PrefBlog

We have a new government, but the same old central planners:

Finance Minister Bill Morneau today announced changes to the rules for government-backed mortgage insurance to contain risks in the housing market, reduce taxpayer exposure and support long-term stability. Effective February 15, 2016, the minimum down payment for new insured mortgages will increase from 5 per cent to 10 per cent for the portion of the house price above $500,000. The 5 per cent minimum down payment for properties up to $500,000 remains unchanged.

Today’s announcement represents a graduated approach to increasing the down payment requirement proportionally to the cost of a home. Canadians who already hold mortgages will not be affected by this announcement.

The Government continuously monitors the housing market and is committed to implementing policy measures that maintain a healthy, competitive and stable housing market. Higher homeowner equity plays a key role in maintaining a stable and secure housing market.

The backgrounder reveals nothing relevant:

The Bank Act requires federally regulated lenders to obtain mortgage default insurance (“mortgage insurance”) for homebuyers who make a down payment of less than 20 per cent of the property purchase price. The homebuyer pays the premium for this insurance, which protects the lender against mortgage loan losses if the homebuyer defaults.

By reducing risk to lenders, mortgage insurance enables consumers to purchase homes with a down payment as low as 5 per cent of the property value and at lower mortgage interest rates that are comparable to those received by homebuyers with higher down payments.
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The Government guarantee of mortgage insurance is intended to support access to homeownership for creditworthy buyers and promote stability in the housing market, financial system and economy. As part of its role to promote stability, and to protect taxpayers from potential mortgage loan losses, the Government sets the eligibility rules for new government-backed insured mortgages.

Between 2008 and 2012, four rounds of changes were made to the eligibility rules, aimed at encouraging insured borrowers to build and retain housing equity and take on mortgage debt that they are able to service over the economic cycle.

And the FAQs are puerile:

Why is the Government making this change at this time?

The Government continuously monitors the housing market and is prepared to implement policy measures to maintain a healthy, competitive and stable housing market. The new measure reduces housing market risks by increasing borrower equity. This protects the stability of the housing market and the economy as a whole, as well as the interests of taxpayers who ultimately back government-guaranteed mortgage insurance.

What will be the impact of the higher down payment requirement on the Canadian economy?

Higher homeowner equity will help maintain a stable and secure housing market and balanced economic growth over the long-term. In the short term, this targeted measure will dampen somewhat the pace of housing activity over the next year, as some prospective homebuyers save for the increased minimum down payment.

There is no meat on these bones at all. There is nothing to quantify any improvement in government policy objectives that is served by this policy. It’s just another randomly chosen measure that will be touted as an indication to those who are unable to compete for housing that Your Government Is Doing Something.

But the cheerleaders were out in force:

Some new buyers in Toronto and Vancouver will be knocked out of the market temporarily.

But that’s a fair price for bringing some stability to a housing market where prices in many cities have for years risen far in excess of incomes.
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Boomers in particular are living in homes that have increased many times in value. A big decline in house prices would be a shocking setback to these people and could negatively affect their financial health in retirement.

Mild as it is, the new down payment rule could only momentarily slow hot markets. But at least the new Liberal government has shown that it’s monitoring housing and ready to act to keep it in line. For homeowners, that’s far better news than another month of big price gains.

As I have noted before, the fact that people are taking advantage of low interest rate to load up on non-productive housing assets instead of productive capital assets is a genuine concern for the western world. There was a story illustrating the process the other day:

It was after losing a huge chunk of money in the stock market, twice, that Ottawa couple Denise and Stuart MacPherson decided they needed to find a new way to save for retirement.

The first bath they took was during the dot-com bust at the start of the century, after getting caught up in the hype around technology stocks. The second was the global financial crisis in 2008, when they watched half of their investments go down the drain.

“That was a very hard lesson to learn, mostly because we didn’t really understand what we were investing in,” says Ms. MacPherson, 61. “It was a wake-up call for us.”

Instead of jumping back into the market, the couple, working then as civil servants, decided to start investing in something they could see and understand.

“That’s when we started looking at real estate,” Ms. MacPherson says.

I suggest that from a policy perspective, what we need is more housing price volatility, not less. Let’s wipe out a swath of real-estate entrepreneurs – as happened in the early eighties and again in the early nineties – pour encourager les autres. Trying to turn the housing market into a 5% GIC – as the repeated lauding of ‘stability’ implies – will have quite the opposite effect from that which is intended. The trouble is, of course, that the central planners and regulators want to turn everything into a 5% GIC, since they run into less criticism that way.

