PrefBlog

Treasuries and swap spreads declined today:

The 10-year swap spread ended little changed after falling to negative 17.6 basis points Thursday, the lowest in Bloomberg data beginning in 1988. A basis point is 0.01 percentage point. The gap turned negative for the first time in three years in September. The spread reached record negative levels in other maturities as well, including the five- and seven-year.

Slumping Treasuries contributed to the narrowing of the spread. Yields on 10-year U.S. notes reached 2.26 percent Thursday, the highest since mid-September, as bets mounted that the Federal Reserve will raise interest rates as soon as next month. Investment-grade corporate issuance may tally about $30 billion this week, putting further pressure on Treasuries. On top of all that, regulations enacted after the financial crisis have curtailed the amount of risk banks can take, leading them to scale back trading and lending.

“This is more of a Treasury-led move as all the on-balance sheet products are becoming more costly to dealers,” said Priya Misra, head of global interest-rate strategy in New York at TD Securities, one of the 22 primary dealers that trade with the Fed. “Treasuries are an on-balance sheet product so they are getting more costly relative to swaps.”

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For those unfamiliar with swap spreads:

In finance, swap spread is a popular way to indicate the credit spreads in a market. It is defined as the spread paid by the fixed-rate payer of an interest rate swap over the rate of the on the run treasury with the same maturity as the swap. For example, if the fixed-rate of a 5-year fixed-for-float LIBOR swap is 7.26% and the 5-year Treasury is yielding at 6.43%, the swap spread is 7.26% – 6.43% = 83 bps.

The endlessly entertaining Sprott / Silver Bullion battle is entering yet another new chapter (emphasis from original):

Silver Bullion Trust (“SBT”) (TSX:SBT.UN) (C$) (TSX:SBT.U) (US$) 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 of October 30, 2015, only 39.64% of SBT Units were tendered, falling far short of the 66 2/3% minimum tender condition. As a result, Sprott has yet again, for the 6th time, extended the expiry date of the offer, which is now set to expire on November 20, 2015.
…

• •The Trustees will continue to act in the best interests of ALL Unitholders and cannot endorse a deficient offer that does not benefit ALL Unitholders. Principally because we don’t agree with them, Sprott has waged a smear campaign claiming poor governance and entrenchment of the Trustees. Their numerous unfounded allegations are intended to distract Unitholders from the deficiencies of their inadequate offer: no material premium, higher management fees, lower bullion security and safeguards, significantly reduced governance rights and higher potential tax liability for certain U.S. Unitholders.
• •Sprott’s claims that SBT Units have “traded for most of their existence at double-digit discounts” [footnote] are completely false. In fact, SBT Units have, on average, traded in-line to net asset value (“NAV”) since SBT was established in 2009

…
Footnote reads: Rick Rule stated on October 1, 2015 during the Sprott webcast relating to the Sprott offer: “It must be stressed that neither [GoldTrust] nor [Silver Bullion Trust] have ever or very seldom traded close to or above par, they have in fact traded at a persistent discount and they’ve traded at a persistent discount for over a decade.”

There was an interesting paper today from the Boston Fed by Joe Peek & Eric Rosengren, titled Credit Supply Disruptions: From Credit Crunches to Financial Crisis:

It is useful to reflect on how the financial environment changed in the interim between the bank credit crunch episode in the early 1990s and the recent financial crisis. What did we learn from the earlier crisis and how did the credit crunch literature help guide policy in the more recent crisis? Among the important changes were the consolidation of the banking sector and the dramatic growth in nonbank financial intermediaries, which are much more susceptible than banks to liquidity risks due to a lack of deposit insurance. This paper highlights the fact that while broker-dealers, money market mutual funds, and issuers of asset-backed securities were not particularly important in the early 1990s when the bank credit crunch occurred, they had grown dramatically over the subsequent two decades to become both a major source of financing and a key element in exacerbating the problems experienced during the recent financial crisis.

The key findings are:

• •The earlier literature on credit crunches contributed importantly to economists’ understanding of how financial shocks can impact the real economy. The real estate shock that caused capital-constrained banks to reduce credit availability to households and firms provided an important lesson learned from the 1990 recession and the academic work that followed. That literature provided a helpful guide as to how to respond to adverse credit shocks.
• •However, many of the financial innovations that occurred after the 1990 recession moved much of the issuance of credit to non-depository financial intermediaries. These intermediaries included money market mutual funds, broker-dealers, and issuers of asset-backed securities.
• •While the main problem facing banks was how to satisfy capital constraints when experiencing large declines in capital, these nonbank intermediaries were much more susceptible than banks to liquidity shocks, runs on liabilities, and fire sales of assets. Although the earlier literature provided important context, the nature of the problems was quite different for non-depository entities. Because these potential problems of nonbank intermediaries had not arisen in the earlier credit crunch, they were largely ignored in the subsequent credit crunch literature.

It seems to me that the moral of the story so far is that during boom times, money is going to flow from willing lenders to willing borrowers, come what may. If it can’t do it through regulated channels, it will do so via unregulated channels. So the authorities, in their wisdom, are attempting to micro-manage the economy, through, for instance, changes in the qualifying rules for mortgages in Canada (which has led directly to mortgage fraud, as discussed on October 30) and changes in tax-deductability of mortgage interest in the UK, as discussed on October 19 and October 1. Which, no doubt, creates a lot of very nicely paid work for the bureaucrats and lets everybody know that Your Government Is Doing Something, but when it comes to human nature vs. political platitudes, you know how I’m placing my bets. If it’s not houses, it will be something else. Bre-X, Nortel, internet stocks … there will be a special prize for those who can guess what the Next Big Thing is going to be!

