PrefBlog

John Heinzl of the Globe penned a paen to FixedResets titled Have rate-reset preferreds hit bottom? Maybe that included some interesting information regarding cash flows:

All three ETFs have been attracting a lot of new money from investors recently. According to a CIBC report, ZPR received inflows of about $34.8-million over the past week – the highest among all Canadian ETFs. CPD was in third spot, with inflows of $26.7-million, and HPR was sixth, with $12.4-million of new funds.

Meanwhile, the recently independent CI Financial has scooped up First Asset:

CI Financial Corp. (TSX: CIX) announced today that it has reached an agreement to acquire 100% ownership of First Asset Capital Corp.

First Asset, which operates through its subsidiary First Asset Investment Management Inc., is a Toronto-based, privately owned investment firm with approximately $3 billion in assets under management. The company is a leader in providing actively managed and factor-based ETFs to the Canadian marketplace, and it also offers a suite of mutual funds and closed-end funds.The transaction, which is subject to regulatory approval, is expected to close by December 31, 2015. Terms were not disclosed.

First Asset is the sponsor of Preferred Share Investment Trust, which has had disappointing performance despite a 28% weighting in corporate bonds (as of September 30).The manager is Aston Hill, which has had its own problems lately as reported on July 20.

Neil Irwin of the NYT has a nice piece on the Phillips Curve:

The idea of the Phillips curve has been under attack almost since William Phillips, the aforementioned New Zealander, wrote his 1958 paper “The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957.”

The most crude versions of the Phillips curve have indeed, in recent decades at least, been nearly useless. Any attempt to estimate it requires a researcher to decide what measure of employment to use, what measure of inflation and what time lags to assume, among other choices. So there are nearly as many versions of the Phillips curve as there are researchers who study it.

If you simply look at the unemployment rate in the United States versus the Consumer Price Index, excluding volatile food and energy prices for every year since 1958, there is nearly no statistical relationship at all, just a jumble of dots. (A best-fit line actually points the wrong direction, correlating higher unemployment with higher inflation, albeit very weakly.)

If you take only subsets of that period, the relationship looks stronger. For example, research from the Federal Reserve Bank of Minneapolis shows a fairly clear (negative) correlation between unemployment and inflation from 1977 to 1990, but suggests that relationship basically disappeared in the 1990s and was barely evident in the first decade of the 2000s. But in some ways an ever shifting curve raises more questions than it answers.

And there is another indication of the US higher education scam:

In 2006, Congress extended the federal Direct PLUS Loan program to allow a graduate or professional student to borrow the full amount of tuition, no matter how high, and living expenses. The idea was to give more people access to higher education and thus, in theory, higher lifetime earnings. But broader access doesn’t mean much if degrees lead not to well-paying jobs but to heavy debt burdens. That is all too often the result with PLUS loans.

The consequences of this free flow of federal loans have been entirely predictable: Law schools jacked up tuition and accepted more students, even after the legal job market stalled and shrank in the wake of the recession. For years, law schools were able to obscure the poor market by refusing to publish meaningful employment information about their graduates. But in response to pressure from skeptical lawmakers and unhappy graduates, the schools began sharing the data — and it wasn’t a pretty picture. Forty-three percent of all 2013 law school graduates did not have long-term full-time legal jobs nine months after graduation, and the numbers are only getting worse. In 2012, the average law graduate’s debt was $140,000, 59 percent higher than eight years earlier.

US prosecutors are preparing another sacrifice to the god of Political Expediency:

Prosecutors contend Michael Coscia, the principal of Panther Energy Trading LLC, placed orders he didn’t intend to fill to manipulate prices in a scheme that raked in illegal profits of about $1.4 million over three months. Coscia, indicted last year and charged with six counts of commodities fraud and six of spoofing, claims he had no intent to defraud anyone and didn’t violate the law.

The trial comes after a year of U.S. law enforcement and regulatory actions against traders who authorities allege systematically place orders they don’t intend to execute to trick the market into thinking there’s demand that doesn’t actually exist. It’s the first time jurors are being asked to apply a provision in 2010’s Dodd-Frank Act that singles out spoofing as a form of illegal market manipulation.
…
The government, for its part, wants to bar Coscia from introducing any evidence that shows ambiguity in the law or trading regulations. U.S. District Judge Harry Leinenweber issued a mixed decision on that point, giving the defense some latitude to show Coscia may have been led astray by conflicting rules.