I was more impressed with OSFI’s note titled Updating capital requirements for residential mortgages:

OSFI is planning to update the regulatory capital requirements for loans secured by residential real estate properties (i.e. residential mortgages).
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The purpose of OSFI’s regulatory capital framework is to ensure, as much as possible, that federally regulated financial institutions can absorb severe but plausible losses. The potential severity of loss scenarios in the residential mortgage market depends crucially on price developments. In particular, potential losses become more severe during extended periods where house prices have recently risen rapidly and/or are high relative to borrower incomes. As a result, the potential severity of losses may vary across Canada.

Accordingly, for banks using internal models, OSFI will propose a risk-sensitive floor for one of the model inputs (losses in the event of default) that will be tied to increases in local property prices and/or to house prices that are high relative to borrower incomes. This will ensure a level of consistency and conservatism in the protection provided to depositors and unsecured creditors.

For federally regulated private mortgage insurers, we will introduce a new standardized approach that updates the capital requirements for mortgage guarantee insurance risk. It will require more capital when house prices are high relative to borrower incomes. This will ensure a level of conservatism in the protection provided to policyholders and unsecured creditors.

The part of this policy that looks back at past prices to determine risk is – in broad outlines – something I’ve been advocating for years, most recently on November 30:

There are two approaches that can be taken: the first is to insist that for risk-management purposes, the loan-to-value ratio of a mortgage be calculated not according to the sale price or to the appraised value, but to an estimate of what this would have been five or ten years ago, adjusted for inflation. So, for instance, if we have a house that sold in 2014 for $567,000 and has a mortgage of $400,000, we would now currently say the LTV is 71%. I suggest that for regulatory risk purposes we use the 2009 price of $395,000, add on 10% to reflect plain vanilla inflation for a notional value of $435,000, and say OK, you’ve got to put up capital reflecting this notional LTV of 92%, which is a different kettle of fish altogether.

The second approach would simply say … 40% of your balance sheet is now mortgages, the average over the last ten years is 30%, the difference is 10% and 10% of that is 1%, so there’s a countercyclical capital surcharge of 1% that will be applied to your risk weighted assets. A solution would need to be more detailed, with meaningful categorizations of bank assets and threshold values for surcharges so that slow change is not discouraged, but that’s the general idea.

Such broad-brush changes are strongly preferable to the micro-management of the economy implicit in down-payment rules.

Meanwhile Third Avenue Management rocked the junk market by liquidating its junk fund:

I am writing to inform you that the Board of Trustees of the Third Avenue Trust has adopted a Plan of Liquidation for the Third Avenue Focused Credit Fund (“FCF”). Pursuant to this Plan, on or about December 16, 2015, there will be a distribution to all FCF shareholders of the Fund’s cash assets not required for the expenses of the Fund and its liquidation. The remaining assets have been placed into a liquidating trust (the “Liquidating Trust”) and interests in that trust will also be distributed to FCF shareholders on or about December 16, 2015. These two distributions will constitute the full redemption for all shares of FCF and existing FCF shareholders will all become beneficiaries of the Liquidating Trust, which will make periodic distributions as cash is received for the remaining investments. The record date for these distributions is December 9, 2015, so no further subscriptions or redemptions will be accepted. Interests in the Liquidating Trust will not trade and will, in general, be transferable only by operation of law.
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In line with its investment approach, FCF has some investments in companies that have undergone restructurings in the last eighteen months, and while we believe that these investments are likely to generate positive returns for shareholders over time, if FCF were forced to sell those investments immediately, it would only realize a portion of those investments’ fair value given current market conditions. We believe that doing so would be contrary to the interests of all of our shareholders, which is why we have taken steps to protect shareholder value by returning cash and implementing the Liquidating Trust to seek maximum value for these investments.

The past performance of this fund – which I have not examined in any detail at all – makes it seem like just another go-go fund:

In 2010, it earned 15.63%, according to Morningstar MORN +0.00%, outperforming the Barclays Aggregate Bond Index by over 900 basis points. That out-performance turned in 2011 when bond markets were spooked by the government’s near-breach of a debt limit, but it returned the following year. In 2013, the Third Avenue Credit Fund was the top fund in its category, according to Morningstar, returning 16.8%, outperforming its index by a whopping 1,800 basis points.

Over the past 24-months, Third Avenue’s performance turned sharply negative, testing investors’ patience. Part of the fund’s troubles come from owning debts in some of the largest leveraged buyouts that remain in the coffers of private equity firms, or stumbled in their return to public markets.

