PrefBlog

Nothing happened today.

It was another terrible day for the Canadian preferred share market, with PerpetualDiscounts losing 67bp, FixedResets off 32bp and DeemedRetractibles down 63bp. The Performance Highlights table is suitably enormous, with bank issues making a relatively rare ascent into prominence amongst the losers. Volume was above average.

I’ve just had a look at A Review of the Oncology Under-Dosing Incident by Jake J. Thiessen, Ph.D. … the report on the chemotherapy scandal in which neither hospitals nor purchasing agents made the slightest effort to determine just what it was they were buying or had bought.

What a whitewash.

The early days of the incident began with the discovery of a questionable MHS GEMCITABINE product on March 20, 2013 at the Peterborough Regional Health Centre.

This, of course, is bullshit. The early days of the incident began with the tendering of the contract to supply the drug. The contract was incompetently drafted and handling of the delivered materials was also incompetent. He didn’t address (or even acknowledge) the kickback negotiated as part of the contract.

As a former chemist, the part I like best is:

The clear difference factor in bulk reconstitution preparation lies in the overfill within the normal saline bags used in hospitals and by MHS. That is, although a bag may be nominally labeled to contain 100, 250, 500 or 1000 mL of 0.9% sodium chloride, the actual volume may be somewhat larger. Such overfill is widely known and is not limited to diluents. For example, Baxter had declared its overfill (shown in Appendix 4). Both the GPO and MHS were apparently aware of such overfills. The degree of overfill is not standardized; it becomes part of a manufacturer’s finished product specifications. The reason for this overfill is that the fluid bags are to some extent permeable to water. That is, water can move through the membrane and then evaporate from the outside surface. On storage, the contents of the bags can thereby decrease. The product’s shelf life is defined by the length of time it would normally take before the contents are reduced to the aforementioned nominal contents (e.g., 100 mL) on the label. Obviously, the rate of loss is determined by the permeability of the bag, fluid volume to surface ratio, and the storage conditions. This influences both the overfill variability used by a manufacturer and the contents determined at any point in time

So it is known that the concentration of active material in the bags will increase over time, but the clowndorks in charge of preparing medication for administration use the bags as a source of stock solution at the concentration shown on the label.

Don’t get sick in Ontari-ari-ari-o.

As a nod to the ostensible subject of this blog (Canadian preferred shares. Remember?) I’ll highlight Assiduous Reader adrian2‘s trip down memory lane to May, 2008, when we were all trying to figure out just what these funny new Fixed-Reset thingamajigs were all about.

It was another day of sickness in the Canadian preferred share market, with PerpetualDiscounts off 1bp, FixedResets down 16bp and DeemedRetractibles losing 19bp. The Performance Highlights table is again very lengthy, but with no obvious patterns. Volume was high.

Nothing happened today.

Another crushing day for the Canadian preferred share market, with PerpetualDiscounts losing 77bp, FixedResets off 8bp and DeemedRetractibles down 23bp. There is a suitably lengthy Performance Highlights table, suitably featuring PerpetualDiscount losers, but with an impressive number of FixedReset losers and a few winners to provide some variety. Volume was quite high.

PerpetualDiscounts now yield 5.64%, equivalent to 7.33% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.7%, so the pre-tax interest-equivalent spread is now about 265bp, an extremely sharp widening from the 240bp reported July 31.

The Fabulous Fab verdict is having its intended effect: funding prospects for the SEC have brightened:

The win adds weight to pledges by SEC Chairman Mary Jo White to reinvigorate the regulator, seeking more onerous settlements in some cases and, if necessary, taking them to trial. It also could bolster support for a 27 percent budget increase for the agency that Congress is considering.
…
“The SEC needed at least one scalp from the financial crisis, or they were going to face a lot of heat from Congress,” said Adam Pritchard, a University of Michigan law professor who previously worked as a lawyer for the regulator.

The only thing that might actually have a chance of working is going after incompetent idiots, such as Laura Schwartz and Alan Roseman of ACA Management LLC, which funded the deal due to analysis critically based on an investment technique called “Follow the Leader”. Fortunately for them and many, many of their peers, though, gross incompetence is not a legitimate target for a regulator, so we’ll have to leave that one up to the clients, ha-ha. I suppose it’s nice to see that Laura Schwartz has her own problems.

