Category: Market Action

Market Action

November 10, 2010

People sometimes pretend that mutual fund MERs are too high. But that’s what people want:

Value of Canadian mutual fund assets: $720-billion

Value of Canadian-listed exchange-traded funds: $36.2-billion

Value of segregated fund assets in Canada: $83.3-billion

Value of hedge fund assets in Canada: $45.7-billion

Value of closed-end funds: $24.1-billion

The Financial Post reports that a real newspaper reports that RBC is too big to fail on a global basis:

Royal Bank of Canada has appeared on a list of banks that have been deemed by global authorities as being too big to fail, according to the Financial Times.
…
The G20 will put off a decision on whether to impose an international capital surcharge for the world’s most vital banks, which would force them to maintain additional capital buffers to help them withstand market shocks, the Financial Times report said.

While it may not be explicitly settled at this week’s G20 meeting, it is understood that the banks that are deemed too big to fail will need to raise even more capital than their peers as extra insurance against their sizable reach and influence over the world’s economy.

There are signs the US fiscal deficit is intractable:

The co-chairmen of President Barack Obama’s debt-reduction commission will propose cuts to Social Security and Medicare, as well as reductions in income tax rates in exchange for curbing tax breaks, according to a Republican aide who attended the meeting.

The chairmen’s plan is already causing some Democrats and Republicans on the 18-member commission to balk. The plan will be announced at 1 p.m. Washington time today, said commission spokesman Fred Baldassaro.

Fearless forecast: the problem will remain intractable until the President gets a call from the Treasury saying they’re having big problems selling a bond issue and can he please start working the ‘phones. Then whichever party’s in power will start showing some sense.

The 30-year Treasury auction was disappointing:

Treasury 30-year bonds declined for a sixth day as the U.S. sold $16 billion of the securities amid concern yields will continue to climb as the Federal Reserve focuses its purchases on shorter-maturity debt.

The bonds drew a yield of 4.32 percent, compared with the average forecast of 4.288 percent in a Bloomberg News survey of eight of the Fed’s 18 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.31, the lowest since November 2009.

In a primer titled A Survival Guide to Bonds, by Rob Carrick of the Globe and Mail, there is a most interesting quote:

“For most of the time in the past 13 years or so, bonds have been negatively correlated to stocks,” explains Michael Herring, managing director and investment strategist at BMO Nesbitt Burns. “When stocks are down, bonds are up. So they provide a nice diversification effect, a counterbalance that dampens the volatility of the overall portfolio.”

That’s not what the Kansas City Fed thinks! In the construction of their Financial Stress Index, they indicate that the “Negative value of correlation between stock and Treasury returns” is an indicator of “Flight to Quality” and therefore a stress indicator. They cite other studies showing that this holds true for other government bond returns; specifically, the measure used is computed over rolling three month periods using the S&P500 and a 2-year Treasury bond index.

MSCI-BARRA published an interesting piece on stock-bond correlation in 2009.

The Canadian preferred share market showed little direction today – for a change! – although volume continued to be high. PerpetualDiscounts lost 3bp, while FixedResets gained 6bp, taking the median weighted average Yield to Worst on the latter index down to 2.84% – yet another new low.

PerpetualDiscounts now yield 5.28%, equivalent to 7.39% interest at the standard equivalency factor of 1.4x. Long Corporates now yiel about 5.3%, so the pre-tax interest-equivalent spread is now about 210bp, a sharp tightening from the 230bp reported on November 3.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	-0.1270 %	2,229.2
FixedFloater	4.94 %	3.55 %	27,261	19.12	1	-0.2268 %	3,402.8
Floater	2.67 %	2.34 %	65,952	21.40	4	-0.1270 %	2,407.0
OpRet	4.78 %	2.89 %	80,621	1.86	9	0.0127 %	2,396.7
SplitShare	5.84 %	-16.73 %	67,067	0.09	2	0.1007 %	2,412.7
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.0127 %	2,191.6
Perpetual-Premium	5.62 %	5.07 %	162,883	2.75	24	0.0779 %	2,029.6
Perpetual-Discount	5.28 %	5.28 %	256,830	14.86	53	-0.0274 %	2,067.9
FixedReset	5.19 %	2.84 %	351,316	3.21	50	0.0557 %	2,297.8

Performance Highlights
Issue	Index	Change	Notes
GWO.PR.I	Perpetual-Discount	-1.82 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-10 Maturity Price : 21.60 Evaluated at bid price : 21.60 Bid-YTW : 5.28 %
FTS.PR.G	FixedReset	-1.28 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2013-10-01 Maturity Price : 25.00 Evaluated at bid price : 26.26 Bid-YTW : 3.22 %
MFC.PR.C	Perpetual-Discount	-1.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-10 Maturity Price : 21.42 Evaluated at bid price : 21.42 Bid-YTW : 5.34 %
ENB.PR.A	Perpetual-Premium	1.22 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2010-12-10 Maturity Price : 25.00 Evaluated at bid price : 25.72 Bid-YTW : -30.35 %
BAM.PR.M	Perpetual-Discount	1.66 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-10 Maturity Price : 21.47 Evaluated at bid price : 21.47 Bid-YTW : 5.61 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BNS.PR.Q	FixedReset	122,290	RBC crossed blocks of 70,000 and 25,000, both at 26.61. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-11-24 Maturity Price : 25.00 Evaluated at bid price : 26.61 Bid-YTW : 2.75 %
TD.PR.M	OpRet	110,555	Scotia crossed 97,900 at 25.90. YTW SCENARIO Maturity Type : Call Maturity Date : 2010-12-10 Maturity Price : 25.75 Evaluated at bid price : 25.86 Bid-YTW : 0.88 %
HSB.PR.D	Perpetual-Discount	93,734	RBC crossed blocks of 32,000 and 27,400, both at 23.48, then another 24,500 at 23.50. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-10 Maturity Price : 23.27 Evaluated at bid price : 23.50 Bid-YTW : 5.38 %
TD.PR.Y	FixedReset	76,481	RBC sold blocks of 10,000 and 21,400 to anonymous, both at 26.75, then crossed 10,700 at 26.72. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-11-30 Maturity Price : 25.00 Evaluated at bid price : 26.75 Bid-YTW : 2.64 %
MFC.PR.A	OpRet	73,532	Nesbitt crossed 30,000 at 25.60. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2015-12-18 Maturity Price : 25.00 Evaluated at bid price : 25.61 Bid-YTW : 3.72 %
TD.PR.E	FixedReset	44,033	TD crossed 35,000 at 27.85. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 27.92 Bid-YTW : 2.85 %
There were 49 other index-included issues trading in excess of 10,000 shares.

Market Action

November 9, 2010

Here’s another exhibit regarding the reluctance of asset management firms to promote star managers:

Roger Guy and Guillaume Rambourg, Gartmore Group Ltd.’s two star managers, won European fund of the year at a black-tie gala at London’s Grosvenor House Hotel on Jan. 21. Ten months later, both have quit and the company is considering putting itself up for sale.
…
Rambourg and Guy together managed about a third of the company’s assets after its IPO. Three other managers have departed, prompting the company to hire Goldman Sachs Group Inc. to help find a buyer after investors including Skandia Investment Management Ltd. pulled or planned to pull 3.3 billion pounds ($5.3 billion), or about 14 percent of its assets under management, since Rambourg was suspended in March. The performance of their funds has lagged behind competitors this year, according to data compiled by Bloomberg.

… and here’s one about the usual effect of politicized regulation:

U.S. airlines canceled 4,754 flights in September, a 62 percent jump from the same month a year ago, as the government requires carriers to let passengers off stuck flights within three hours.
…
Carriers are seeking to avoid fines as high as $27,500 per customer stuck on a plane during a lengthy delay under the rule by Transportation Secretary Ray LaHood. Airlines said the requirement would lead to cancellations, and as of September an additional 5,000 flights were scrapped, an 18 percent rise, since the rule took effect.
…
“Cancellations are a much worse result for passengers” than long delays, said David Stempler, president of the Air Travelers Association, an advocacy group in Chevy Chase, Maryland. “The time it takes them to get to their destinations may last up to days” after a flight is scrubbed, he said.

One of China’s major credit rating agencies has downgraded the US to A+:

China’s Dagong Global Credit Rating Co. reduced its credit rating for the U.S. to A+ from AA, citing a deteriorating intent and ability to repay debt obligations after the Federal Reserve announced more monetary easing.

The credit outlook for the U.S. is “negative,” as the Fed’s plan to buy government debt will erode the value of the dollar and “entirely encroaches” on the interests of creditors, analysts at Dagong, one of China’s five official ratings companies, said in a statement.
…
Dagong, seeking to become an alternative to S&P, Moody’s and Fitch Ratings, ranks China’s debt higher than that of the U.S. and Japan, citing widening deficits in the developed world. Global ratings methodology is “irrational,” Dagong Chairman Guan Jianzhong said in July, and “cannot truly reflect repayment ability.”

In September, the Securities and Exchange Commission denied the application of Dagong to become a Nationally Recognized Statistical Rating Organization in the U.S.

Life will become even more fun if the EU sets up its own captive credit rater!

I ran across an interesting essay … The Impact of High Frequency Trading on the Canadian Market by members of the BMO-CM Quantitative Execution Services, dated July 2009 … it’s filled with the familiar booHooHoos about Portfolio Managers having their lunch eaten. I mean, look at this:

Liquidity has become less obvious – As predatory high frequency trading creates extra volume without creating additional real liquidity, it become increasing difficult for fund managers to discern the real achievable liquidity in a given stock. To date we have witnessed many instances where portfolio managers looking at total trading volume attempt to buy (sell) too much of a given stock resulting in additional market impact. This cost is again shouldered by the individual end clients

They hired an incompetent manager and it cost them. I’m not wringing my hands.

We have had several discussions with Canadian buy side accounts who have noted the decreasing effectiveness of their pre-trade analytic tools. Typically these tools rely on volume and a number of other market metrics (e.g. spread, volatility) to predict the impact a given order will have on the market for that issue. As ‘real’ volume becomes less discernable these tools have greater difficulty determining this number. Portfolio managers, who have become increasingly reliant on these tools over the last several years, are becoming increasingly frustrated with their performance.

