PrefBlog

I have a lot of sympathy for the central bankers of the world, as I’ve mentioned before: they cut policy yields to the bone, hoping thereby to get consumers spending and business investing, but all that happens is people drive up the value of real estate. It will take a long period of declines and stagnation before people look upon their houses merely as a place to live, and that hasn’t started happening yet!

To address this problem of what can credibly be argued is misdirected investment – into non-productive assets – politicians from all over have played God with their economies, micromanaging mortgage rules to ensure that only the right sort of people can get financing for real-estate. I deplore this, while at the same time agreeing that a problem is demonstrable.

I would prefer a broader-brush approach to bank capital, based on the precept that while change can be good or bad, rapid changes of emphasis in the economy are very often bad, evidence of bubbles rather than shifts in demand. For instance, mortgages as a share of Canadian bank assets increased from 30% to 40%, fueled by an enormous expansion of CMHC guarantees, and while I would not go so far as to say that is definitive proof of a bubble, I will say that it’s a big change and should be addressed in a cautious manner.

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.

An Australian change of mortgage risk-weights last summer:

Under rules coming into force on July 1, 2016, the average risk weight on residential mortgage exposures will rise to at least 25 percent from about 16 percent, the Australian Prudential Regulation Authority said in a statement.
…
The regulator is forcing banks to shore up their capital after a government review last December recommended they should rank among the top 25 percent of lenders globally. The capital increase forms part of the regulators’ attempt to ensure the financial system can cope with any downturn in the housing market, where prices have climbed almost 30 percent in the past three years.

Australia & New Zealand Banking Group Ltd. Commonwealth Bank of Australia, National Australia Bank Ltd., Westpac Banking Corp. and Macquarie Group Ltd. will be affected by the new rules, which equate to increasing minimum capital requirements by about 80 basis points, APRA said. The cost of holding more capital may force the lenders to raise their mortgage rates, according to Morningstar Inc. and Bell Potter Securities Ltd.

… and the change appears to have had some effect:

Sydney home prices fell the most in five years in November as a regulatory crackdown forces banks to tighten lending and increase mortgage rates.

Dwelling values in Australia’s largest city dropped 1.4 percent from a month earlier, data from property researcher CoreLogic Inc. showed on Tuesday. That was the biggest drop since December 2010 and the first decline since May. Prices across the nation’s capital cities declined 1.5 percent, with Melbourne leading with a 3.5 percent decrease.

“The fact that mortgage rates have risen independently of the cash rate has, in all likelihood, become a contributor to the slowdown in housing market conditions,” Tim Lawless, head of research at the firm, said in an e-mailed statement. “Tighter mortgage servicing criteria across the board and affordability constraints in the Sydney and Melbourne markets are also having an impact on market demand.”

The drop in home prices is yet another indicator of the cooling Sydney property market after mortgage rates close to five-decade lows and buying by foreigners sent prices up 44 percent in the past three years.

The regulator’s justification for the increase makes much more sense than the micro-economic arguments we’re hearing from Ottawa and the UK!

And in today’s drone news, Amazon has released videos and pictures about its developing Prime Air delivery service!

Click for Big

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts up 30bp, FixedResets off 42bp and DeemedRetractibles gaining 14bp. FixedResets comprised all of the bad part of the Performance Highlights table. Volume was 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

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 19.30 to be $1.30 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.95 cheap at its bid price of 12.64.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 20.60 to be 0.49 rich, while MFC.PR.J, resetting at +261bp on 2018-3-19, is bid at 21.00 to be 0.62 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 15.90 to be $1.16 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 15.16 and appears to be $0.77 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 18.89, looks $0.92 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.82 and is $0.58 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.35%, with no outliers. There is one junk outlier 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?

Nothing happened today.

It was a moderately good day for the Canadian preferred share market today [for a change!] with PerpetualDiscounts up 13bp, FixedResets gaining 12bp and DeemedRetractibles winning 32bp. The Performance Highlights table is dominated by winners. Volume was above average.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 19.50 to be $1.27 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.97 cheap at its bid price of 12.80.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 20.53 to be 0.36 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 22.69 to be 0.26 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.19 to be $1.01 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 20.75 and appears to be $0.68 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 19.16, looks $1.04 expensive and resets 2019-3-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 19.83 and is $0.44 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.60%, with no outliers. There is one junk outlier 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?