But, as a chart prepared by the WSJ indicates, go-go investing works really well for managers!

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Look at all that money chasing performance! But all good things come to an end:

The fund, which had $3.5 billion in assets as recently as July of last year, suffered almost $1 billion in redemptions this year through November. The Third Avenue fund lost 13 percent in the past month and is down 27 percent this year, according to data compiled by Bloomberg. Assets have declined to $788 million as of Dec. 8 as clients pulled an estimated $979 million this year through November, according to Morningstar Inc.

“It’s significantly bad news for the market, and another straw on the camel’s back,” said Martin Fridson, a money manager at Lehmann Livian Fridson Advisors LLC. “It’s not typical, but it raises the question: Can this happen to the next-worst fund? You just don’t know. It certainly doesn’t encourage people to put money in, and that just exacerbates the liquidity problem there.”

The weakness in the market comes as credit quality in speculative-grade debt is falling. For every junk-bond issuer that had its rating boosted this year, two have been downgraded, a ratio not seen since 2009, according to data compiled by Bloomberg.

And companies are increasingly defaulting on their debt. Swift Energy Co.’s failure to make an $8.9 million interest payment last week raised the global tally of defaults to 102 issuers, a figure last exceeded in 2009, according to Standard & Poor’s.

And there is some credibility to the claim that the fund fell into a shark tank:

Mutual funds that own hard-to-trade debt are gunning for an advantage when it comes to returns, but they can face a big disadvantage when it comes time to sell.

They are often the weakest hand in a market of hungry experienced traders simply by virtue of their structure. They must publicly report their holdings, albeit on a delayed basis, and disclose information about investor inflows and outflows. Hedge funds, on the other hand, do not have to disclose nearly as much.

That’s like putting a huge “kick me” sign on these mutual funds when investors start asking for their money back. Because the debt these funds own may only trade a few times a year, prices are as reliant on supply and demand as the actual fundamentals of a given company.
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Exhibit A of this phenomenon is Third Avenue Management. After it decided to liquidate its $788 million mutual fund that focuses on highly distressed debt — and to gate in remaining investors to avoid a fire sale of the remaining assets — its chief executive hinted that the fund was a victim of just such behavior.

“Our portfolio was well known, it’s almost like we were targeted,” CEO David Barse said, according to the Wall Street Journal.

But misery loves company, and fund holders had that, all right:

Global financial markets turned gloomy as the prospects for a Federal Reserve interest-rate increase next week and a drop in oil helped spark a selloff in riskier assets, from equities to commodities to high-yield debt.

U.S. stocks tumbled to a two-month low, with the Dow Jones Industrial Average dropping more than 300 points, while shares in developing nations extended the longest slump since June. Oil plunged below $36 a barrel to cap its worst week in a year, and junk bonds had their worst day since December 2012. Treasuries rallied with the yen on haven demand.
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The Standard & Poor’s 500 Index slumped 1.9 percent to 2,012.37 at 4 p.m. in New York, to the lowest level since Oct. 14. The gauge sank 3.8 percent in the week. That’s the most since Aug. 21, when signs of slowing growth from China to Europe rekindled concern that weakness could spread to America.
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The iShares iBoxx $ High Yield Corporate Bond exchange-traded fund, known by its ticker of HYG, tumbled 2.7 percent as oil extended its loss. Trading in the high-yield ETF options surged as billionaire investor Carl Icahnsaid more pain is coming. “The meltdown in High Yield is just beginning,” he wrote on his verified Twitter account Friday.
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Traders are pricing in a 72 percent chance that the Fed will raise rates at its Dec. 16 meeting, with data out of the U.S. Friday showing growth in retail sales and producer prices for November. That’s down from 80 percent earlier this week, amid the turmoil on financial markets.
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The Stoxx Europe 600 Index tumbled 2 percent, taking its weekly loss to 4 percent. The regional benchmark fell to its lowest level since October and has sunk 7.7 in December amid a rout in commodity companies and disappointment over the European Central Bank’s last meeting.
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The risk premium on the Markit CDX North American High Yield Index, a credit-default swaps benchmark tied to the debt of 100 speculative-grade companies, rose 36 basis points to 514.52 basis points, the highest since December 2012. BlackRock’s iShares iBoxx High Yield Corporate Bond ETF, the largest fund of its kind, fell to the lowest levels since 2009.

