Category: Market Action

Only four months until Christmas!

Oh, those naughty European speculators! No matter how often they’re told everything is fine, they keep panicking!

Stocks retreated as panic selling pushed Germany’s DAX Index (DAX) down 4 percent in 15 minutes amid speculation that Germany’s public finances are deteriorating and that regulators may impose restrictions on the market. The dollar and Treasuries advanced, while oil fell and Bank of America Corp. shares surged.
…
There was concern Germany’s debt rating would be reduced, said Walter Todd, the chief investment officer at Greenwood Capital Inc. in Greenwood, South Carolina. CNBC reported that S&P, Moody’s Investors Service and Fitch Ratings all affirmed their ratings.

Investors also speculated that Germany would impose a short-selling ban, said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management Inc. in Chicago. German regulator BaFin has “all the regulation in place” regarding short selling in equities, press officer Dominika Kula said, in response to a question on whether the agency may ban the practice.

I propose that anybody wishing to sell a stock should submit a form in triplicate to the regulators, who will ensure that the decision has been made in accordance with the required process. That’ll fix those pesky speculators!
On cue:

French, Italian and Spanish stock- market regulators extended temporary bans on short selling introduced this month in a bid to stem market volatility.

Spain and Italy extended their bans through Sept. 30, regulators in both countries said in a statement. France’s Autorite des Marches Financiers said its ban could last as long as Nov. 11. The “objective” is to lift the temporary ban on short-selling of financial stocks “as soon as market conditions allow,” Spain’s CNMV market regulator said.

YLO took a break on its MTN buyback today, with no filings. However, it appears that they continued buying YLO.PR.B, YLO.PR.C and YLO.PR.D on the exchange through their Normal Course Issuer Bid.

DBRS confirmed Toronto at AA:

DBRS has today confirmed the ratings of the debentures issued by the City of Toronto (the City) at AA. The trends remain Stable, supported by the City’s relatively wealthy tax base and strong resolve in restraining spending and finding permanent solutions to eliminate the budget gap. However, debt remains under considerable pressure as a result of heavy capital spending, which is eroding financial flexibility and could affect the City’s rating if increases are not contained.
…
DBRS commends management for the thorough review underway, which is probably the most extensive cost-containment effort undertaken by the City in recent memory. However, it remains unclear whether Council will approve the full range of measures necessary to protect fiscal sustainability. Significant concerns also remain with respect to the rising tax-supported debt burden, which stood at a moderate $964 per capita at December 31, 2010, but is set to grow by more than 50% to approximately $1,550 per capita by 2014 due to capital investments. While still manageable, the projected debt peak is up notably from the forecasts available at the time of last year’s rating review and is expected to consume a significant portion of the remaining flexibility within the current rating category. Since the capital plan excludes more than $8 billion in transit needs, the risk of further sizeable revisions to debt projections and their potentially adverse effect on the rating remains material.

I received notice today that a neighbor is seeking a zoning variance. It would appear that supporting documents are not filed electronically and are not available on the Internet. I have get to the York Civic Centre and ask a bureaucrat if I can look at them. Hymas Bonehead Rating Service confirms Toronto at AAAA++.

The Canadian preferred share market pulled back today, with PerpetualDiscounts down 13bp, FixedResets off 10bp and DeemedRetractibles losing 26bp. Good volatility – albeit highly skewed to the negatives! – and volume was merely average, although several issues traded more than 100,000 shares.

Moody’s downgraded Japan:

Japan’s debt rating was lowered by Moody’s Investors Service, which cited “weak” prospects for economic growth that will make it difficult for the government to rein in the world’s largest public debt burden.

Moody’s cut the grade one step to Aa3, with a stable outlook, it said in a statement today. Rebuilding costs from the March 11 earthquake and tsunami, along with continuing efforts to contain the Fukushima nuclear crisis, may make it hard for officials to meet their borrowing target this year, it said.

More joy from US housing:

Home prices in the U.S. fell 5.9 percent in the second quarter from a year earlier, the biggest decline since 2009, as foreclosures added to the inventory of properties for sale.

Prices dropped 0.6 percent from the prior three months, the Federal Housing Finance Agency said today in a report from Washington. In June, prices retreated 4.3 percent from a year earlier, while increasing 0.9 percent from the previous month.
…
The U.S. inventory of homes for sale averaged 3.7 million during the second quarter, the highest since the third quarter of 2010, data from the National Association of Realtors show. The mortgages on 6.5 million U.S. homes had late payments or were in foreclosure in June, according to Lender Processing Services Inc. in Jacksonville, Florida.

It’s all the banks fault! Banks are evil! Banks should show forebearance, the way the neighbors would!

Members of the Vintage East Condominium Association in Miami Beach got tired of waiting for JPMorgan Chase & Co. (JPM) to foreclose on unit 9, so they sued the bank in February to take control of the property.