Not frustrated enough, apparently, to do a damn bit of work to fix the problem.

The Bank of Canada has released a working paper by Céline Gauthier, Zhongfang He and Moez Souissi titled Understanding Systemic Risk: The Trade-Offs between Capital, Short-Term Funding and Liquid Asset Holdings:

We offer a multi-period systemic risk assessment framework with which to assess recent liquidity and capital regulatory requirement proposals in a holistic way. Following Morris and Shin (2009), we introduce funding liquidity risk as an endogenous outcome of the interaction between market liquidity risk, solvency risk, and the funding structure of banks. To assess the overall impact of different mix of capital and liquidity, we simulate the framework under a severe but plausible macro scenario for different balance-sheet structures. Of particular interest, we find that (1) capital has a decreasing marginal effect on systemic risk, (2) increasing capital alone is much less effective in reducing liquidity risk than solvency risk, (3) high liquid asset holdings reduce the marginal effect of increasing short term liability on systemic risk, and (4) changing liquid asset holdings has little effect on systemic risk when short term liability is sufficiently low.

I don’t like it much becaue it does not address the role of the Central Bank in reducing liquidity risk.

Regulators continue to run amok in the UK, once best known as the home of Magna Charta:

Traders’ mobile-telephone calls may be taped in an effort to stamp out insider trading under new rules scheduled to be published by the U.K. financial regulator as soon as this week.

The Financial Services Authority has said cell phones used for business shouldn’t be exempt from rules requiring banks and brokerages to record employees’ calls so that they can be listened to later. In March, the agency said in draft proposals that around 22,000 phones would be covered.
…
The regulator in September warned companies to prevent leaks to the media as part of its effort to crack down on market abuse. The FSA started to cold-call traders to interview them under caution two years ago about possible insider trading, a strategy that fell prey to hoax calls.
…
“We continue to work to keep undesirable people out of our financial services industry,” FSA enforcement chief Margaret Cole said in a speech yesterday. “We use information and intelligence from a range of sources to consider whether those who own or run financial firms, as well as people in sensitive roles within those businesses, are ‘fit and proper.’”

There’s more about the cold-calling here. For now, it’s all to the good – I know some fine immigrants from the UK who came here out of disgust with the ubiquitous camera monitors, ASBOs and so on. But this trend will eventually hurt us all.

Another strong day on the Canadian preferred share market, but this time with a big difference in inter-sector performance. PerpetualDiscounts gained 41bp, while FixedResets lost 3bp; today’s performance takes the Bozo Spread (the difference between PerpetualDiscount and FixedReset Current Yields) down to a mere 9bp. I am all agog to see if this spread goes negative … it is my theory that this spread shows the retail perception of the interest rate risk inherent in a Straight Perpetual … but who knows? Maybe it doesn’t. Volume was very heavy.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.1272 %	2,232.1
FixedFloater	4.93 %	3.53 %	27,559	19.14	1	-0.6757 %	3,410.6
Floater	2.67 %	2.34 %	64,550	21.40	4	0.1272 %	2,410.0
OpRet	4.78 %	2.87 %	80,881	1.87	9	-0.1875 %	2,396.4
SplitShare	5.84 %	-14.84 %	66,296	0.09	2	-0.0403 %	2,410.3
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.1875 %	2,191.3
Perpetual-Premium	5.62 %	5.01 %	160,386	3.08	24	-0.0805 %	2,028.0
Perpetual-Discount	5.28 %	5.27 %	257,751	14.96	53	0.4123 %	2,068.4
FixedReset	5.19 %	2.86 %	352,075	3.21	50	-0.0298 %	2,296.6

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.H	OpRet	-1.53 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2010-12-09 Maturity Price : 25.25 Evaluated at bid price : 25.70 Bid-YTW : -8.13 %
FTS.PR.H	FixedReset	1.02 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2015-07-01 Maturity Price : 25.00 Evaluated at bid price : 26.00 Bid-YTW : 3.23 %
RY.PR.D	Perpetual-Discount	1.07 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-09 Maturity Price : 22.57 Evaluated at bid price : 22.73 Bid-YTW : 4.96 %
RY.PR.E	Perpetual-Discount	1.12 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-09 Maturity Price : 22.49 Evaluated at bid price : 22.65 Bid-YTW : 4.97 %
SLF.PR.C	Perpetual-Discount	1.13 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-09 Maturity Price : 21.53 Evaluated at bid price : 21.53 Bid-YTW : 5.24 %
SLF.PR.E	Perpetual-Discount	1.21 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-09 Maturity Price : 21.46 Evaluated at bid price : 21.77 Bid-YTW : 5.22 %
FTS.PR.F	Perpetual-Discount	1.22 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-09 Maturity Price : 23.21 Evaluated at bid price : 23.42 Bid-YTW : 5.23 %
TD.PR.O	Perpetual-Discount	1.24 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-09 Maturity Price : 24.30 Evaluated at bid price : 24.57 Bid-YTW : 4.96 %
RY.PR.F	Perpetual-Discount	1.30 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-09 Maturity Price : 22.41 Evaluated at bid price : 22.56 Bid-YTW : 4.94 %
RY.PR.A	Perpetual-Discount	1.33 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-09 Maturity Price : 22.62 Evaluated at bid price : 22.80 Bid-YTW : 4.88 %
NA.PR.L	Perpetual-Discount	1.45 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-09 Maturity Price : 23.59 Evaluated at bid price : 23.85 Bid-YTW : 5.09 %
MFC.PR.B	Perpetual-Discount	1.61 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-09 Maturity Price : 21.79 Evaluated at bid price : 22.10 Bid-YTW : 5.33 %
GWO.PR.I	Perpetual-Discount	1.62 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-09 Maturity Price : 21.65 Evaluated at bid price : 22.00 Bid-YTW : 5.16 %

Volume Highlights
Issue	Index	Shares Traded	Notes
MFC.PR.A	OpRet	151,540	RBC bought 35,700 from Nesbitt at 25.59. RBC then crossed 24,300 at 25.59, while Nesbitt crossed 57,000 at 25.60. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2015-12-18 Maturity Price : 25.00 Evaluated at bid price : 25.60 Bid-YTW : 3.72 %
BNS.PR.N	Perpetual-Discount	120,002	Desjardins crossed 10,000 at 25.09; RBC crossed 70,500 at 25.14. Anonymous crossed (?) 13,000 at 25.14. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-02-26 Maturity Price : 25.00 Evaluated at bid price : 25.06 Bid-YTW : 5.27 %
PWF.PR.P	FixedReset	117,485	TD crossed 10,700 at 26.25, then sold 10,000 to Desjardins at 26.27. Finally, TD crossed 39,500 at 26.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-09 Maturity Price : 23.44 Evaluated at bid price : 26.00 Bid-YTW : 3.44 %
BNS.PR.J	Perpetual-Discount	89,000	RBC crossed 76,500 at 25.15. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-09 Maturity Price : 23.41 Evaluated at bid price : 25.11 Bid-YTW : 5.17 %
RY.PR.F	Perpetual-Discount	88,487	RBC crossed 50,000 at 22.56. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-09 Maturity Price : 22.41 Evaluated at bid price : 22.56 Bid-YTW : 4.94 %
RY.PR.A	Perpetual-Discount	87,814	RBC crossed 47,900 at 22.78. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-09 Maturity Price : 22.62 Evaluated at bid price : 22.80 Bid-YTW : 4.88 %
There were 64 other index-included issues trading in excess of 10,000 shares.

Market Action

November 8, 2010

The Canadian Securities Administrators have brought in proposals to maximize the risk of single-point failure in Canada, titled Consultation Paper 91‐401 on Over‐the‐Counter Derivatives Regulation in Canada. One of the risks outlined is the potential for doing business in a productive manner:

Regulatory inaction is not an option given the commitments Canada has made as part of the G20. Notwithstanding Canada’s G20 commitments, there are compelling reasons to introduce regulation. Because OTC derivatives trading takes place across borders, if other countries adopt stringent regulations, and Canada does not act, it may gain a reputation as a haven, resulting in regulatory arbitrage and a flight of risky trading to Canada.

Mind you, the scare factor of “risky trading” is inflammatory bullshit. The proposals are all about central clearing, not “risky trading”.

The Canadian Securities Law blog advises:

CNSX Markets Inc., the operator of the Canadian National Stock Exchange and Pure Trading has proposed amendments to its Policy 2 that would extend listing eligibility to certain prospectus-exempt debt securities. The amendments to Policy 2 would mirror language contained in its Restated Order. Comments are being accepted on the amendments for 30 days from today.

OSC Notice 2010-006 specifies:

The prospectus-exempt debt securities that CNSX Markets seeks to list are currently distributed to the public in Canada under the exemptions set out in the Restated Order, following which the securities are freely traded over-the-counter with settlement through FundServ.

This might mean simply GICs: FundSERV is making a push in this market:

FundSERV announces the launch of GICSERV, an industry wide network for automating brokered GIC transactions. The first release of industry standards are now available for comment.

“We saw the brokered GIC market as a perfect chance for FundSERV to utilize its business and technical capabilities to further support our existing distribution customers and other participants in this financial services segment,” said Brian Gore, president and chief executive officer at FundSERV. “Our goal is to allow our existing network to facilitate standards and automation in the brokered GIC market.”

It will be most interesting to see how the CNSX proposal unfolds. Will it be strictly a new issue market – for instance, if you bid 2.55% for a five year GIC and somebody hits you, will you get a brand new GIC with a 2.55% coupon? Probably not, since that would restrict the sellers to issuers only. Perhaps there will be conversion formulas and such, so that when you get hit on your 2.55% bid, you get whatever the seller wants to deliver … a higher (lower) coupon with a lower (higher) price. In such a case, I will be fascinated to see whether the brokerages start showing account statments with the price of the GIC marked to market.

However, PPNs might be the securities in question:

Treatment of Deposit Products

SSI commented that clarification is required to address the treatment of deposit products held in dealer client accounts, such as Guaranteed Investment Certificates (“GICs”) or Principal Protected Notes (“PPNs”) and asked how accrued interest is to be addressed in determining market values.

MFDA Response

The market value of GICs should be reported as the principle amount plus accrued interest earned as at the end of the account statement period.

