Category: Market Action

Why are so many investors unhappy with their advisors? Because they got what they deserved:

Investors would rather pay commissions for the financial advice they receive than a fee based on assets under management, said Cerulli Associates.

About 47 percent of 7,800 households surveyed prefer paying commissions, compared with 27 percent that would rather contribute a fee based on assets, according to the report released today by the Boston-based research firm. About 18 percent said they prefer paying retainer fees, which are generally lump sums negotiated between advisers and clients, and 8 percent said they opt for an hourly fee structure.
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About 33 percent of investors surveyed said they didn’t know how they pay for the investment advice they receive, and 31 percent said they thought their adviser or broker provided investment advice for free. Those who were unsure of how they pay for advice were most likely to be unhappy with their financial adviser, with 47 percent reporting dissatisfaction, the study said. About 27 percent of those who said they pay commissions reported being dissatisfied.
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About 64 percent of those surveyed said they believe their financial adviser is held to a fiduciary standard of care, and 63 percent of clients of the largest broker-dealers said they thought that as well.

Brokers currently must meet a standard to offer clients “suitable investments,” whereas registered investment advisers have a fiduciary obligation to put clients’ best interests first.

In January, the U.S. Securities and Exchange Commission released a report recommending a common fiduciary standard for brokers and registered investment advisers who provide personalized investment advice. The SEC is scheduled to propose a rule on the standard between August and the end of the year, according to its website. Holding brokers to a fiduciary standard won’t preclude them from accepting commissions, the SEC report said.

Perhaps somebody, somewhere, will somehow explain to me how fiduciary responsibility is compatible with a transaction-based fee structure. But I doubt it.

In trouble over hockey arenas? Try a distraction, like paternalistic, invasive regulation:

The Quebec government, desperate to head off a looming collapse of household finances when interest rates rise, has tabled a bill that would force credit card holders to boost their monthly payments and settle their debts faster.

Among the new rules proposed Wednesday by the Liberal government of Jean Charest, lenders would be required to raise the minimum monthly credit card payment to 5% of the outstanding balance from the current 2%. The measure would be phased in over three years.

The government is worried its citizens will have a hard time paying off what they owe and saving money when interest rates start their inevitable climb.

I don’t pay a lot of attention, but credit card rates aren’t all that sensitive to prime, are they?

There’s another coercive Irish tender:

DBRS Inc. (DBRS) today has downgraded the Dated Subordinated Debt rating of Irish Life & Permanent plc (IL&P or the Group) to “C” from CCC. Today’s downgrade follows the announcement by IL&P that it has commenced an offer to purchase the aforementioned securities for cash and a solicitation of consents in relation to the securities. Moreover, DBRS expects to downgrade the Dated Subordinated Debt to “D” at completion of the buyback; as such, the securities remain Under Review with Negative Implications, where they were placed on 3 December 2010.

In DBRS’s view, the purchase offer, when completed, is tantamount to a default as defined by DBRS policy. DBRS views the proposed purchase offer as coercive as the offer affords bondholders limited options. Should the bondholder reject the proposed offer, at an 80% discount on the majority of the tendered securities, they risk receiving substantially less if the proposed consent amendments are ratified. Remaining bondholders would then receive 0.001% of par value, should the consent to allow the “clean-up” of residual notes be accepted by tendering bondholders.

The FRB-Boston has released a Public Policy Discussion Paper by Christopher L. Foote and Jane S. Little titled Oil and the Macroeconomy in a Changing World: A Conference Summary:

Analysis of oil-price movements is once again an important feature of economic policy discussions. To provide some background for this analysis, this paper summarizes a conference on the oil market held at the Federal Reserve Bank of Boston in June 2010. Four cross-cutting themes emerged from this symposium, which included scientific experts, market participants, business leaders, academics, and policymakers. First, the decline in real oil prices that followed the 1970s’ oil shocks is unlikely to be repeated today, because there are fewer ways in which oil-importing countries can reduce oil demand or expand domestic supplies in response to higher prices. The second lesson of the conference, however, is that any prediction about oil markets is highly uncertain, a fact illustrated by the wide confidence intervals that result when futures-market data are used to quantify forecast uncertainty. Third, there is little consensus on whether new financial investment in commodity index funds has increased the volatility of oil prices. Finally, changes in oil prices still have large effects on the economy. Some research suggests that the rapid run-up in oil prices in 2007–08 may have significantly weakened the U.S. economy in the early stages of the Great Recession.

