PrefBlog

Nothing happened today.

There is an indication that Google has become a mature company – and that’s not a good thing:

But behind the scenes a more pedestrian drama was playing out. Executives at Google parent Alphabet Inc., absorbed with making sure all the various companies under its corporate umbrella have plans to generate real revenue, concluded that Boston Dynamics isn’t likely to produce a marketable product in the next few years and have put the unit up for sale, according to two people familiar with the company’s plans.

Possible acquirers include the Toyota Research Institute, a division of Toyota Motor Corp., and Amazon.com Inc., which makes robots for its fulfillment centers, according to one person. Google and Toyota declined to comment, and Amazon didn’t respond to requests for comment.
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Boston Dynamics, though, was never folded into Google X and was instead put up for sale. After the division’s latest robot video was posted to YouTube, in February, Google’s public-relations team expressed discomfort that Alphabet would be associated with a push into humanoid robotics. Their subsequent e-mails were also published to the internal online forum and became visible to all Google employees.

“There’s excitement from the tech press, but we’re also starting to see some negative threads about it being terrifying, ready to take humans’ jobs,” wrote Courtney Hohne, a director of communications at Google and the spokeswoman for Google X.

Hohne went on to ask her colleagues to “distance X from this video,” and wrote, “we don’t want to trigger a whole separate media cycle about where BD really is at Google.”

“We’re not going to comment on this video because there’s really not a lot we can add, and we don’t want to answer most of the Qs it triggers,” she wrote.

Demanding instant profitability … terrified of negative press … this is indicative of a company in which the careerists and managers have taken over from the innovators and visionaries. Don’t get me wrong – Google will, I am sure, continue to do excellent work. Just like Microsoft, they will be able to produce very high quality products simply by dint of their ability to spend more money on development than anybody else. But the situation with Boston Dynamics is an indication that their tenure as disruptors is over.

Pembina Pipelines has announced:

that it has entered into agreements to acquire certain sour natural gas processing assets (the “Acquired Assets”) from Paramount Resources (“Paramount”) for cash consideration of approximately $556 million, subject to customary closing adjustments (the “Transaction”).

The Acquired Assets include Paramount’s recently constructed Kakwa sour natural gas processing complex and associated infrastructure including gas gathering pipelines, sales gas pipeline and future disposal wells (the “Kakwa Assets”); and Paramount’s preliminary engineering studies, licenses and surface rights for the future construction of a sour natural gas processing facility (the “6-18 Facility”). The Transaction will add 250 million cubic feet per day (“mmcf/d”) of processing capacity in one of Pembina’s core areas. This will increase total processing capacity under Pembina’s Gas Services business to over 1.7 billion cubic feet per day (“bcf/d”), inclusive of the Musreau III and the Resthaven expansions which are expected to be on-stream by mid-2016, making Pembina one of the largest third-party gas processors serving the Western Canadian Sedimentary Basin.

They later announced:

that it has entered into an agreement with a syndicate of underwriters, co-led by Scotiabank and RBC Capital Markets, pursuant to which the underwriters have agreed to purchase from Pembina on a “bought deal” basis and sell to the public 8,825,000 common shares at a price of $34.00 per share, for gross proceeds of approximately $300 million. Pembina has also granted the underwriters an over-allotment option to purchase, on the same terms and exercisable not more than 30 days after the closing of the offering, up to an additional 1,323,750 common shares for additional gross proceeds of up to $45 million. Closing of the offering is expected to occur on or about March 29, 2016, in which case purchasers under this offering who are shareholders of record on April 25, 2016 (the “Record Date”) will be entitled to receive the Company’s monthly cash dividend payable on May 13, 2016 in respect of any common shares held on the Record Date.

Pembina intends to use the net proceeds from the offering, together with funds available under the Company’s existing credit facilities to finance the purchase price for its proposed acquisition of certain natural gas processing assets from Paramount Resources.

In response, DBRS announced that it:

notes that Pembina Pipeline Corporation (Pembina or the Company; rated BBB with a Stable trend by DBRS) has announced its agreement to acquire the Kakwa Assets and the 6-18 Facility (Acquisition Assets) from Paramount Resources, Inc. (Paramount) for total consideration of $556 million (the Acquisition). The purchase price will be funded by net proceeds from the Company’s concurrently announced $300 million bought deal common share financing and existing capacity under the $2.0 billion revolving credit facility. The Acquisition is expected to close in Q2 2016, pending approval under the Competition Act (Canada) and other customary closing conditions. Based on DBRS’s initial review of the Acquisition Assets and Pembina’s financing plan, DBRS believes that the Acquisition will not have a material impact on the Company’s credit profile.

Today’s big new was the FOMC Release:

Information received since the Federal Open Market Committee met in January suggests that economic activity has been expanding at a moderate pace despite the global economic and financial developments of recent months. Household spending has been increasing at a moderate rate, and the housing sector has improved further; however, business fixed investment and net exports have been soft. A range of recent indicators, including strong job gains, points to additional strengthening of the labor market. Inflation picked up in recent months; however, it continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. However, global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
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Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

The press conference added a little colour:

“You have seen a shift this time, in most participants assessments of the appropriate path for policy,” Fed Chair Janet Yellen said at a press conference in Washington. “That largely reflects a somewhat slower projected path for global growth, for growth in the global economy outside the United States, and for some tightening in credit conditions in the form of an increase in spreads.”