With respect to reporting the value of PPNs, certain PPNs have market values that are available on FundSERV. However, for PPNs that do not have a reliable market value, the book value should be reported.

Political manoeuvering over the Volcker Rule was mentioned briefly on November 4. Jim Hamilton’s World of Securities Regulation has more details and supporting documentation, and a post detailing support for the Rule. There is also some reason to hope that US Covered Bonds will be forthcoming.

Pam Martens writes an entertaining, if paranoid, account of the Flash Crash titled The “Flash Crash” Cover-Up:

The official report does not break out the wealth destruction to the small investor on May 6, but Ms. Schapiro shared that information on September 7 with the Economic Club of New York: “A staggering total of more than $2 billion in individual investor stop loss orders is estimated to have been triggered during the half hour between 2:30 and 3 p.m. on May 6. As a hypothetical illustration, if each of those orders were executed at a very conservative estimate of 10 per cent less than the closing price, then those individual investors suffered losses of more than $200 million compared to the closing price on that day.”

A stop-loss order is the dull Boy Scout knife with which the small investor attempts to protect himself from the star wars gang. It is an order placed with an unlimited time frame that sits in the system and says if my stock trades down to this level, sell me out. Unfortunately, most of these orders are placed as market orders rather than indicating a specific “limit” price that the investor will accept. (That alternative order is called a stop-loss limit order.) Stop-loss market orders go off on the next tick after the designated price is reached. In a liquid and orderly market, that should be only a fraction away from the last trade. On the day of the Flash Crash during that pivotal half hour, the next tick was frequently 10 to 60 per cent away from the last trade.

The SEC has banned stub-quotes:

The new rules address the problem of stub quotes by requiring market makers in exchange-listed equities to maintain continuous two-sided quotations during regular market hours that are within a certain percentage band of the national best bid and offer (NBBO). The band would vary based on different criteria:

For securities subject to the circuit breaker pilot program approved this past summer, market makers must enter quotes that are not more than 8% away from the NBBO.
For the periods near the opening and closing where the circuit breakers are not applicable, that is before 9:45 a.m. and after 3:35 p.m., market makers in these securities must enter quotes no further than 20% away from the NBBO.
For exchange-listed equities that are not included in the circuit breaker pilot program, market makers must enter quotes that are no more than 30% away from the NBBO.
In each of these cases, a market maker’s quote will be allowed to “drift” an additional 1.5% away from the NBBO before a new quote within the applicable band must be entered.

The new market maker quoting requirements will become effective on Dec. 6, 2010.

For the life of me, I don’t understand why the exchanges and the SEC ever permitted stub quotes in the first place. Market Makers get special privileges – from the SEC’s perspective, exemptions from the various short-sale rules – so why were they allowed to pay for them with debased coin?

Here’s one reason QE2 might not work:

Rather than providing money to businesses and consumers, U.S. commercial banks are increasingly using the cash available at interest rates set by the Federal Reserve that are next to zero and lending it back to the government. Since June, the biggest banks bought about $127 billion of Treasuries, compared with $47 billion in the first half, according to the central bank. Commercial and industrial loans outstanding have fallen by about $68.5 billion this year, central bank data show.
…
The Basel III regulations set by the Bank for International Settlements in Basel, Switzerland, may trim economic growth by 0.1 percent and 0.9 percent, and result in $400 billion of additional Treasury purchases by U.S. commercial banks by 2015, a committee of bond dealers and investors that advises Treasury Secretary Timothy Geithner said in a Nov. 2 report.
…
Lenders are on pace this year to buy the most Treasury and agency debt since the Fed began tracking the data in 1950, adding $186.2 billion of the securities through Oct. 20 and bringing the total to $1.62 trillion. At the same time, commercial and industrial loans fell by 5.3 percent to $1.23 trillion, Fed data show.

Of interest in the November 2 TBAC Report:

Against this economic backdrop, the Committee’s first charge was to examine what adjustments to debt issuance, if any, Treasury should make in consideration of its financing needs. In the near term, given the uncertain economic and fiscal situation, the Committee felt stabilizing nominal coupon issuance at current levels was appropriate. To the extent the Committee has greater clarity, it will likely recommend further reductions to nominal coupon issuance at the February refunding. Consistent with the August meeting, the Committee felt maintaining flexibility was necessary.

There was continued debate regarding the average maturity of outstanding Treasury debt. Although the Committee felt meaningful progress had been made, there was broad agreement that continuing down this path was appropriate. One concerning consequence of raising the average maturity of debt is the decline in T-bills as a percentage of marketable debt. A majority felt that a further lengthening of the average maturity should take precedence.

With regard to TIPS, the Committee suggested an auction every month. To accomplish this, the Committee recommended two 30-year TIPS re-openings, in June and October, and a discontinuation of the 30-year TIPS re-opening in August. Likewise, in five year TIPS, the Committee recommended two re-openings, in August and December, and a discontinuation of the October re-opening. This auction schedule should allow for growth in gross TIPS issuance to approximately $120 billion in calendar year 2011 from approximately $86 billion in calendar year 2010.

Despite the aforementioned recommendation on TIPS issuance, there was continued debate at the Committee regarding the success of the TIPS program. A number of members cited that relative to nominal issuance, TIPS issuance was more expensive, less liquid, and lacked the flight to quality aspect experienced in 2008. One Committee member recommended further detailed analysis into the costs and benefits of the TIPS program.

… and with respect to Basel 3 …

The third charge examined the potential impacts of Basel III (presentation attached). The member documented the tighter definitions of Tier-1 capital, prescribed leverage and liquidity ratios, counter-cyclical capital buffers, additional capital requirements for systemically important firms, and new limits on counterparty credit risk. The member remarked that while institutions had years to comply, markets were pushing institutions to convey and implement adoption plans today. As a result, extension of liquidity, credit, and capital are being curtailed at a time of slow economic growth. The member included estimates of Basel III’s negative impact on growth. Furthermore, members expressed concern that specific U.S. regulatory reforms in conjunction with Basel III adoption may put U.S. financial firms at a competitive disadvantage versus international peers. Lastly, the member pointed out that compliance with liquidity coverage ratios will lead to increased demand by designated institutions for U.S. Treasuries.

How ’bout that Goldman Sachs, eh? They’ve done a Maple Issue:

Goldman Sachs Group Inc. (GS) raised C$500 million from an issue of five-year, so-called Maple bonds, according to people familiar with the matter.

Maple bonds are debt securities denominated in Canadian dollars that are issued by foreign companies.

The Goldman issue, which matures in November 2015, was priced at 208 basis points over the relevant government of Canada benchmark curve, or at the low end of the guidance, to yield 4.102%.

The bonds carry a coupon of 4.10%.

Goldman’s offering provides the latest evidence of a recovery in the Maple-bond market this year following a slow period in 2009, reflecting a combination of improved credit conditions and larger syndicates underwriting the deals. A larger number of dealers in a syndicate often lends itself to better trading conditions for the securities in the secondary market.

… and an ultralong issue:

The Goldman issue is a poster child for the continuing frenzy in the capital market for long-dated instruments. The Wall Street bank originally hoped investors might have the appetite for $250-million (U.S.) worth of the securities, according to market chatter at the time of the issue last month.

But Goldman sold more than five times as much – $1.3-billion. Ordinary ma and pa investors were the target buyers, signified by Goldman chopping the bonds into minuscule $25 amounts. This is an unusual size. Bonds typically trade in minimum multiples of $1,000.

It’s not clear how many of the small investors who bought Goldman’s bonds realize the fine points of the deal. According to the prospectus, Goldman has reserved for itself the right to redeem the bonds at their face value of $25 on five days’ written notice any time after Nov. 1, 2015.

If interest rates stay low, Goldman, which didn’t respond to a request for comment, will likely call the bonds and pay off investors. Those seemingly high yields will then vanish.

Meanwhile, if market interest rates return to more normal levels because the economy recovers or inflation resumes, it’s likely that the cost of borrowing for extremely long terms could rise well above the 6.125 per cent that Goldman is paying. In that case, Goldman won’t redeem them, and buyers will be stuck with losses because bond prices move inversely to interest rates.

It’s telling that, while Goldman has the right to redeem, buyers weren’t given the same right to force Goldman to buy back the securities if interest rates surge.

By way of comparison, the Long Term Corporate Bond ETF (VCLT) has a “SEC Yield” of 5.42% … but mind you, the SEC Yield is basically Current Yield, so it doesn’t mean much.

Efforts to destroy banking in the UK continue:

Business Secretary Vince Cable dismissed warnings from U.K. banks of a potential brain drain to Asia if the government follows through on its pledge to crack down on bonuses.

Warnings that banks may quit London are “a familiar negotiating technique and clearly one has to listen to them — one has to take these things seriously,” Cable said in an interview with Bloomberg Television in Beijing yesterday. “But it is clear that you have got to balance that against our national interest. Banks have to be safe and that means that the regulations have to take into account the potential problems created by cash bonuses.”

Royal Bank of Scotland Group Plc Chairman Philip Hampton and Standard Chartered Plc Chief Executive Officer Peter Sands said during a trade mission to Beijing with Cable and Chancellor of the Exchequer George Osborne that tighter bonus rules would drive bankers and traders away from London.
…
In April, the U.K. introduced a new 50 percent tax band for those earning more than 150,000 pounds a year. Osborne said last month he will block the payment of large bonuses unless banks show they are extending credit to households and companies.

HSBC Bank of Canada is redeeming its HaTS-series 2010. This Innovative Tier 1 Capital Issue is described as:

Each Series 2010 unit was issued at $1,000 per unit to provide an effective annual yield of 7.78 per cent to December 31, 2010 and the six month bankers’ acceptance rate plus 2.37 per cent thereafter. The units are not redeemable by the holders. The Trust may redeem the units on any distribution date, subject to regulatory approval.