In June, more than four years after the owner stopped making payments, a judge ruled that JPMorgan lost its claim to the $144,000 mortgage. The apartment is now on the market for $87,500, and the association may stave off insolvency with proceeds from the sale and a new owner who pays monthly dues, said Jane Losson, a board member at the complex.
…
Financially troubled condo associations are taking banks to court as foreclosure delays enable delinquent homeowners to stay in their buildings for years, often without paying dues that keep boards running. The groups start by pressuring lenders to speed up home seizures and take over payment of the monthly fees. In extreme situations, like the Vintage East case, associations may force banks to give up rights to the property.
…
The bank delays have left homes in the delinquency process longer. U.S. homeowners facing foreclosure averaged 587 days without making a mortgage payment in June, up from 251 days in January 2008, according to Lender Processing Services Inc. (LPS), a real estate information company in Jacksonville, Florida.

In Florida, where 14 percent of homes with a mortgage have a foreclosure notice, the average delinquent borrower hadn’t made a payment for 719 days, or almost two years, LPS data show.

What a surprise! European credit markets are sick:

Investors are demanding a yield of 42 per cent to buy Greek two year notes amid concern that bailouts won’t work.

In the corporate credit markets, huge financial institutions aren’t able to borrow for longer terms such as five years. There’s no credible market for their bonds, strategists say, but even guesses at the prices show interest rates that investors would demand from banks mean there’s no way they would borrow.

This is having a few knock-on effects:

UBS AG (UBSN)’s decision to cut 5 percent of its workforce brings to more than 40,000 the number of jobs cut by European banks in the past month as the region’s worsening sovereign debt crisis crimps trading revenue.

UBS, Switzerland’s biggest bank, said yesterday it will eliminate 3,500 jobs, mainly from its investment bank. It follows HSBC Holdings Plc (HSBA), which announced 30,000 cuts on Aug. 1, Barclays Plc (BARC), which is cutting headcount by 3,000, and Royal Bank of Scotland Group Plc (RBS), which is eliminating 2,000 posts. Credit Suisse Group AG (CSGN) announced 2,000 reductions on July 28.

European banks are slashing jobs this year six times faster than their U.S. peers, according to data compiled by Bloomberg…

I’m not the only one nervous about the ECB buying bad credits:

“In the long term, this can’t be good, and therefore should be tolerated at best for a short period of time,” Mr. Wulff said in the English text of his remarks, which were delivered in German. “The guardians of the currency, too, must quickly find their way back to the agreed principles. I regard the huge buy-up of government bonds of individual states by the European Central Bank as legally questionable.”
…
Mr. Wulff’s views are reflective more of the mood of the rank-and-file of Germany coalition government than of the government itself. German Chancellor Angel Merkel said in the eastern German city of Mageburg Wednesday that she would vigorously fight the breakup of the currency bloc.
…
The yield on two-year Greek debt surged to a record Wednesday, as investors demanded interest of more than 44 per cent to buy the security. Faith in the latest European effort to rescue Greece is waning as several of its euro-area partners demand collateral in return for aid payments. Greece earlier sent Finland cash to secure the Nordic country’s contribution to the pan-European bailout plan.

You win some, you lose some:

John Paulson, the billionaire who is betting on an economic recovery by the end of 2012, has lost about 14 percent this month on a merger arbitrage hedge fund, according to an investor.

The Paulson Partners Enhanced fund declined 11 percent this year through Aug. 19, said the investor, who asked not to be named because the information is private. The fund had been up 2.9 percent this year through Aug. 4.

Paulson’s merger-fund losses add to the declines his New York-based firm, Paulson & Co., has suffered on other strategies. His largest hedge fund, Paulson Advantage Plus, dropped 22 percent this month through Aug. 19, bringing its 2011 loss to 39 percent, the investor said.

I wonder how the Disadvantage Minus fund did!

DBRS confirmed AER.PR.A at Pfd-3.

S&P downgraded Sino-Forest yesterday:

• We believe the delay in the findings of an independent committee’s investigation into fraud allegations is negative for Sino-Forest’s credit profile.
• In addition, the company’s operating profit declined in the most recently reported financial quarter.
• We are therefore lowering the corporate credit rating on Sino-Forest and the issue rating on its senior unsecured notes and convertible bonds to ‘B’ from ‘B+’.
• We have kept all the ratings on CreditWatch with negative implications. We may withdraw or suspend the ratings if we believe information risk is too high, such as the company delays its results announcement for the third quarter of 2011 or the investigation is extended again.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 20bp, FixedResets gaining 12bp and DeemedRetractibles up 17bp. Good volatility, with the Performance Highlights table comprised completely of winners. Volume was average.

PerpetualDiscounts now yield 5.45%, equivalent to about 7.08% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.95%, so the pre-tax interest-equivalent spread is now about 210bp, a tightening from the 225bp reported August 17 as the yields converged slightly.

