austin- based, nonpartisan group that tracks state political donations.

The campaign to eliminate humour in the western world scored another victory:

The department store said in its statement: “We agree that the ‘Too pretty’ T-shirt does not deliver an appropriate message, and we have immediately discontinued its sale. Our merchandise is intended to appeal to a broad customer base, not to offend them.”

YLO did not file any Insider MTN purchases on SEDI today, but the Normal Course Issuer Bid for the preferreds continued – in fact, it appears that the company bought a block, as some insider (presumably the company) bought a block of 57,100 YLO.PR.B at 9.15, total value $522,465. The common traded somewhere north of 179-million shares on the month – about a third of the entire float, although a lot of that will be double-counted, what with day-traders and all.

The Canadian preferred share market closed the month on a mixed note, with PerpetualDiscounts losing 16bp, FixedResets up 2bp and DeemedRetractibles winning 18bp. Volatility was average. Volume was average.

PerpetualDiscounts now yield 5.39%, equivalent to 7.01% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 5.00%, so the pre-tax interest-equivalent spread (also called the seniority spread) is now 201bp, a tightening from the 210bp reported August 24 as yields converged slightly.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	-0.2134 %	2,160.4
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.2134 %	3,249.2
Floater	2.81 %	2.54 %	25,740	20.95	4	-0.2134 %	2,332.7
OpRet	4.88 %	3.46 %	61,131	0.80	9	-0.1589 %	2,444.9
SplitShare	5.37 %	0.07 %	59,059	0.49	4	0.1295 %	2,498.5
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.1589 %	2,235.7
Perpetual-Premium	5.66 %	4.80 %	131,628	0.65	14	-0.0829 %	2,109.1
Perpetual-Discount	5.34 %	5.39 %	109,784	14.74	16	-0.1565 %	2,234.7
FixedReset	5.14 %	3.16 %	210,341	2.67	60	0.0187 %	2,323.2
Deemed-Retractible	5.06 %	4.67 %	263,932	7.83	46	0.1797 %	2,189.3

Performance Highlights
Issue	Index	Change	Notes
PWF.PR.A	Floater	-2.35 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-31 Maturity Price : 20.75 Evaluated at bid price : 20.75 Bid-YTW : 2.54 %
FTS.PR.C	OpRet	-1.49 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2011-09-30 Maturity Price : 25.50 Evaluated at bid price : 25.86 Bid-YTW : -11.57 %
FTS.PR.E	OpRet	-1.23 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2013-06-01 Maturity Price : 25.75 Evaluated at bid price : 26.51 Bid-YTW : 3.03 %
GWO.PR.L	Deemed-Retractible	1.19 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.35 Bid-YTW : 5.45 %
IAG.PR.C	FixedReset	1.20 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2013-12-31 Maturity Price : 25.00 Evaluated at bid price : 27.00 Bid-YTW : 2.45 %

Volume Highlights
Issue	Index	Shares Traded	Notes
IFC.PR.C	FixedReset	221,464	Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-30 Maturity Price : 25.00 Evaluated at bid price : 24.97 Bid-YTW : 4.28 %
GWO.PR.N	FixedReset	135,340	RBC crossed blocks of 80,000 and 50,000, both at 24.65. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.50 Bid-YTW : 3.47 %
PWF.PR.M	FixedReset	135,200	TD crossed 135,000 at 27.00. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-31 Maturity Price : 25.00 Evaluated at bid price : 26.71 Bid-YTW : 3.27 %
SLF.PR.H	FixedReset	126,045	Recent new issue. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.73 Bid-YTW : 4.02 %
TD.PR.Q	Deemed-Retractible	105,662	TD crossed 100,000 at 26.70. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-01-31 Maturity Price : 26.00 Evaluated at bid price : 26.58 Bid-YTW : 4.09 %
MFC.PR.A	OpRet	63,796	Nesbitt crossed 50,000 at 25.50. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2015-12-18 Maturity Price : 25.00 Evaluated at bid price : 25.40 Bid-YTW : 3.66 %
There were 30 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
PWF.PR.A	Floater	Quote: 20.75 – 22.00 Spot Rate : 1.2500 Average : 0.9591 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-31 Maturity Price : 20.75 Evaluated at bid price : 20.75 Bid-YTW : 2.54 %
CIU.PR.C	FixedReset	Quote: 25.00 – 25.49 Spot Rate : 0.4900 Average : 0.3258 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-31 Maturity Price : 23.18 Evaluated at bid price : 25.00 Bid-YTW : 3.02 %
FTS.PR.E	OpRet	Quote: 26.51 – 27.00 Spot Rate : 0.4900 Average : 0.3268 YTW SCENARIO Maturity Type : Call Maturity Date : 2013-06-01 Maturity Price : 25.75 Evaluated at bid price : 26.51 Bid-YTW : 3.03 %
MFC.PR.E	FixedReset	Quote: 26.33 – 26.73 Spot Rate : 0.4000 Average : 0.2468 YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-19 Maturity Price : 25.00 Evaluated at bid price : 26.33 Bid-YTW : 3.67 %
BAM.PR.P	FixedReset	Quote: 27.00 – 27.38 Spot Rate : 0.3800 Average : 0.2388 YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-30 Maturity Price : 25.00 Evaluated at bid price : 27.00 Bid-YTW : 4.64 %
BNS.PR.Z	FixedReset	Quote: 24.85 – 25.49 Spot Rate : 0.6400 Average : 0.5289 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.85 Bid-YTW : 3.43 %