Hellzapoppin’ on the Canadian preferred share market today, with PerpetualDiscounts rocketting up 55bp and FixedResets soaring 17bp, taking the median weighted average pre-tax yield to worst on the latter index down to 2.86%. Volume continued at elevated levels. All entries in the Performance table are in the black and my snarky remarks about MFC on the weekend appear to have attracted considerable interest … from contrarians.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.9241 %	2,229.2
FixedFloater	4.90 %	3.49 %	26,665	19.20	1	-0.0900 %	3,433.8
Floater	2.67 %	2.34 %	61,573	21.40	4	0.9241 %	2,407.0
OpRet	4.77 %	2.71 %	81,117	1.87	9	0.3562 %	2,400.9
SplitShare	5.84 %	-12.93 %	67,059	0.08	2	0.0403 %	2,411.2
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.3562 %	2,195.4
Perpetual-Premium	5.62 %	4.96 %	164,121	3.08	24	0.2291 %	2,029.6
Perpetual-Discount	5.30 %	5.29 %	257,807	14.87	53	0.5459 %	2,059.9
FixedReset	5.19 %	2.86 %	343,587	3.21	50	0.1738 %	2,297.3

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.K	Floater	1.01 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-08 Maturity Price : 17.05 Evaluated at bid price : 17.05 Bid-YTW : 3.10 %
BAM.PR.P	FixedReset	1.08 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-30 Maturity Price : 25.00 Evaluated at bid price : 28.09 Bid-YTW : 3.82 %
PWF.PR.A	Floater	1.24 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-08 Maturity Price : 21.88 Evaluated at bid price : 22.12 Bid-YTW : 2.34 %
SLF.PR.C	Perpetual-Discount	1.33 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-08 Maturity Price : 21.29 Evaluated at bid price : 21.29 Bid-YTW : 5.30 %
ELF.PR.G	Perpetual-Discount	1.58 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-08 Maturity Price : 20.61 Evaluated at bid price : 20.61 Bid-YTW : 5.83 %
SLF.PR.D	Perpetual-Discount	1.62 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-08 Maturity Price : 21.35 Evaluated at bid price : 21.35 Bid-YTW : 5.28 %
SLF.PR.A	Perpetual-Discount	1.66 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-08 Maturity Price : 22.53 Evaluated at bid price : 22.72 Bid-YTW : 5.29 %
BAM.PR.I	OpRet	1.81 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2010-12-08 Maturity Price : 25.50 Evaluated at bid price : 27.00 Bid-YTW : -49.79 %
MFC.PR.B	Perpetual-Discount	1.87 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-08 Maturity Price : 21.75 Evaluated at bid price : 21.75 Bid-YTW : 5.43 %
MFC.PR.C	Perpetual-Discount	3.03 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-08 Maturity Price : 21.45 Evaluated at bid price : 21.45 Bid-YTW : 5.33 %

Volume Highlights
Issue	Index	Shares Traded	Notes
RY.PR.I	FixedReset	227,675	National crossed 80,000 at 26.61; RBC crossed 94,200 at 26.62. National crossed two more blocs, of 20,000 and 18,000 shares, both at 26.61. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.60 Bid-YTW : 2.87 %
TD.PR.P	Perpetual-Premium	196,484	Desjardins crossed 175,000 at 25.19. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-12-01 Maturity Price : 25.00 Evaluated at bid price : 25.14 Bid-YTW : 5.19 %
SLF.PR.E	Perpetual-Discount	138,425	Nesbitt crossed blocks of 45,000 and 20,000, both at 21.40. RBC crossed 55,400 at 21.51. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-08 Maturity Price : 21.51 Evaluated at bid price : 21.51 Bid-YTW : 5.30 %
RY.PR.X	FixedReset	114,790	RBC crossed 20,200 at 28.10; Scotia crossed 50,000 at the same price; RBC crossed another 10,000 at the same price again. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-23 Maturity Price : 25.00 Evaluated at bid price : 28.05 Bid-YTW : 2.86 %
CM.PR.D	Perpetual-Premium	108,060	Nesbitt crossed blocks of 40,000 and 59,800, both at 25.60. YTW SCENARIO Maturity Type : Call Maturity Date : 2011-05-30 Maturity Price : 25.25 Evaluated at bid price : 25.56 Bid-YTW : 3.71 %
MFC.PR.E	FixedReset	73,900	RBC crossed blocks of 25,000 and 16,600, both at 26.90. Nesbitt crossed 20,000 at 27.00. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-19 Maturity Price : 25.00 Evaluated at bid price : 26.85 Bid-YTW : 3.78 %
There were 50 other index-included issues trading in excess of 10,000 shares.

Market Action

November 5, 2010

Gregg Berman of the SEC has contradicted Nanex:

There is no indication thus far that “one or more parties flooded the market with quotes” to cause delays in exchange feeds that list stock prices,Gregg Berman, a senior adviser to the SEC’s trading and markets division, said today at a Washington meeting to discuss the May 6 plunge.

Berman’s comments were at odds with speculation by Nanex LLC, a market-data provider, which said high-frequency traders destabilized New York Stock Exchange trading by submitting and then canceling thousands of rapid-fire orders.

OK, Mr. Berman, you say there’s no evidence that there was quote-stuffing to destabilize the markets. Fair enough. But (a) do you agree that a very high volume of orders led to delays in the tape? and (b) If so, what is your explanation?

And, of course, the booHooHoo brigade is fighting for the rights of twerps from good schools to make a fat living:

Brooksley Born, a former CFTC chairman serving on the panel advising the agencies, said investor confidence has been eroded by concerns that high-frequency traders have better access to markets and information.

Born said she sees “major problems” with the level of order cancellations by high-frequency traders. She said she’s worried that some firms submit “fraudulent” quotes to get a sense of where asset prices are heading.
…
Regulators should consider placing restrictions on algorithmic transactions and limiting how many contracts a single firm can trade, said CFTC Commissioner Bart Chilton. Permitting high-frequency traders to buy and sell 10 percent of a market 10 times in 10 seconds doesn’t seem to provide any benefit to financial markets, he said.

“It seems there is a good argument that this type of trading is, in essence, parasitical trading,” Chilton said. “Given what we saw on May 6th, appropriate limits on financial futures and robotic algos seems warranted.”

Um … why should you care whether any benefit is provided to financial markets? Isn’t your job to ensure there is no harm done to the financial markets? It’s a totally different mind-set. It’s too bad Chilton didn’t let the rest of us know what the “good argument” is. And by the way, Ms. Born, in what way are the quotes submitted “fraudulent”?

One semi-legitimate worry is the idea that momentum trading causes negative convexity:

Robert Cook, director of the SEC’s trading and markets unit, said regulators are examining how brokers and other firms create algorithms, how they test the computer programs and what information is disclosed to customers about how they work. An SEC task force began looking at algorithm use before the crash, and it is an area of “further inquiry,” Cook said.

Regulators are also examining whether a firm’s algorithm could “cascade,” causing executions to affect market prices in ways that trigger further action by the computerized-trading system, said Andrei Kirilenko, a senior economist at the CFTC.

… but frankly I don’t see how that becomes an SEC problem. The Nanex critique of the SEC report has been discussed on PrefBlog.

It was another hot day on heavy volume for the Canadian preferred share market, with PerpetualDiscounts gaining 24bp and FixedResets up 3bp.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.2961 %	2,208.8
FixedFloater	4.89 %	3.48 %	25,289	19.22	1	1.2762 %	3,436.9
Floater	2.70 %	2.37 %	57,000	21.32	4	0.2961 %	2,384.9
OpRet	4.79 %	2.85 %	81,355	1.88	9	-0.0297 %	2,392.4
SplitShare	5.84 %	-13.63 %	66,403	0.09	2	0.1614 %	2,410.3
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0297 %	2,187.6
Perpetual-Premium	5.62 %	5.03 %	166,311	3.09	24	0.1132 %	2,025.0
Perpetual-Discount	5.32 %	5.34 %	258,068	14.87	53	0.2447 %	2,048.7
FixedReset	5.19 %	2.86 %	340,951	3.22	50	0.0272 %	2,293.3

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.I	OpRet	-1.08 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2010-12-05 Maturity Price : 25.50 Evaluated at bid price : 26.52 Bid-YTW : -32.90 %
SLF.PR.A	Perpetual-Discount	1.04 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-05 Maturity Price : 21.97 Evaluated at bid price : 22.35 Bid-YTW : 5.36 %
BAM.PR.G	FixedFloater	1.28 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-05 Maturity Price : 25.00 Evaluated at bid price : 22.22 Bid-YTW : 3.48 %
SLF.PR.B	Perpetual-Discount	2.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-05 Maturity Price : 22.62 Evaluated at bid price : 22.81 Bid-YTW : 5.32 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BNS.PR.P	FixedReset	224,830	Nesbitt crossed blocks of 112,700 and 100,000, both at 26.59. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-25 Maturity Price : 25.00 Evaluated at bid price : 26.59 Bid-YTW : 2.37 %
RY.PR.I	FixedReset	104,625	TD crossed 97,700 at 26.62. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.65 Bid-YTW : 2.79 %
SLF.PR.D	Perpetual-Discount	65,456	Nesbitt crossed two blocks of 25,000 each, both at 21.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-05 Maturity Price : 21.01 Evaluated at bid price : 21.01 Bid-YTW : 5.37 %
BAM.PR.T	FixedReset	65,435	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-05 Maturity Price : 23.09 Evaluated at bid price : 25.00 Bid-YTW : 4.17 %
MFC.PR.B	Perpetual-Discount	50,784	TD crossed 25,000 at 21.41. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-05 Maturity Price : 21.35 Evaluated at bid price : 21.35 Bid-YTW : 5.53 %
BMO.PR.K	Perpetual-Discount	46,345	TD crossed 25,000 at 24.80. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-05 Maturity Price : 24.58 Evaluated at bid price : 24.82 Bid-YTW : 5.29 %
There were 54 other index-included issues trading in excess of 10,000 shares.

Market Action

November 4, 2010

The mortgage rep & warranty issue in the States, briefly mentioned on October 25 is getting more interesting:

Total losses from repurchases by the banks, which also include Wells Fargo & Co., Citigroup Inc., PNC Financial Services Group Inc. and U.S. Bancorp, may amount to about $43 billion from 2009 to 2012, Vandana Sharma, an S&P credit analyst, wrote in a report today. The banks have accounted for about $12.4 billion so far, she said.