U.S. 10-year yields fell nine basis points to 2.13 percent on Friday, compared with 2.17 percent on Dec. 31, 2014. The yield on similar-maturity German bunds was at 0.54 percent.
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Oil declined to the lowest level since 2008 in London amid estimates that OPEC’s decision to scrap production limits will keep the market oversupplied. West Texas Intermediate for January delivery slipped to $35.62 a barrel for the lowest settlement since 2009.

Crude capped its worst week in a year. The global oil surplus will persist at least until late 2016 as demand growth slows and OPEC shows “renewed determination” to maximize output, the International Energy Agency said in a report released Friday.

I ran across an interesting blog post today – CBO: Tangled Web of Welfare Programs Creates High Tax Rates on Participants, which included this chart:

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… and this map of US federal programmes:

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Despite all this there are still many people willing to snare people in the poverty trap; if this requires intellectual dishonesty when discussing a universal refundable tax credit, so what?

E-L Financial, proud issuer of ELF.PR.F, ELF.PR.G and ELF.PR.H, has Solidified its Long-term Interest in Empire Life:

Financial Corporation Limited (E-L Financial) (TSX:ELF) (TSX:ELF.PR.F) (TSX:ELF.PR.G) (TSX:ELF.PR.H) has agreed to purchase Guardian Assurance Limited’s (Guardian) 19% share of holding company E-L Financial Services Limited (ELFS). As a result of this agreement, E-L Financial will own 100% of ELFS, which owns 98.3% of The Empire Life Insurance Company (Empire Life).

The transaction will close next week, at a purchase price of approximately book value, or $200 million (CDN).

“For years, Empire Life has been an important long-term investment for E-L Financial,” said Mr. Duncan Jackman, Chairman and Chief Executive Officer of E-L Financial, “We are very excited about being able to increase our stake in this great company and reinforce our continued commitment to its ongoing success.” Mr. Jackman also acknowledged Guardian’s strong contribution to Empire Life.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 33bp, FixedResets off 15bp and DeemedRetractibles up 41bp. Today’s big move in government rates took the YTW of FixedResets below 5%. The Performance Highlights table continues to show a lot of churn. Volume was extremely high by all standards save those of the last few days.

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:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.99 to be $1.14 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.89 cheap at its bid price of 11.81.

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Mostexpensive is MFC.PR.H, resetting at +313bp on 2017-3-19, bid at 21.00 to be 0.57 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 16.80 to be 0.59 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 14.51 to be $0.83 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 19.50 and appears to be $1.44 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 17.00, looks $0.75 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 16.00 and is $0.75 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.40%, with no outliers. There is one junk outlier below -1.50%.

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

On November 24 I mentioned the tender offer for a big chunk of Talisman’s debt securities. Today they announced the pricing:

Talisman Energy Inc. (the “Offeror”) announced today the pricing of its previously announced tender offer (the “Offer”) to purchase for cash up to $1,524,531,000 aggregate principal amount (the “Maximum Tender Amount”) of the 5.85% Senior Notes due 2037 (CUSIP No. 87425E AJ2), 5.50% Senior Notes due 2042 (CUSIP No. 87425E AN3), 6.25% Senior Notes due 2038 (CUSIP No. 87425E AK9), 7.25% Debentures due 2027 (CUSIP No. 87425E AE3) and 5.75% Senior Notes due 2035 (CUSIP No. 87425E AH6) issued by the Offeror (collectively, the “Securities”).
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The Offeror has accepted for purchase on the Early Settlement Date Securities having an aggregate principal amount equal to the Maximum Tender Amount that were validly tendered and not validly withdrawn on or before the Early Tender Date (as defined below). Settlement for Securities validly tendered on or prior to the Early Tender Date and accepted for purchase pursuant to the Offer is expected to occur on December 11, 2015.

The Offer is being made upon the terms and subject to the general conditions set forth in the Offer to Purchase, as amended by the Offeror’s press release dated December 9, 2015 announcing an increase in the Maximum Tender Amount to $1,524,531,000. The Offer will expire at 12:00 midnight, New York City time, on December 22, 2015 (one minute after 11:59 p.m., New York City time, on December 22, 2015), unless extended or earlier terminated by the Offeror (as it may be extended or earlier terminated, the “Expiration Date”). The deadline to validly withdraw tenders of Securities was 5:00 p.m., New York City time, on December 8, 2015; therefore, Securities that have been tendered and not validly withdrawn, and Securities tendered after that date, may not be withdrawn unless otherwise required by applicable law.

Seems to me they just about nailed the pricing of this, which was about 420bp over comparable Treasuries, give or take a few beeps dependent on the issue. They got all they wanted, with no more than 80% take-up for any of the five issues.