Yields on Treasury securities fell following the Fed’s actions, with the rate on the 10-year note dropping to 1.91 percent at 4:25 p.m. in New York from 1.99 percent just before the announcement.
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“The tone of the FOMC statement and accompanying economic projections was dovish,” Neil Dutta, head of U.S. economist at Renaissance Macro Research LLC in New York, said in a research note. The reference to global risks “pushes the Fed in the role of the world’s central bank. In this role, the Fed needs to let inflation in the U.S. surge to offset disinflation in the rest of the world.”
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The median of Fed officials’ projections, known as the “dot plot,” saw the federal funds rate at 1.875 percent at the end of 2017, compared with 2.375 percent forecast in December. The end-2018 level fell to 3 percent, from 3.25 percent, with the longer-run projection at 3.25 percent, down from 3.5 percent.

And Brian Milner writes in the Globe:

The Fed expects the job market to continue strengthening, with unemployment sliding to 4.7 per cent by the end of this year and falling further in subsequent years. Yet, it has slightly lowered its outlook for both economic growth and inflation – expecting the latter to remain below the 2 per cent target through next year – and reduced its long-term rate forecast to 3.3 per cent from 3.5 per cent, which implies that we won’t be seeing an economic boom any time soon south of the border.

The Fed’s policy doves, led by Ms. Yellen, seem likely to hold sway, particularly now that inflation is expected to reach only 1.2 per cent this year, down from the Fed’s earlier forecast of 1.6. Gauged by Fed funds futures trading, the market is expecting the next modest hike in June and one more before the end of the year. But that is by no means a sure bet.

“Reduced uncertainty about global economic and financial developments or further meaningful gains in the labour market and core inflation, or some combination of all of these, would appear to be the necessary condition for the next normalization step,” Michael Gregory, deputy chief economist with BMO, said in a note.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 7bp, FixedResets up 10bp and DeemedRetractibles off 9bp. The Performance Highlights table shows churn. Volume was average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.23 to be $1.09 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.71 cheap at its bid price of 18.18.

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Most expensive is MFC.PR.O, resetting at +497bp on 2021-6-19, bid at 25.39 to be 0.84 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.56 to be 1.44 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 14.25 to be $0.85 cheap. BAM.PF.E, resetting at +255 on 2020-3-31 is bid at 17.40 and appears to be $1.05 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 15.42 looks $0.61 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 11.12 and is $0.52 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.98%, with two outliers below -2.00% and one above 0.00%. There are four junk outliers above 0.00%.

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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

Bloomberg reminds us that forecasting is hard:

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First National Financial Corporation, proud issuer of FN.PR.A, has been confirmed at Pfd-3 by DBRS:

DBRS Limited (DBRS) has today confirmed the Issuer Rating of First National Financial LP (FNFLP) at BBB, and the ratings for the Senior Unsecured Debt and Class A Preference Shares of First National Financial Corporation (FNFC; DBRS refers to FNFLP and FNFC together as First National or the Company) at BBB (low) and Pfd-3, respectively. The trend on these ratings is Stable. The rating actions follow a detailed review of the Company’s operating results, financial fundamentals and future prospects.
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DBRS considers First National’s low risk balance sheet as a key factor supporting the ratings. DBRS notes that the Company’s direct credit exposure is limited to a $246 million mortgage investment portfolio (0.9% of total assets as of YE15) it holds on its balance sheet, mostly in commercial bridge lending. Historically, mortgages originated by First National have outperformed the industry with very low delinquency rates. DBRS sees sustaining this performance as critical to the Company’s business model and franchise. While low energy prices continue to be a headwind for the Canadian economy, the impact on the Canadian housing market has largely been regional to date, with some weakening of credit metrics in the western provinces.

DBRS considers First National’s liquidity and funding to be appropriately managed and aligned with its assets. First National funds most of its MUA either through sales to institutional investors (63%) or by securitization (26%), with the remaining MUA mostly warehoused temporarily, awaiting sale or securitization. However, FNF does have some concentration risk, with 13.7% of placement fees and mortgage income being originated from one Canadian financial institution in 2015.
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DBRS considers First National’s capital levels to be acceptable given the relatively low level of credit risk. At December 31, 2015, the Company’s tangible partner equity-to-tangible assets (excluding securitized mortgages) was 8.8%. However, given the high dividend payout ratio, organic capital generation has been constrained. DBRS would view improved capital retention favourably.

It was a modestly positive day for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp, FixedResets up 11bp and DeemedRetractibles winning 18bp. The Performance Highlights table shows a fair amount of underlying churn. While overall volume was average, there was a lot of volume in the top issues.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.50 to be $1.47 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.84 cheap at its bid price of 18.00.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 17.28 to be 0.78 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.61 to be 1.38 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 14.08 to be $1.00 cheap. BAM.PF.E, resetting at +255 on 2020-3-31 is bid at 17.40 and appears to be $1.04 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 15.30 looks $0.48 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 11.15 and is $0.53 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.93%, with two outliers below -2.00% and one above 0.00%. There is one junk outlier above 0.00%.

Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?