Category: Market Action

The Bank of Canada has released a discussion paper by Gordon Wilkinson titled The Behaviour of Consumer Prices Across Provinces:

Measures of core inflation enable a central bank to distinguish price movements that are transitory and generated by non-monetary events from those that are more permanent and related to prior monetary policy decisions. The author uses standard statistical measures to assess the behaviour of consumer prices across provinces and identify price components with more divergent price patterns. The results indicate that energy, shelter and tobacco prices are the most volatile across provinces. Very large price movements restricted to one or a few provinces suggest that the forces or events triggering those movements may be province specific and unrelated to national demand pressures. Such results suggest that constructing a type of core inflation measure called the “trimmed mean” that excludes components with exceptionally large price changes at the provincial level may offer an alternative means of assessing underlying inflationary pressures.

Speaking of inflation, Statscan is changing the shopping basket:

For inflation’s scorekeepers, it’s out with film developing and in with tablet computers and smartphones.

Statistics Canada is revamping its approach to measuring the price of goods to reflect new realities about today’s consumer experience: Spending habits are changing more rapidly, and the lifespan of products is growing ever shorter.

This month, for the first time in four years, the federal agency is updating the basket of goods and services that measures price changes, adding new items like tablet computers, smart phones and dried lentils, and de-emphasizing older ones, such as photography services.

And starting next year, the agency plans to revise the basket every three years or less because consumption patterns are changing more quickly. Statscan has typically updated the basket every four or five years. Similar agencies in other countries, such as Britain or Sweden, update their measures every year or two.

The FRBB has released a Public Policy Discussion Paper by Geoffrey M.B. Tootell titled Do Commodity Price Spikes Cause Long-Term Inflation?:

This public policy brief examines the relationship between trend inflation and commodity price increases and finds that evidence from recent decades supports the notion that commodity price changes do not affect the long-run inflation rate. Evidence from earlier decades suggests that effects on inflation expectations and wages played a key role in whether commodity price movements altered trend inflation. This brief is based on a memo to the president of the Federal Reserve Bank of Boston as background to a meeting of the Federal Open Market Committee.

There’s a new Maple issuer:

The ranks of so-called Maple issues by non-financial borrowers has expanded by one with news Tuesday that Korea Gas Corporation priced and raised a $300-million, five-year offering.

KOGAS set up in 1983, is a public company which has grown to become the world’s largest LNG import company, originally planned to raise $250-million but raised more because of strong institutional demand. The A+ rated notes came with a coupon of 4.58% and a yield of 4.585% – for a spread of 203 basis points or two points tighter than what was presented in the marketing period.

The deal is the first by Kogas in Canada. Indeed the financing is the first Maple by either an Asian or South Korean borrower.
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The market, both in its heyday and since its return to life a year back, is dominated by financial institutions. But investors soon get their fill of such issues and clamor for borrowings by industrial companies. Kogas has met those wishes and becomes the third non-financial issuer in the past eight months. Earlier, Molson Coors Brewing Co. ($500-million) and Anheuser-Busch InBev Worldwide Inc. ($600-million) raised capital in this market.
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So fat this year $2.25-billion has been raised via the sale of Maple bonds, For the same period last year $1.8-billion. For all of 2010 $4.5-billion was raised. “I expect that demand will stay strong and issuance for the year will exceed last years,” added [John] Tkach [of Scotia Capital].

This issue is being sold on the exempt market, so you can’t buy it, suckers. The regulators have determined that you’re not smart enough.

OSFI’s Julie Dickson has delivered a 2011 Financial Services Invitational Forum, April 27, 2011. There was nothing very new or interesting in the content, but I was pleased to see that at least some attempt was made to support some of the assertions. One reference was to a letter to the Financail Times from Prof. Anat Admati of Stanford and others:

Banks’ high leverage and the resulting fragility and systemic risk contributed to the near collapse of the financial system. Basel III is far from sufficient to protect the system from recurring crises. If a much larger fraction, at least 15 per cent, of banks’ total, non-risk-weighted, assets were funded by equity, the social benefits would be substantial. And the social costs would be minimal, if any.
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Debt that converts to equity, so-called “contingent capital”, is complex to design and tricky to implement. Increasing equity requirements is simpler and more effective.