The bureaucrats will be happy today! The ‘guilty until proven innocent’ aspect of anti-corruption laws has permitted them to exercise a certain level of direction and control over SNC Lavalin:

The previous Conservative government softened its tough anti-corruption rules for companies doing business with Ottawa last July in the face of intense criticism from business groups. The most contentious part of the rules was an inflexible 10-year contracting ban on companies charged with a long list of offences anywhere in the world, which was softened to five years. Under the new rules, the government could also immediately suspend any company charged.

That last change was of particular concern to SNC, given that it was charged in February with fraud and corruption related to its business in Libya and does significant business with the federal government. The company wanted to be sure it wouldn’t be suspended so entered into talks on an administrative agreement, said SNC spokesman Louis-Antoine Paquin.

The SNC-Lavalin agreement is the first reached under the new regime, and allows the company to continue with existing contracts and any future work with the federal government. As part of the deal, it agreed to strict conditions and third-party oversight of its business practices. The specific terms are confidential, Mr. Paquin said.

And soon life may get even better for the central planners, when everybody’s a Secret Policeman:

A pledge of allegiance to the Islamic State (IS) – otherwise known as Daesh – that might have been posted to Facebook by suspected terrorist Tashfeen Malik has prompted US lawmakers to revive a bill that would require technology companies such as Facebook and Twitter to report suspected online terror activity.

Sen. Dianne Feinstein, a Democrat from California, is sponsoring the legislation along with Sen. Richard Burr, a Republican from North Carolina.

From her statement:

We’re in a new age where terrorist groups like [Islamic State of Iraq and the Levant, or ISIL] are using social media to reinvent how they recruit and plot attacks.

That information can be the key to identifying and stopping terrorist recruitment or a terrorist attack, but we need help from technology companies.

Feinstein said that under the legislation, companies wouldn’t have to go out of their way to uncover terrorist activity. But if they do happen upon it, they’d be required to report it to law enforcement.

Laurentian Bank, proud issuer of LB.PR.F and LB.PR.H, got a vote of confidence from DBRS:

DBRS Limited (DBRS) notes that yesterday Laurentian Bank of Canada (Laurentian or the Bank) (Deposits and Senior Debt, rated A (low)) launched a $65 million common share offering to strengthen its capital ratios after reporting a net loss for Q4 2015 of $18.7 million due to impairment and restructuring charges totalling $61.7 million after tax. Excluding these charges and other adjustments, Laurentian announced good core net earnings of $44.1 million for Q4 2015 and $172.2 million for the full year ended October 31, 2015. The Bank’s year-end CET1 capital ratio of 7.6% would instead be 8.0% pro forma the common share issue. With good underlying results and a net impact-to-capital ratio of only 7 basis points (bps) due to the charges, there is no impact to DBRS current ratings for Laurentian at this time.
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DBRS does view positively Laurentian’s decision to issue common shares in order to improve the buffer it has relative to regulatory minimums. However, DBRS also reiterates its observation from its November 6, 2015, rating report that, even after the common share issuance, Laurentian’s capitalization levels are closer to regulatory minimums than its peers. Although the Bank has indicated it is raising the capital in order to strengthen its flexibility, including being able to proceed with opportunistic acquisitions consistent with its growth objectives, if they were to present themselves (there are none on the immediate horizon), DBRS believes the Bank will still have a limited buffer to withstand a major problem and continues to have limited financial flexibility.

It was – wait for it – a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 27bp, FixedResets off 9bp and DeemedRetractibles gaining 22bp. The Performance Highlights table continues to reveal a lot of churn. Volume is still enormously 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:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.91 to be $1.15 rich, while TRP.PR.G, resetting 2020-11-30 at +154, is $1.02 cheap at its bid price of 18.40.

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Most expensive is MFC.PR.H, resetting at +313bp on 2017-3-19, bid at 20.80 to be 0.54 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 16.53 to be 0.75 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 14.50 to be $1.13 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 19.50 and appears to be $1.16 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 16.80, looks $0.62 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 15.75 and is $0.83 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.41%, with one outlier below -1.50%. There is one junk outlier below -1.50%.