The rules may be relevant for Coscia to show that he acted consistently with permitted market behavior and “thus did not reflect intent to defraud or cancel orders prior to execution,” the judge said.
…
If convicted of spoofing, Coscia could face as long as 10 years in prison, plus a fine of as much as $1 million for each count.
…
This type of case is going to present of challenges for the U.S. Attorney’s Office because it’s a complicated market and the conduct doesn’t necessarily appear to be wrongful because traders put in orders and cancel them all the time, said Peter Henning, a law professor at Wayne State University’s Law School in Detroit.

The prosecutors have to show intent and “that’s never easy,” Henning said. “If the government loses a couple of these cases it may be that you can’t prove spoofing is a crime,” Henning said. “Even though it’s outlawed you may not be able to prove that spoofing is illegal.”

Moody’s has released an interesting report titled Corporate Bond Market Volatility Poses Most Risk for Asset Managers:

Asset managers are most exposed to higher bond market volatility, primarily because they now hold the greatest share of outstanding corporate debt – up to 25% of the total stock in corporate bonds, from just 13% pre-crisis. Should volatility rise sharply, managers could experience fund outflows or reduced fund sales, leading to lower revenues and increasing reputational risks.
…
However, turnover rates – average daily trading volumes relative to outstanding bonds
– have declined over the last decade – falling from around 0.4% of outstanding investment-grade US corporate bonds by volume in 2006 to around 0.2% in September 2015.

Further, average trade size has declined, particularly for block trades (those with a value greater than $5 million),1 and market participants have reported a material lengthening of the time needed to ‘offload’ large positions.
…
While asset managers are largely conduits, not ‘storers’, of risk, they are still likely to be most affected by bond market volatility relative to banks and insurance companies. In a protracted market disruption, asset managers could experience fund outflows, or at least reduced fund sales, leading to lower revenues. Further, regulatory focus on asset managers’ liquidity risk management has already increased and could negatively affect the industry. The US Securities and Exchange Commission (SEC) recently voted to propose new liquidity management rules for mutual funds and exchange traded funds (ETFs). These rules include requirements that funds disclose portfolio liquidity and limit illiquid holdings such as certain fixed-income securities. Managers will incur additional costs to comply with the rules, and their funds may underperform their benchmarks owing to the performance drag of carrying more liquid assets.

In the US, asset managers’ share of outstanding corporate bond exposures has risen significantly. At the end of June 2015, mutual funds and ETFs held 25% of outstanding US corporate bonds (by volume), up from 13% pre-crisis. Since many pension and etirement funds are also under the purview of asset managers, the investment management industry’s total share of corporate bonds stood at 36% versus 21% pre-crisis). The shares of outstanding bonds held by banks, dealers and finance companies have all declined.

Click for Big

It was a strong day for the Canadian preferred share market, with PerpetualDiscounts up 50bp, FixedResets winning 56bp and DeemedRetractibles gaining 25bp. The lengthy Performance Highlights table is notable for a large number of FixedReset winners. 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.B, which resets 2020-6-30 at +128, is bid at 12.76 to be $0.50 rich, while TRP.PR.A, resetting 2020-12-31 at +192, is $0.50 cheap at its bid price of 15.55.

Click for Big

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 19.56 to be 0.54 rich, while MFC.PR.I resetting at +286bp on 2017-9-19, is bid at 21.51 to be 0.73 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.95 to be $1.30 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 21.94 and appears to be $0.94 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 19.85, looks $1.12 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 14.02 and is $0.79 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.87%, with one outlier above 0.00%. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -1.08% and other issues averaging -0.45%. There are two junk outliers above 0.00% and two below -2.00%.

Click for Big

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

David Parkinson of the Globe points out that headline inflation may not be benign for much longer:

Statistics Canada reported Friday that the consumer price index (CPI) slipped 0.2 per cent in September from August, putting the year-over-year CPI inflation rate at 1 per cent, down from 1.3 per cent the previous month, and the lowest rate since June.
…
The energy segment of CPI slumped 4.4 per cent in September alone, as the price of gasoline tumbled nearly 8 per cent, reflecting renewed weakness in the oil market. On a year-over-year basis, gasoline is down a remarkable 19 per cent, the main driver in the 11-per-cent decline in the overall energy segment.