Another reference was to a Bank of England discussion paper by David Miles, Jing Yang and Gilberto Marcheggiano titled Optimal Bank Capital:

This paper reports estimates of the long-run costs and benefits of banks funding more of their assets with loss-absorbing capital, or equity. Measuring those costs requires careful consideration of a wide range of issues about how shifts in funding affect required rates of return and on how costs are influenced by the tax system; it also requires a clear distinction to be drawn between costs to individual institutions (private costs) and overall economic (or social) costs. Without a calculation of the benefits from having banks use more equity no estimate of costs — however accurate — can tell us what the optimal level of bank capital is. We use empirical evidence on UK banks to assess costs; we use data from shocks to incomes from a wide range of countries over a long period to assess risks to banks and how equity funding (or capital) protects against those risks. We find that the amount of equity capital that is likely to be desirable for banks to use is very much larger than banks have used in recent years and also higher than targets agreed under the Basel III framework.

The US housing market is still sick:

U.S. lenders should consider debt-for- equity swaps to help homeowners who face default or owe more than their properties are worth, mortgage pioneer Lewis Ranieri said.

“If his house was $220,000, and now it’s $90,000, give me the keys, I give you a lease for seven years,” Ranieri, chairman of investment company Ranieri Partners LLC, said during a panel discussion at the Milken Institute Global Conference in Beverly Hills, California. “If you behave well, I will give you back the house.”

As many as 11 million troubled mortgages are weighing on the U.S. housing market, said Ranieri, who helped Salomon Brothers become Wall Street’s most profitable firm in the 1980s by packaging home loans into securities. Distressed sales made up 40 percent of transactions in March, the National Association of Realtors said April 20. Home prices fell 3.3 percent in February from a year earlier, according to the S&P/Case-Shiller measure of 20 cities.

I don’t understand how Ranieri’s idea can be described as a debt for equity swap (if you have to give it back, you don’t own it, do you?) but doubtless there’s some explanation.

Of much more interest than all this ephemeral financial stuff is the results of the NASA relativity test:

Gravity Probe B, built by Lockheed Martin Corp. (LMT) and designed by scientists from Stanford University near Palo Alto, California, measured how space and time are warped by gravitational bodies, a phenomenon called the geodetic effect. The probe launched in 2004 also analyzed frame-dragging, the way spinning objects pull space and time around them.

The effects were demonstrated by having Gravity Probe B point at a star, IM Pegasi, while orbiting Earth. If gravity didn’t affect space and time, the gyroscopes aboard the probe would point in the same direction forever during their orbit, as Isaac Newton had theorized. Instead, they showed tiny, measurable changes in the direction of their spin as Earth’s gravity tugged at them, as Einstein had predicted.
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The project was one of the longest-running efforts in the U.S. space agency’s history, beginning in 1963, and cost about $750 million, NASA spokesman Trent Perrotto said today in a telephone interview. The findings were the culmination of 49 years of work by [Stanford physicist Francis] Everitt, who came to Stanford in 1962 to help build the most precise gyroscope ever designed and produced, according to NASA.

Forty-nine years! I think we can allow Dr. Everitt a day off now, right? Then he can work on the Higgs boson.

It was a strong day in the Canadian preferred share market, with PerpetualDiscounts roaring ahead 42bp, FixedResets winnning 15bp and DeemedRetractibles gaining 14bp. The Performance Highlights table, while hardly lengthy, was comprised entirely of gainers. Volume was good.

The FRB Cleveland has released the April, 2011, edition of Economic Trends.

There will be a conference on The Future of Life-Cycle Saving & Investing sponsored by the Boston Fed and others at the end of May.

The Portuguese bail-out has been agreed:

Portugal reached an agreement with officials preparing its European Union-led bailout that will provide as much as 78 billion euros ($116 billion) in aid and allow more time to reduce the country’s budget deficit.

The three-year plan set goals for a budget deficit of 5.9 percent of gross domestic product this year, 4.5 percent in 2012 and 3 percent in 2013, Prime Minister Jose Socrates said in Lisbon today. The government in March targeted a deficit of 4.6 percent this year, 3 percent in 2012 and 2 percent in 2013.