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

Well, it looks like one source of PrefBlog entertainment is coming to an end … Sprott is on the verge of winning the battle for Gold Trust:

Sprott Asset Management LP (“Sprott” or “Sprott Asset Management”), together with Sprott Physical Gold Trust (NYSE:PHYS) (TSX:PHY.U) and Sprott Physical Silver Trust (NYSE:PSLV) (TSX:PHS.U), today announced that a majority of Central GoldTrust (“GTU”) (TSX:GTU.UN) (TSX:GTU.U) (NYSEMKT:GTU) unitholders have tendered into the Sprott offer for GTU, and as a result Sprott, on behalf of tendering GTU unitholders and as described in Sprott’s November 20, 2015 Notice of Extension and Variation, has removed Brian Felske, Glenn Fox, Bruce Heagle, Ian McAvity, Michael Parente and Jason Schwandt as GTU trustees and appointed Marc Faber, James Fox, Sharon Ranson, John Wilson and Rosemary Zigrossi as new trustees of GTU. Stefan Spicer remains a trustee of GTU.

Following the replacement of GTU’s trustees, Sprott, also on behalf of tendering GTU unitholders, submitted a unitholder meeting requisition to the reconstituted GTU board proposing that the Merger transaction forming part of the Sprott offer for GTU be considered at a special meeting of GTU unitholders.

Sprott has extended the expiry times of the Sprott offers for GTU and for Silver Bullion Trust (“SBT”) (TSX:SBT.UN) (TSX:SBT.U) (collectively, the “Sprott offers”) to 5:00 p.m. (Toronto time) on January 12, 2016. Notices of extension will be filed shortly.

As of 5:00 p.m. (Toronto time) on December 7, 2015, there were 10,641,033 GTU units (55.14% of all outstanding GTU units) and 2,294,963 SBT units (41.98% of all outstanding SBT units) tendered to the respective Sprott offers.

Fortunately, the battle for Silver Trust still rages and incumbent management had this to say:

Silver Bullion Trust (“SBT”) (TSX:SBT.UN) (C$) and (TSX:SBT.U) (US$) confirmed today that the unsolicited offer by Sprott Asset Management LP and Sprott Physical Silver Trust (“Sprott PSLV”; and collectively, “Sprott”) for all of the outstanding units of SBT has once again failed to achieve sufficient acceptance to satisfy the required minimum tender condition. As a result, Sprott has yet again, for the 8th time, extended the expiry date of their offer, which is now set to expire on January 12, 2016.

Bruce Heagle, Chair of the Special Committee of the Board of Trustees, stated: “Yet again, Sprott’s inadequate offer has failed to achieve sufficient support from SBT unitholders. We expect that unitholder support for Sprott’s offer will erode further and support for the proposed conversion (the “ETF Conversion”) of SBT into a silver bullion exchange-traded fund will gain momentum as unitholders review the Trustees’ Information Circular (the “Circular”), which describes the benefits of the ETF Conversion for all unitholders and its clear advantages relative to Sprott’s offer. We are confident that unitholders will reach the same conclusion as the Independent Trustees have; that the proposed ETF Conversion is a superior alternative to Sprott’s inadequate offer.”

Gold Trust, regrettably, was silent.

I understand there will be a new publication devoted to the Canadian preferred share market:

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It was another appalling day for the Canadian preferred share market, with PerpetualDiscounts down 3bp, FixedResets losing 133bp and DeemedRetractibles off 45bp. FixedReset yields have now broken through the 5.00% barrier. The Performance Highlights table is its usual ridiculous self. Volume was, again, incredibly high.

PerpetualDiscounts now yield 5.91%, equivalent to 7.68% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 4.2%, so the pre-tax interest-equivalent spread [in this context, the “Seniority Spread”] is now about 345bp, an incredibly high number, representing an explosive widening from the 310bp reported December 2.

For those keeping score, TXPR is now down about 7.16% on the month to date and is now only 0.93% above the low of October 14.

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TXPL is down about 8.76% on the month to date and is 0.74% above the October 14 low.

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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:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.00 to be $1.20 rich, while TRP.PR.G, resetting 2020-11-30 at +154, is $1.13 cheap at its bid price of 18.25.

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Most expensive is MFC.PR.H, resetting at +313bp on 2017-3-19, bid at 21.00 to be 0.72 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 16.82 to be 0.52 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 14.68 to be $1.01 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 19.50 and appears to be $1.09 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 16.73, looks $0.61 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 15.75 and is $0.76 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.41%, with one outlier below -1.50%. There is one junk outlier below -1.50%.

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

Good news! Litvak’s won his appeal!

In a ruling that will shape how the U.S. Justice Department and Securities and Exchange Commission pursue several similar cases already in the pipeline, a federal appeals court threw out Jesse Litvak’s March 2014 conviction for defrauding the U.S. Troubled Asset Relief Program and making false statements to the government. Prosecutors will retry charges of lying to buyers and sellers of mortgage-backed securities.