Some parts of the US economy are growing rapidly:

At least one sector of the economy is booming, and President Barack Obama can legitimately take credit for it. Since he took office, employment has surged 13 percent at federal regulatory agencies. The regulators’ budgets are up 16 percent. (These numbers are derived from a May report published by Washington University and George Washington University.) And that’s before some of the major regulatory initiatives of the administration — the financial-reform bill and the health-care overhaul — are fully implemented.

Obama understands that a reputation for regulatory hyperactivity in the midst of a weak economy wouldn’t help his re-election prospects. In January, he promised “a government- wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive.” That review led to some modest improvements: The Environmental Protection Agency pulled back a rule that would have treated dairy spills on farms as though they were oil spills.

Equitable Group, proud issuer of ETC.PR.A has announced:

that it has become aware of a suspected fraud relating to four loans having a total outstanding balance of approximately $14.0 million. The amount of the total loss, if any, cannot be determined at this time. The matter is presently being investigated with a view to minimizing any potential losses to the Company.

Equitable is currently reviewing its legal options for commencing claims against several parties to the subject loan transactions and is consulting with legal counsel in this regard. In addition, Equitable maintains insurance that is intended to cover such occurrences. There is no assurance that the proceeds or recoveries, if any, will be received in a timely manner, or that such proceeds or recoveries will be sufficient to recover the full amount of the loans.

If totally lost, that’s enough to wipe out a whole quarter’s profit.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 22bp, FixedResets gaining 4bp and DeemedRetractibles up 8bp. Volatility was low, volume was on the low side.

Richard W Fisher, President and Chief Executive Officer of the Federal Reserve Bank of Dallas, gave a speech titled Connecting the dots – Texas employment growth; a dissenting vote; and the ugly truth (with reference to P G Wodehouse):

I voted against that commitment-cum-signal. In the press’ reporting of my dissenting vote and those of the other two members of the FOMC who voted against that commitment – Mr. Kocherlakota, my counterpart from the Minneapolis Fed, and Mr. Plosser, my counterpart from Philadelphia – there was substantial speculation as to the reasons for our dissent. I will let my other two colleagues speak for themselves; I can only speak for myself.
…
The trimmed mean analysis we do at the Dallas Fed focuses on the price movements of personal consumption expenditures. It is an analysis that tracks the price movements of 178 items that people actually buy, such as beer, haircuts, shoe repair, food and energy prices. In June, the trimmed mean came in at an annualized rate of 1.3 percent, versus 2.1 percent for the first five months of the year. The 12-month rate was 1.5 percent.

My concern is not with immediate inflationary pressures.
…
My concern is with the transmission mechanism for activating the use of the liquidity we have created, which remains on the sidelines of the economy. I posit that nonmonetary factors, not monetary policy, are retarding the willingness and ability of job creators to put to work the liquidity that we have provided.

I have spoken to this many times in public. Those with the capacity to hire American workers – small businesses as well as large, publicly traded or private – are immobilized. Not because they lack entrepreneurial zeal or do not wish to grow; not because they can’t access cheap and available credit. Rather, they simply cannot budget or manage for the uncertainty of fiscal and regulatory policy. In an environment where they are already uncertain of potential growth in demand for their goods and services and have yet to see a significant pickup in top-line revenue, there is palpable angst surrounding the cost of doing business. According to my business contacts, the opera buffa of the debt ceiling negotiations compounded this uncertainty, leaving business decisionmakers frozen in their tracks.
…
Based on past behavior of fiscal policy makers, businesses understandably regard the debt ceiling agreement and the political outcome of negotiations between Congress and the president with the suspicion akin to how the British humorist P.G. Wodehouse regarded his aunts: “It is no use telling me there are bad aunts and good aunts,” he wrote. “At the core they are all alike. Sooner or later, out pops the cloven hoof.”

Holy smokes, here’s a sign of the times:

Gold reached a new milestone in its role as an investment and haven, with the leading exchange- traded fund that tracks bullion surpassing its equities counterpart as the biggest ETF by market value.

You can call it what you like – me, I call it a contrarian indicator.

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts winning 14bp, FixedResets up 4bp and DeemedRetractibles gaining 3bp. Volatility was good. Volume was absolutely pathetic.

William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York gave a speech titled The national and regional economic outlook providing some colour on the Second Dip:

While there have been indications that home prices in the area have been firming in the past few months, the mortgage crisis continues to take a toll on New Jersey homeowners. As of March of this year, 10 percent of all borrowers in the state were either 90-plus days delinquent on their mortgages or their homes were in foreclosure – above the national rate of 7.7 percent. In Essex County, that rate had reached 16 percent, and in Newark it was 30 percent.

In our recent small business survey, which we conducted in May, we asked firms to report on their first quarter sales and their future outlook. The results were encouraging. Over two thirds of firms told us they had stable or increased sales in Q1, up from 50 percent last year. When asked about their future outlook, while the majority of business owners, 56 percent, were neutral – many more said they were optimistic than pessimistic – 37 percent compared with only 7 percent.