Without energy, the year-over-year inflation rate for the rest of Statscan’s consumer basket is 2.1 per cent. And, indeed, it has hovered at or a little above 2 per cent for more than a year now, even as the oil shock delivered a sustained blow to Canada’s overall economic health. Every major segment outside of transportation – which contains gasoline costs – has posted year-over-year inflation well north of the overall CPI reading, with a median reading of 2.5 per cent.

But here’s the thing: That energy effect, which has sucked the life out of CPI inflation for months now, will disappear within the next few months. It’s all but a statistical certainty. It was last fall that energy prices went into their tailspin, and by January they had bottomed; pretty much from here on in, the year-over-year comparisons in the energy segment are going to look much brighter.

In Europe, however, Draghi is more concerned about deflation:

On Thursday in Malta, Draghi said the committees have been given their orders again and that the ECB wanted to be “vigilant,” echoing his predecessor Jean-Claude Trichet’s preferred signal for an imminent policy change. Investors took the hint, sending the euro tumbling and German bond yields to a record low — and economists debating whether policy makers will cut rates, expand QE, do both or even more.
…
While Draghi reiterated his belief that the 19-nation currency bloc is not in deflation, or a downward spiral of prices and wages, he made clear he’s ready to act to stem what Executive Board member Peter Praet two weeks ago called a “seeping pessimism” in the euro area.

This caused an immediate uptick in my favourite statistice – the value of bonds with negative yields:

With his confirmation that policy makers discussed cutting the region’s deposit rate, Mario Draghi extended the euro area’s negative-yield universe by $190 billion.

Those comments by the European Central Bank chief on Thursday sparked a rally that left yields on German sovereign securities negative for as long as six years, and pushed Spanish and Italian two-year yields below zero. Across the currency bloc, the value of securities issued by governments at negative yields rose to $1.57 trillion, from $1.38 trillion before Draghi spoke, according to data compiled by Bloomberg. That’s equivalent to about a quarter of the market.
…
Germany’s two-year yield was little changed at minus 0.32 percent as of 4:26 p.m. London time, after earlier reaching a record-low minus 0.348 percent. The price of the zero percent security maturing September 2017 was at 100.605 percent of face value.

French two-year yields dropped to a record minus 0.292 percent on Friday, also below the current level of the deposit rate, which is at minus 0.20 percent. There are about $752 billion of securities in the euro region with yields below that rate, according to data compiled by Bloomberg, making them ineligible for the ECB’s 1.1 trillion-euro ($1.2 trillion) bond-buying plan.

Italy’s two-year yield dropped to as low as minus 0.014 percent on Friday, while Spain’s fell to as low as minus 0.02 percent.

In addition, China cut policy rates again:

China stepped up monetary easing with its sixth interest-rate cut in a year to combat deflationary pressures and a slowing economy, moving ahead of anticipated fresh stimulus by central banks from Europe to Japan and possible tightening in the U.S.

The one-year lending rate will be cut to 4.35 percent from 4.6 percent effective Saturday the People’s Bank of China said on its website on Friday, while the one-year deposit rate will fall to 1.5 percent from 1.75 percent. Reserve requirements for all banks were lowered by 50 basis points, with an extra 50 basis point reduction for some institutions.
…
The need for new growth engines was underscored by data Monday that showed the economy expanded 6.9 percent in the three months through September from a year earlier. While that beat economists’ estimates for 6.8 percent, the expansion benefited from an out-sized contribution from financial services after a surge in share trading from the year-earlier period. That prop is unlikely to endure, raising challenges to Li’s growth goal of about 7 percent this year.

Meantime, consumer inflation at about half the government’s target and a protracted slump in producer prices added room for additional easing.

This news actually weakened Treasuries:

Treasuries fell, with 10-year note yields touching a two-week high, after China’s central bank lowered its benchmark lending rate and reserve requirements for banks in an effort to curb an economic decline.

U.S. yields rose for a second day as investors see China’s efforts to address its problems as easing turmoil in emerging markets and lessening demand for haven assets.
…
The yield on the 10-year Treasury note rose six basis points, or 0.06 percentage point, to 2.09 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data, after touching its highest since Oct. 8. The price of the 2 percent U.S. security maturing in August 2025 dropped 17/32, or $5.31 per $1,000 face amount, to 99 7/32.

The move by the Chinese central bank helped bolster risk appetite, with stocks rising around the world and U.S. bond market inflation expectations rising to the highest levels in two weeks, forecasting a rate of 1.52 percent during the next 10 years.

And, all in all, the Central Bankers reclaimed their position as the Masters of the Universe:

Canadian stocks joined a global equities rally sparked by optimism central-bank stimulus will jumpstart growth.

