PrefBlog

There were a few things I wanted to discuss in today’s post, notably Six Strange Things That Have Been Happening in Financial Markets and a new twist in the Sprott Silver Battle, but frankly – it’s late and I’m tired. So today, folks, all you’re getting is the barest of bare bones.

SNC-Lavalin thinks it would be helpful if we had a no-fault justice system with no judiciary:

SNC-Lavalin Group Inc. is pressing Canada’s new Liberal government to adopt corporate corruption settlement deals like those in place in the United Kingdom and the United States, saying federal charges laid against the company are hurting its ability to compete against rivals in Group of 7 countries.
…
SNC is expending significant effort explaining its situation and Canada’s legal system to potential clients, Mr. Bruce added in an interview with The Globe and Mail. He said although those conversations are getting easier over time, ongoing reputational issues continue to affect the company’s ability to bid for work.

“Effectively, we are locked in the court system,” he said, “[It’s] by trial until you’re either found guilty or not guilty.”
…
Differing interests are at play. SNC wants to resolve the matter without admitting guilt, which could damage its ability to bid for contracts internationally and at home. Ottawa has been trying to get tougher on companies involved in corruption after being rebuked for years on the international stage for its perceived failure to take the matter seriously.

Prosecutors in February laid rare corruption and fraud charges against Montreal-based SNC, Canada’s largest engineering firm, related to its business in Libya.

Well, I don’t know why we’re so eager to save Libyans from corruption (Libya is still a foreign country, as far as I know), but that’s a part of law that is currently beside the point. It appears that Mr. Bruce would rather have nice quiet chats with federal bureaucrats regarding allegations of wrongdoing and pay a license fee administrative penalty in lieu of court-ordered fines. He also thinks it would be pleasant to avoid admitting wrongdoing, which will make it much harder for aggrieved third parties to go to what is quaintly known as ‘public court’ to seek redress.

I have no doubt that the law can be improved – and certainly the complete destruction of a company due to relatively limited wrongdoing by a tiny part of it seems disproportionate – but the holus-bolus replacement of the judiciary by well connected political operatives does not sound like much of an improvement to me.

Allister Heath of The Telegraph has some well expressed views on economics:

Seeking to predict the unpredictable has certainly kept a lot of people employed in the City of London, and for good reason: there is an immense and unquenchable appetite for their services. Being proved wrong time and again doesn’t really matter: what counts is the plausibility of the forecast and of the way in which it is delivered. In extremis, economics becomes a branch of showbusiness: entertainment and therapy dressed up as science.

We all want to know what exactly will happen to the economy, interest rates and inflation over the next few years; but economies are complex, non-linear systems that cannot meaningfully be predicted by inputting a few variables into a computer. They are just too random for that – and in any case, the data and statistics at our disposal are too imprecise and subject to endless, drastic revisions. We don’t really know what is happening to the economy today, so how can we possibly know with any degree of precision what will happen in three years’ time? The best we can do is what Nobel prize-winning economist F.A. Hayek called “pattern predictions” and scenario-based forecasts; attempts at spurious accuracy are scientistic rather than scientific, he argued.

It was a mixed, mostly negative day for the Canadian preferred share market, with PerpetualDiscounts off 22bp, FixedResets down 40bp and DeemedRetractibles gaining 15bp. The Performance Highlights table is ridiculously long, as has been the case all year, with a notable preponderance of losers. Volume was slightly below 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 19.88 to be $0.76 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.76 cheap at its bid price of 14.06.

Click for Big

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 20.70 to be 0.56 rich, while MFC.PR.F resetting at +141bp on 2016-6-19, is bid at 15.00 to be 0.64 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.54 to be $2.07 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.06 and appears to be $1.09 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 20.13, looks $0.93 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 14.70 and is $0.73 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.58%, with no outliers. 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?

While the Fed moves closer to an anti-inflationary rate hike – or so it is assumed! – China continues to be worried about deflation:

China’s consumer inflation waned in October while factory-gate deflation extended a record streak of negative readings, signaling policy makers may need to hit the gas again to ease deflationary pressures.

The consumer-price index rose 1.3 percent in October from a year earlier, according to the National Bureau of Statistics, missing the 1.5 percent median estimate in a Bloomberg survey and down from 1.6 percent in September. The producer-price index fell 5.9 percent, its 44th straight monthly decline.