I don’t expect the third point to get much attention from the politicians and regulators!

The Big Yellow Machine continued to break down:

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts losing 8bp, FixedResets up 11bp and DeemedRetractibles down 10bp. There was a nice little bit of volatility, mainly to the downsider for the insurer DeemedRetractibles that have done so well lately. Volume continued to be pathetic – all the players must be enjoying the good weather!

The Sino-Forest plot thickens:

Muddy Waters Research, the firm founded by short seller Carson Block, “pre-marketed” its June 2 report on Sino-Forest Corp. (TRE) to hedge funds for the past five weeks, said an analyst at Dundee Securities Ltd.
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“Muddy Waters pre-marketed this smoking-gun report on Sino-Forest to hedge funds over the last five weeks,” said Richard Kelertas, a Montreal-based analyst at Dundee, which helped sell shares in Sino-Forest as recently as December 2009.
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Kelertas said that the Muddy Waters report was inaccurate and there’s nothing fraudulent about Sino-Forest “to the best of our knowledge.” He recommended buying Sino-Forest shares from September 2007 until June 3, when he put his rating on the company under review.

Dundee was among institutions that helped Sino-Forest sell shares in December 2009 and also in May 2009.

Short selling, or selling borrowed shares with the hope of profiting when they fall, more than doubled to a record 35 percent of Sino-Forest’s outstanding stock as of June 3, up from 17 percent at the beginning of May and 13 percent at the end of 2010, according to Data Explorers, a New York-based research firm. Sino-Forest was the most-shorted stock in the Standard & Poor’s TSX Composite Index, which has an average short interest of 4.8 percent.
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Offering a report to hedge funds before making it public is not illegal, said James Fanto, who teaches classes on international financial regulation and securities laws at Brooklyn Law School in New York.

“Muddy Waters can profit from this information itself, or allow others to profit from their insights as well,” Fanto said in an e-mail message. “The only problems emerge when research is in fact based on insider tips. But that doesn’t seem to be the case here.”

I haven’t heard such an impassioned defense of company from a dealer since Bre-X! I hope everybody has popcorn at hand to watch the rest of this show.

Speaking of companies getting trashed, there was another outbreak of yellow fever today:

It was another muted day for the Canadian preferred share market, with PerpetualDiscounts gaining 6bp, FixedResets basically flat and DeemedRetractibles up 3bp. Volume was low.

This is old, but Laurie Carver wrote a good piece on Credit Rating Agencies titled Losing Credit:

Brooks says the NAIC decided to move to the new methodology because of rating agencies’ failure to accurately capture the risk of severity of loss in structured credit (and consequently its flipside – recovery). “Under the old regime, ratings were a kind of blunt tool for determining the risk-based capital, whereas now we’re doing a more detailed analysis of each security held by the insurer.”

He sees the old rating-based RBC charges as creating ‘cliff risk’, because their focus on the first dollar of loss in the whole structure caused sudden downgrades to be assigned to tranches that were actually likely to recoup or profit. For instance, under the old regime, AAA securities would carry a capital charge of just 0.4%, compared to 23% for a CCC security. “This very sharp change in the RBC charge can happen without a material effect on the actual return on the insurer’s investment,” says Brooks.

“The rating agencies’ methodology is binary – they take account of the probability of default but not the severity of loss to the insurer’s specific position. Just because there’s a default, doesn’t mean that the security held by the insurer is going to experience 100% loss.”

Trichet has figured out that maybe the EU should have paid attention when Greece announced it was cooking its books:

The economic crisis in Europe is not a crisis of the euro currency or of the monetary union, says the president of the European Central Bank.

“The current crisis stems rather from insufficient monitoring of economic policies in a number of member states,” Jean-Claude Trichet said in a speech at the Conference of Montreal. “Today, it’s not the monetary pillar of economic and monetary union that is at stake but the economic pillar,” he said.

Gee, and I thought it was all Goldman Sachs’ fault, as mocked 2010-4-19.