The nation’s benchmark index rose to a two-week high, as Valeant Pharmaceuticals International Inc. halted a four-day rout. Canada’s largest lenders contributed the most to gains, while materials producers also advanced.

Central banks are reasserting dominance over the global financial markets, sparking demand for risk assets, as China’s central bank cut its benchmark lending rate a day after the European Central Bank signaled it will consider bolstering a bond-buying program before the end of the year. Canada’s central bank held rates steady this week.

The Standard & Poor’s/TSX Composite Index rose 75.55 points, or 0.5 percent, to 13,953.66 at 4 p.m. in Toronto. The gauge posted a 0.8 percent gain in the week. It’s extended an October rally to 4.9 percent, on pace for the biggest monthly increase since 2011.

Brompton Lifeco Split Inc., proud issuer of LCS.PR.A, was confirmed at Pfd-4(high) by DBRS:

Based on the dividend yields of the underlying companies in the Portfolio and after management fees and other expenses have been paid, the dividend coverage ratio stands at 0.6 times.
…
The amount of downside protection available to the Preferred Shares as of October 15, 2015 is 34%.

Since the last review conducted on October 24, 2014, performance of the Company’s preferred shares remains stable. Quarterly Preferred Share distributions have been paid regularly since the inception of the Company in 2007. Other key rating considerations include the credit quality, volatility and diversification of the Portfolio as well as changes in the dividend policies of the underlying companies in the Portfolio.

Based on the aforementioned considerations and performance metrics, DBRS confirms the Pfd-4 (high) rating of the Preferred Shares issued by Brompton Lifeco Split Corp.

There were good solid gains in the Canadian preferred share market today, with PerpetualDiscounts winning 29bp, FixedResets gaining 24bp and DeemedRetractibles up 27bp. As has become normal, however, these figures masked a lot of churn illustrated by a lengthy Performance Highlights table. 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

Implied Volatility increased today with a good fit, but the pattern of fitting errors makes me suspect that the figure is subject to rapid change on small pricing shifts.

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.75 to be $0.45 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.34 cheap at its bid price of 13.37.

Click for Big

Implied Volatility declined slightly for the MFC series today.

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 19.34 to be 0.42 rich, while MFC.PR.F resetting at +141bp on 2016-6-19, is bid at 14.00 to be 0.64 cheap.

Click for Big

The fit on the BAM issues continues to be poor. Implied Volatility remained constant today, but this is a figure that’s very highly dependent on the performance of the high-spread issue BAM.PF.H.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.75 to be $1.18 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 21.60 and appears to be $0.82 rich.

Click for Big

Implied Volatility declined significantly today.

FTS.PR.K, with a spread of +205bp, and bid at 19.50, looks $0.99 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 14.11 and is $0.61 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.87%, with one outlier above 0.00%. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -1.28% and other issues averaging -0.30%. There are three junk outliers above 0.00% and one below -2.00%.

Click for Big

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

Nothing happened today.

It looked for a long time as if there would be a significant pullback in the preferred share indices today, but the Forces of Goodness and Truth mounted a counterattack a little after 3:30pm that recouped a good chunk of the day’s losses:

Click for Big

TXPL closed at 706.54. You can see a tiny little sliver of green at the extreme right-hand side of the chart, showing how the index rose 3+ points in the dying seconds of the day … at 3:58pm, the index level was 702.97.

But one must remember two very important things when looking at TXPL! First, it’s a price index and therefore of highly limited informational value. All the Royal Bank issues went ex-dividend today and this caused about 5bp divergence on the day between the Total Return index and the Price Index. Additionally, TXPL is calculated on a close/close basis; while the late rally will have causes some distortion (in that the closes will be, in general, further above the bid than otherwise), there will have been even more distortion in the prior number due to yesterday‘s wild ride. In addition, TXPL is riddled with junk, which I don’t pay much attention to. What I’m trying to say is …

It was a good, albeit mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 17bp, FixedResets up 41bp and DeemedRetractibles off 27bp. The bad part of the Performance Highlights table is dominated by insurance issues; the good part is more heterogeneous. Volume was high.

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

Implied Volatility declined to more reasonable levels today.

TRP.PR.B, which resets 2020-6-30 at +128, is bid at 12.43 to be $0.50 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.41 cheap at its bid price of 13.00.

Click for Big

Implied Volatility declined slightly for the MFC series today.