Fannie Mae, Freddie Mac and bond insurers such as MBIA Inc. are pressing lenders to honor promises to buy back mortgages if they’re later found to be based on inaccurate data. Known as representations and warranties, the promises cover defects such as inflated appraisals or misstatements about borrowers.
…
The repurchases will only become “systemic” and affect credit ratings if more so-called private-label mortgage investors pursue the six lenders, according to the report.

A group of such investors, including Bill Gross’s Pacific Investment Management C
o. and BlackRock Inc., last month moved to use Bank of America’s allegedly faulty mortgage servicing to overcome hurdles blocking them from seeking repurchases. Typically, mortgage bond trustees must make the claim on their behalf.

I trust nobody thinks that you get appointed to a nice job as mortgage bond trustee by making waves and rocking the boat.

The Kansas City Fed has released a working paper by Nada Mora titled Lender Exposure and Effort in
the Syndicated Loan Market:

This paper tests for agency problems between the lead arranger and syndicate participants in the syndicated loan market. One problem comes from adverse selection, whereby the lead arranger has a private informational advantage over participants. A second problem comes from moral hazard, whereby the lead arranger puts less effort in monitoring when it retains a smaller loan portion. Applying an instrumental variables strategy, I find that borrowers’ performance is influenced by the lead’s share. Dynamic tests extract active contributions made by the lead, supporting a monitoring interpretation. Loan covenants serve as a mechanism to induce the lead arranger to monitor.

Monitoring and skin in the game are more important than might be otherwise thought, because nearly half of the borrowers are “opaque”, where opacity is defined as:

Dummy = 1 indicating publicly traded borrowers without a debt rating, and 0 otherwise. This information is from Compustat.

The Republican majority in the House may be seeking to undermine Dodd-Frank:

Hours after Republicans secured control of the U.S. House, the council of federal regulators studying how to implement the so-called Volcker rule received a warning from the lawmaker in line to be their new overseer.

U.S. Representative Spencer Bachus, the Alabama Republican who may become chairman of the House Financial Services Committee, said in a Nov. 3 comment letter to the new Financial Stability Oversight Council that the rule barring bank holding companies from trading on their own accounts will undermine U.S. competitiveness and cut profits at the largest banks.

“Depending on how U.S. regulators choose to implement it, the Volcker rule may spark a mass exodus of clients from U.S. banks to banks based abroad,” wrote Bachus, who offered an amendment during the legislative process that would have disabled the rule until other countries established similar regulation.

I regret to advise that the “Market Action” portion of this report will be delayed. My internet connection has decided to become useless – I can connect to the internet, but I can’t get any data. Thank you, Bell Canada! These words are being typed via my Blackberry, but unfortunately HIMIPref™ is not (yet) an app downloadable for $1.99 from the App Store! I will update this post when Bell replaces the hamsters in the wheel.

Update, 2010-11-5: Sorry for the delays.

November 4 was another red-hot day on the Canadian preferred share market, with PerpetualDiscounts up 23bp and FixedResets gaining 14bp.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	-0.2184 %	2,202.3
FixedFloater	4.96 %	3.54 %	26,300	19.15	1	-0.2727 %	3,393.5
Floater	2.70 %	2.38 %	54,764	21.29	4	-0.2184 %	2,377.9
OpRet	4.79 %	2.87 %	81,466	1.88	9	0.2252 %	2,393.1
SplitShare	5.85 %	-13.84 %	66,140	0.09	2	0.1212 %	2,406.4
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.2252 %	2,188.3
Perpetual-Premium	5.63 %	5.02 %	164,378	3.09	24	0.0685 %	2,022.7
Perpetual-Discount	5.34 %	5.38 %	257,621	14.85	53	0.2321 %	2,043.7
FixedReset	5.20 %	2.88 %	339,797	3.22	50	0.1404 %	2,292.6

Performance Highlights
Issue	Index	Change	Notes
POW.PR.B	Perpetual-Discount	-1.23 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-04 Maturity Price : 23.88 Evaluated at bid price : 24.15 Bid-YTW : 5.58 %
ELF.PR.G	Perpetual-Discount	-1.07 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-04 Maturity Price : 20.28 Evaluated at bid price : 20.28 Bid-YTW : 5.92 %
BAM.PR.P	FixedReset	1.01 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-30 Maturity Price : 25.00 Evaluated at bid price : 28.03 Bid-YTW : 3.87 %
CIU.PR.B	FixedReset	1.05 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-01 Maturity Price : 25.00 Evaluated at bid price : 28.80 Bid-YTW : 2.67 %
MFC.PR.B	Perpetual-Discount	1.08 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-04 Maturity Price : 21.43 Evaluated at bid price : 21.43 Bid-YTW : 5.51 %
TRP.PR.A	FixedReset	1.13 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2015-01-30 Maturity Price : 25.00 Evaluated at bid price : 26.75 Bid-YTW : 2.96 %
BAM.PR.O	OpRet	1.15 %	YTW SCENARIO Maturity Type : Option Certainty Maturity Date : 2013-06-30 Maturity Price : 25.00 Evaluated at bid price : 26.50 Bid-YTW : 2.85 %
IAG.PR.C	FixedReset	1.51 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 27.49 Bid-YTW : 3.16 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BNS.PR.N	Perpetual-Discount	213,701	RBC crossed blocks of 123,500 at 25.08 and then 74,100 at 25.14. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-04 Maturity Price : 24.80 Evaluated at bid price : 25.04 Bid-YTW : 5.27 %
RY.PR.I	FixedReset	104,630	Desjardins crossed 98,500 at 26.62. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.62 Bid-YTW : 2.82 %
CM.PR.P	Perpetual-Premium	101,780	Desjardins crossed blocks of 20,000 and 50,000, both at 25.26. RBC crossed 25,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2012-11-28 Maturity Price : 25.00 Evaluated at bid price : 25.20 Bid-YTW : 5.14 %
MFC.PR.D	FixedReset	57,159	TD crossed 25,000 at 27.85; Nesbitt crossed 12,600 at 28.00. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-19 Maturity Price : 25.00 Evaluated at bid price : 27.95 Bid-YTW : 3.44 %
BNS.PR.O	Perpetual-Premium	46,270	Desjardins crossed 40,000 at 25.75. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-05-26 Maturity Price : 25.00 Evaluated at bid price : 25.79 Bid-YTW : 5.08 %
GWO.PR.M	Perpetual-Premium	43,495	Nesbitt crossed blocks of 12,000 and 19,600, both at 25.45. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-04-30 Maturity Price : 25.00 Evaluated at bid price : 25.40 Bid-YTW : 5.69 %
There were 45 other index-included issues trading in excess of 10,000 shares.

Market Action

November 3, 2010

Naked access has been banned:

SEC commissioners voted 5-0 today to approve a rule that requires brokers to implement pre-trade risk controls when clients use the firms’ identification codes to trade directly on exchanges. Agency officials proposed the regulation in January, saying they were concerned that a computer malfunction or human error might trigger an order that would erode a broker’s capital.

The SEC rule targets so-called naked-sponsored access, in which a customer uses a broker’s identification code while bypassing pre-trade risk controls. The tactic is used by traders whose strategy of buying and selling thousands of shares in milliseconds would be slowed if they executed through a broker.

I would have thought that the potential for erosion of the brokers’ capital was the brokers’ problem. But nowadays, I guess, everything is a public utility.

The FOMC statement was pretty much as expected:

Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.
…
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.
…
Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.

The FRBNY gave details of the implementation; it should be noted that they are also reinvesting principal repayments received from their mortgage portfolio. However, the market was unimpressed by the term-structure of the proposed purchases:

Treasury 30-year bond fell the most in two months after the Federal Reserve said it will buy fewer of the securities than anticipated by investors in its $600 billion program of purchases to boost the economy.

The difference between rates on 30-year bonds and Treasury Inflation Protected Securities touched the highest since May 2008 on concern the Fed will be successful in reigniting inflation.
…
“The yield curve should start to steepen because the Fed will focus on 5- to 6- years,” said William Larkin, a fixed income portfolio manager in Salem, Massachusetts at Cabot Money Management, which manages $500 million. “The risk once they finish is that inflation will be elevated. There’s a good chance we’ll be rip-roaring in terms of growth and inflation.”

Thirty-year bond yields rose 13 basis points to yield 4.06 percent at 4:02 p.m. in New York, the biggest rise since Sept. 9. The 3.875 percent bonds due in August 2040 rose [sic – I think they meant “declined” – JH] 2 8/32, or $22.50 per $1,000, to 96 26/32.
…
The difference between rates on 30-year bonds and Treasury Inflation Protected Securities, touched 2.74 percent, the highest since May 2008 when the financial crisis was intensifying.

The Potash takeover has been blocked; apparently if Canadians are allowed sell their (minority) position in the company at a good price, we’re too damn stupid to reinvest the money and will just waste it on beer and prostitutes. I eagerly await the next sermon on productivity.

Today’s most surprising news is that Premier Dad has done something intelligent:

Premier Dalton McGuinty announced Wednesday that 75 PhD students will receive full four-year scholarships, each worth $40,000 annually, starting in the 2011-12 school years. The program is billed as the first of its kind in Canada.

It remains to be seen just what fields of study will be emphasized.

The Canadian preferred share market had another good day, with both PerpetualDiscounts and FixedResets up 20bp, on continued high volume (Desjardins had a good day!). This is getting really dull. Remember the good old days of the Panic of 2007, when you read this blog just to find out how much money you’d lost? And it took half an hour just to scan the Performance Highlights table? That was fund. FixedResets set a new all-time yield low … I’ll post about it in a while.