It was another mixed day in the Canadian preferred share market, but this one was much calmer: PerpetualDiscounts lost 10bp, FixedResets gained 6bp and DeemedRetractibles were basically flat. There was only one entry in the Performance Highlights table. Volume was very light.

The drive to protect incompetent traders continues:

U.S. prosecutors have joined regulators’ investigation into whether some high-speed traders are manipulating markets by posting and immediately canceling waves of rapid-fire orders, two officials said.

Justice Department investigators are “working closely” with the Securities and Exchange Commission to review practices “that are potentially manipulative, like quote-stuffing,” Marc Berger, chief of the Securities and Commodities Task Force at the U.S. Attorney’s Office for the Southern District of New York, said today at an event in New York.

While regulators previously said they were probing possibly abusive algorithmic trading practices, the attention of criminal authorities ramps up the stakes.

While researching something else, I ran across an opinion piece by Ed Waitzer titled New IIROC plan avoids putting duty on advisors to act in clients’ interest that illustrates the complete inability of professional regulators to analyze the simplest transaction. In talking about the “fiduciary responsibility” issue, he states:

To understand the difference between a “suitability” and “best-interest” standard, think of a student seeking advice at an electronics store about her need for a laptop. The salesperson recommends a highly priced unit with an expensive extended warranty — all designed to generate the highest commission. The laptop is suitable — it will satisfy the student’s needs. It clearly isn’t the best solution and a disclosure obligation isn’t likely to stand in the way of a motivated salesperson. If the salesperson had been bound by a “best-interest” standard, he would recommend a simpler, more reliable and affordable unit.

What utter balderdash. If the salesperson was bound by the “best-interest” standard and was being paid on commission, he would simply ensure that he had a plausible rationale for recommending the more profitable product as being in the student’s best interest. “What if it breaks? You’re on a tight budget! It might break at a bad time! You’re better off buying the extended warranty and fixing your costs. Then you can concentrate on your studies, instead of worrying about malfunctions in your machine.” No purpose would be served by a “best-interest” standard in the presence of commissioned sales except for the – very important, with respect to the employment prospects of some – generation of paperwork and checklists for the electronic consumer goods’ salesmen’s regulator.

I get hate mail whenever I write about the fiduciary responsibility issue – such as January 24 – so all I can suggest is: if you want a fiduciary, hire one. I’m a Portfolio Manager, for instance. I get paid for Assets Under Management, not for transactions. I’m a fiduciary – in fact, I’m legally (OSC) and ethically (CFA) required to be. If you don’t want a fiduciary, don’t hire a Portfolio Manager – hire a stockbroker or mutual fund salesman. It’s really quite simple.

It looks like Berkshire Hathaway has been stung by recent criticism and is now attempting to worm its way back into the good graces of morons by criticisizing investment banks:

Charles Munger, whose Berkshire Hathaway Inc. (BRK/A) holds $5 billion of options on Goldman Sachs Group Inc. (GS) stock, said the role of investment bankers in helping to mask Greece’s financial troubles was “perfectly disgusting.”

“Wall Street to some extent is deliberately trying to profit from sin, and I think it’s a mistake,” Munger told reporters yesterday after Berkshire’s annual press conference in Omaha, Nebraska. “Why should an investment banker go to Greece to teach them how to pretend their finances are different from what they really are? Why isn’t that a perfectly disgusting bit of human behavior?”

Goldman’s conduct with respect to Greece was discussed on PrefBlog when the issue became fashionable (see, for example, March 1, 2010). I eagerly await Munger’s next pronouncement, which may be on the topic of whether lawyers should represent Bad People. Still, I can’t blame him for chanting the slogan of the ‘finance as a cooperative game’ crowd – the Berkshire / Buffett / Munger mystique is worth what? 10%? 20% of their stock price? Who wants to guess?

The US Administration recently announced drastic measures against a Public Enemy. You know who I mean:

Citing an epidemic of childhood obesity, regulators are taking aim at a range of tactics used to market foods high in sugar, fat or salt to children, including the use of cartoon characters like Toucan Sam, the brightly colored Froot Loops pitchman, who appears in television commercials and online games as well as on cereal boxes.

Regulators are asking food makers and restaurant companies to make a choice: make your products healthier or stop advertising them to youngsters.