Most expensive is MFC.PR.H, resetting at +313bp on 2017-3-19, bid at 22.75 to be 0.46 rich, while MFC.PR.G resetting at +290bp on 2016-12-19, is bid at 20.95 to be 0.54 cheap.

Click for Big

The fit on the BAM issues continues to be poor. Implied Volatility increased a little today, but this is a figure that’s very highly dependent on the performance of the high-spread issue BAM.PF.H.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.00 to be $1.61 cheap. BAM.PF.A, resetting at +290bp on 2018-9-30 is bid at 21.50 and appears to be $0.74 rich.

Click for Big

Implied Volatility remains high.

FTS.PR.K, with a spread of +205bp, and bid at 18.95, looks $1.33 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 13.50 and is $0.55 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.88%, with two outliers below -2.00%. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -1.29% and other issues averaging -0.29%. There are two junk outliers above 0.00% and three below -2.00%.

Click for Big

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

Top news of the day was the BoC Rate Announcement:

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

Inflation has evolved in line with the outlook in the Bank’s July Monetary Policy Report (MPR). Total CPI inflation remains near the bottom of the Bank’s target range, owing to declines in consumer energy prices. Core inflation is close to 2 per cent as the transitory effects of the past depreciation of the Canadian dollar are roughly offsetting disinflationary pressures from economic slack, which has increased this year. The Bank judges that the underlying trend in inflation continues to be about 1.5 to 1.7 per cent.
…
The Bank projects real GDP will grow by just over 1 per cent in 2015 before firming to about 2 per cent in 2016 and 2 1/2 per cent in 2017. The complex economic adjustments to the decline in Canada’s terms of trade will continue to play out over the projection horizon. The weaker profile for business investment suggests that, in the near term, growth in potential output is more likely to be in the lower part of the Bank’s range of estimates. Given this judgment about potential output, the Canadian economy can be expected to return to full capacity, and inflation sustainably to target, around mid-2017.

So now it’s a return to full capacity ‘around mid-2017’. In the July announcement it was ‘the first half of 2017.’ We are approaching normalcy asymptotically.

I mentioned the ‘welfare wall’ on October 14; this is the ridiculously high effective marginal tax rate on low income earners due to clawback of benefits when they’re imprudent enough to get a slightly better job or work slightly more hours. This came to mind when I read about a pending wave of closures of slum housing:

There are currently about 1.34 million units of affordable housing created by a HUD program known as Section 8 project-based rental assistance, according to a blog post published on Wednesday by Poethig and her Urban Institute colleague Reed Jordan. More than 30 percent of those units are kept affordable by contracts that are set to expire by the end of 2017.
…
Under Housing and Urban Development’s system, tenants who meet income requirements pay 30 percent of their income in rent, and HUD pays the landlord a subsidy on top of that rent. The average subsidy was $665 a month (PDF) in 2011, according to the National Low Income Housing Coalition. New York, where 33 percent of units are set to expire by 2017, has more than 123,000 units in the program; Dallas, where 47 percent of units are at risk, has about 8,800.
…
The system for preserving affordable units varies from place to place. State law gives cities in Massachusetts the right of first refusal when property owners want to let a HUD contract expire, and a number of nonprofit groups and a state-affiliated agency are devoted to preserving it. In 2013, a nonprofit called Preservation of Affordable Housing paid $234 million for about 850 apartments in Boston, Cape Cod, and elsewhere in the state to prevent the units form being converted to market rate. Washington, Chicago, and other cities require landlords to notify tenants in advance of conversions and, in some cases, give them the opportunity to buy the apartment.

So basically, given that ‘tenants … pay 30% of their income in rent’ means that the housing benefit alone is worth a 30% marginal tax rate! Overtime? A new job at $1/hour more? Are you crazy?

It’s a little difficult to put numbers on the Boston project! According to a story in the Boston Globe, basically all of the 234-million is government money, either directly or through shifting the subsidy to tax credits:

Low-income residents joined government officials and investors Thursday to celebrate the renovation of six apartment buildings, a project that totaled nearly $234 million and is being touted as the state’s largest affordable housing improvement effort.
…
They were all renovated with the help of a $168 million loan from MassHousing, the state’s affordable housing bank, almost $66 million in private investments that came from $8.9 million in tax credits provided by the Massachusetts Department of Housing and Community Development tax credits

I think the touted Preservation of Affordable Housing is just another government boondoggle, but it’s hard to say. They don’t publish their financials and their news page doesn’t provide any hints of their financing. Their news release regarding the Boston project shows the usual grab-bag of government hand-outs:

The financing package includes:
 MassHousing: $35.8 million construction and permanent loan and a $9.3 million bridge loan
 Mass Housing Investment Corp: $12.3 million federal low-income housing tax credit investment
 Two loans from the City of Cambridge /Cambridge Affordable Housing Trust: $1,852,286 and $2.4 million for a total City/Trust contribution of $4,252,286
 CEDAC: bridge loan of $3,700,000

I have sent them the following eMail:

Sirs,

I am curious regarding the incentive your beneficiaries have to improve their financial situation.