Market Action

August 30, 2011

I sincerely hope that the banks have shot themselves in the foot:

The Bay Street firms that weren’t invited into the Maple Group plan to buy TMX Group Inc. (X-T39.94-0.42-1.04%) are lining up their options to ensure that competition and low-priced trading services remain should the deal to create a market-dominating company goes through.
…
The Maple plan would combine the two biggest players in the country in trading, and create a for-profit system to replace the current not-for-profit clearing system for shuttling cash between buyers and sellers of stocks after trades take place.
…
That’s why sources said some brokerages are already mulling the idea of starting a new trading system to compete in the business of matching stock buy-and-sell orders, and pushing regulators to adopt a strict cost control system for the clearing business based on the utility industry.

Eric Reguly of the Globe speculates that the LSE might come back with a new offer.

European debt problems are causing a little bit of what some might call hanky panky:

It appears that some companies are not following IAS 39 when determining whether the Greek government bonds that they classify as AFS are impaired. They are using the assessed impact on the present value of future cash flows arising from the proposed restructure of those bonds, rather than using the amount reflected by current market prices as required in IAS 39.

In addition, some companies holding Greek government bonds classified as AFS have stated that they are relying on internal valuation methodologies, rather than on market prices, to measure the fair value of the assets as at 30 June 2011. The reason generally given for using models rather than market prices is that the market for Greek government bonds is currently inactive (and therefore, in their view, does not provide reliable pricing information).

One bank pulling a fast one is BNP Paribas:

However, you wouldn’t normally discover government bonds in Level 3.

BNP Paribas’ argument seems to be that the market for Greek debt is now so illiquid that this accounting shift is justified. The bank explains its determination of fair value and what it counts as an ‘active’ market from page 23 of the full Q2 consolidated financial statements onwards.

Greek debt is hugely illiquid, but the price also reflects a market bet on a massive haircut at some point, and it has done for a while. The influence of Level 3 is in a way appropriate more than you’d think however, as it seems that mathematical modelling has been used during the construction of the Greece bond swap itself. Option 4′s valuation seems to depend on stochastic modelling in some way, for instance.

But for now we’ll just wonder if BNP’s Level 3 will be a guide to other banks taking their Greek impairments medicine…

On a brighter note, sovereign debt is sometimes upgraded:

Peru had its foreign debt rating raised one level by Standard & Poor’s, which said it expects recently elected President Ollanta Humala to continue policies that support the country’s economic expansion.

S&P raised Peru to BBB, the second-lowest investment grade, from BBB-. The outlook is stable. S&P also lifted Paraguay’s rating to BB-, three steps below investment grade, from B+, because an agreement with Brazil to boost its revenue share from a hydroelectric power plant has improved the country’s “fiscal flexibility.”

No new YLO MTN buy-backs but the Normal Course Issuer Bid for the preferreds is still being pursued vigorously, with the fund spending its usual $80,000+ today.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts up 7bp, FixedResets winning 17bp and DeemedRetractibles gaining 9bp. Volatility was OK, with several BAM issues doing well. Volume was a little on the light side of average.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.7930 %	2,165.0
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.7930 %	3,256.2
Floater	2.80 %	2.48 %	26,019	21.12	4	0.7930 %	2,337.6
OpRet	4.88 %	3.68 %	59,362	0.81	9	0.1764 %	2,448.8
SplitShare	5.37 %	0.98 %	59,574	0.49	4	0.1456 %	2,495.3
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.1764 %	2,239.2
Perpetual-Premium	5.65 %	4.49 %	127,866	1.12	14	0.1267 %	2,110.9
Perpetual-Discount	5.34 %	5.36 %	98,091	14.78	16	0.0679 %	2,238.2
FixedReset	5.14 %	3.19 %	212,000	2.67	60	0.1691 %	2,322.8
Deemed-Retractible	5.06 %	4.71 %	266,166	7.99	46	0.0893 %	2,185.3