I’m tired of YLO – bor-ring! I wish Sino-Forest had preferred shares.

A mildly depressing day on the Canadian preferred share market, with PerpetualDiscounts down 8bp, FixedResets off 4bp and DeemedRetractibles losing 9bp. Volatility was muted. Volume was dead. D-E-D. Dead.

Greece may be getting some money:

European Union and International Monetary Fund officials agreed to pay the next installment to Greece under last year’s 110 billion-euro ($161 billion) bailout, paving the way for an upgraded aid package that includes a “voluntary” role for investors.

“I expect the eurogroup to agree to additional financing to be provided to Greece under strict conditionality,” Luxembourg Prime Minister Jean-Claude Juncker said after meeting with Greek Prime Minister George Papandreou in Luxembourg today. “This conditionality will include private sector involvement on a voluntary basis.”

It should be remembered, however, that Jean-Claude Juncker is a liar, unworthy of respect or position.

The Bank of Canada has released a working paper by Alexandre Lazarow titled Lessons from International Central Counterparties: Benchmarking and Analysis:

Since the financial crisis, attention has focused on central counterparties (CCPs) as a solution to systemic risk for a variety of financial markets, ranging from repurchase agreements and options to swaps. However, internationally accepted standards and the academic literature have left unanswered many practical questions related to the design of CCPs. The author analyzes the inherent trade‐offs and resulting international benchmarks for a certain set of issues. Four CCPs – FINet, CME Clearing, Eurex Clearing and LCH.Clearnet – are considered in terms of risk management, CCP links, governance and operational risk.

This may be viewed as part of the global regulators’ desperate attempts to convince fools that single point failure and moral hazard is not a problem as long as they’re in charge, oh no.

Today, they called it mellow yellow.

A very positive day in the Canadian preferred share market, with PerpetualDiscounts up 7bp, FixedResets gaining 10bp and DeemedRetractibles winning 21bp. Volatility was muted. Volume was sub-par.

Sorry this is so late, folks! What can I say? Time flies like an arrow, but fruit flies like bananas.

The Bank of Canada has released a working paper by Ron Alquist, Lutz Kilian and Robert Vigfusson titled Forecasting the Price of Oil:

We address some of the key questions that arise in forecasting the price of crude oil. What do applied forecasters need to know about the choice of sample period and about the tradeoffs between alternative oil price series and model specifications? Are real or nominal oil prices predictable based on macroeconomic aggregates? Does this predictability translate into gains in out-of-sample forecast accuracy compared with conventional no-change forecasts? How useful are oil futures markets in forecasting the price of oil? How useful are survey forecasts? How does one evaluate the sensitivity of a baseline oil price forecast to alternative assumptions about future demand and supply conditions? How does one quantify risks associated with oil price forecasts? Can joint forecasts of the price of oil and of U.S. real GDP growth be improved upon by allowing for asymmetries?

Maybe another movie? “How Yellow was my Valley”? About a family of unfortunate preferred share investors.

It was an uneventful day for the Canadian preferred share market, with PerpetualDiscounts down 3bp, FixedResets losing 3bp, and DeemedRetractibles up 5bp. There was only minor volatility. Volume was quite low.

Plans for a Greek debt restructuring are moving along;

European officials preparing Greece’s second bailout in two years may offer bondholders incentives to roll over maturing debt without triggering a credit-rating downgrade that would roil Europe’s banking system, two people with knowledge of the talks said.

Investors may be given preferred status, higher coupon payments or collateral as inducements to buy bonds replacing Greek debt maturing between 2012 and 2014, said the people, who declined to be identified because the talks are in progress.
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“We are also examining the feasibility of voluntarily rescheduling, which would not create a credit event,” European Union Economic and Monetary Commissioner Olli Rehn said in an interview yesterday in New York. “Debt restructuring is not on the table, it’s not in the cards, it will not be part of our agenda.”

DBRS has placed some Master Asset Vehicle notes under Review-Positive. The MAV notes are repackaged, term-extended ABCP.