I will be very disappointed if this is the end of the Silver-Sprott battle:

Today, Silver Bullion Trust (TSX:SBT.UN) (C$) (TSX:SBT.U) (US$) (“SBT”) entered into a new definitive agreement with Purpose Investments Inc. (“Purpose”), regarding the conversion of SBT into a silver bullion exchange-traded fund (“ETF”) managed by Purpose and Silver Administrators Limited. The proposed ETF conversion, which is subject to unitholder approval, has the unanimous support of your Independent Trustees and represents an exciting opportunity for SBT unitholders.

Purpose has current assets under management of over $1.4 billion across 17 funds and is one of Canada’s most experienced ETF managers, with significant experience in managing and marketing bullion funds. Purpose’s predecessor company, Claymore Investments, which was acquired by BlackRock in 2012, managed the Claymore Silver Bullion Trust, which was successfully converted into an ETF in 2012. For further information on Purpose, we encourage unitholders to visit their website at www.purposeinvest.com.

Andrew Jackson, of Carleton University and the Broadbent Institute, is making much more sense now that he no longer works for the Canadian Labour Congress! He’s written a piece for the Globe titled Global slump should be addressed by this monetary taboo, which includes a paen to micromanagement:

As Adair Turner shows in his new book, Between Debt and the Devil, private-sector debt soared as a share of GDP in most advanced economies after the 1980s, fuelling unproductive, debt-financed household consumption, housing bubbles and wasteful financial speculation.
…
Adair Turner, former chief regulator of British banks, argues that we need to reign in the growth of unproductive private debt by imposing tighter controls on banks through much higher capital requirements and by imposing limits on borrowing, such as maximum loan-to-value mortgage rules. Banks should, he argues, be pushed to support real business investment as opposed to highly leveraged financial speculation and household consumption.

Mr. Jackson’s egalitarian impulses were, no doubt, responsible for his refusal to use Lord Turner’s honorific!

The Grauniad’s review provides more detail:

When capitalism works, debt channels money into factories, machinery and know how. There will be bumps along the road, but the economy will grow. In the run up to 2007, however, the made-up money was not going into anything productive, but rather inflating the price of pre-existing homes. Indeed, Turner locates the roots of the crisis in the mismatch between a limited supply of urban land, and the limitless potential to finance rising demand for it. For individual banks, it can make sense to lend for unrealistically costly houses, since mortgaged families will sacrifice everything else to keep up payments and avoid ending up on the streets. For the economy as a whole, however, concentrating debt in property is a disaster, draining resources from worthwhile investment and wagering collective prosperity on a one-way bet. Worse, while debt-fuelled bursts of real activity will push up inflation, when all the money is in property that warning light never flashes. We’re all left exposed: unsafe as houses.
…
To kick our addiction to debt, Turner argues, we can and should restrain the banks, for example by forcing them to hold more reserves. We can and should also devise new ways to privilege productive investment over property speculation. Turner, who became chair of the Financial Services Authority days after Lehman Bros toppled, puts great emphasis on explaining how regulators could do all this practically, a dimension that gives the book extra importance, albeit at the occasional expense of readability. Every so often you yearn for him to say “posh houses”, rather than “locationally desirable real estate”.

The Independent offers some criticism:

Turner is admirably fearless. He goes where his fundamental analysis tells him to go. But is his underlying thesis right? A weakness of the book is that Turner doesn’t fully engage with the counter evidence. For instance, there are signs that small firms in the UK have been turned down for loans by their banks, or at least discouraged from seeking credit – an indication that lack of credit supply is part of the problem. Demand for mortgages in th UK seems to have bounced back, despite still elevated household debt to income ratios here in Britain.

There are also other plausible explanations, beyond excessive debt, for the weak recoveries across the world, not least the thesis of secular stagnation. Perhaps the incubus squatting on the chest of our economies is not a debt overhang, as Turner asserts, but slow growth brought on by demographic trends. Or maybe its dunderheaded fiscal austerity imposed by governments that’s primarily to blame.

Lord Turner’s previous notable production was highlighted on PrefBlog when UK FSA Publishes Turner Report on Bank Regulation with more commentary in HM Treasury Responds to Turner Report. It looks like it could be a decent book … I might buy it!

Oh, and speaking of houses:

Properties in Canadian cities don’t command New York prices but Canada is definitely rising in the ranks, Mr. Henry says.