Performance Highlights
Issue	Index	Change	Notes
FTS.PR.F	Perpetual-Discount	-1.10 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-30 Maturity Price : 24.02 Evaluated at bid price : 24.31 Bid-YTW : 5.05 %
BAM.PR.N	Perpetual-Discount	1.31 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-30 Maturity Price : 22.01 Evaluated at bid price : 22.37 Bid-YTW : 5.38 %
BAM.PR.T	FixedReset	1.37 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-30 Maturity Price : 22.90 Evaluated at bid price : 24.38 Bid-YTW : 4.16 %
BAM.PR.M	Perpetual-Discount	2.00 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-30 Maturity Price : 22.11 Evaluated at bid price : 22.45 Bid-YTW : 5.36 %
IAG.PR.C	FixedReset	2.03 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2013-12-31 Maturity Price : 25.00 Evaluated at bid price : 26.68 Bid-YTW : 2.99 %
PWF.PR.A	Floater	2.36 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-30 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 2.48 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BNS.PR.N	Deemed-Retractible	161,172	Nesbitt crossed 50,000 at 25.80 and two blocks of 35,000 each at the same price. RBC crossed 24,400 at the same price again. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-01-27 Maturity Price : 25.00 Evaluated at bid price : 25.72 Bid-YTW : 4.77 %
BMO.PR.K	Deemed-Retractible	109,343	Desjardins crossed 103,000 at 25.91. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-11-25 Maturity Price : 25.00 Evaluated at bid price : 25.84 Bid-YTW : 4.56 %
MFC.PR.B	Deemed-Retractible	83,844	TD crossed 75,400 at 22.05. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.14 Bid-YTW : 6.16 %
SLF.PR.D	Deemed-Retractible	82,343	Desjardins crossed 25,000 at 21.77; TD crossed 50,000 at the same price. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.85 Bid-YTW : 6.09 %
BNS.PR.P	FixedReset	80,320	RBC crossed 17,000 at 25.90; Nesbitt crossed 50,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-04-25 Maturity Price : 25.00 Evaluated at bid price : 25.81 Bid-YTW : 3.26 %
IFC.PR.C	FixedReset	57,155	Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-09-30 Maturity Price : 25.00 Evaluated at bid price : 24.95 Bid-YTW : 4.30 %
There were 29 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
BNS.PR.Z	FixedReset	Quote: 24.86 – 25.45 Spot Rate : 0.5900 Average : 0.4071 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.86 Bid-YTW : 3.42 %
FTS.PR.G	FixedReset	Quote: 25.80 – 26.60 Spot Rate : 0.8000 Average : 0.6192 YTW SCENARIO Maturity Type : Call Maturity Date : 2013-09-01 Maturity Price : 25.00 Evaluated at bid price : 25.80 Bid-YTW : 3.59 %
FTS.PR.F	Perpetual-Discount	Quote: 24.31 – 24.75 Spot Rate : 0.4400 Average : 0.3013 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-30 Maturity Price : 24.02 Evaluated at bid price : 24.31 Bid-YTW : 5.05 %
ELF.PR.F	Perpetual-Discount	Quote: 22.85 – 23.34 Spot Rate : 0.4900 Average : 0.3793 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-30 Maturity Price : 22.56 Evaluated at bid price : 22.85 Bid-YTW : 5.87 %
BAM.PR.I	OpRet	Quote: 25.42 – 25.98 Spot Rate : 0.5600 Average : 0.4738 YTW SCENARIO Maturity Type : Call Maturity Date : 2012-06-30 Maturity Price : 25.00 Evaluated at bid price : 25.42 Bid-YTW : 4.59 %
GWO.PR.J	FixedReset	Quote: 26.80 – 27.20 Spot Rate : 0.4000 Average : 0.3174 YTW SCENARIO Maturity Type : Call Maturity Date : 2013-12-31 Maturity Price : 25.00 Evaluated at bid price : 26.80 Bid-YTW : 3.24 %

Market Action

August 29, 2011

Banks are pushing back against proposed capital rules:

The Clearing House Association and the Institute of International Bankers, whose members include JPMorgan Chase & Co (JPM), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), Citigroup Inc. (C), Deutsche Bank AG (DBK) and ING Groep NV (INGA), said in a letter that capital surcharges agreed to by the Federal Reserve and international regulators are “deeply flawed” and “reflexively based on the notion that size alone creates prudential concerns.”
…
Bloomberg News obtained an Aug. 25 draft of the letter, which will be filed as a comment on proposed capital surcharges for big banks agreed on by the Basel Committee on Banking Supervision in June. The Fed, which is part of the Basel Committee, is also preparing to release its own proposals under the Dodd-Frank Act for stricter standards for the largest U.S. banks sometime in the next five weeks.