“Toucan Sam can sell healthy food or junk food,” said Dale Kunkel, a communications professor at the University of Arizona who studies the marketing of children’s food. “This forces Toucan Sam to be associated with healthier products.”

Walk the plank, Cap’n!

It was another mixed day for the Canadian preferred share market, with DeemedRetractibles bouncing back (a little, anyway) from a sub-par month of April: PerpetualDiscounts lost 1bp, FixedResets gained 13bp and DeemedRetractibles won 31bp. The badly beaten up DeemedRetractibles from insurers were prominent on the performance highlights table. Volume was good. And now it’s time to watch the election news…

Elections have consequences!

The TMX Group Inc.’ s plan to merge with London Stock Exchange Group Plc wouldn’t get federal government approval if Jack Layton has any say — and polls say that the New Democratic Party leader may have a lot of say after Monday’s federal election.

Speaking Friday as his party surges in popularity, Mr. Layton said he saw too much risk to approve the deal.
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“We worry that Canadian business trying to access capital might have greater difficulty. As much as one might want to pretend that nothing will change, we find that hard to believe,” he said, according to Reuters.

But there’s a decent chance the deal will be approved before the new Minister’s office is painted orange:

On Friday TMX Group (X-T40.080.150.38%) and London Stock Exchange Group cast any questions aside by starting the formal application process with federal and provincial authorities regarding their proposed combination.

That means TMX has submitted its application to Investment Canada, which now has 75 days at most to review the proposal. Formal filings with the four provincial regulators who have a say will come in the next few weeks.

It was another mixed and somewhat strange day on the Canadian preferred share market – it appears that the announcement that CM will prioritize preferred share redemptions is having some effect. PerpetualDiscounts gained 20bp, FixedResets were down 4bp and DeemedRetractibles won 44bp. DeemedRetractibles dominated the Performance Highlights table, with a few insurer issues nestled amongst the banks. Volume was good.

And that’s a wrap for another month! Final figures aren’t in yet, but it looks like the overall market was basically flat on the month.

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts losing 4bp, FixedResets up 10bp and DeemedRetractibles gaining 41bp. The Performance Highlights table was comprised entirely of strongly performing bank DeemedRetractibles, almost certainly due to news that CM will prioritize preferred share redemptions as a use of its excess capital. Volume was strong.

The FOMC Statement did not contain any major surprises:

Information received since the Federal Open Market Committee met in March indicates that the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually.
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Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued.
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Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations.
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The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts up 11bp, FixedResets gaining 5bp and DeemedRetractibles winning 9bp. Volatility remained low, but volume was pretty good.

PerpetualDiscounts now yield 5.58%, equivalent to 7.25% interest at the standard equivalency factor of 1.3x. Long Corporates remain at about 5.5% (maybe a little less) so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 175bp, with all numbers unchanged from the April 20 values.

The market is anticipating European sovereign default:

Yields on government securities from Greece, Ireland and Portugal reached records amid speculation the heavily indebted nations won’t be able to avoid restructuring.

Ireland’s two-year yield reached a euro-era record 12.08 percent after the European Union said the nation’s debt burden surged the most in the currency area last year. Greek two-year yields have climbed almost 870 basis points this month, reaching 24.45 percent today as investors priced in losses, or so-called haircuts, they may incur in the event of a restructuring.
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Portugal’s two-year note yields touched a euro-era record of 11.74 percent, up from 8.78 percent at the end of last month. The 10-year yield reached a record 9.61 percent today, compared with 8.41 percent on March 31.

Greece’s deficit was bigger than expected:

Greece’s chances of avoiding a debt-crunching exercise faded to almost nothing with the revelation that its budget deficit is going in the wrong direction in spite of robust efforts to reduce government spending.

The country’s budget deficit in 2010 was 10.5 per cent of gross domestic product, Eurostat, the European Union’s statistics agency, reported on Tuesday. The figure was considerably bigger than Greek government’s own deficit target of 9.4 per cent and the European Commission’s estimate of 9.6 per cent.

DBRS confirmed BAM, but was careful to include some warnings:

Overall, DBRS still remains concerned with Brookfield’s aggressive expansion program and the possible impact it may have on its overall risk profile. Brookfield’s investments normally include real, low risk assets that generate steady cash flow. If there was a shift towards more speculative investments intended for shorter hold periods, the ratings could come under pressure. DBRS notes that the financial packaging of Brookfield’s investments within its portfolio can be complex. The transparency for this and intercompany transactions can be a challenge at times.