Some will be glad the week is finally over:

Hewlett-Packard Co. (HPQ) plunged 27 percent this week, the most since the October 1987 market crash, after a strategy shift undermined confidence in its managers. Technology, industrial and raw-material companies in the S&P 500 dropped at least 6.9 percent, the most among 10 groups. Caterpillar Inc. (CAT) and Alcoa Inc. (AA) retreated more than 8.4 percent after some of the world’s biggest banks — Morgan Stanley, JPMorgan Chase & Co. and Citigroup Inc. — slashed economic growth forecasts.

The S&P 500 lost 4.7 percent to 1,123.53. It has sunk 16 percent since July 22 as about $3 trillion was erased from the value of U.S. equities, according to data compiled by Bloomberg. The Dow Jones Industrial Average fell 451.37 points, or 4 percent, to 10,817.65 this week, extending its four-week decline to 1,863.51 points.
…
Stocks in the S&P 500 are moving in lockstep with each other by the most since at least 1990, a sign that the market’s biggest retreat in three years may not be over, according to MF Global Holdings Ltd. The average correlation coefficient between the 500 companies and the index was 0.8268 yesterday, using 60 days of data, according to MF Global.
…
Correlation among S&P 500 stocks exceeded 0.78 twice previously, according to MF Global. After the first time, on Dec. 1, 2008, the S&P 500 declined 17 percent to a 12-year low on March 9, 2009. Correlation peaked again on July 26, 2010, when the benchmark slipped 6.1 percent over the next month, data compiled by MF Global and Bloomberg show.

Others will be hoping for more of the same:

Gold rose to a record above $1,880 an ounce in New York, rallying for the seventh straight week, as concern that the global economy is slowing drove equities lower.

So why not play it safe?

Treasury 30-year bond yields had their biggest weekly drop since the depths of the financial crisis in December 2008 on concern the U.S. economic recovery is stalling and Europe’s sovereign-debt crisis is getting worse.

Yields on five-, seven- and 10-year notes fluctuated a day after plunging to historic lows. Government bonds have rallied since the Federal Reserve pledged this month to keep its target lending rate at virtually zero until at least mid-2013 and Standard & Poor’s lowered the top U.S. credit rating for the first time.
…
A gain in 30-year bonds pushed yields down three basis points to 3.39 percent. They had a weekly drop of 34 basis points, the most since tumbling 49 basis points during the five days ended Dec. 19, 2008. Yields on five- and seven-year notes were little changed today after falling yesterday to record lows of 0.79 percent and 1.31 percent.

There are rumblings that Basel III is in trouble:

The 27 member-states of the Basel Committee on Banking Supervision fought over the new regime, known as Basel III, for more than a year before agreeing in December to require banks to bolster capital and reduce reliance on borrowing. Now, as they put the standards into effect in their own countries, European Union lawmakers are revising definitions of capital, while the U.S. is struggling to reconcile the Basel mandates with financial reforms imposed by the Dodd-Frank Act.

“The game on the ground has changed in Europe and the U.S.,” said V. Gerard Comizio, a former Treasury Department lawyer who is now a senior partner at Paul Hastings Janofsky & Walker LLP in Washington. “The realists in Europe realized that their banks cannot raise the capital they’d need to comply. U.S. banks have reversed course and are more assertively fighting against it. The future of Basel III looks less certain now than it did when it was agreed to.

Well, that would be the regulatory standard, wouldn’t it? Do wonderful-sounding things, but do them badly. More particularly:

The European proposal alters the definition of capital that Basel III aimed to tighten when the committee agreed not to allow anything other than common shares to count toward the top- quality bank capital regulators examine.

During the 2010 negotiations, Germany sought to maintain recognition of so-called silent participations — hybrid securities that act like debt and equity at the same time — which some banks rely on for more than half their capital. While Germany lost the battle to exempt silent participations last year, the EU’s implementation proposal was written to allow the securities to be included if they fulfill certain conditions, according to an EU official who asked not to be identified because he wasn’t authorized to speak.
…
Italy fought during Basel talks last year to include deferred tax assets — future deductions from tax liabilities resulting from current losses — when calculating top-tier capital. Basel III restricted use of these assets to no more than 10 percent of a bank’s capital. The EU’s proposal would allow unrestricted use of deferred tax assets if they comply with certain requirements. Italy modified its tax laws in February to enable the assets to meet those conditions.

Counting tax assets would raise the capital ratio at Banca Monte dei Paschi di Siena SpA, the oldest bank in the world and Italy’s third-largest, by about 1 percentage point, according to a February Mediobanca SpA report on the benefits of the tax-law change to Italian banks.
…
Basel III also sought to put an end to the double counting of capital in insurance subsidiaries, which many European lenders do. The proposed EU rules don’t require banks to deduct investments in these subsidiaries from their capital, which will allow the double counting to continue, said analysts including Andrew Stimpson at KBW Inc. in London. That would benefit banks such as France’s Credit Agricole SA (ACA), whose insurance subsidiary accounts for 10 percent of income.
…
European banks had opposed a leverage ratio, arguing that different accounting regimes make the balance sheets of U.S. lenders smaller than those of their foreign counterparts and that restricting leverage would unfairly punish non-U.S. firms. While U.S. banks are subject to a leverage cap, Generally Accepted Accounting Principles allow them to keep more assets off their balance sheets and to net out derivatives more than International Financial Reporting Standards do.