Juwai.com crunched its latest numbers for The Globe and found that, within Canada, Chinese buyers of sumptuous properties have shifted their preference toward Toronto and away from Vancouver.

The average price for property viewed by Chinese property hunters in Toronto has increased over the past two years as the average price in Vancouver has declined, according to Juwai.com. The two cities have switched roles, with Toronto now attracting a higher-priced buyer mix than Vancouver.

In five of the past six months, Juwai.com’s users have searched for a higher average price in Toronto than in Vancouver.

In October, for example, the average search price in Toronto was $1,963,278, compared with $1,268,194 in Vancouver. In October of 2014, the average search price in Toronto was $1,582,300 and, in Vancouver, $1,840,999.

Brompton’s Life & Banc Split Corp., proud issuer of LBS.PR.A, was confirmed at Pfd-3(low) by DBRS:

DBRS Limited (DBRS) has today confirmed the rating on the Preferred Shares issued by Life & Banc Split Corp. (the Company) at Pfd-3 (low). In October 2006, the Company raised gross proceeds of $300 million by issuing 12 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). Since then, the Company has completed several additional treasury offerings. The final redemption date for both classes of shares issued was originally November 29, 2013, but was extended to November 29, 2018.
…
The performance of the Portfolio has experienced some volatility over the past year, with the downside protection fluctuating between 41.8% and 52.0% from November 2014 to November 2015. As of November 19, 2015, the downside protection available to the Preferred Shares is approximately 45.4% and the dividend coverage ratio is about 1.1 times. The Pfd-3 (low) rating of the Preferred Shares is based primarily on the downside protection available and the additional protection provided by the asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.

It was yet another mixed, mostly negative, bad-for-FixedResets day for the Canadian preferred share market, with PerpetualDiscounts off 2bp, FixedResets down 23bp and DeemedRetractibles gaining 2bp. The Performance Highlights table is lengthy. Volume was very high.

PerpetualDiscounts now yield 5.64%, equivalent to 7.33% interest at the standard conversion factor of 1.3x. Long Corporates now yield 4.33%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 300bp, a widening from the 290bp reported November 4.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 19.38 to be $1.23 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.89 cheap at its bid price of 12.85.

Click for Big

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 19.74 to be 0.33 rich, while MFC.PR.M, resetting at +236bp on 2019-12-19, is bid at 20.20 to be 0.20 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 15.95 to be $1.14 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 20.58 and appears to be $0.63 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 18.97, looks $0.77 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.20 and is $0.48 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.60%, with no outliers. There is one junk outlier 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?

The UK government is bringing micromanagement of the economy to new levels:

Buy-to-let landlords have been hit by the second major tax hike in less than a year, as Chancellor George Osborne took action against the “growing crisis of home ownership” in Britain.

Property investors will be hit by a 3pc rise in stamp duty from 1 April 2016, and the surcharge will also apply to people buying second homes. It means the tax bill on a buy-to-let property costing £250,000 will jump from £2,500 to £8,800.
…
Mr Osborne also announced a London Help to Buy initiative, which will allow more young people to get on the housing ladder in the capital, where the average house price for a first-time buyer is now an eye-watering £385,000. The scheme will offer buyers with a 5pc deposit a loan of up to 40pc of the value of a new build home, interest-free for five years.

It was another mixed, mostly negative day for the Canadian preferred share market, with PerpetualDiscounts off 12bp, FixedResets down 44bp and DeemedRetractibles gaining 20bp. The Performance Highlights table is mostly negative, but still showing a lot of churn. Volume was 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

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 19.22 to be $1.19 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.87 cheap at its bid price of 12.80.

Click for Big

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 22.67 to be 0.23 rich, while MFC.PR.K resetting at +222bp on 2018-9-19, is bid at 19.25 to be 0.42 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.04 to be $1.16 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 20.91 and appears to be $0.89 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 18.85, looks $0.65 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.16 and is $0.65 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.35%, with one outlier above +0.50%. There is one junk outlier 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?

The junk market is getting nervous:

Investors in the debt of junk-rated companies are showing little patience for even the slightest whiff of bad news as they seek to shield themselves from the market’s first annual loss since 2008. With the Federal Reserve poised to lift interest rates next month and a deepening commodities slump stirring fears that earnings growth will be squeezed, price swings in the market are intensifying.
…
Investors are shunning the lowest-rated junk bonds. That is underscored by the extra yield that investors are demanding to hold CCC rated credits relative to those rated BB. This has jumped to the most in six years.
…
One sometimes-overlooked element that’s contributing to the big price swings is the increasing concentration among investors, according to Stephen Antczak, head of credit strategy at Citigroup Inc. Mutual funds, insurance companies and foreign investors make up 68 percent of corporate bondholders compared with 52 percent at the end of 2007.