Tuesday’s decision forces the U.S. to bolster its case that traders who lie to customers are committing fraud. In it, the appeals court faulted the judge for excluding some defense evidence, saying the accused must be allowed to show that his actions were in keeping with how Wall Street does business.
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A central issue in the Litvak case is whether it’s important for the buyer of a bond to know how much a trader paid for it. Prosecutors argued that Litvak’s lies about how much he paid constituted fraud. Litvak’s team compared their client to used-car salesman who isn’t expected to be honest about what he paid for a car: If a sophisticated bond-buyer agrees the price is fair, they argued, it doesn’t matter what the dealer originally paid.

Litvak’s case was last discussed on PrefBlog on August 13.

The Bank of Canada has acknowledged that its policy options have been widened:

Policy makers still have firepower to spur growth even with borrowing costs near zero, Bank of Canada Governor Stephen Poloz said, citing unconventional policies and fiscal stimulus.

While the central bank doesn’t expect another crisis that will force it to resort to such policies, a number of tools are still available, including charging banks for deposits, forward guidance and asset purchases, Poloz said. Fiscal stimulus could be even more effective than monetary policy in extreme circumstances, he said.

“I certainly hope we won’t ever have to use these tools,” Poloz said Tuesday during a speech in Toronto. “However, in an uncertain world, a central bank has to be prepared for all eventualities.”

While Poloz sought to highlight the hypothetical nature of his comments, the speech comes amid growing concern for Canada’s economy as fresh signs of weakness in China and growing concerns about a global oil glut damp the outlook for commodity-producing nations.

Swaps trading suggests investors are pricing in a 25 percent chance of another rate cut by May, following two reductions this year that brought the benchmark rate to 0.5 percent.

I’m not reading much into this. The central banks just want to make their toolbox transparent, so that during the next crisis there will be fewer surprises to worry about. During the Credit Crunch you could almost see the Fed moving down the list … ‘do this, tick the box, see if it’s enough ….’

Meanwhile the central planners are touting micro-management of the economy:

“There are significant pockets of vulnerability created by the growth in mortgage debt in recent years,” according to Craig Alexander, a C.D. Howe researcher and former chief economist at Toronto Dominion Bank, and Paul Jacobson, president of the Canadian Association for Business Economics. “The majority of Canadians have been responsible in their borrowing, but the sustained low interest rate environment has encouraged a significant minority to take on considerably more mortgage debt relative to after-tax income.”

New Finance Minister Bill Morneau, who was chairman of C.D. Howe before entering politics, has said housing is one of the first briefings he took from his officials. Canada has long faced international warnings about the need to head off a housing crash like those seen in the U.S., the U.K. and Spain, and former Finance Minister Jim Flaherty acted several times to tighten lending rules.

Putting in new restrictions is difficult because those past changes have already slowed credit growth, and because the risks now are in a few segments of the market that make using a “blunt tool” approach counter-productive, the authors said.

Policy makers could set tougher underwriting rules on criteria such as credit scores and debt-service ratios, or raise the interest rate that tests a borrower’s ability to pay up later, Alexander and Jacobson wrote.

One tool to target Vancouver and Toronto would be raising the down payment requirement on more expensive homes, the report said. That echoes a proposal the finance department has been making this year, according to people familiar with those talks.

OSFI’s Deputy Superintendent Mark Zelmer gave a speech to the C.D. Howe Institute, Toronto, Ontario, December 8, 2015 titled Asset Managers and Global Financial Stability:

Liquidity mismatches could potentially contribute to instability in important financial markets

The first topic I would like to address relates to liquidity mismatches. Combining less liquid investments with short-notice redemption features for fund units gives rise to a potential misalignment between the redeemability of investment fund units versus the actual liquidity of their underlying investments. This mismatch may result in fragile demand for those investments if investors think they are more liquid than they really are. When times are good, everyone benefits. But if prospects dim and investors suddenly decide to rush to the exit gates, it could prove very disruptive for the markets in question, particularly if a fund has to quickly liquidate large blocks of securities to meet the redemption requests.
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While most funds are well positioned to cope with normal redemption flows, their ability to cope with an unexpectedly large surge in redemption requests merits further exploration. As we shine light down this corridor, however, we should resist the temptation to treat investment fund liquidity management practices as a macro-prudential tool for cushioning markets from the actions of end-investors. Taken to extremes, that would slow markets’ processing of new information, which could give rise to some easy arbitrage opportunities. I do not think we need to give more sophisticated and nimble market participants new ways to profit at the expense of everyone else.