The Basel committee addressed the issue by devising a mechanism for adding total assets that puts aside different accounting standards. Still, the EU proposal doesn’t commit to implementing the ratio by 2018 as required by Basel III. Instead, it asks for a five-year period to review the rule’s effectiveness in curbing risk before deciding whether to make it binding.
…
The EU proposal also softens Basel III’s liquidity standards that would require banks to hold enough cash or easily sellable assets to meet short- and long-term liabilities. It omits the rule covering debt coming due in the next 12 months and modifies the one for 30-day obligations to allow counting covered bonds as liquid assets. Denmark, Sweden and Spain lobbied for the modification because their banks have sizeable holdings of those bonds, which are securities backed by the cash flow from a pool of mortgage loans

They don’t have any preferreds outstanding, but many will be interested to note that DBRS has downgraded Canadian Tire:

DBRS has today downgraded the Debentures and Medium-Term Notes ratings of Canadian Tire Corporation, Limited (Canadian Tire or the Company) to BBB (high) from A (low) and its Commercial Paper rating to R-2 (high) from R-1 (low); the trends are Stable. This action follows the Company’s acquisition of The Forzani Group Ltd. (FGL) and removes the ratings from Under Review with Negative Implications.

Andrew Coyne – an old school buddy – has an excellent article about Milkfare in MacLeans, titled The $25,000 Cow.

It was a relatively quiet, mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 8bp, FixedResets losing 9bp and DeemedRetractibles down 7bp. All entries on the Performance Highlights table were losers. Volume was average.

It’s been a bad few weeks for pension plans:

Pension consulting firm Aon Hewitt estimates the average funded position of corporate pension plans in Canada fell from 97 per cent on July 25 to 85 per cent by Aug. 8 after stock markets went into a tailspin. That means plans have slid into a significant deficit after being close to fully funded, based on financial statement disclosure measures.
…
The results show pension plans have been “on a roller coaster,” [Aon Hewitt vice-president] Mr. [Tom] Ault said, with high volatility and daily swings of more than two percentage points in their funded position on many of the days in August so far.

There’s at least one European bank with a major funding problem:

The euro zone’s sovereign debt crisis knows no bounds. The European Central Bank’s disclosure that it had provided $500-million to a bank — the biggest sum in two years — shows that one euro zone institution is struggling to raise dollars.
…
U.S. money market funds, although a small proportion of overall European bank funding, give an idea of the risk: they have reduced both maturities and funding lines. BBVA and Santander, Spanish banks with U.S. retail units, had a foretaste last year when they struggled to raise dollar funds. This year, as investors fret about Italy’s sovereign risk, it is Italian lenders that are looking for alternative short-term funding as U.S. sources hug the sidelines.

In July alone, their usage of ECB repo lines increased by €40-billion to compensate, Morgan Stanley notes. French banks are also big users of U.S. money funds (perhaps €50-billion for BNP Paribas and €38-billion for Société Générale, the broker estimates) but their ECB usage rose by much less, suggesting they could roll over dollar funding, but perhaps only at shorter maturities.

It was quite a day:

Stocks plunged while Treasuries rallied, pushing yields to record lows, amid growing signs the economy is slowing and speculation that European banks lack sufficient capital. Gold climbed to a record, while oil led commodities lower.

The Standard & Poor’s 500 Index tumbled 4.5 percent to 1,140.74 at 4 p.m. in New York. The Stoxx Europe 600 Index lost 4.8 percent in its worst plunge since March 2009 and Germany’s DAX Index slid 5.8 percent, the most since 2008. Ten-year Treasury yields fell as much as 19 basis points to 1.97 percent as rates on similar-maturity Canadian and British debt also reached all-time lows. The dollar gained versus 15 of 16 major peers, strengthening 0.6 percent to $1.4336 per euro. Gold futures rallied as much as 2.1 percent to $1,832 an ounce, while oil slid 5.9 percent.

Banks led losses a day after the European Central Bank said a lender will borrow dollars for the first time in six months. Lars Frisell, chief economist at Sweden’s financial regulator, said it won’t take much for interbank lending to freeze and the Wall Street Journal reported regulators were scrutinizing the U.S. operations of Europe’s largest lenders to assess their vulnerability. U.S. jobless claims rose and Philadelphia-area manufacturing shrank by the most since 2009, while hopes for more stimulus from the Federal Reserve receded.

Politicians like to pretend they care about productivity, while at the same time forking over millions in milkfare, protecting Air Canada from foreign competition and subsidizing not-ready-for-prime-time solar technology. The latest example is a little more homespun:

A local fruit vendor has been forced to close a popular produce stand after the City of Vancouver decided the operation had grown too large for its streetside space.
…
To continue operating the stand at its present size, [Vancouver deputy chief licence inspector] Mr. [Tom] Hamilton said, Mr. Smith would require a farmer’s-market permit.