Tighter international and U.S. standards on capital, liquidity and risk management are likely to alter competition in the U.S., the banking groups said in their letter. The Basel capital surcharge will “lead to unjustified competitive inequities between large banks” subject to the charge and others that aren’t, they said.

A bit more detail regarding TRE. Sino-Forest announced the resignation of its chairman:

Sino-Forest Corporation (“Sino-Forest” or the “Company”)
(TSX:TRE) announced that Allen Chan has voluntarily resigned as Chairman, Chief Executive Officer and Director, pending completion of the review by the Independent Committee of the allegations made by Muddy Waters.
…
Mr. Chan will become Founding Chairman Emeritus of the Company and will be fully available to assist Mr. Martin with operational matters and with the Independent Committee review as requested.

The Globe reported on the sequence of events :

Mr. Chan’s resignation follows a tumultuous week of allegations and confrontations. Shortly after the company alerted the OSC about its discovery of what sources described as irregular deals involving Mr. Chan, the OSC caught the company off guard on Friday by slapping a cease trade order on its stock and ordering the resignation of Mr. Chan and the four executives.

I have not yet seen any updated commentary from Richard Kelertas of Dundee Securities, whose changing views on the topic were discussed here on June 20.

S&P withdrew ratings after a downgrade to CCC-:

We expect China-based commercial forest operator Sino-Forest’s business
to rapidly deteriorate following additional fraud allegations and senior management resignations.

We are lowering the corporate credit rating on Sino-Forest and the issue rating on its senior unsecured notes and convertible bonds to ‘CCC-‘ from ‘B’. We removed all the ratings from CreditWatch.
We are also withdrawing the ratings due to heightened information risks.
The negative outlook prior to the rating withdrawal reflected our view that the company’s operations were likely to deteriorate further in the
next 12 months, at least.

Moody’s also downgrade, but did not withdraw the rating:

Moody’s Investors Service has downgraded to Caa1 from B1 the corporate family and senior unsecured debt ratings of Sino-Forest Corporation (“Sino-Forest”).

At the same time, Moody’s continues its review for further downgrade.

What a surprise! The Maple-TMX deal may well fail!

TMX Group Inc., which has gained the most of any exchange involved in the industry’s biggest wave of acquisitions, is now in danger of being left without a buyer.

Since reaching a three-year high in June as the London Stock Exchange Group Plc and a group of Canadian banks waged a bidding contest, the owner of the Toronto bourse has now fallen more than 10% with the LSE scrapping its agreement. TMX is trading almost $10 below the $50-a-share unsolicited bid from Maple Group Acquisition Corp., close to the widest gap since it was announced in May and indicating that traders are growing increasingly concerned the takeover will also fail.

While more than US$30-billion in acquisitions for exchanges have been announced in the past year, only one deal — Deutsche Boerse AG’s takeover of NYSE Euronext — has been approved by shareholders. Macquarie Group Ltd. says Maple’s attempt to buy TMX may not overcome antitrust scrutiny because it would combine Canada’s largest bourse with its biggest rival, Alpha Group, and create an entity controlling 85 percent of the nation’s trading. That may make TMX, one of the least valuable market venues versus earnings, fall further, said WallachBeth Capital LLC.

Of course, that all depends on what you mean by the word “fail”. If you define success as “scuttling an international acquisition that would create an entity with enough size to talk back to the banks”, then it’s already a success!

The Globe & Mail blog had a good post titled Ms. Lagarde’s recapitalization plan makes sense:

Freed of her government shackles, the former French finance minister pulled no punches Saturday in her first major speech to the august audience. Ms. Lagarde declared flatly that European banks “need urgent recapitalization. They must be strong enough to withstand the risks of sovereigns and weak growth. This is key to cutting the chains of contagion. If it is not addressed, we could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis.”

Her proposal: “Mandatory substantial recapitalization — seeking private resources first, but using public funds if necessary.”
…
The response, predictably, has been howls of indignation in European political and banking circles. A Reuters headline summed up the attitude: “Europe snubs IMF call to force-feed bank capital.”
…
But there is a saying that a nation’s banking system is only as sound as its government. And that is particularly true in Europe, where banks hold an inordinate amount of government debt on their books. The reason is simple: Loans to your friendly local government count as a risk-free asset under Basel rules. Too bad the markets don’t agree.