PerpetualDiscounts now yield 5.37%, equivalent to 7.52% interest at the standard equivalency factor of 1.4x. Long Corporates now yield 5.2% (OK, a little over. Sue me) so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 230bp, a slight (and perhaps meaningless) tightening from the 235bp reported on October 29.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.3739 %	2,207.1
FixedFloater	4.94 %	3.52 %	26,120	19.18	1	1.1494 %	3,402.8
Floater	2.70 %	2.37 %	56,997	21.33	4	0.3739 %	2,383.1
OpRet	4.80 %	3.31 %	79,275	1.88	9	-0.0467 %	2,387.7
SplitShare	5.86 %	-14.48 %	65,974	0.09	2	0.4056 %	2,403.5
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0467 %	2,183.3
Perpetual-Premium	5.63 %	5.12 %	160,469	3.09	24	0.0530 %	2,021.3
Perpetual-Discount	5.35 %	5.37 %	257,574	14.80	53	0.2031 %	2,039.0
FixedReset	5.20 %	2.88 %	344,769	3.23	50	0.2047 %	2,289.4

Performance Highlights
Issue	Index	Change	Notes
IAG.PR.C	FixedReset	-1.53 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 27.08 Bid-YTW : 3.67 %
BMO.PR.K	Perpetual-Discount	-1.37 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-03 Maturity Price : 24.21 Evaluated at bid price : 24.44 Bid-YTW : 5.37 %
BNA.PR.C	SplitShare	1.07 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-01-10 Maturity Price : 25.00 Evaluated at bid price : 22.75 Bid-YTW : 5.89 %
MFC.PR.B	Perpetual-Discount	1.15 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-03 Maturity Price : 21.20 Evaluated at bid price : 21.20 Bid-YTW : 5.57 %
BAM.PR.G	FixedFloater	1.15 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-03 Maturity Price : 25.00 Evaluated at bid price : 22.00 Bid-YTW : 3.52 %
MFC.PR.E	FixedReset	1.20 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-19 Maturity Price : 25.00 Evaluated at bid price : 26.91 Bid-YTW : 3.69 %
MFC.PR.C	Perpetual-Discount	1.28 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-03 Maturity Price : 20.51 Evaluated at bid price : 20.51 Bid-YTW : 5.57 %
ELF.PR.G	Perpetual-Discount	1.54 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-03 Maturity Price : 20.50 Evaluated at bid price : 20.50 Bid-YTW : 5.85 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BNS.PR.K	Perpetual-Discount	176,198	Desjardins crossed blocks of 76,200 and 86,700, both at 24.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-03 Maturity Price : 23.73 Evaluated at bid price : 24.00 Bid-YTW : 5.02 %
TD.PR.R	Perpetual-Premium	120,060	Desjardins crossed blocks of 69,000 shares, 32,900 and 11,800, all at 25.70. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-05-30 Maturity Price : 25.00 Evaluated at bid price : 25.70 Bid-YTW : 5.14 %
CM.PR.P	Perpetual-Premium	94,780	Desjardins crossed blocks of 25,000 and 68,400, both at 25.26. YTW SCENARIO Maturity Type : Call Maturity Date : 2012-11-28 Maturity Price : 25.00 Evaluated at bid price : 25.21 Bid-YTW : 5.12 %
SLF.PR.C	Perpetual-Discount	85,594	RBC crossed blocks of 50,000 and 22,800, both at 20.69. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-03 Maturity Price : 20.83 Evaluated at bid price : 20.83 Bid-YTW : 5.41 %
BAM.PR.T	FixedReset	81,735	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-03 Maturity Price : 23.07 Evaluated at bid price : 24.92 Bid-YTW : 4.19 %
BMO.PR.L	Perpetual-Premium	64,960	Desjardins crossed 56,700 at 26.10. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-24 Maturity Price : 25.00 Evaluated at bid price : 26.02 Bid-YTW : 5.05 %
There were 54 other index-included issues trading in excess of 10,000 shares.

Market Action

November 2, 2010

Our Government Motors investment has a long way to go:

But for the U.S. to break even through sales of the rest of its stake, the share price may need to rise more than 60% from its initial level, to about $50.

The initial public offering plan envisions the shares would be priced at $26 to $29 each, these people said. The actual price of the stock to be sold in the IPO would be set about Nov. 17, and the sale would take place the following day.

More subsidies urgently required!

Merkel is stepping up calls for an EU default mechanism:

Measures being drafted by the European Union will result in rules with “more bite” to protect the euro, Merkel said in a speech today in Bruges, Belgium. Along with steps to prevent EU members running up excessive debt, a crisis mechanism enshrined in EU treaties is necessary for the longer term, she said.

“We will set it up in such a way that European taxpayers will no longer be on the hook for possible new mistakes and turmoil on the financial markets,” Merkel said. “Private investors must also make a contribution.”

European officials including Spanish Prime Minister Jose Luis Rodriguez Zapatero are concerned that announcing bond investors will have to shoulder a greater part of any future bailout will spook traders at a time when Ireland and Portugal are struggling to cut their budget deficits.

European Central Bank President Jean-Claude Trichet told EU leaders last week he’s concerned that talk of a debt restructuring mechanism from 2013 would hurt the bonds of the euro-region’s so-called periphery nations, according to an EU official familiar with the talks.

Irish bonds fell for a sixth day, sending the 10-year yield to a record, and Greek bonds dropped for a seventh day, the longest losing streak since April.

Rules, schmules. They’re only as effective as the political will to enforce them – Germany and France both demanded exemptions from the 3% deficit cap; turned a willful blind eye to the Greek crisis as it was developing; and participated in the Greek bail-out contrary to the EU’s no-bailout rules.

The Depositary Trust Company is now publishing average daily General Collateral repo rates. The Treasury Market Practices Group applauds the move:

The Treasury Market Practices Group (“TMPG”) today applauded the announcement by the Depository Trust and Clearing Corporation (“DTCC”) to introduce the publication of three overnight general collateral repo rate indices and corresponding transaction volumes.

These new data, which will be published daily, reflect activity on DTCC’s GCF Repo dealer-to-dealer trading platform for the three most active collateral categories traded: Treasury securities, agency debt securities, and agency mortgage-backed securities. Publication of these data, made at the request of the TMPG, provides useful information in a form that has not been available to market participants until now.

“The publication of these indices by DTCC is a major step on the critical path of enhanced transparency in the secured funding markets,” said Tom Wipf, the chairman of the TMPG. “This collaboration demonstrates the shared commitment of TMPG and DTCC in support of the integrity and efficiency of the Treasury, agency debt, and mortgage-backed securities markets.”

God knows why. Greater transparency leads to fairer markets for the little guys, which leads to less profit for the well capitalized big guys, which leads to … surprise! a withdrawal of capital from the market. We’ve seen this countless times and every single time the market in question becomes a little thinner and a little more brittle. If that’s what we want, fine … but not once have I seen a regulatory decision take explicit account of the trade-off.

It will soon be easier to confine people who look at you funny, given all the complaints that private citizens can get in trouble for shooting people who are running away. While worried, I am also entertained by the slow oscillations of the pendulum … how long will it be before some looney-tune exercises his new citizen’s arrest rights in a manner that is unpopular?

It was yet another good day for the Canadian preferred share market, with PerpetualDiscounts up 28bp and FixedResets gaining 19bp, taking the median weighted average yield on the latter index back down to 2.93%. The all-time low yield for this index was 2.89%, set on September 23; today’s level ranks #3 all-time. Volume returned to very strong levels.

And how about that BMO.PR.N, eh? Now with a pre-tax bid-YTW of 2.23%, based on a bid of 28.34 and a call 2014-3-27 at 25.00. I note that the BMO Capital Trust BOATS Series D, 5.474%, (prospectus on SEDAR dated September 23, 2004) are indicated at 108.97 to yield 3.15% to a presumed call December 31, 2014. Note that given current market conditions the call would not be in the economic best interests of BMO; but there is also the thought that OSFI will demand redemption due to concerns over the loss-absorption potential of the issue (this issue can convert into 5% preferred shares, but only if Very Bad Things happen). One way or another, BMO.PR.N is yielding at an interest-equivalent rate of 3.12% at the standard conversion factor of 1.4x.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.1162 %	2,198.9
FixedFloater	5.00 %	3.58 %	27,170	19.12	1	1.1628 %	3,364.2
Floater	2.71 %	2.38 %	55,298	21.28	4	0.1162 %	2,374.2
OpRet	4.79 %	3.15 %	77,780	1.89	9	0.4351 %	2,388.8
SplitShare	5.88 %	-16.37 %	66,542	0.09	2	-0.1013 %	2,393.8
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.4351 %	2,184.4
Perpetual-Premium	5.64 %	5.03 %	160,524	3.09	24	0.3199 %	2,020.2
Perpetual-Discount	5.36 %	5.40 %	253,396	14.79	53	0.2784 %	2,034.9
FixedReset	5.21 %	2.93 %	338,152	3.23	50	0.1926 %	2,284.8

Performance Highlights
Issue	Index	Change	Notes
BAM.PR.J	OpRet	1.01 %	YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2018-03-30 Maturity Price : 25.00 Evaluated at bid price : 26.88 Bid-YTW : 4.31 %
SLF.PR.B	Perpetual-Discount	1.10 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-02 Maturity Price : 21.79 Evaluated at bid price : 22.14 Bid-YTW : 5.47 %
BAM.PR.G	FixedFloater	1.16 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-02 Maturity Price : 25.00 Evaluated at bid price : 21.75 Bid-YTW : 3.58 %
BAM.PR.R	FixedReset	1.18 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-07-30 Maturity Price : 25.00 Evaluated at bid price : 26.61 Bid-YTW : 4.19 %
RY.PR.H	Perpetual-Premium	1.24 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2017-06-23 Maturity Price : 25.00 Evaluated at bid price : 26.12 Bid-YTW : 4.83 %
GWO.PR.G	Perpetual-Discount	1.26 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-02 Maturity Price : 23.86 Evaluated at bid price : 24.15 Bid-YTW : 5.44 %
PWF.PR.K	Perpetual-Discount	1.44 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-02 Maturity Price : 23.08 Evaluated at bid price : 23.30 Bid-YTW : 5.33 %
MFC.PR.B	Perpetual-Discount	1.50 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-02 Maturity Price : 20.96 Evaluated at bid price : 20.96 Bid-YTW : 5.63 %
SLF.PR.G	FixedReset	1.53 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-02 Maturity Price : 23.45 Evaluated at bid price : 25.91 Bid-YTW : 3.22 %
BAM.PR.I	OpRet	1.63 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2010-12-02 Maturity Price : 25.50 Evaluated at bid price : 26.86 Bid-YTW : -45.78 %
IAG.PR.E	Perpetual-Premium	2.70 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-01-30 Maturity Price : 25.00 Evaluated at bid price : 26.20 Bid-YTW : 5.39 %

Volume Highlights
Issue	Index	Shares Traded	Notes
TD.PR.S	FixedReset	163,605	TD crossed block of 100,000 and 52,500, both at 26.57. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-08-30 Maturity Price : 25.00 Evaluated at bid price : 26.61 Bid-YTW : 2.52 %
BMO.PR.J	Perpetual-Discount	123,855	RBC crossed blocks of 74,500 and 30,000, both at 22.90. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-02 Maturity Price : 22.72 Evaluated at bid price : 22.89 Bid-YTW : 4.91 %
BNS.PR.P	FixedReset	115,424	RBC crossed 100,000 at 26.55. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-25 Maturity Price : 25.00 Evaluated at bid price : 26.59 Bid-YTW : 2.36 %
BAM.PR.T	FixedReset	109,183	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-02 Maturity Price : 23.01 Evaluated at bid price : 24.76 Bid-YTW : 4.22 %
RY.PR.X	FixedReset	108,850	Desjardins crossed blocks of 12,900 and 83,000, both at 27.90. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-23 Maturity Price : 25.00 Evaluated at bid price : 27.87 Bid-YTW : 3.03 %
CM.PR.I	Perpetual-Discount	63,477	RBC crossed blocks of 39,000 and 11,000, both at 22.56. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-02 Maturity Price : 22.43 Evaluated at bid price : 22.58 Bid-YTW : 5.23 %
There were 52 other index-included issues trading in excess of 10,000 shares.