Wow, the Boston Fed gets its fingers into a lot of pies! A working paper by Mary A. Burke and Frank W. Heiland is titled Explaining Gender-Specific Racial Differences in Obesity Using Biased Self-Reports of Food Intake:

Policymakers have an interest in identifying the differences in behavior patterns—namely, habitual caloric intake and physical activity levels—that contribute to demographic variation in body mass index (BMI) and obesity risk. While disparities in mean BMI and obesity rates between whites (non-Hispanic) and African-Americans (non-Hispanic) are well-documented, the behavioral differences that underlie these gaps have not been carefully identified. Moreover, the female-specificity of the black-white obesity gap has received relatively little attention. In the National Health and Nutrition Examination Surveys (NHANES) data, we initially observe a very weak relationship between self-reported measures of caloric intake and physical activity and either BMI or obesity risk, and these behaviors appear to explain only a small fraction of the black-white BMI gap (or obesity gap) among women. These unadjusted estimates echo previous findings from large survey datasets such as the NHANES. Using an innovative method to mitigate the widely recognized problem of measurement error in self-reported behaviors—proxying for measurement errors using the ratio of reported caloric intake to estimated true caloric needs—we obtain much stronger relationships between behaviors and BMI (or obesity risk). Behaviors can in fact account for a significant share of the BMI gap (and the obesity gap) between black women and white women and are consistent with the presence of much smaller gaps between black men and white men. The analysis also shows that the effects smoking has on BMI and obesity risk are small-to-negligible when measurement error is properly controlled.

Jule Dickson highlighted fraud as a problem for the P&C industry in a speech to the 2011 Property and Casualty Insurance Industry Forum:

Rate increases, together with progress in curtailing fraudulent claims, are required if the industry is to continue to provide the services it offers Ontario drivers.

While recent measures to curtail fraud are encouraging, there is no short-term solution to deal with the escalating losses residing in the GTA. Individuals, institutions, the government and the police must continue to be vigilant in curtailing fraud if they want to ensure the Ontario auto line returns to profitability.

I’m thinking of producing a movie: “I am volatile – yellow”, starring a young female preferred share investor.

It was a good start to the month for the Canadian preferred share market, with PerpetualDiscounts leaping 28bp, FixedResets gaining 17bp and DeemedRetractibles up 6bp. Volatility was good. Volume was elevated.

PerpetualDiscounts now yield 5.50%, equivalent to 7.15% interest at the standard equivalency factor of 1.3x. Long Corporates now yield a little under 5.3% (!) so the pre-tax interest-equivalent spread is now about 185bp, a wee bit tighter than the 190bp reported on May 26, as the PerpetualDiscounts play catch-up.

There was a yellow cat bounce today.

It was a relatively quite day on the Canadian preferred share market, with PerpetualDiscounts up 6bp, FixedResets basically flat and DeemedRetractibles gaining 4bp. Volatility was muted, with only two issues on the Performance Highlights table. FixedResets thoroughly dominated the Volume Highlights table, possibly due to the settlement today of SJR.PR.A; although it looks like HSBC (who?) got some work acting for a big client reducing preferred share exposure in a big way.

Greece is sliding closer to bankruptcy:

The European Union may withhold the next amount of credit to Greece after a report by an international panel of inspectors concluded that the debt-laden country has missed all the fiscal targets agreed in its rescue plan, Der Spiegel said, without saying how it obtained the information.

Portuguese 10-year bonds fell the most in a week, sending the yield spread with German bunds, Europe’s benchmark government security, 18 basis points higher to 678 basis points, the most since Bloomberg began gathering the data in 1997. Italian 10-year yields rose six basis points to 4.81 percent after the government sold 8.3 billion euros ($12 billion) debt. Spain is due to sell debt on June 2.

and Moody’s put Japan on Review-Negative.

Yellow bellies continued to panic.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts gaining 17bp, FixedResets basically flat, and DeemedRetractibles down 4bp. Volatility was minimal, with only one entry in the Performance Highlights table. Volume was OK, a little on the low side, as befits a day when the US market was closed.

US housing sales are slow:

The number of Americans signing contracts to buy previously owned homes plunged more than forecast in April, a sign the industry that triggered the recession continues to struggle.

The index of pending home resales declined 12 percent after a revised 3.5 percent increase the prior month, the National Association of Realtors said today in Washington. The median forecast in a Bloomberg News survey called for a 1 percent decline.