But such a permit would require Mr. Smith’s suppliers to sell their produce directly to the public at the stand, Mr. Hamilton said.

Quick! Find out who developed the rules and put them in charge of Toronto’s food cart programme! With some help, we can make it even more counterproductive and precious this time ’round!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 22bp, FixedResets up 5bp and DeemedRetractibles down 14bp. Volatility was quite good. Volume was average.

Both Yellow Media common and Sino-Forest common will be removed from the MSCI world index.

Predictably, it doesn’t look as if the proposed European financial transaction tax is going anywhere:

Banks criticized Franco-German plans for a tax on financial transactions, saying they will jeopardize economic growth and distort markets, as the British, Dutch and Swedish governments distanced themselves from the proposals.
…
The British government, which oversees Europe’s biggest financial center, is preparing to clash with its French and German counterparts over the levy, which would be applied in all 27 European Union countries. Finance chiefs failed to agree on a transactions tax in September 2010, amid opposition from nations including the U.K. The Swedish and Dutch governments also said today that they oppose the plans. EU taxation proposals require unanimous support from the bloc’s 27 governments to become law.

We have our first rationale for dissent from the last FOMC statement:

Federal Reserve Bank of Dallas President Richard Fisher said the central bank shouldn’t ease monetary policy whenever there is a big drop in U.S. stock prices, an action he said some traders might view as a “Bernanke put.”

“My long-standing belief is that the Federal Reserve should never enact such asymmetric policies to protect stock market traders and investors,” Fisher said today in prepared remarks in Midland, Texas. “I believe my FOMC colleagues share this view.”

Fisher’s comments offered his first explanation of his dissent from the Federal Open Market Committee decision last week to specify a date for their commitment to low borrowing costs. The Fed said the benchmark interest rate will stay in a range of zero to 0.25 percent at least through mid-2013. The new language replaces a prior promise to keep rates low for an “extended period.”

The shape of the Treasury curve also attracted notice:

The extra yield Treasury investors get to hold 30-year bonds instead of two-year notes shrank to the narrowest in a week on speculation the U.S. economic recovery is stalling.

The long bonds rose as much as two points as stocks pared gains. Federal Reserve Bank of Philadelphia President Charles Plosser told Bloomberg Radio today that policy makers should have waited to see how the economy performed before pledging on Aug. 9 to hold interest rates at record lows for two years.
…
The difference between yields on two-year notes and 30-year bonds shrank to 3.37 percentage points at 5 p.m. in New York, from 3.48 percentage points yesterday. The spread was the narrowest since Aug. 10, when it was the smallest since October 2010.

Closet indexing is alive and well:

The study by Lipper and Avana, a German asset management boutique firm, found that portfolio managers started a risk management system that measured relative risk compared to their benchmarks instead of measuring absolute risk in terms of losses.

The new management guidelines did not meet the expectations of private investors and led to the following conclusions:

Relative risk management systems are penalizing fund managers if their risk compared to the benchmark moved above a defined level. The study found that a fund manager was not allowed to hold a high percentage of his portfolio in cash or decrease the weighting of a specific industry to zero, as this would increase the risk of the portfolio relative to the benchmark.

As a result, managers moved their allocations closer to the benchmarks in market downturns to avoid penalties. Conversely, if a fund lost 45 percent, while the respective benchmark had lost 50 percent, for example, the fund manager could be rewarded for his outperformance, even as he lost money for investors.

I don’t see anything wrong with the tendency expressed in the last sentence – or, indeed, with the concept of measuring relative risk compared to benchmarks! But I don’t believe outperformance happens much.

DBRS downgraded Ireland:

DBRS Inc. (DBRS) has downgraded the Republic of Ireland’s long-term foreign and local currency debt to A (low) from “A”. The trend on both ratings remains Negative. In spite of strong political commitment to fiscal consolidation and lower interest rates on official loans, the downgrade reflects weaker than expected growth prospects. As a result, public debt ratios are estimated to peak in 2013 at higher levels than previously anticipated. The Negative trend reflects DBRS’s view that downside risks to Ireland’s export-led recovery persist, particularly given heightened uncertainty over the economic outlook in the United States and Europe and ongoing turbulence in financial markets.
…
Weaker than expected growth is likely to push public debt ratios higher than previously anticipated. In our revised baseline scenario, Ireland’s gross general government debt peaks at 120% of GDP in 2013 and gradually declines thereafter. This excludes NAMA bonds and its associated assets.

DBRS also changed the trend on Spain to negative:

DBRS Inc. (DBRS) has today confirmed the ratings of the Kingdom of Spain’s long-term foreign and local currency debt at AA and changed the trends from Stable to Negative.