Golly – substitute “AAA subprime paper” for “loans to your friendly local government” and that last paragraph could have been written in 2008!

Her published remarks also include an exhortation for the US:

So the United States needs to move on two specific fronts.
….
Second—halting the downward spiral of foreclosures, falling house prices and deteriorating household spending. This could involve more aggressive principal reduction programs for homeowners, stronger intervention by the government housing finance agencies, or steps to help homeowners take advantage of the low interest rate environment.

See the post titled Redefault on Modified Mortgages for more on that idea.

There’s more commentary at BusinessInsider.com

The Italians aren’t hurting enough yet:

The Italian government backtracked on parts of its widely criticized austerity package on Monday, scrapping a tax on high earners and scaling back cuts to local authority funding.

In a statement after seven hours of talks at Prime Minister Silvio Berlusconi’s home outside Milan, the government said it would also exclude years spent at university and military service from retirement age calculations, delaying retirement for some people.

The statement contained little detail on the funding impact of the changes or how the government would make up for revenue lost from the €45.5-billion ($66-billion U.S.) austerity package now making its way through parliament which is aimed at balancing the budget by 2013.

There was also no mention of any increase in value-added tax, a measure which had been widely mooted in the media before the meeting.

It was a good day overall for the Canadian preferred share market, with PerpetualDiscounts gaining 21bp, FixedResets down 3bp and DeemedRetractibles up 10bp. Volatility was reasonable. Volume was a little on the soft side of average.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	-0.2681 %	2,148.0
FixedFloater	0.00 %	0.00 %	0	0.00	0	-0.2681 %	3,230.5
Floater	2.82 %	2.54 %	26,150	20.96	4	-0.2681 %	2,319.3
OpRet	4.88 %	2.86 %	59,794	0.57	9	-0.0817 %	2,444.5
SplitShare	5.38 %	0.97 %	62,037	0.50	4	0.1771 %	2,491.7
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0817 %	2,235.3
Perpetual-Premium	5.66 %	4.69 %	128,585	1.13	14	0.1043 %	2,108.2
Perpetual-Discount	5.34 %	5.46 %	98,163	14.64	16	0.2093 %	2,236.7
FixedReset	5.15 %	3.23 %	213,196	2.67	60	-0.0275 %	2,318.9
Deemed-Retractible	5.07 %	4.69 %	255,975	7.96	46	0.0982 %	2,183.4

Performance Highlights
Issue	Index	Change	Notes
FTS.PR.E	OpRet	-1.37 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2013-06-01 Maturity Price : 25.75 Evaluated at bid price : 26.58 Bid-YTW : 2.86 %
TRI.PR.B	Floater	-1.36 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-29 Maturity Price : 21.49 Evaluated at bid price : 21.75 Bid-YTW : 2.40 %
NA.PR.P	FixedReset	-1.06 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-02-15 Maturity Price : 25.00 Evaluated at bid price : 27.06 Bid-YTW : 3.22 %
SLF.PR.A	Deemed-Retractible	1.05 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.14 Bid-YTW : 5.69 %
PWF.PR.L	Perpetual-Discount	1.32 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-29 Maturity Price : 24.28 Evaluated at bid price : 24.57 Bid-YTW : 5.23 %