The prospect that foreclosures will continue to drive down property values may keep buyers on the sidelines awaiting further price declines. Unemployment at 9 percent and stricter credit requirements are further signs that a housing recovery may take years to unfold.

And things are unfolding elsewhere, too:

Dexia SA (DEXB), the bank that took the most Federal Reserve discount-window help in October 2008, said it will take a charge of 3.6 billion euros ($5.1 billion) for the anticipated sale of mostly U.S. residential mortgage-backed securities and long-term bond disposals.
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By writing down the U.S. asset-backed securities to their market value, Dexia said it will be in a position to waive the Belgian and French state guarantees covering losses on those assets and renegotiate the terms and consequences arising from the state support.

Note that they’re going to “take a charge” rather than cover the loss with reserves. That gives you a nice warm feeling about European bank balance sheets, doesn’t it?

Long-term readers of PrefBlog will recognize one of my hobby-horses: genetic modification of cellular organisms to take carbon dioxide out of the air (good) and convert it to fuel (better). So I was pleased to see news of the Solazyme IPO:

Solazyme Inc., the developer of oil products from genetically modified algae, jumped as much as 22 percent in its first day of trading.

The shares rose $3.15, or 18 percent, to $21.15 at 1:18 p.m. in Nasdaq Stock Market trading. Earlier it reached $22, a 22 percent gain from its initial price of $18 a share. The South San Francisco, California-based company sold 10.975 million shares, raising $197.55 million, according to a regulatory filing.

The demand validates the technology used to convert organic material into biofuels and specialty chemicals, according to Pavel Molchanov, an analyst for Raymond James & Associates Inc. It remains to be seen whether Solazyme, or rivals that are developing similar products such as Gevo Inc., and Amyris Inc. (AMRS), can do so cost-effectively.

“The science in their process works,” Molchanov said today in a telephone interview. “So as we think about the risk factors that investors in these companies have to confront, it’s not a science risk. It’s how successfully can they scale up to be a large production business.”

The logic of the third paragraph there rivals that seen during the Tech Boom, but never mind (the demand validates the science? Let’s take a vote on gravity!). Note that I have no idea of whether the science works, whether the engineering for scale-up is promising, or whether the shares are good value at the price … I’m just happy to see that a technology I’ve wondered about for thirty years is coming to market.

What the world needs is a new phrase, something along the lines of “as vindictive as an American”. When one of them takes a stand against retroactive rules, it’s considered news:

I join the Chairman in thanking the Division of Corporation Finance and the other divisions and offices that have contributed to the proposal under consideration today.

As required by Sec. 926 of the Dodd-Frank Act, we are proposing rules that would disqualify securities offerings involving certain “felons and other ‘bad actors’” from reliance on the safe harbor from Securities Act registration provided by Rule 506 of Regulation D.

Unfortunately, however, I am not able to support this proposing release, because the proposed rules would apply retroactively by disqualifying transaction participants from engaging in Rule 506 offerings for conduct occurring prior to enactment of the Dodd-Frank Act.

I want to emphasize at the outset that I do not disagree, as a policy matter, with disqualifying so-called “bad actors” from Rule 506 offerings.
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Where, as here, the statute and jurisprudence do not, in my view, support retroactive application of these rules, it would be more appropriate to apply our rules prospectively, and/or seek from Congress a technical amendment to the statute to clarify that these provisions should be applied retroactively if that was indeed Congressional intent.

Rule 506 of Regulation D is, basically, the accredited investor exemption.

Yellow Fever continued to plague the market.

All that aside, the Canadian preferred share market had a reasonably good day overall, with PerpetualDiscounts gaining 18bp, FixedResets up 4bp and DeemedRetractibles off 1bp. Volatility was muted. Good volume was dominated by CM issues.

Yellow got clobbered again!

Apart from that, said Mrs. Lincoln, it was a very nice evening at the theatre! The Canadian preferred share market did quite well today, with PerpetualDiscounts gaining 15bp, FixedResets picking up 1bp and DeemedRetractibles winning 29bp. A good crop of winners is in the Performance Highlights table, led by CM.PR.H, which is being redeemed and followed by others that are not seeking NVCC status. Volume was good, and again CM issues were featured.