Leverage comes in many forms
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Investment funds of all types also make use of financial derivatives to hedge risks and as a cheap way to establish investment positions. The latter is often prevalent in situations where cash markets are less liquid and positions can be established at lower cost through derivatives markets. This can, however, result in the creation of leverage within a fund when the values of the derivatives’ exposures change over the life of the contracts.

As was shown by the failure of Long-term Capital Management in 1998, global financial stability concerns can emerge in situations where banks supply the financing for these investment funds or serve as the principal counterparties for investment fund derivatives transactions. Of course, much has changed since then. There have been advances in asset manager and bank risk management practices, plus a number of regulatory measures to contain the amount of leverage in the global financial system.

Transferring investment mandates may not be as easy as some people think

The third potential vulnerability I want to highlight focuses on the challenges of replacing asset managers. Now, let me stress at the outset that the asset management industry has plenty of experience in transferring investment mandates from one asset manager to another, with no disruptions to markets or other parts of the financial system. A lot of credit is due to the asset managers in question, their advisers, custodians and the firms that specialize in providing transition services. But, if you take a snapshot of the global asset management sector at any point in time, you will see a small group of asset managers that clearly stands out from the rest in terms of the amount of assets they have under management. This begs the question of how easy would it be to transfer their investment mandates to other asset managers on short notice, especially if the need arose in a period when markets are under stress.

Presumably, such an event is most likely to arise in a situation where a very large asset manager is experiencing operational difficulties or challenges that inhibit its ability to deliver services as per investor expectations. If the issues are serious enough and the disruptions sufficiently prolonged, it is conceivable that investors could lose confidence in the funds offered by the asset manager and seek to either move their funds or accounts to another manager, or even liquidate their investments and re-establish them with another manager. Similar issues could also arise from a reputational risk perspective.
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Nevertheless, it does beg the issue of what steps could be taken to quickly transfer investment mandates from one manager to another in a smooth fashion, so as to minimise the need for any actual redemptions of fund units by end-investors that would then trigger transactions in financial markets. As I noted at the outset, the asset management industry argues that such processes operate fairly smoothly in practice, given the role that transition managers and custodians play in facilitating transfers of funds and investor accounts from one manager to another. The industry is also quick to cite the recent PIMCO experience as a good example to that effect. And, certainly, that has been the experience to date. But, one cannot help but wonder whether the PIMCO episode would have played out so smoothly had it happened say, in the autumn of 2008, when the global financial system as a whole was in the midst of trying to cope with a major crisis.

Huh. That last point could be laying the ground for expropriation of investment management contracts.

On another note, it appears that nowadays even your car will rat you out:

“Attention!” the automated call from the black Ford Escort’s vehicle emergency system had said after detecting a crash and calling emergency number 911.

“A crash has occurred in a Ford vehicle. Press 1 at any time for location information or press 0 to speak with vehicle occupants.”

A recording of the call obtained by local station WPBF features Bernstein, a 57-year-old from Port Lucie, Florida, telling the dispatcher (repeatedly) that there hadn’t been any accident and that no, she hadn’t been drinking.
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Although Bernstein initially denied it, there had, in fact, been two accidents.

The first was a hit-and-run on Monday afternoon last week (30 November).

The victim, Anna Preston, said she was struck from behind by a black vehicle that took off.

As the New York Daily News reports, after her car ratted her out, police went by Bernstein’s house to have a chat with her.

There, they saw the black Ford with a wrecked front-end, with silver paint from Preston’s car still on it.

So I understand they’re making a movie based on the Canadian preferred share market:

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It was an incredibly awful day for the Canadian preferred share market, with PerpetualDiscounts off 82bp, FixedResets losing an awesome 261bp and DeemedRetractibles down 97bp. The yield-to-worst on the HIMIPref™ FixedReset subindex is now 4.99% – a level not seen since late May, 2009. The Performance Highlights table is, of course, ridiculous, with bank issues being more prominent at the extreme bad end than usual. Volume was enormous – I’m not sure whether it is unprecedentedly enormous or not, but it’s certainly among the historic highs.

For those keeping score, TXPR is now down about 5.69% on the month to date and is now down to October 16 levels – about 2.53% above the low of October 14.

TXPL is down about 6.88% on the month to date and is also down to October 16 levels – about 2.81% above the October 14 low.

But take heart! There was a late day rally in TXPR:

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… and in TXPL:

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