Volume Highlights
Issue	Index	Shares Traded	Notes
CM.PR.I	Deemed-Retractible	241,086	RBC crossed four blocks: 47,500 shares, two of 50,000 each, and one of 49,500, all at 25.20. Nesbitt crossed 25,000 at 25.20. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.15 Bid-YTW : 4.66 %
RY.PR.P	FixedReset	86,179	TD crossed 50,000 at 27.00; Scotia crossed 35,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-02-24 Maturity Price : 25.00 Evaluated at bid price : 26.90 Bid-YTW : 3.11 %
HSB.PR.E	FixedReset	71,667	RBC crossed 65,600 at 27.68. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-30 Maturity Price : 25.00 Evaluated at bid price : 27.42 Bid-YTW : 3.42 %
MFC.PR.D	FixedReset	67,314	RBC crossed blocks of 50,000 and 13,000, both at 27.00. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-19 Maturity Price : 25.00 Evaluated at bid price : 26.89 Bid-YTW : 3.64 %
MFC.PR.B	Deemed-Retractible	62,082	Scotia crossed 25,000 at 22.18; TD crossed 25,000 at the same price. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.16 Bid-YTW : 6.14 %
CM.PR.J	Deemed-Retractible	56,203	TD crossed blocks of 25,000 and 24,500, both at 25.10. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.02 Bid-YTW : 4.56 %
There were 29 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
IAG.PR.C	FixedReset	Quote: 26.15 – 26.95 Spot Rate : 0.8000 Average : 0.5909 YTW SCENARIO Maturity Type : Call Maturity Date : 2013-12-31 Maturity Price : 25.00 Evaluated at bid price : 26.15 Bid-YTW : 3.91 %
PWF.PR.A	Floater	Quote: 20.76 – 22.00 Spot Rate : 1.2400 Average : 1.0681 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-29 Maturity Price : 20.76 Evaluated at bid price : 20.76 Bid-YTW : 2.54 %
BAM.PR.B	Floater	Quote: 15.99 – 16.48 Spot Rate : 0.4900 Average : 0.3348 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-29 Maturity Price : 15.99 Evaluated at bid price : 15.99 Bid-YTW : 3.31 %
BAM.PR.M	Perpetual-Discount	Quote: 22.01 – 22.49 Spot Rate : 0.4800 Average : 0.3332 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-29 Maturity Price : 21.67 Evaluated at bid price : 22.01 Bid-YTW : 5.47 %
ELF.PR.F	Perpetual-Discount	Quote: 23.01 – 23.38 Spot Rate : 0.3700 Average : 0.2579 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-29 Maturity Price : 22.72 Evaluated at bid price : 23.01 Bid-YTW : 5.83 %
NA.PR.P	FixedReset	Quote: 27.06 – 27.38 Spot Rate : 0.3200 Average : 0.2083 YTW SCENARIO Maturity Type : Call Maturity Date : 2014-02-15 Maturity Price : 25.00 Evaluated at bid price : 27.06 Bid-YTW : 3.22 %

Market Action

August 26, 2011

Three cheers for Muddy Waters!

The Ontario Securities Commission said it ordered five executives of Sino-Forest Corp. (TRE) including Chief Executive Officer Allen Chan to resign because the forestry operator may have misrepresented revenue and exaggerated its timber holdings.

Canada’s main securities regulator also ordered the shares to cease trading, it said in an e-mailed statement today. Stan Neve, an external spokesman for the Hong Kong- and Mississauga, Ontario-based company, declined to comment. OSC spokesman Dylan Rae didn’t immediately return a phone call seeking comment.

The OSC Cease Trade / Suspension Order states in part:

12. Sino-Forest, through its subsidiaries, appears to have engaged in significant non-arm’s length transactions which may have been contrary to Ontario securities laws and the public interest;

13. Sino-Forest and certain of its officers and directors appear to have misrepresented some of its revenue and/or exaggerated some of its timber holdings by providing information to the public in documents required to be filed or furnished under Ontario securities laws which may have been false or misleading in a material respect contrary to section 122 or 126.2 of the Act and contrary to the public interest;

14. Sino-Forest and certain of its officers and directors including Chan appear to be engaging or participating in acts, practices or a course of conduct related to its securities which it and/or they know or reasonably ought to know perpetuate a fraud on any person or company contrary to section 126.1 of the Act and contrary to the public interest;

Let’s take a vote … would the Madoff Ponzi scheme have done so much damage if it had been possible to short-sell his fund?

The OSC later rescinded the order regarding the executives because, um, they don’t have that authority:

The Ontario Securities Act doesn’t allow the commission to force the resignation of a corporate officer in a temporary order without a hearing.

Well, one way or another, it looks like Sino-Forest was actually doing something naughty – just how naughty, is currently impossible to tell, but I don’t think the OSC would take this step unless they could actually point to something meaningful. Fearless Forecast: the usual pack of clowns will claim that (a) this is the regulators’ fault, and (b) it never would have happened if we had a national regulator.

US banks have a problem – too much money:

U.S. regulators have asked some banks to take more deposits from large investors even if it’s unprofitable, and lenders in return are seeking relief on insurance premiums and leverage ratios, according to six people with knowledge of the talks.

Deposits are flooding into the biggest U.S. banks as customers seek shelter from Europe’s debt crisis and falling stock prices. That forces lenders to raise capital for a growing balance sheet and saddles them with the higher deposit insurance payments. With short-term interest rates so low, it’s hard for financial firms to reinvest the new money profitably.
…
While the Fed has been paying 0.25 percent interest on deposits placed with the central bank, known as interest on excess reserves, since late 2008, it may not be enough to erase the cost to banks of holding the deposits, said Robert Eisenbeis, a former head of research at the Federal Reserve Bank of Atlanta and now chief monetary economist for Sarasota, Florida-based Cumberland Advisors Inc.
…
FDIC insurance fees for large banks typically average more than 0.1 percent, three of the people said. In addition, large banks also may apply an internal capital charge of at least 0.1 percent to such reserves, one bank executive estimated.