That means that if one mutual fund investor wants to sell some holdings, there isn’t another one that’s ready to step in. That’s because they typically have similar mandates from investors and often need to sell for the same reasons.

“A less diverse group of investors hold a lot more bonds,” Antczak said. “The difference between incremental buyer is more now than it used to be. It takes a bigger move to get people interested.”

Click for Big

Repsol, which recently purchased Talisman Energy, has not seen much joy from its acquisition:

Repsol SA reported a 62 percent decline in third-quarter earnings as lower crude prices countered improved refining performance. The shares slumped the most in two weeks.

Adjusted net income fell to 159 million euros ($171 million) from 415 million euros a year earlier, Spain’s largest oil company said Thursday. That missed the average 201.6 million-euro estimate of 18 analysts surveyed by Bloomberg. It reported a net loss of 221 million euros after taking charges at units including gas and power.

Repsol is among international oil producers to suffer from a 40 percent decline in the price of Brent crude over the past year. Like its peers, it has sold assets and cut investments to weather the slowdown as a global supply glut persists. The Madrid-based company has also seen debts mount after acquiring Canada’s Talisman Energy Inc. for $13 billion in May.
…
Repsol last month unveiled a five-year plan to sell 6.2 billion euros of assets and reduce investments by as much as 38 percent as it deals with higher debt and the plunge in crude prices. The company announced more than $1 billion in asset sales in the third quarter, part of which was included in the five-year target.

So now they’ve announced a debt tender offer:

Talisman Energy Inc. (the “Offeror”) announced today that it has commenced a tender offer (the “Offer”) to purchase for cash up to $750 million 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”). The amounts of each series of Securities that are purchased will be determined in accordance with the acceptance priority levels specified in the table below and on the cover page of the offer to purchase dated November 24, 2015 (the “Offer to Purchase”) in the column entitled “Acceptance Priority Level” (the “Acceptance Priority Level”), subject to the proration arrangements applicable to the Offer.

As with today’s coercive DC.PR.C exchange offer, they’re offering a premium for early tenders:

Holders of the Securities that are validly tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on December 8, 2015 (the “Early Tender Date”) and accepted for purchase will receive the applicable Total Consideration, which includes an early tender premium of $50.00 per $1,000 principal amount of the Securities accepted for purchase (the “Early Tender Premium”).

S&P rates Repsol’s bonds at BBB- with a negative watch.

Rona Inc., proud issuer of RON.PR.A, was confirmed at Pfd-4[high] by DBRS:

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of RONA inc. (RONA or the Company) at BB (high), and the Preferred Shares rating at Pfd-4 (high). All trends are Stable. The Recovery Rating on the Senior Unsecured Debt remains RR3. The confirmation reflects RONA’s solid operating performance (growth in same-store sales and margin expansion) through the end of Q3 F2015 in the face of macroeconomic headwinds in certain regions of Canada and its reasonable leverage levels, balanced by rising balance-sheet debt used to finance share repurchases and complete the acquisitions of the 20 franchise stores in its network.
…
Despite the increase in balance-sheet debt, RONA’s credit risk profile and leverage metrics should remain within the range considered acceptable for the current rating over the medium term (i.e., lease-adjusted debt-to-EBITDAR below 4.0 times (x) and lease-adjusted EBITDA coverage above 4.5x).

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 2bp, FixedResets off 63bp and DeemedRetractibles up 19bp. I note that the TXPL total return index now stands at 812.11, down from the October month-end figure of 814.94 … so all the gains of that wondrous first week of November have now evaporated. Easy come, easy go! The Performance Highlights table is its usual lengthy self, highlighting the churn in the market. Volume was very high.

There won’t be any the usual volatility charts and block trading report today … sorry!

I was disgusted to read an opinion piece in the Globe titled The weakest links in terror finance legislation need to be addressed:

Group of 20 leaders turned their focus to the financing question this week when they met in Antalya, Turkey. Leaders committed themselves to combatting terrorist financing by enhancing the exchange of information; criminalizing terrorist financing and implementing targeted financial-sanction regimes related to terrorism and terrorist financing; and facilitating the widespread implementation of standards developed by the Financial Action Task Force (FATF), the international institution responsible for combatting money laundering and terrorist financing.