The lingering deflation risks, along with weakening trade, open the door for additional stimulus as inflation remains about half the government’s target pace. The People’s Bank of China — which has cut interest rates six times in the past year — is seeking to stabilize the economy without fueling a renewed surge in debt.
…
Food prices rose 1.9 percent from a year earlier, from 2.7 percent in September. Non-food prices climbed 0.9 percent. Prices of consumer goods increased 1 percent, while services increased 1.9 percent, the data showed.

The inflation reading follows a tepid trade report that suggested the world’s second-biggest economy isn’t likely to get a near-term boost from global demand. Overseas shipments dropped 6.9 percent in October in dollar terms while weaker demand for coal, iron and other commodities from declining heavy industries helped pushimports down 18.8 percent, leaving a recordtrade surplus of $61.6 billion.

China isn’t the only major economy battling lowflation. American consumers’ expectations for inflation three years ahead fell last month to the lowest level in records going back to June 2013, according to a monthly Federal Reserve Bank of New York survey released Monday.

The Bank of Japan last month blamed the slide in oil prices for its decision to postpone its time frame for reaching a 2 percent inflation target for the second time this year, while the Bank of England last week forecast that consumer-price growth will remain below 1 percent — less than half its target — until the second half of 2016. In the euro zone, inflation has averaged 1.2 percent in the four years since Mario Draghi took the helm of the European Central Bank in November 2011, according to Bloomberg calculations.

It will be recalled that China’s devaluation was characterized as ‘exporting deflation’; I guess they’d better export more!

Meanwhile, Treasuries continued to ease:

Treasuries haven’t had such an extended losing run since June 2013, as investors step up bets that the first Federal Reserve interest-rate increase in almost a decade will come this year.

U.S. sovereign debt retreated for a sixth day Monday, after Boston Fed President Eric Rosengren added his voice to the chorus of Fed officials saying liftoff could come at their Dec. 15-16 meeting. The yield on 10-year Treasury notes touched a three-month high of 2.37 percent that day. Futures put the odds for a rate rise by year-end at 68 percent, compared with a 50 percent probability at the end of last month.

Meanwhile the war on markets continues:

U.S. officials investigating the $12.8 trillion market for U.S. Treasuries are zeroing in on a practice of trading the debt before it’s issued, said a person familiar with the matter — spotlighting trades that several recent lawsuits allege are part of big banks’ efforts to rig Treasury markets.

Goldman Sachs Group Inc. tipped the government’s avenue of inquiry in a recent regulatory filing. In a standard passage about areas under regulatory scrutiny, the bank’s Nov. 2 disclosure included a handful of words that hadn’t appeared the previous quarter: “offering,” “auction” and “when-issued trading.” It was a reference, the person said, to a fresh line of exploration in the government’s broader, months-old investigation into Treasuries trading.

That shows officials’ interest in one of the least transparent corners of the world’s largest debt market. When-issued securities act as placeholders for bills, notes or bonds before they’re auctioned. The instruments change hands over the counter, with lifespans of just days. There’s scant public information on trading volumes or the market’s biggest players.
…
When debt sells for less than when-issued prices indicate, traders say the auction “tailed.” Auctions tailed more than half the time in every type of security except for the 10-year note between 2010 and 2014, a Cleveland pension fund alleged in a lawsuit against the 22 primary dealers filed Aug. 26 in Manhattan federal court. The chances that a supposedly predictive market would be so consistently off, in a direction that favors the people selling the security, is lower than 1 percent, the fund alleged.

The banks selling when-issued securities are often the same ones that receive billions of dollars worth of client bids for those same auctions. That raises the concern — taken as a given in several of the recent suits — that information is being shared within and between banks.

It was a mixed, modestly negative, day for the Canadian preferred share market as buyers took a rest after Friday‘s exertions. PerpetualDiscounts gained 7bp, FixedResets were off 15bp and DeemedRetractibles were down 17bp. Beneath the veneer of calm, however, was a lot of churn, as illustrated by the Performance Highlights table. Volume was slightly below 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 19.86 to be $0.66 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.75 cheap at its bid price of 14.05.

Click for Big

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 20.82 to be 0.61 rich, while MFC.PR.F resetting at +141bp on 2016-6-19, is bid at 15.12 to be 0.63 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.97 to be $1.77 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.00 and appears to be $0.88 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 20.28, looks $0.88 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 15.01 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 -0.52%, with no outliers. 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?