Has your organization done – or are you aware of – any research into the Effective Marginal Tax Rate (EMTR) faced by occupants of your subsidized units? By EMTR, I mean the impact of both direct taxation and reduction of benefits on additional income that could be earned by these clients.

Sincerely,

In an announcement sure to cause a fit of giggles, DBRS Confirms Advantaged Preferred Share Trust Units Stability Rating of STA-2 (middle). Stop snickering, Stability Ratings are supposed to reflect “the fund’s ability to generate sufficient cash to pay out a stable level of distributions on a per-unit basis over the longer term.” Good for snickers in the DBRS rating confirmation is the phrase:

The credit quality of the Portfolio remains strong: approximately 78% of the portfolio shares are rated at Pfd-3 (high) or higher.

Rather an unusual cut-off, wouldn’t you say? But … “Pfd-3(high)” allows them to include Enbridge. But heads will nod in agreement with:

As of Oct 14, 2015 the Trust has seen a 24% decline in Portfolio value compared to June 30, 2015 values. Such a decline is mainly explained by the negative investor sentiment regarding the overall preferred share market that translates into vast selling of preferred shares causing the supply exceeding the demand. The fund rating methodology does not directly address the potential price volatility of the Portfolio.

Until, of course, those wisely nodding heads realize that it doesn’t actually say anything. Some might wonder if this comment is the whole point of the confirmation, desperately asked for by the fund sponsors! “Please, give us something we can say to all our angry clients!”

Canadian preferred share investors have a new ride!

Click for Big

It was another incredibly strong day for the Canadian preferred share market, with PerpetualDiscounts up 53bp, FixedResets winning an amazing 306bp and DeemedRetractibles gaining a mere 48bp. No less than fourteen issues, all FixedResets, gained over 5% on the day (bid/bid); this is a rather fun statistic, too bad I don’t get to use it more often! Volume was very extremely high.

Still, let’s keep things in perspective and remember that the TXPL (price index) is still only back to where it was in mid-August. 15Q3 was a really, really, lousy quarter. On a total return basis, performance for TXPL is below zero with a start-date of August 19. So while I’m pleased to see these impressive gains, we’ll need another few weeks of them before we can call it a good year!

Click for Big

PerpetualDiscounts now yield 5.76%, equivalent to 7.49% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.3%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 320bp, a sharp reduction from the ludicrous 340bp reported October 14.

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

Implied Volatility remained constant today, above what I consider reasonable.

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.71 to be $0.60 rich, while TRP.PR.A, resetting 2019-12-31 at +192, is $0.58 cheap at its bid price of 15.15.

Click for Big

Implied Volatility declined slightly for the MFC series today.

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 14.90 to be 0.71 rich, while MFC.PR.L resetting at +216bp on 2019-6-19, is bid at 18.18 to be 0.70 cheap.

Click for Big

The fit on the BAM issues continues to be poor. Implied Volatility increased a little today, but this is a figure that’s very highly dependent on the performance of the high-spread issue BAM.PF.H.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.60 to be $0.90 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 21.63 and appears to be $0.69 rich.

Click for Big

Implied Volatility declined again today but remains high.

FTS.PR.K, with a spread of +205bp, and bid at 18.90, looks $0.63 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.27 and is $0.47 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.87%, with one outlier above 0.00%. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -1.07% and other issues averaging -0.31%. There are two junk outliers above 0.00% and two below -2.00%.

Click for Big

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

Nothing happened today, other than Canadian preferred share investors checking out the current value of their portfolios:

Click for Big

It was another superb day for the Canadian preferred share market (boy, when things snap back, they snap back in a hurry, don’t they?) with PerpetualDiscounts up 57bp, FixedResets winning a whopping 239bp and DeemedRetractibles gaining 38bp. It will be most interesting to see in the coming weeks whether these gains continue or vanish like fairy gold! The Performance Highlights table is, of course, enormous, with no less than eight issues (all FixedResets) up more than the 5% that usually indicates a ridiculous situation with bad quotes. Volume was, again, extremely high.