The ratings balance Spain’s relatively low public-sector indebtedness and its progress in achieving its fiscal targets with high fiscal deficits, high unemployment, a fragile recovery and a weakened financial sector. The Negative trends reflect the potentially adverse effects of the sharp rise in uncertainty in financial markets on economy-wide funding conditions and the increased risks to the growth outlook of the United States that could affect both Europe and Spain’s export-based recovery.

They soon after published a correction which commenced:

DBRS Inc. (DBRS) has today confirmed the ratings of the Kingdom of Spain’s long-term foreign and local currency debt at AA and changed the trend from Stable to Negative.

The ratings balance Spain’s relatively low public-sector indebtedness and its progress in achieving its fiscal targets with high fiscal deficits, high unemployment, a fragile recovery and a weakened financial sector. The Negative trends reflect the potentially adverse effects of the sharp rise in uncertainty in financial markets on economy-wide funding conditions, and the increased risks to the growth outlook of the United States that could affect both Europe’s and Spain’s export-based recovery. This concern goes beyond the direct trade link between the United States and Spain, which is limited, as there may be more widespread consequences on growth and trade in Europe.

It was a very strong day for the Canadian preferred share market, with PerpetualDiscounts up 36bp, FixedResets gaining 34bp and DeemedRetractibles winning 48bp. Volatility was good, as might be inferred from the index performances; volume was average.

PerpetualDiscounts now yield 5.49%, equivalent to 7.14% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.9%, so the pre-tax interest-equivalent spread is not about 225bp, a good tightening from the 240bp reported on August 10 derived from movement in both sectors.

Oh joy, oh bliss! US monetary policy is being politicized – and in pretty polemical terms:

Texas Governor Rick Perry, finishing his first full day of campaigning for the U.S. Republican presidential nomination in Iowa, said it would be “almost treacherous — or treasonous” for Federal Reserve Chairman Ben S. Bernanke to increase stimulus spending before the 2012 election.

“If this guy prints more money between now and the election, I don’t know what you would do with him,” Perry said at a backyard appearance in Cedar Rapids, Iowa. “We would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous — or treasonous in my opinion.”

It’s pretty hard to walk away from language like that … even as the US slides slowly towards total dysfunction.

On a cheerier note, France and Germany propose to eliminate the European financial sector, allowing business opportunities for the rest of us:

France and Germany will propose a financial transaction tax in September, President Nicolas Sarkozy said after talks with German Chancellor Angela Merkel.

There were further details:

German Chancellor Angela Merkel and French President Nicolas Sarkozy said they’ll press for closer euro-area economic integration with tougher deficit rules and stricter supervision to stamp out the debt crisis.

Merkel and Sarkozy rejected euro bonds and expanding the 440 billion-euro ($633 billion) rescue fund. A plan to resubmit a financial-transaction tax, which was rejected in 2010, extended declines in U.S. stocks. They proposed debt limits be written into national law and a “euro council” to be headed by European Union President Herman van Rompuy established as part of a planned “economic government” for Europe.

It was a strong day for the Canadian preferred share market, with PerpetualDiscounts winning 40bp, FixedResets up 13bp and DeemedRetractibles gaining 25bp. Volatility was good. Volume was average.

Sorry this is so late, folks! Either PrefLetter weekend causes a lot of dislocation, or I’m getting pretty lazy, one or the other.

S&P revised the outlook on RON from stable to negative:

• We are revising our outlook on RONA Inc. to negative from stable because weak earnings amid difficult market conditions have contributed to higher debt leverage.
• At the same time, we are affirming our ‘BBB-‘ long-term corporate credit rating on the company.
• Fully adjusted last 12 months debt to EBITDA has jumped to 3.8x, which we consider very high for the rating, although reported debt to EBITDA is low at 1.5x and liquidity is strong.
• The negative outlook stems from our view that weak market conditions will make it difficult for RONA to return leverage to below our key 3x threshold in the near term.
• We could lower the rating on RONA if the company’s profitability remains weak enough to keep leverage at about 3.5x through the critical second and third quarters of 2012.

The European Central Bank is taking on a lot of credit risk:

The European Central Bank spent a record amount on government bonds last week as it began buying Italian and Spanish securities to contain the debt crisis.

The Frankfurt-based ECB said today it settled purchases worth 22 billion euros ($31.7 billion) in the week through Aug. 12, more than the 15 billion-euro median estimate in a Bloomberg News survey of 19 economists and strategists. That also surpasses the 16.5 billion euros the ECB spent during the first week of its initial foray into Greek markets in May last year.

Giulio Tremonti has the best line on the crisis so far:

After unveiling tougher austerity plans in return for ECB help, Italian Economy Minister Giulio Tremonti said a common euro zone bond would stop markets forcing high-debt economies in the bloc to the brink. “We would not have arrived where we are if we had had the euro bond,” he said at the weekend.

Think about it. OK, so there wouldn’t be a crisis now, so you wouldn’t have to commence austerity now. Great! Then what happens?