This is just another job application from the Merchants Of Fear (Secret Police Edition).

“But conducting attacks in the heart of Europe requires a complex series of financial transactions between IS supporters and the cells committing acts of terrorism.”

It will be noted that the authors do not give any examples of these “complex series of financial transactions” that are supposedly so ubiquitous; they do not give any specifics of what new laws and regulations might be sufficient to choke off this source of funds; and they do not provide any sort of cost-benefit analysis to show that the problem justifies the solution.

That’s because they can’t. According to John Allison (who ran the BB&T bank with distinction through the Credit Crunch) the US “Patriot Act” costs US banks over $5-billion annually and “there has never been a single terrorist caught and convicted because of the Patriot Act.” Instead, the Patriot Act has enabled government snooping that, so far, has achieved success in nailing Eliot Switzer (a guy who hired prostitutes) and Dennis Hastert (a blackmail victim desperate to pay his blackmailer). Oh, very well done and well worth $5-billion per year.

The authors admit that “very few jurisdictions have obtained successful convictions”, but do not have the intestinal fortitude to admit why this should be – and the simple fact is that terrorist operations do not cost a great deal of money. Al Qaeda spent only about half a million dollars to finance the entire 9/11 plot; only about $300,000 of this was spent in the US. So, be generous, call it $20,000 per attacker during their stay of over a year in the US.

It’s no surprise that Momani and Kempthorne are so shy when it comes to talking about the specifics of their wonderful plans!

The entire article is nothing more than demagogic nonsense, seeking to expand useless banking regulations and even more useless bureaucratic oversight, through panicking the populace. But hey, I suppose the authors will get paid.

However, I was inspired to read the TERRORIST FINANCING FATF REPORT TO G20 LEADERS ACTIONS BEING TAKEN BY THE FATF, most notable for its casual request for more money:

The G20 can support this programme by: leading by example, helping low capacity jurisdictions implement essential counter terrorist financing measures, and continuing to support the FATF in its ongoing work.
…
The number of domestic designations varies widely. Thirty-seven jurisdictions have applied targeted financial sanctions on their own motion, and there is a significant variation in the number of entities, and the value of assets frozen, as shown in the table below. This may result from the nature of the terrorist and terrorist financing activity in each country, and from the different roles that targeted financial sanctions play in the context of national counter-terrorism strategies – in particular whether they are directed at restraining individuals or value, or both.

Click for Big

Pretty good, eh? Canada’s FINTRAC has a budget of about $50-million p.a. and imposes immense costs on financial intermediaries and has managed to freeze almost €100,000 in assets allegedly belonging to alleged terrorists, including “funds subsequently un-frozen or confiscated, as well as funds frozen currently”. I would dearly love to see a detailed breakdown of this number with the facts of each case attached.

And in France, the usual suspension of civil liberties (and, I’ll guess, harassment of annoying people) is occurring:

All over France, from Toulouse in the south to Paris and beyond, the police have been breaking down doors, conducting searches without warrants, aggressively questioning residents, hauling suspects to police stations and putting others under house arrest.

The extraordinary steps are now perfectly legal under the state of emergency decreed by the government after the attacks on Nov. 13 in Paris that left 130 dead — a rare kind of mobilization that will continue. The French Parliament voted last week to extend the emergency for three more months, which means more warrantless searches, more interrogations, more people placed under house arrest.

There have been 1,072 police searches already and 139 police interrogations, and 117 people have been placed in custody, the Ministry of the Interior said on Monday.

On the other hand, I was pleased to read an article regarding another favourite theme: Britain is cutting green energy subsidies:

Wind and solar farms will be forced to pay for the extra costs they impose on the UK’s electricity system as a result of their intermittent nature, Amber Rudd, the energy secretary has announced.

Renewable generators will be held “responsible for the pressures they add to the system when the wind does not blow or the sun does not shine”, she said, under new plans being drawn up by the Department of Energy and Climate Change.

In a long-awaited policy “reset” speech, Ms Rudd also unveiled plans to offer billions of pounds of new subsidies for offshore wind farms, potentially doubling the UK’s offshore wind capacity with a further 10 gigawatts in the 2020s, on top of 10GW expected by 2020.