Market Action

November 1, 2010

Fabulous Fab’s trial is progressing … slowly:

U.S. District Judge Barbara S. Jones today dismissed Tourre’s motion seeking a judgment in the case. He had argued that the SEC can’t sue him over a Goldman Sachs deal involving collateralized debt obligations because the transaction didn’t take place in the U.S.

In the same order, Jones said the SEC can file an amended complaint by Nov. 22.

“Defendant Tourre’s motion for judgment on the pleadings is dismissed without prejudice and with leave to renew after plaintiff has filed its amended complaint,” Jones wrote.
…
The U.S. Supreme Court ruled in June that U.S. securities laws don’t apply to claims of foreign buyers of non-U.S. securities on foreign exchanges, lawyers for the Goldman executive director said in a court filing in September. The collateralized debt obligations, known as Abacus, at issue in the SEC’s complaint weren’t listed on any exchange and the sole investor in the notes was a foreign bank that bought them overseas, according to the filing.

Never waste a crisis – even if it wasn’t really a crisis:

In a speech at Notre Dame University, CFTC Commissioner Bart Chilton said the agency already has the authority to impose limits on how many financial futures contracts any one market player can hold, although he didn’t offer any details on what kind of limits might be appropriate.

“I think we need some sort of boundary on financial futures as well as futures on commodities of finite supply like energy, metals and agriculture,” he said in prepared remarks. “How and what those confines are I don’t know at this time, but it seems only prudent to institute some type of restrictions to ensure we don’t again see another flash crash, or even a miniflash crash.”
…
“I’m talking about sensible, well-calibrated limits to give us a handle on these markets,” he said.

He said he would like to see limits imposed on “robotic algo-trading” and “high-frequency trading,” although he noted that “like financial futures, it isn’t clear how it would be best achieved.”

Meanwhile, on Friday, a joint advisory committee to the SEC and CFTC will meet to discuss the flash-crash report and come up with some recommendations. Mr. Gensler previously has outlined some areas he would like to explore, including new obligations for brokers executing algorithms for their clients and greater transparency in the public listing at exchanges of bids and offers.

Hurray! All we have to do is support the regulators and investors will never, ever have to worry about losing money again!

The Lancet has taken a strong stand against candy:

One of the world’s most influential medical journals is accusing UNICEF Canada of selling out its values by allowing candy giant Cadbury to use its logo to sell Halloween candy.

In an editorial published online Saturday, the Lancet slammed UNICEF Canada for accepting $500,000 from Cadbury Adams Canada Inc. over a three-year period for construction of schools in Africa in exchange for allowing the company to plaster the iconic – and valuable – UNICEF logo on millions of product packages a year.
…
UNICEF Canada has made a serious error in judgment by allowing a candy company to use its name to sell high-fat, high-sugar and overall unhealthy products under the guise of raising money for African programs, the editorial states.

In Canada, a country with serious health and obesity problems, “encouraging products which are undeniably unhealthy is irresponsible,” the editorial says.

I was about to buy a bag of Cadbury stuff until I saw the logo, at which point I replaced it on the shelf; but that was because UNICEF is a sleazy organization, not because I’m a precious little doorknob. I bought other brands of chocolate instead; for next year I’m considering cigarettes.

The Canadian preferred share market had yet another good day today, wth PerpetualDiscounts gaining 24bp and FixedResets winning 17bp. Volume continued to be quite good.

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.5190 %	2,196.3
FixedFloater	5.06 %	3.64 %	26,623	19.07	1	0.4673 %	3,325.5
Floater	2.71 %	2.38 %	56,186	21.30	4	0.5190 %	2,371.5
OpRet	4.81 %	3.36 %	77,747	1.89	9	0.1582 %	2,378.5
SplitShare	5.88 %	-16.99 %	67,524	0.09	2	0.0000 %	2,396.2
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.1582 %	2,174.9
Perpetual-Premium	5.66 %	5.11 %	153,386	3.10	24	-0.1005 %	2,013.8
Perpetual-Discount	5.38 %	5.41 %	255,171	14.77	53	0.2364 %	2,029.2
FixedReset	5.22 %	3.00 %	338,201	3.23	50	0.1700 %	2,280.4

Performance Highlights
Issue	Index	Change	Notes
IAG.PR.E	Perpetual-Premium	-2.45 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2019-01-30 Maturity Price : 25.00 Evaluated at bid price : 25.51 Bid-YTW : 5.81 %
POW.PR.B	Perpetual-Discount	1.08 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-01 Maturity Price : 24.02 Evaluated at bid price : 24.30 Bid-YTW : 5.54 %
BAM.PR.R	FixedReset	1.15 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2021-07-30 Maturity Price : 25.00 Evaluated at bid price : 26.30 Bid-YTW : 4.33 %
GWO.PR.I	Perpetual-Discount	1.52 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-01 Maturity Price : 21.35 Evaluated at bid price : 21.35 Bid-YTW : 5.34 %
IAG.PR.C	FixedReset	1.73 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 27.57 Bid-YTW : 3.05 %
GWO.PR.H	Perpetual-Discount	2.21 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-01 Maturity Price : 22.89 Evaluated at bid price : 23.10 Bid-YTW : 5.30 %

Volume Highlights
Issue	Index	Shares Traded	Notes
TD.PR.G	FixedReset	136,639	TD crossed two blocks of 25,000 each, both at 27.89. Nesbitt crosse blocks of 48,800 and 25,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-05-30 Maturity Price : 25.00 Evaluated at bid price : 27.86 Bid-YTW : 2.89 %
BNS.PR.P	FixedReset	132,068	RBC crossed 97,400 at 26.55; National crossed 25,000 at 26.57. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-25 Maturity Price : 25.00 Evaluated at bid price : 26.57 Bid-YTW : 2.39 %
BAM.PR.T	FixedReset	107,129	Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-11-01 Maturity Price : 22.99 Evaluated at bid price : 24.70 Bid-YTW : 4.24 %
RY.PR.R	FixedReset	106,125	National crossed 50,000 at 27.63; Nesbitt crossed 50,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 27.62 Bid-YTW : 2.89 %
MFC.PR.A	OpRet	67,650	Desjardins bought 36,100 from Nesbitt at 25.50 and crossed 23,600 at the same price. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2015-12-18 Maturity Price : 25.00 Evaluated at bid price : 25.45 Bid-YTW : 3.83 %
TD.PR.M	OpRet	63,734	Desjardins crossed 45,000 at 25.80. YTW SCENARIO Maturity Type : Call Maturity Date : 2010-12-01 Maturity Price : 25.75 Evaluated at bid price : 25.80 Bid-YTW : 2.36 %
There were 40 other index-included issues trading in excess of 10,000 shares.

Market Action

October 29, 2010

The EU is now openly discussing mechanisms for sovereign default:

European Union leaders endorsed German calls for a rewrite of EU treaties to create a permanent debt-crisis mechanism, while sparring over whether to force bondholders to help pay the bill for rescuing financially distressed states.

As the biggest contributor to this year’s hastily arranged 860 billion euros ($1.2 trillion) in loans and pledges to stem the debt crisis, Germany won backing to set up a permanent system by 2013. Deficit-strapped Spain warned that provisions to reschedule or cancel some debts would expose its markets to renewed selling pressure.

“We won’t allow only the taxpayers to bear all the costs of a future crisis,” German Chancellor Angela Merkel told a press conference in Brussels today after a summit of EU leaders. There is “a justified desire to see that it’s not just taxpayers who are on the hook, but also private investors.”
…
Germany rules out extending this year’s emergency taxpayer- funded financial assistance mechanisms when they expire in 2013. Merkel’s follow-up system would extend debt maturities, suspend interest payments and waive creditor claims, Handelsblatt newspaper reported yesterday, citing an unidentified government official.

Assiduous Readers will remember that on July 23 I reported:

But the best line in the farce comes from a central banker:

ECB Vice President Vitor Constancio called the tests “severe” and explained they didn’t include a scenario of a national default because “we don’t believe there will be a default.”

That’s just great, Vitor! Maybe you’ll be put in charge of the government run credit rating agency the Europeans are thinking about, you know, the ones that will be much nicer to sovereigns than those mean old-style CRAs!

There is no word yet regarding whether Vitor Constancio has resigned.

The Bank of Canada has released a working paper by Ali Dib titled Capital Requirement and Financial Frictions in Banking: Macroeconomic Implications:

The author develops a dynamic stochastic general-equilibrium model with an active banking sector, a financial accelerator, and financial frictions in the interbank and bank capital markets. He investigates the importance of banking sector frictions on business cycle fluctuations and assesses the role of a regulatory capital requirement in propagating the effects of shocks in the real economy. Bank capital is introduced to satisfy the regulatory capital requirement, and serves as collateral for borrowing in the interbank market. Financial frictions are introduced by assuming asymmetric information between lenders and borrowers that creates moral hazard and adverse selection problems in the interbank and bank capital markets, respectively. Highly leveraged banks are vulnerable and therefore pay higher costs when raising funds. The author finds that financial frictions in the interbank and bank capital markets amplify and propagate the effects of shocks; however, the capital requirement attenuates the real impacts of aggregate shocks (including financial shocks), reduces macroeconomic volatilities, and stabilizes the economy.