Canadian pension plans are about to get hit by the pointy end of longevity risk:

The bottom line in the Towers Watson report is this: Just as things are looking up for pension plans, the fact that we’re living longer may soon officially change assumptions, undoing the recent gains from stronger stock markets and rising interest rates.

Towers Watson based its report on new, draft mortality tables unveiled last week by the Canadian Institute of Actuaries. These are used to measure how much pension plans require to meet their obligations to retirees going forward.

“Although the effect will vary from plan to plan, adoption of the proposed mortality tables and acceptance of the study’s prediction of future mortality improvements could also immediately increase pension accounting liabilities by 5 per cent to 10 per cent for many plans, potentially impacting corporate income statements and balance sheets,” Towers Watson said.

The proposed new tables increase the life expectancy of a 60-year-old man by 2.9 years, and for a woman by 2.7 years.

Mind you, pensions have had a good year:

U.S. state and local-government pension investments gained the most in two years in fiscal 2013, overshadowed by intensifying scrutiny of underfunded municipal-retirement plans following Detroit’s record bankruptcy.
Public pensions booked a median gain of 12.4 percent for the 12 months through June, powered by a surge in U.S. stock prices to a record, Wilshire Associates said today in a report. The funds chalked up an annualized three-year median return of 11.4 percent while their assets surpassed a pre-recession peak to reach $2.9 trillion, according to U.S. Census Bureau figures.

Spend-Every-Penny is beginning to address the Canadian mortgage problem – in his own socialistic way:

The Crown corporation has notified banks, credit unions and other mortgage lenders that they will each be restricted to a maximum of $350-million of new guarantees this month under its National Housing Act Mortgage-Backed Securities (NHA MBS) program. The decision comes in the wake of “unexpected demand” for the guarantees, a spokeswoman for CMHC said in an e-mailed statement.

Hurray! When demand outstrips supply … ration the commodity! Isn’t that the Canadian way?

Bloomberg has an interesting story showing how Wal-Mart haters can be efficiently exploited:

In the city of Selma, a Central Valley town south of Fresno, Wal-Mart accused Save Mart of being behind an anti-Wal-Mart group, Save Our Selma Coalition, in a 2005 filing requesting a subpoena. Bentonville, Arkansas-based Wal-Mart built its store anyway. In Tracy, California, WinCo accused Save Mart in 2007 of directing a lawsuit filed by neighborhood group Tracy First against the city for approving a new WinCo store, according to a state court document. WinCo also built its store.

[Consultant Burt] Flickinger said Save Mart’s territory still only has one Wal-Mart supercenter for every 150,000 people, compared with one for every 45,000 in Alabama.

“It’s not for lack of trying either,” Flickinger said.

The only thing that can possibly make wind power economical is storage. In Ontario we’ve blown the budget on not-ready-for-prime-time technology, but market leaders are doing research:

On a windy island 500 miles north of Tokyo, Japan is about to experiment with a battery designed to transform the way electricity is supplied and at the same time boost Prime Minister Shinzo Abe’s economic rescue plan.

The Ministry of Economy, Trade and Industry is investing 20 billion yen ($203 million) on a Sumitomo Electric Industries Ltd. (5802) device to be used by Hokkaido island’s utility to store excess solar and wind power, stabilizing flows to consumers.
…
The battery, which uses the metal vanadium to store electrical energy in electrolyte tanks, has been researched from Australia to China and promises to handle the sort of large power surpluses that can develop on a transmission grid.

Speedy subways or slow LRTs for Toronto? Well, here’s the London experience:

Crossrail, Europe’s largest construction project, costing an estimated 15 billion pounds ($23 billion), will cut commuting times by as much as half, enticing tenants to rent offices in once-overlooked corners of the City. Plans for buildings from Farringdon through Smithfield to the Thameslink overland rail station to the south represent the City’s biggest development pipeline since 2011, when a cluster of towers went up near the Lloyds of London insurance building, said Peter Rees, the City’s planning officer.