The Greek government has announced terms for its COMPLETELY VOLUNTARY exchange offer:

“Greece shall not be obliged to proceed with any portion of the transaction described in this letter unless holders of eligible GGBs tender, in response to Greece’s eventual Invitation to Tender, eligible GGBs having a principal amount equal to not less than 90% of all eligible GGBs, including 90% of that portion of the eligible GGBs maturing during the period from June 30, 2011 through August 31, 2014. If these thresholds (or either of them) are not met, Greece shall not proceed with any portion of the transaction described in this letter if it determines, in consultation with the official sector, that the total contribution of private sector creditors towards the financing needs of Greece and Greece’s debt sustainability resulting from this transaction is insufficient to permit the official sector to support the new multi-year adjustment program for Greece announced on July 21, 2011.”
…
The interest rate (which will comprise of an initial rate applicable to years 1–5 increasing by 0.50% p.a. for years 6-10 and a further 0.50% p.a. for years 11-30) will be determined at or about the time of launch of the liability management transaction (the “Rate Fixing Date”) to result in a net present value of 79% of the face value of eligible GGBs tendered.

Merkel continued to ratchet up the inflammatory language:

German Chancellor Angela Merkel said investors are trying to “blackmail” governments into helping debt-strapped European countries, underscoring the need for all euro-area governments to reduce debt.

You tell ’em, Merkel! You tell the financial markets: ‘We won’t pay your extortionate interest rates because we don’t need to borrow any money!’ That’ll fix ’em.

Hurricanes affect markets:

Rates for borrowing and lending securities in the repurchase-agreement market rose and investors sought to extend maturities on concern power outages and closings of mass transit will keep traders home after Hurricane Irene strikes.

Overnight general collateral Treasury repurchase, or repo, rates, opened today at 0.10 percent and traded at 0.13 percent at 10 a.m. New York time, according to data from ICAP Plc, the world’s largest inter-dealer broker.

Securities dealers use repos to finance holdings and increase leverage. The majority of repo transactions take place on an overnight basis, with those current funding positions maturing on Aug. 29. Diminished staffing and computer-related problems following the hurricane may make it difficult to roll over such transactions.

BC voted in favour of increasing the cost of tax collection:

British Columbian voters have rejected the province’s controversial harmonized sales tax in an unprecedented referendum – a decision that will complicate efforts by the province’s Liberal government to manage B.C.’s finances and may also head off the prospect of a fall election.
…
Adrian Dix, leader of the opposition BC New Democrats, urged the provincial government to move quickly to restore the 7 per cent B.C. provincial sales tax., and also urged the Liberals to focus on the economy, jobs, health, education and the environment.

It was a quiet day for the Canadian preferred share market, with PerpetualDiscounts down 1bp, FixedResets flat, and DeemedRetractibles losing 4bp. Volatility was reasonable; volume was low.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.7836 %	2,153.8
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.7836 %	3,239.2
Floater	2.82 %	2.54 %	27,276	20.96	4	0.7836 %	2,325.5
OpRet	4.88 %	2.03 %	58,388	0.57	9	0.1205 %	2,446.5
SplitShare	5.39 %	1.84 %	64,606	0.51	4	-0.2286 %	2,487.3
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.1205 %	2,237.1
Perpetual-Premium	5.66 %	4.76 %	127,514	1.18	14	0.1072 %	2,106.0
Perpetual-Discount	5.35 %	5.47 %	99,055	14.61	16	-0.0052 %	2,232.0
FixedReset	5.14 %	3.18 %	206,879	2.71	60	0.0000 %	2,319.5
Deemed-Retractible	5.07 %	4.71 %	258,276	7.99	46	-0.0412 %	2,181.2

Performance Highlights
Issue	Index	Change	Notes
CIU.PR.B	FixedReset	-1.20 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-01 Maturity Price : 25.00 Evaluated at bid price : 27.17 Bid-YTW : 3.38 %
FTS.PR.G	FixedReset	-1.11 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-26 Maturity Price : 23.84 Evaluated at bid price : 25.81 Bid-YTW : 3.50 %
GWO.PR.M	Deemed-Retractible	-1.09 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.52 Bid-YTW : 5.69 %
RY.PR.H	Deemed-Retractible	1.02 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-24 Maturity Price : 26.00 Evaluated at bid price : 26.73 Bid-YTW : 3.78 %
BAM.PR.K	Floater	1.34 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-26 Maturity Price : 15.91 Evaluated at bid price : 15.91 Bid-YTW : 3.33 %
TRI.PR.B	Floater	1.38 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-26 Maturity Price : 21.81 Evaluated at bid price : 22.05 Bid-YTW : 2.37 %