However, she said that offshore wind remained “too expensive” and that the cash would be strictly conditional on deep cost reductions.

In the referenced policy reset speech:

Britain will no longer pursue green energy at all costs and will instead make keeping the lights on the top priority, Amber Rudd, the energy secretary, will vow this week.

Households already face paying over-the-odds for energy for years to come as a result of expensive subsidies handed out to wind and solar farms by her Labour and Lib Dem predecessors, Ms Rudd will warn.

In a major speech setting out a new strategy, the energy secretary is expected to say that from now on, policies will balance “the need to decarbonise with the need to keep bills as low as possible”.
…
Although the Government wants gas plants to replace coal, Ms Rudd is expected to admit that the UK electricity market is now so distorted by subsidies that “no form of power generation, not even gas-fired power stations, can be built without government intervention”.
…
In what will be seen as criticism of her Lib Dem predecessor, Ed Davey, Ms Rudd will say that “contracts were signed with no competition and could have offered better value for money” – an apparent reference to subsidy contracts handed out to offshore wind farms in early 2014.

Only in the final months of the Coalition were subsequent offshore wind projects forced to compete for the payments – revealing they could be built with far lower levels of subsidy.

And finally, to return to the financial markets that are supposed to be the subject of this blog, CAD options markets are looking bearish for the loonie:

Traders are positioning themselves for what could be the last leg down in the Canadian dollar’s three-year collapse.

They’re paying the biggest premium since September for options contracts that protect against currency swings expiring a month from now than for similar contracts that expire three months out, as oil suddenly threatens to fall below $40 per barrel again and the U.S. Federal Reserve looks set to raise interest rates in a matter of weeks. The last time the premium for 30-day protection spiked this high the currency ended up falling to an 11-year low before month’s end.

The options market is lining up with the consensus forecast of economists, who also see weakness in the short term followed by stabilization and ultimately gains into 2016. For many, the Fed’s first interest-rate increase in almost a decade and the most recent surge in oil inventories could mark the last stage of the Canadian dollar’s 25 per cent, three-year slide.

And the market is increasingly expectant of a Fed hike:

The odds the Federal Reserve will raise interest rates at its next meeting in December climbed to 74 percent, and Pacific Investment Management Co. says a move is likely.

The probability the central bank will act at its Dec. 15-16 session increased from less than 30 percent as recently as mid-October, futures contracts show. The U.S. is scheduled to sell $35 billion of five-year notes Tuesday, after a two-year auction Monday drew the highest yield in five years, reflecting expectations among traders for rising interest rates.

Click for Big

And, to get back to non-financial news, the FAA has released proposed regulations for drones:

The recommendations, from a task force created by the agency, would be the biggest step yet by the government to deal with the proliferation of recreational drones, which are usually used for harmless purposes but have also been tools for mischief and serious wrongdoing, and pose a risk to airborne jets.
…
The task force did not go as far with its recommendations as some aviation and security experts had hoped. The proposals say owners should not have to submit any information about their aircraft, for example. It also said there should not be a requirement for drone users to be citizens or permanent residents.
…
The F.A.A. task force was composed of 25 people, including representatives of drone makers, technology companies, an airline pilots association and government officials. The agency gave them a short time — four weeks — to come up with recommendations on a registration system. The F.A.A. said it would take the recommendations into consideration and then write new rules.

Members of the task force stressed on Monday that many compromises were made. The task force wrote in its report that the goal of the registration process was to “ensure accountability by creating a traceable link between aircraft and owner, and to encourage the maximum levels of regulatory compliance by making the registration process as simple as possible.”

“We tried to write it in as generic a flavor as possible,” Dave Vos, a member of the task force and the head of a drone project at Google X, a business that works on future technologies, said in a conference call.

With the “consensus we reached, everyone is quite happy here,” he said.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts down 50bp, FixedResets losing 54bp and DeemedRetractibles off 24bp. The Performance Highlights table is enormous. 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

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 19.20 to be $0.93 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.62 cheap at its bid price of 13.25.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 20.66 to be 0.66 rich, while MFC.PR.K resetting at +222bp on 2018-9-19, is bid at 19.07 to be 0.57 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.48 to be $1.14 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 15.66 and appears to be $0.76 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 19.62, looks $0.90 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 14.09 and is $0.86 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.65%, with no outliers. There is one junk outlier 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?