CRUNCH! The Canadian preferred share market took a shellacking today, with PerpetualDiscounts losing 102bp, FixedResets down 88bp and DeemedRetractibles off 72bp. The Performance Highlights table is suitably enormous and comprised entirely of losers. Volume was high, but nothing extraordinary.

I suspect that the problem is a massive batch of sell orders placed through Citigroup Global markets (Broker #123). Now, I am hesitant to criticize traders for their trading, because I have no way of knowing who their client is or what their instructions were …. but I will go so far as to say their selection of trading algorithm is a red flag. In many cases they used what I call a “drip algorithm” (the cool guys probably call it something else) whereby you sell 100 shares at market every X seconds. It is the easiest thing in the world to spot and a marvellous thing to exploit. Just sit on the bid and get N different fills over the next NX seconds. It has the advantage from the seller’s perspective of getting done, guaranteed: since when will a market order not get filled? It has the advantage from the buyers’ perspective of being the way most likely to take the market price down to ridiculous levels. To sum up: somebody is probably a moron, but there’s no way of knowing who: the seller or the trader. And the seller might have been doing something better to compensate on the other side of his trade.

“Drip Algorithms” might work OK in a deep, liquid market, but in the thin little world of Canadian preferreds … sorry, Charlie.

The US jobs number was no great shakes:

“This number isn’t an earth-shaker,” John Manley, who helps oversee $222.7 billion as chief equity strategist for Wells Fargo Funds Management in New York, said in a phone interview. “It is debatable if it was good or bad. It was OK. The number still indicates the Fed is going to be there for a while, that is not bad.”

The 162,000 increase in payrolls last month was the smallest in four months and followed a revised 188,000 rise in June that was less than initially estimated, Labor Department figures showed today in Washington. The median forecast of 93 economists surveyed by Bloomberg called for a 185,000 gain. Workers spent fewer hours on the job and hourly earnings fell for the first time since October.
The unemployment rate was forecast to drop to 7.5 percent from 7.6 percent, according to the Bloomberg survey median.

Matthew Klein of Bloomberg points out:

The BLS report also tells us what kinds of jobs were added. Here again, the news is not particularly encouraging. More than half of the jobs added last month were either in retail trade or “food services and drinking places.” People employed in those sectors tend to have much shorter work weeks and much lower hourly wages than everyone else.

Even worse, a recent paper by Canadian researchers suggests that many of the people taking these jobs are relatively over-educated. The authors argue that, since 2000, globalization and technological advancement have reduced the demand for “high-skilled” workers. Desperate for employment, these workers ended up pushing the “lower-skilled” out of the job market entirely. This may help explain why the share of people aged 25 to 54 counted as being in the labor force has plunged by 3.5 percentage points since 2000.

The quality of jobs being created is probably connected to the depressing performance of incomes and the decline in the work week. Hourly pay has grown by just 1.9 percent over the past 12 months — basically unchanged since the end of 2009. The data from the BEA tell a similar story. Real after-tax incomes fell in June. Americans still have less purchasing power than they did in November 2012. Our standard of living has barely improved over the past year.

There’s some good, if politically motivated discussion at hotair.com.

Assiduous Reader nervousone begs me to point out:

James, if you’re going to mention the July number in an upcoming comment, show them you’re ahead of the game and make me proud . . . please include this [final paragraph] from todays release,

“The change in total nonfarm payroll employment for May was revised from +195,000 to +176,000, and the change for June was revised from +195,000 to +188,000.”

No one else will mention it . . . or trade on it (well almost no one else).

The twenty minutes bracketting the jobs announcement is entertaining. Every cowboy in the world is placing a bet on what the number will be and how the market will react to it, then reversing the trade a few minutes afterwards, taking whatever P&L there might be – so there’s lots of volume and the dealers jack up their spreads.

Of perhaps more importance than the revisions is the quality of the jobs. Lots of times they’re part-time, or all government, or (as in the current case) largely crummy jobs … there’s a lot more to the number than the headline.

I’m sure that somebody, somewhere, has a proper econometric model that incorporates the data – all the data – in a sensible manner (possibly feeding into a Taylor Rule based system) whereby a sensible person could actually trade at prices that made sense, once the spreads returned to normal; but in such a rational system, the jobs number would (a) be only one of many inputs, and (b) be foreshadowed by the ADP number anyway. I have, however, never seen such a system.