Volume Highlights
Issue	Index	Shares Traded	Notes
MFC.PR.D	FixedReset	233,426	Nesbitt crossed 50,000 at 27.00; RBC crossed blocks of 50,000 and 98,200 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-19 Maturity Price : 25.00 Evaluated at bid price : 26.87 Bid-YTW : 3.65 %
CM.PR.I	Deemed-Retractible	154,300	Nebitt crossed 34,900 at 25.15; Desjardins crossed 50,000 at 25.20; RBC crossed 50,000 at 25.20. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.20 Bid-YTW : 4.60 %
MFC.PR.F	FixedReset	114,085	RBC crossed two blocks of 50,000 each, both at 24.65. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.61 Bid-YTW : 3.69 %
CM.PR.L	FixedReset	112,862	Nesbitt crossed 52,100 at 27.45; RBC crossed 28,000 at 27.45; Nesbitt crossed 25,000 at 27.46. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-30 Maturity Price : 25.00 Evaluated at bid price : 27.46 Bid-YTW : 2.85 %
RY.PR.T	FixedReset	96,400	RBC crossed blocks of 75,000 and 20,000, both at 27.26. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-24 Maturity Price : 25.00 Evaluated at bid price : 27.20 Bid-YTW : 3.19 %
TD.PR.C	FixedReset	58,861	Scotia crossed 50,000 at 26.55. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-31 Maturity Price : 25.00 Evaluated at bid price : 26.51 Bid-YTW : 3.18 %
There were 23 other index-included issues trading in excess of 10,000 shares.

Wide Spread Highlights
Issue	Index	Quote Data and Yield Notes
PWF.PR.A	Floater	Quote: 20.76 – 21.99 Spot Rate : 1.2300 Average : 0.8796 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-26 Maturity Price : 20.76 Evaluated at bid price : 20.76 Bid-YTW : 2.54 %
CIU.PR.B	FixedReset	Quote: 27.17 – 27.86 Spot Rate : 0.6900 Average : 0.5033 YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-01 Maturity Price : 25.00 Evaluated at bid price : 27.17 Bid-YTW : 3.38 %
GWO.PR.G	Deemed-Retractible	Quote: 25.05 – 25.49 Spot Rate : 0.4400 Average : 0.3060 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.05 Bid-YTW : 5.31 %
NA.PR.N	FixedReset	Quote: 26.20 – 26.64 Spot Rate : 0.4400 Average : 0.3183 YTW SCENARIO Maturity Type : Call Maturity Date : 2013-08-15 Maturity Price : 25.00 Evaluated at bid price : 26.20 Bid-YTW : 2.96 %
IAG.PR.E	Deemed-Retractible	Quote: 25.52 – 25.97 Spot Rate : 0.4500 Average : 0.3370 YTW SCENARIO Maturity Type : Call Maturity Date : 2018-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.52 Bid-YTW : 5.60 %
GWO.PR.M	Deemed-Retractible	Quote: 25.52 – 25.87 Spot Rate : 0.3500 Average : 0.2487 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.52 Bid-YTW : 5.69 %

Volume Highlights
Issue	Index	Shares Traded	Notes
CIU.PR.B	FixedReset	55,226	RBC crossed two blocks of 23,600 each, both at 27.35. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-01 Maturity Price : 25.00 Evaluated at bid price : 27.30 Bid-YTW : 3.24 %
BNS.PR.T	FixedReset	53,687	RBC crossed blocks of 23,500 and 25,000, both at 27.35. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-25 Maturity Price : 25.00 Evaluated at bid price : 27.32 Bid-YTW : 2.86 %
BNS.PR.L	Deemed-Retractible	45,218	TD crossed 20,000 at 25.19. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-04-27 Maturity Price : 25.00 Evaluated at bid price : 25.16 Bid-YTW : 4.49 %
TD.PR.R	Deemed-Retractible	39,914	RBC crossed 18,500 at 26.75. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-04-30 Maturity Price : 26.00 Evaluated at bid price : 26.75 Bid-YTW : 3.92 %
RY.PR.A	Deemed-Retractible	39,461	YTW SCENARIO Maturity Type : Call Maturity Date : 2015-05-24 Maturity Price : 25.00 Evaluated at bid price : 25.09 Bid-YTW : 4.42 %
BMO.PR.J	Deemed-Retractible	38,127	YTW SCENARIO Maturity Type : Call Maturity Date : 2016-02-25 Maturity Price : 25.00 Evaluated at bid price : 25.15 Bid-YTW : 4.42 %
There were 26 other index-included issues trading in excess of 10,000 shares.

PrefBlog

Category: Market Action

September 9, 2011

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