Jobs, jobs, jobs!

Forget about ambiguity. The October jobs report left little doubt the U.S. labor market is back with a vengeance after a two-month lull.

The 271,000 gain in payrolls was the biggest this year and exceeded all estimates in a Bloomberg survey of economists, a Labor Department report showed Friday. The jobless rate fell to a seven-year low of 5 percent and average hourly earnings over the past 12 months climbed by the most since 2009.
…
Investors have raised to about 70 percent the probability of a rate increase by policy makers’ December meeting, according to pricing in the federal funds futures market. That compares to 56 percent on Thursday, and assumes the effective funds rate averages 0.375 percent after liftoff.

The report also showed diminishing labor-market slack. The number of Americans working part-time because of a weak economy fell to 5.7 million in October, the lowest since June 2008.

There were even some private sector jobs in Canada!

Canada added 44,000 jobs in October, a gain that blew past expectations but was likely due to temporary hiring for the federal election.

The bulk of the new jobs were in the public administration sector and coincided with the last two weeks before the election in mid-October that saw the Liberals sweep to power.
…
The country lost 9,000 construction jobs and the resources sector continued to shrink, shedding another 8,000 jobs last month, according to the government’s latest labour report.

Alberta shouldered a big chunk of the losses, shedding 11,000 jobs in October.
…
Meanwhile, Ontario and British Columbia each added more than 20,000 jobs.

… so treasuries took a hit:

Yields on 10-year U.S. Treasuries surged 10 basis points to 2.33 percent, following a four-day increase as bets on a Fed move next month crept up. The rate on the more policy-sensitive 2-year note jumped six basis points to 0.89 percent.

The yield on the Bloomberg U.S. Treasury Bond Index climbed to 1.64 percent Thursday, the highest level since July 13. The gauge headed for a third weekly loss, with the decline totaling 1.2 percent.

There’s an interesting New York Fed piece on the Differences in Rent Inflation by Cost of Housing:

In this post, which is based upon our updated staff report on “The Measurement of Rent Inflation,” we present evidence that price changes for rent, which comprises a large share of consumer spending, can vary considerably across households. In particular, we show that rent inflation is consistently higher for lower-cost housing units than it is for higher-cost units. Note that since owners’ equivalent rent inflation is estimated from observed changes in rent of rental units, this finding applies to homeowners as well. While we cannot be certain about why this is the case, it appears to be at least partly related to how additional units are supplied to the housing market: in higher-price segments additional units primarily come from new construction, while most of the increase in lower-price segments comes from units that previously were occupied by higher-income households.
…
Putting these various threads together, it appears that the inverse relationship between prior rent levels and rent inflation may be related to a greater concentration of new residential construction in the higher rent level segments of the housing market, dampening the price response to a tightening in that market. As one moves down the rent level distribution, increases in the supply of housing increasingly come from previously higher-rent units, which may still have rents above the average of the incumbent units, pushing up rents more in such segments.

One interesting question is how various public policies designed to influence the level of housing costs affect the growth of that cost over time. We hope to explore this issue in future work.

Canadian preferred share investors are making new plans for the Christmas holidays!

Click for Big

The TXPL total return index has now recovered to its late July levels, meaning that the horror of August, September and early October has been reversed. There were a few days in August in which the TXPR total return index was higher than it is today, but the broad market is also quite close to extinguishing the past three months odd. Mind you, the five year Canada is back to where it was in early June (also early May and early January, for that matter) so the preferred share market is either lagging behind its driver, or the relationship has changed, or something else.

It was a superb day for the Canadian preferred share market, with PerpetualDiscounts up 39bp, FixedResets winning an awesome 227bp and DeemedRetractibles gaining 17bp. The Performance Highlights table is, of course, ridiculously long and contains no losers at all. Volume was very extremely awfully 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 20.01 to be $0.45 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.51 cheap at its bid price of 14.50.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 21.70 to be 0.84 rich, while MFC.PR.J resetting at +261bp on 2018-3-19, is bid at 21.60 to be 0.68 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 17.08 to be $1.57 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.30 and appears to be $1.30 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 20.07, looks $0.81 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 15.02 and is $0.52 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.56%, with one outlier above 0.00%. 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?