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

Implied Volatility eased off again today but remains above what I consider reasonable.

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.56 to be $0.85 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.73 cheap at its bid price of 12.60.

Click for Big

The MFC series has now renormalized and the fit has returned to its usual excellence.

Most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 14.75 to be 0.27 rich, while MFC.PR.J resetting at +261bp on 2018-3-19, is bid at 19.85 to be 0.31 cheap.

Click for Big

The fit on the BAM issues continues to be poor.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.00 to be $0.90 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 20.75 and appears to be $0.81 rich.

Click for Big

Implied Volatility declined again today but remains high.

FTS.PR.M, with a spread of +248bp, and bid at 19.90, looks $0.31 expensive and resets 2019-12-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.16 and is $0.67 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.87%, with no outliers (although I had to change the scale again!). The distribution is slightly bimodal, with bank NVCC non-compliant pairs averaging -1.08% and other issues averaging -0.56%. There is one junk outlier above 0.00% and one below -2.00%.

Click for Big

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

I have often railed against the useless of regulatory make-work schemes; clearly, one of the most ridiculous is the anti-money-laundering set of regulations. I’ve quoted John Allison’s observation before, but now I’ll quote it again:

And then there was the Patriot Act, which was supposed to catch terrorists. I’ve talked to many people in government and they all do this dancing act, but the fact is there has never been a single terrorist caught and convicted because of the Patriot Act. The Act cost the banking industry more than $5 billion annually, and I would argue that no one is going to be caught. If you are dumb enough to get caught under the Patriot Act, you are going to get caught anyway. The only significant conviction of the Patriot Act was Eliot Spitzer, the governor of New York, who was convicted of soliciting prostitutes under a law designed to catch terrorists.

Since he wrote that, the authorities also seem to have caught John Hastert, who needed lots of cash because he was being blackmailed as discussed on May 28, 2015; knowing that victims of blackmail can be caught and exposed more easily and righteously should certainly cause us all to sleep better at night. But the direct human effects – beyond the financial cost for this make-work – has now been written about in a Globe story about Canadian “politically exposed persons”:

Those regulations propose a vast reach: For 20 years after the politically exposed persons (PEPs) leave office, the financial institutions will need to keep their eyes on them, their family and associates. The financial institutions’ first job is to identify the PEPs; then to assess their risk; and then, if the institutions determine the PEPs are a high risk – there is little public explanation on how the banks are expected to do this – they will need to monitor the PEPs’ account activity. The institutions will need to report suspicious activity (anything they suspect is connected to terrorism or money laundering) to a federal intelligence agency known as Fintrac, which investigates and can turn over files to the Mounties or the Canada Revenue Agency.
…
Ontario sisters Catherine and Emilie Taman both said in interviews they received mysterious phone calls from their separate banks, asking intrusive questions. (Emilie Taman is running for the New Democratic Party in an Ottawa riding in the federal election.) Catherine’s banker eventually explained why: Her mother was a foreign PEP. The Taman sisters’ mother is Ms. Arbour, who apart from being a retired Supreme Court judge is also a former international war-crimes prosecutor and a former United Nations human rights commissioner. Catherine said when she refused to answer the questions (on her mother’s advice), her account was frozen, which she discovered when she tried to use her bank card in a restaurant. A letter she provided to The Globe showed her bank asking questions such as, “From whom/where are you getting money?” “How did you accumulate your wealth/net worth?”

How the banks knew the Taman sisters were Ms. Arbour’s daughters was a mystery to all three women, but experts contacted by The Globe say a small group of private companies provide lists of foreign PEPs and their families, and banks run new customers through those computerized lists, for a fee. There are similar lists for domestic PEPs.

In a commentary published in Thursday’s Globe, Ms. Arbour calls the program a “useless bureaucratic nightmare,” and says that her children should be left alone by their bankers.

The highlight of the story is a quote from one of the piggies at the trough:

“I think corruption is growing by leaps and bounds,” Garry Clement, a former national director of the RCMP’s proceeds of crime program, said in an interview. “It’s far greater than people are willing to accept.”