DBRS notes that while Brookfield’s corporate liquidity and cash flow has been reasonable, it is not sufficient to be a primary funding source for large new investments. In fact, the current size of corporate debt and preferred shares is approaching the limits for the current rating category. Thus far, concerns that sizable transactions could negatively affect the Company’s credit ratings have been mitigated with the used of co-investor capital and non-recourse debt. Even so, DBRS notes that the non-recourse debt at the operating levels is significant and that it has first claim on the related cash flows. It also presents some group refinancing risk.

Japan has joined S&P’s list of sovereigns with a negative outlook.

Apparently Obesity is expected to surpass smoking as the leading cause of preventable morbidity and mortality. I can’t wait for the time when the do-gooders have had their way with this one! Outside every office tower and public place will be a long line of fatties scarfing down their french fries and pizza!

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts off 2bp, FixedResets losing 11bp and DeemedRetractibles up 5bp. Not much volatility. Volume was average.

Nothing happened today.

It was an uneventful day on the Canadian preferred share market, with PerpetualDiscounts gaining 4bp, FixedResets off 4bp and DeemedRetractibles up 3bp. There wasn’t a single entry for the Performance Highlights table; volume was average.

There’s a hot new investment product being flogged in Somalia – piracy futures:

Piracy syndicates are selling shares in planned attacks, fueled by a surge of ransom payments that help attract investors, the U.S. Chief of Naval Operations said.

Piracy syndicates in villages, mainly in largely ungoverned Somalia, solicit investors who buy shares in the attack missions and gain a corresponding share of ransoms paid by the shipping industry, Admiral Gary Roughead said.

The world deserves this, because we’re all wimps now. As I said on August 3:

Julius Caesar knew what to do about pirates; so did Thomas Jefferson.

Maybe the shipping companies should just pay the next ransom in Apple products:

[Alasdair] Allan and former Apple software engineer Pete Warden said they stumbled upon the file where all the location data was being stored by accident while toying with the iPhone to see what other data could be pulled from the device. They were surprised to find a file with about 29,000 logs of their whereabouts — about a year’s worth.

They determined that Apple’s iOS 4 operating system for the iPhone and iPad 3G is logging latitude-longitude coordinates along with the time stamp of when a spot was visited. The data is transferred to the hard drive of a computer when the 3G iPhone or iPad is synched.

And, given that I’m basically ignoring fixed income in today’s report, let’s wrap up with some political F-35 news:

It may cost as much as $1 trillion to operate the military’s fleet of Lockheed Martin Corp. (LMT) F-35 aircraft for several decades, according to a preliminary Pentagon estimate sent to Congress.

The figure is 9.3 percent more than the $915 billion estimate by the Defense Department in its 2009 Selected Acquisition Report to Congress.

The long-term cost estimate, which includes inflation, was submitted to Congress on April 15 in a report obtained by Bloomberg News. It assumes 8,000 hours of flying time for each of the 2,443 aircraft over a 30-year period. The Air Force, Navy and Marine Corps have their own variations of the aircraft, with the last in the fleet to be produced in 2035.

We’re supposed to be buying 65 of them, so our cost should only be about $26.6-billion based on the US estimates, assuming we don’t experience higher unit costs for a smaller-scale programme.

In news related to the Canadian preferred share market that is supposed to be the subject of this blog, it was a pretty quiet day, with PerpetualDiscounts down 5bp, FixedResets gaining 5bp and DeemedRetractibles basically flat. Volatility continued to be low; volume was average, albeit with some big blocks changing hands.

DBRS confirmed Transcontinental at Pfd-3(high); the ticker is TCL.PR.D.

The Canadian preferred share market had mixed returns today as, in a reversal of recent form, PerpetualDiscounts lost 7bp, FixedResets were essentially flat and DeemedRetractibles gained 13bp. Volatility remained subdued. Volume was high.

PerpetualDiscounts now yield 5.58%, equivalent to 7.25% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 5.5%, so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 175bp, a slight (and perhaps spurious) increase from the 170bp reported April 13.