Commissioner Elisse B. Walter of the SEC delivered an interesting speech regarding the SEC review of the US Municipal market. A lot of familiar cross currents – exchanges for bonds! the Credit Rating Agencies are no good! brokers should tell us what to buy! – and discussion of the move from the Municipal rating scale to the global scale:

Three participants endorsed the principle of a global rating scale. However, one pointed out that during this time — where some rating agencies are moving to a global scale — investors may find it increasingly difficult to compare municipal credits against each other. Further, he thinks that despite recalibration, investors will continue to have a hard time comparing munis to corporates because municipal risk remains overstated relative to corporate risk.

Several others were critical of the notion of a global rating scale, arguing that municipal bonds and corporate securities are just not comparable. One panelist stated that munis should not be rated on a scale that focuses on default risk and recovery, since governments rarely default. Some of the participants would prefer a new rating scale for governments that could be tailored to the unique characteristics of governmental entities. We heard suggestions for a simple pass/fail scale, a three-part scale or a scale of 1-100.

Another area of concern was the impact of ratings on the cost of issuance. One panelist pointed out that higher ratings lead to lower borrowing costs and lower ratings lead to higher borrowing costs. He and a co-panelist highlighted the consequence of lower ratings: increased costs to taxpayers for financing critical infrastructure projects.

That last panelist should take a tip from the Europeans: set up a new rating agency with a mandate to be chipper and upbeat at all times.

Themis Trading points out signs of a high-level regulatory battle, with the NYSE opining:

NYSE Euronext Chief Executive Officer Duncan Niederauer said regulators will probably respond to the May 6 stock-market crash by extending obligations to buy and sell shares to more traders.

Niederauer, speaking in Washington today, said too many traders reap the benefits of making markets without responsibilities to keep providing liquidity when stocks are plunging. New rules may be in place as soon as January, he said.

Securities and Exchange Commission Chairman Mary Schapiro called on the agency in September to examine whether the loss of “old specialist obligations” has hurt investors after measures such as trading stocks in penny increments cut the number of market makers. With the facilitation of trading now dominated by hundreds of automated firms with few rules for when they must buy and sell, the SEC is considering ways to keep the biggest from abandoning the market at the first sign of trouble.

The astonishing part is in the third paragraph. Imagine! The regulators made it less profitable to be a specialist … and fewer firms wanted to be specialists. Well, who woulda thunk it?

NASDAQ takes the other view:

The head of Nasdaq OMX Group Inc (NasdaqGS:NDAQ – News) said on Friday he does not expect any new obligations or privileges for U.S. “market-makers” until 2012 at the earliest, calling any regulatory change “a slippery slope.”
…
“I don’t think something will happen in 2011,” Nasdaq OMX Chief Executive Officer Robert Greifeld said on a conference call, adding it would be “a difficult road to try to properly define what responsibility and privileges to give participants.”

Mervyn King made an excellent point in a speech at the Second Bagehot Lecture:

Second, the Basel approach calculates the amount of capital required by using a measure of “risk-weighted” assets. Those risk weights are computed from past experience. Yet the circumstances in which capital needs to be available to absorb potential losses are precisely those when earlier judgements about the risk of different assets and their correlation are shown to be wrong. One might well say that a financial crisis occurs when the Basel risk weights turn out to be poor estimates of underlying risk. And that is not because investors, banks or regulators are incompetent. It is because the relevant risks are often impossible to assess in terms of fixed probabilities. Events can take place that we could not have envisaged, let alone to which we could attach probabilities. If only banks were playing in a casino then we probably could calculate appropriate risk weights. Unfortunately, the world is more complicated. So the regulatory framework needs to contain elements that are robust with respect to changes in the appropriate risk weights, and that is why the Bank of England advocated a simple leverage ratio as a key backstop to capital requirements.

He also mentioned the Too Big To Fail problem:

But in most other countries, identifying in advance a group of financial institutions whose failure would be intolerable, and so are “too important to fail”, is a hazardous undertaking. In itself it would simply increase the subsidy by making it explicit. And it is hard to see why institutions whose failure cannot be contemplated should be in the private sector in the first place. But if international regulators failed to agree on higher capital requirements in general, adding to the loss-absorbing capacity of large institutions could be a second-best outcome.

… which has been a hot issue lately:

“Are we a systemically important bank in the world? I think (we’re) not. Nothing in my strategy is trying to make us that,” Toronto-Dominion Bank CEO Ed Clark said last week, although he also acknowledged that regulators may not agree with him.

“It’s not obvious that there will be no impact on us, and I don’t know that and I can’t get any assurance on that,” he said at a presentation in Toronto. TD is Canada’s No. 2 bank.

Rick Waugh, CEO of third-ranked Bank of Nova Scotia , has also said his bank is not systemically important.

Gord Nixon, head of Royal Bank of Canada , which is considered the Canadian bank most likely to be deemed “too big to fail,” said at a presentation Wednesday that the whole debate was “ridiculous” and suggested labeling a bank “too big” might compel it to shed assets to shrink.

It’s so far unclear how many banks will fit the bill, with some speculating regulators could name 30 or more lenders.

Canada’s bank regulator, which has objected to the idea of singling out large banks, is also pushing the point that Canadian banks should be left off the list.

“I’d say that 80 per cent of global financial intermediation goes through 20 institutions … and no Canadian financial institutions fit that bill,” said Julie Dickson, Canada’s Superintendent of Financial Institutions.

It is precisely to avoid such irresolvable arguments that I propose that regulation eschew the TBTF label; what should happen is that there should be a progressive surcharge on Risk-Weighted-Assets, so that the first 100-billion is requires less capital than the next 100-billion and so on.

The SEC has $450-million available for paid informers! Denounce your neighbor today!

Alackaday! TMX DataLinx has advised:

The daily Toronto Stock Exchange and TSX Venture Exchange Trades & Quotes files for Friday October 29, 2010 will be delayed due to systems testing and are expected to be available by 5:00 AM, Sunday October 31, 2010. We regret any inconvenience this may cause.

They like to do this on PrefLetter weekends and monthends. So we’re all gonna hafta wait. I will update with the day’s action when I can.

Update, 2010-10-31: The Canadian preferred share market closed the month with a small gain, PerpetualDiscounts up 3bp and FixedResets winning 2bp. Volume continued at elevated levels.

PerpetualDiscounts now yield 5.41%, equivalent to 7.57% at the standard equivalency factor of 1.4x. Long Corporates now yield about … oh, call it a hair over 5.2%, so the pre-tax interest-equivalent spread is now about 235bp, a slight (and perhaps meaningless) increase from the 230bp reported on October 27, but a sharp decline from the 260bp reported on September 30. The tightening was driven on both sides, as PerpetualDiscount yields fell while long corporate yields rose modestly; the performance of the BMO Long Corporate ETF shows how returns on the asset class plateaued in October.

Click for Big

HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
Ratchet	0.00 %	0.00 %	0	0.00	0	0.0911 %	2,184.3
FixedFloater	0.00 %	0.00 %	0	0.00	0	0.0911 %	3,308.9
Floater	2.87 %	3.17 %	88,576	19.29	3	0.0911 %	2,358.4
OpRet	4.90 %	3.60 %	94,867	0.73	9	-0.0086 %	2,374.7
SplitShare	5.88 %	-17.20 %	67,984	0.09	2	-0.3030 %	2,396.2
Interest-Bearing	0.00 %	0.00 %	0	0.00	0	-0.0086 %	2,171.5
Perpetual-Premium	5.70 %	5.05 %	152,219	5.33	19	0.0639 %	2,015.8
Perpetual-Discount	5.40 %	5.41 %	246,879	14.71	58	0.0324 %	2,024.4
FixedReset	5.26 %	3.00 %	379,806	3.24	48	0.0227 %	2,276.5

Performance Highlights
Issue	Index	Change	Notes
IAG.PR.C	FixedReset	-1.49 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-30 Maturity Price : 25.00 Evaluated at bid price : 27.10 Bid-YTW : 3.63 %
CM.PR.G	Perpetual-Discount	-1.12 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-29 Maturity Price : 24.49 Evaluated at bid price : 24.77 Bid-YTW : 5.47 %

Volume Highlights
Issue	Index	Shares Traded	Notes
BAM.PR.T	FixedReset	229,985	New issue settled today. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-29 Maturity Price : 23.03 Evaluated at bid price : 24.83 Bid-YTW : 4.16 %
TRP.PR.C	FixedReset	108,075	RBC crossed 100,000 at 25.53. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-29 Maturity Price : 25.46 Evaluated at bid price : 25.51 Bid-YTW : 3.55 %
BNS.PR.P	FixedReset	104,900	RBC crossed 100,000 at 26.53. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-05-25 Maturity Price : 25.00 Evaluated at bid price : 26.54 Bid-YTW : 2.43 %
TD.PR.O	Perpetual-Discount	62,665	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-29 Maturity Price : 23.55 Evaluated at bid price : 23.80 Bid-YTW : 5.11 %
BAM.PR.B	Floater	48,161	Nesbitt crossed two blocks of 20,000 each, both at 16.65. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2040-10-29 Maturity Price : 16.61 Evaluated at bid price : 16.61 Bid-YTW : 3.18 %
RY.PR.L	FixedReset	45,660	RBC sold 11,200 to Nesbitt at 26.89 and 11,000 to TD at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-03-26 Maturity Price : 25.00 Evaluated at bid price : 26.93 Bid-YTW : 3.01 %
There were 37 other index-included issues trading in excess of 10,000 shares.

PrefBlog

Category: Market Action

November 11, 2010

November 10, 2010

November 9, 2010

November 8, 2010

November 5, 2010

November 4, 2010

November 3, 2010

November 2, 2010

November 1, 2010

October 29, 2010

Archives

Of Interest