I have a message for Garry Clement: I don’t give a rat’s ass what you think and neither does anybody else with half a brain. Let’s see some proof. Let’s see some proof, first that corruption is growing by leaps and bounds and second that it needs to be addressed (I don’t care about corruption in Libya, the Libyans aren’t paying me anything to look after them) and third that these regulations are the best way to fight it. Proof that can stand up in court and has been used to convict real bad guys, not pathetic victims like Spitzer and Hastert.

I mentioned the folly of UK central planners with respect to buy-to-let housing on October 1. The scheme has now attracted the ire of Institute of Chartered Accountants in England & Wales:

Britain’s leading professional accounting body, the Institute of Chartered Accountants in England & Wales, has attacked the Chancellor’s controversial new tax on buy-to-let tax as “unfair and unreasonable”.

It condemns the legislation as “unthought-through” and predicts it will cause “extreme confusion”, as well as forcing some landlords out of business, distorting the market – and even making life harder for first-time buyers.

The new tax, which was not consulted upon and which The Telegraph is campaigning against, is included within the Finance Bill currently progressing through Parliament.

It will be phased in between 2017 and 2020, and effectively removes the ability of private landlords to offset the cost of their mortgage interest before arriving at a taxable profit.
…
While the proposed tax has found popularity among tenants, the ICAEW says it could exacerbate the property crisis and make it more difficult for first-time buyers.

“The interest relief restriction will favour cash buyers who want to buy to let and may increase the competition even more at the lower end of the property market, thereby increasing prices and hindering first-time buyers.”

According to the Economist, Canadian housing is grossly overvalued, tied for most in the world (with Hong Kong) with respect to rents (89% rich) and highly ranked with respect to income (34% rich). Paul Matsiras of Moody’s claims:

“The risks are less around the rapid house price appreciation per se than the fact that, relative to incomes, homes in Toronto and Vancouver are increasingly becoming unaffordable either to own or to rent,” Moody’s economist Paul Matsiras said in his report.

“Canadian household debt has risen faster than disposable income since 2011, greatly increasing the debt burden for consumers and the risks of a pullback in spending as interest rates rise.”

He warned of difficulties as the key measure of household debt to disposable income rises, now standing at almost 165 per cent.

But fear not! In future photographs of G-7 meetings, Canada will display the best hair:

The country’s three major broadcasters — CTV, CBC and Global News — have projected a Liberal majority win. The Liberals won or were leading in 183 of the 338 House of Commons seats, with the Conservatives ahead in 98 and the New Democratic Party with 30, as of 10:36 p.m. Monday in Ottawa, according to preliminary results from Elections Canada. A party needs 170 seats for a majority.
…
The Canadian dollar fell after the networks called a Liberal victory, down 0.1 percent at 10 p.m. in Toronto to C$1.3040 per U.S. dollar, dropping for a third day. The currency has depreciated 10.9 percent against the U.S. dollar this year.

I’m very glad to see the end of the Bill C-51 boys, but I wish their replacements were led by somebody with a better claim to fame than being born. But we’ll see. Maybe we can stop obsessing about how other people dress, anyway.

Yee-haw!

Click for Big

Canadian preferred share investors were riding the bull today in the best day I can remember off the top of my head, with PerpetualDiscounts up 76bp, FixedResets winning an incredible 304bp and DeemedRetractibles gaining 35bp. The Performance Highlights table is much as you’d expect, with no less than a dozen issues – all FixedResets – gaining more than the 5% figure that usually indicates an absurdity of some kind. Volume was very high.

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

Implied Volatility declined today but remains above what I consider reasonable.

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.96 to be $0.77 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.90 cheap at its bid price of 11.95.

Click for Big

There was some normalization from Friday‘s absurd results, but MFC.PR.F is still noticeably off the line defined by the other issues.

Most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 14.52 to be 0.85 rich, while MFC.PR.L resetting at +216bp on 2019-6-19, is bid at 17.09 to be 0.51 cheap.

Click for Big

The fit on the BAM issues continues to be horrible!

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 15.25 to be $0.90 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 20.20 and appears to be $0.69 rich.

Click for Big

Implied Volatility declined substantially today but remains high.

FTS.PR.M, with a spread of +248bp, and bid at 19.55, looks $0.40 expensive and resets 2019-12-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 16.70 and is $0.78 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.67%, with no outliers. The distribution is only slightly bimodal, with bank NVCC non-compliant pairs averaging -0.85% and other issues averaging -0.41%. There is one junk outlier above 0.50% and one below -1.50%.

Click for Big

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