In Canada, those with jobs are buying houses:

Sales of existing homes in both Toronto and Vancouver, the country’s two most precarious housing markets, hit their highest level for the month of July since 2009 last month.

Greater Vancouver saw a 40.4 per cent year-over-year increase in sales over the Multiple Listing Service, while the Greater Toronto Area saw a 16-per-cent increase.
…
The Toronto Real Estate Board, meanwhile, noted that last month was the third highest July on record for the city, and pointed to an eight per cent year-over-year increase in the average selling price, to $513,246, as evidence that market conditions are tightening (though averages can be skewed by the types of homes that are selling).

There’s a little reaction to the politicization of the next Fed appointment:

Since the president in an interview with Charlie Rose June 16 indicated he wouldn’t reappoint Federal Reserve Chairman Ben Bernanke, intrigue over his successor has grown to a level where Fed experts and former administration officials are concerned that the selection process is so political it could have long-lasting ramifications for the markets, the eventual nominee’s confirmation hearings and the Fed as an institution.

“What’s really unfortunate is how public and polarized this debate has gotten,” Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., the world’s biggest mutual fund, said in an interview on Bloomberg Television. “This has an impact for the market going forward.”

The president and White House officials have spent the last week trying to defuse an escalating public contest between Lawrence Summers, Obama’s former top economic adviser, and Janet Yellen, the Fed’s current Vice Chair.

Confronted by a chorus of concerns about Summers — and letters from House and Senate Democrats voicing support for Yellen — Obama on Capitol Hill told his party’s lawmakers on July 31 that he has interviewed “lots” of candidates. He threw a new name into the mix, former Fed Vice Chair Donald Kohn, as he and his aides tried to buy some time, saying the choice was weeks away and not until autumn.

The post-mortems on the Fabulous Fab verdict are coming in:

Fabrice Tourre, the former Goldman Sachs Group Inc. (GS) vice president found liable for his role in a failed $1 billion investment, may have lost his case because jurors rejected his defense that as a junior employee he wasn’t primarily responsible for the transaction.

“Being 28 years old and one of several employees of Goldman Sachs isn’t a defense,” Tom Gorman, a former lawyer with the Securities and Exchange Commission’s Enforcement Division, who is now in private practice, said in an interview.

Tourre was a highly paid specialist working in a particular area who asked people to invest billions of dollars in a product he created, Gorman said.

I think the part “asked people to invest” part is a bit overstated, although technically true. He was a salesman. He had a product. Sold it. Big deal. It is the role of a Portfolio Manager to select good stuff from oodles and oodles of bad they are offered every single day.

Megan McArdle of Bloomberg has a good perspective:

The picture you get from reading about the testimony in the Fabrice “Fabulous Fab” Tourre case is of a bunch of people behaving like idiots. Tourre appears willing to say anything to potential buyers to close the deal. The people buying his mortgage bonds don’t inquire as to whether hedge-funder John Paulson’s “equity perspective” is equivalent to an “equity investment”; they just assume it is, and give Fab Tourre a bunch of money.

But was all this illegal? My impression from watching coverage of the case was that the Securities and Exchange Commission’s case against Tourre was pretty weak. That’s why his lawyers rested without calling any witnesses. And these defenders aren’t arrogant idiots; one securities lawyer I know says they’re “top notch.”

So why did the jury find against him? It’s not exactly clear. “At the end of the day, he probably could have done the right thing,” one, a 61-year-old school principal, said. “But he chose to play the game.”
…
One hears it over and over, in writing about the financial crisis: “Why isn’t someone in jail?” Fab Tourre is someone. To be sure, he isn’t a very important someone. And he’s not actually going to jail, because this was a civil trial. But we can’t indict “the game.” Fab Tourre may have been the closest substitute we could find.

It was a day of modest declines in the Canadian preferred share market, with PerpetualDiscounts off 4bp, FixedResets down 5bp and DeemedRetractibles losing 6bp. Volatility was relatively high, but with no clear pattern. Volume was very low, since many hard-working participants in the highest paid profession on earth took the afternoon off ahead of the long weekend; this provides more time to complain about the appalling work ethic prevalent among bar and restaurant staff.