The explanations for the SocGen share price collapse are starting to get silly:

But did a British malentendu over another French summer staple — a fictional series of articles in Le Monde — contribute to a mysterious sell-off in French bank stocks last week?
…
The series, “End of the Line for the Euro,” looked at how a collapse of the single currency might play out, against the backdrop of French presidential elections next year. While the 12-part story was clearly labeled as fiction, it named real banks, like Société Générale, whose shares plunged 15 percent last Wednesday, prompting the bank to deny speculation that it was in financial trouble.

As market participants and journalists searched for possible reasons, the trail seemed to lead to London. There, The Mail on Sunday, a tabloid newspaper, had published an article in which it said Société Générale was “on the brink of disaster.” Société Générale and an Italian bank, UniCredit, were in a “perilous” state, the paper added, citing “a senior government source.”

The Sino-Forest saga will continue for a few more chapters:

Sino-Forest Corp. (TRE), the tree- plantation operator accused by short-seller Carson Block of overstating its timberland holdings, said an independent investigation into the allegations will take longer than previously expected.

The independent committee set up by the company to conduct the probe presented an interim report to the board on Aug. 11 and expects to complete its review by the year-end, Hong Kong- and Mississauga, Ontario-based Sino-Forest said yesterday in a statement. Sino-Forest, which has denied the allegations, hired PricewaterhouseCoopers LLP to assist the review and said June 14 the process would take two to three months.

It was a mixed day in the Canadian preferred share market, with PerpetualDiscounts down 5bp, FixedResets gaining 10bp and DeemedRetractibles winning 40bp. There was plenty of volatility, but not much volume.

There’s more information about the attack on the Hong Kong Exchange website:

Hong Kong Exchanges & Clearing Ltd. said it will find new ways of publicizing earnings and other corporate events after hackers jammed its public news website.

The bourse, acting to safeguard communications from listed companies, will use e-mails and newspaper advertisements to back up its central online system, Chief Executive Officer Charles Li said at a press briefing. Trading in HSBC Holdings Plc (HSBA), Cathay Pacific Airways Ltd. (293) and five other stocks was halted on Aug. 10 and access to filings was disrupted again yesterday amid a “sustained and systematic” attack, Li said.
…
The assault was a so-called distributed denial of service attack aimed at preventing access to the exchange’s public news feed by overwhelming its capacity to handle website traffic, Li said. Should the hackers change strategies, Li said the bourse may not be able to defend the website and its backup online bulletin board.

I mentioned a paper regarding defense against DDOS attacks on March 7.

The sudden cessation of US MMF fund lending to European banks after the Lehman bankruptcy caused a crisis in itself. This time the process is more selective and graceful, but will the result be the same?

The six largest U.S. money market funds have eliminated their lending to Italian and Spanish banks, reduced investments in French banks and are favoring Swiss securities for their $511 billion of assets.

Holdings of European bank certificates of deposit, repurchase agreements and commercial paper reported by the six largest funds managed by JPMorgan Chase & Co. (JPM), Fidelity Investments, Federated Investors Inc. (FII), Blackrock Inc. (BLK) and the Vanguard Group Inc. show they are shunning euro-region banks, according to data compiled by Bloomberg.

European bank shares tumbled to the lowest since March 2009 on Aug. 10, led by Paris-based Societe Generale SA, amid concern that France’s creditworthiness was in doubt. U.S. prime money funds have reduced European debt holdings by $38 billion to $340 billion in July, according to an Aug. 9 report by JPMorgan.

Dealbreaker has a good piece on the semi-European short selling ban.

Regulators gone wild! An agency of the US Government is investigating as to whether the downgrade of US Government was done properly:

The Securities and Exchange Commission is reviewing the method Standard & Poor’s used to cut the U.S.’s credit rating and whether the firm properly protected the confidential decision, according to a person with direct knowledge of the matter.

SEC inspectors are examining S&P’s policies for conducting such analyses and whether those procedures were followed when the New York-based firm downgraded the U.S.’s credit rating Aug. 5, said the person, who declined to be identified because the inquiry isn’t public.

Free speech? Of course there’s free speech! Just fill out these forms and sit here for a while we check out what you said.

Not to be outdone, French are checking out whether trading in SocGen was done properly:

France’s stock market regulator opened an investigation into speculation that affected trading in shares of Societe Generale (GLE) SA, said the agency’s president, Jean-Pierre Jouyet.

Societe Generale, France’s second-largest bank, on Aug. 10 denied “all market rumors” and asked France’s Autorite des Marches Financiers to open a probe. Speculation that France’s creditworthiness was in doubt sent the shares tumbling 15 percent that day.

“We’re investigating the unfounded rumors that hit specific stocks this week,” Jouyet said in an interview on RTL Radio today. “I can tell you that the secretary general of the AMF, Thierry Francq, has opened an investigation into the rumors that affected Societe Generale.”

It was a very strong day for the Canadian preferred share market, with PerpetualDiscounts up 46bp, FixedResets gaining 32bp and DeemedRetractibles winning 58bp. Volatility was impressive on low volume.