But fear not! The SEC is working diligently to ensure that people who make instant investment decisions based on randomly selected Twitter posts will be protected:

According to the SEC’s complaint filed in federal court in the Northern District of California, James Alan Craig of Dunragit, Scotland, tweeted multiple false statements about the two companies on Twitter accounts that he deceptively created to look like the real Twitter accounts of well-known securities research firms.

The U.S. Attorney’s Office for the Northern District of California today filed criminal charges against Craig.

The SEC’s complaint alleges that Craig’s first false tweets caused one company’s share price to fall 28 percent before Nasdaq temporarily halted trading. The next day, Craig’s false tweets about a different company caused a 16 percent decline in that company’s share price. On each occasion, Craig bought and sold shares of the target companies in a largely unsuccessful effort to profit from the sharp price swings.
…
The SEC’s complaint charges that Craig committed securities fraud in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The complaint seeks a permanent injunction against future violations, disgorgement, and a monetary penalty from Craig.

The SEC has issued an Investor Alert titled Social Media and Investing – Stock Rumors prepared by the Office of Investor Education and Advocacy. The alert aims to warn investors about fraudsters who may attempt to manipulate share prices by using social media to spread false or misleading information about stocks, and provides tips for checking for red flags of investment fraud.

Some may be interested in another Boston Fed paper by Daniel Cooper & Maria José Luengo-Prado titled Household Formation Over Time: Evidence from Two Cohorts of Young Adults:

Residential investment accounts for an important component of U.S. gross domestic product, and traditionally plays a strong role in business cycle expansions. U.S. residential investment has improved slowly during the recovery from the Great Recession, despite a relatively strong national rebound in house prices and record low interest rates. An important determinant of residential investment is the household formation rate, which is largely driven by young adults moving out of their parents’ homes after completing high school or college. New household formation can be offset when existing households combine, typically through marriage or by moving in with parents or other relatives for economic reasons. This paper uses National Longitudinal Survey of Youth (NLSY) data from the 1979 and the 1997 cohorts to examine how various demographic, economic, and geographic factors influence the rate of household formation among young adults, both within cohorts and over time across cohorts.

… with the key findings:

• •Comparing parental co-residence rates for young adults between the ages of 23 and 31 years shows that the share of individuals living with parents declines with age, but that the share of those living with parents is higher at nearly every age for the 1997 cohort compared to the 1979 cohort.
• •There is important variation in household formation by race both within a given cohort and over time. The share of black youth living with parents is substantially lower at young ages in both cohorts, but after the late teenage years, blacks and Hispanics are more likely to be living with parents than non-black/non-Hispanic youths. In the 1997 cohort, non-black/non-Hispanic and Hispanic youths, regardless of age, are more likely to be living with parents relative to their 1979 counterparts, while the rate of living with parents for blacks is unchanged.
• •Overall, housing costs have a meaningful effect on the decision of young adults to live with parents. The share of the 1979 cohort living with parents rose with the cost of housing. Among the 1997 cohort, 23 year-olds living in regions with high housing costs were about 15 percent more likely to be residing with parents than same-age members of the 1979 cohort who were living in areas with low housing costs.

But Holy Smokarisms! Today FixedResets were …

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… ON WHEELS!

It was a very strong, very uneven day for the Canadian preferred share market, with PerpetualDiscounts flat, FixedResets up 164bp and DeemedRetractibles gaining 25bp. The only losers on the ridiculously long Performance Highlights tables are BAM PerpetualDiscounts, which got whacked. Volume was very heavy.

Basically, FixedResets were strong all day:

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I don’t think we can ascribe the move to ETF action – only one block of ZPR changed hands today, Scotia buying 16,000 from Nesbitt at 10.79. CPD was similarly boring, with CIBC buying 10,000 from RBC at 13.20 and TD crossing 13,600 at 13.36.

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 19.75 to be $0.61 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.60 cheap at its bid price of 13.90.

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Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 20.81 to be 0.61 rich, while MFC.PR.I resetting at +286bp on 2017-9-19, is bid at 21.92 to be 0.58 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 17.00 to be $1.13 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 20.69 and appears to be $1.22 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 19.55, looks $0.89 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.69 and is $0.47 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.53%, with no outliers. There are four junk outliers above 0.00% and two below -2.00%.

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

The Fed is making sure that nobody takes them for granted:

Federal Reserve Chair Janet Yellen and New York Fed President William Dudley both said the central bank could boost interest rates as soon as next month.

“At this point, I see the U.S. economy as performing well,” Yellen said on Wednesday in testimony before the House Financial Services Committee in Washington. If economic data continue to point to growth and firmer prices, a December rate hike would be a “live possibility,” she said. Speaking in New York hours later, Dudley said he agreed with the chair, but “let’s see what the data shows.”

The Federal Open Market Committee said in its October statement that it will consider raising interest rates at its “next meeting,” citing “solid” rates of household spending and business investment. Yellen’s and Dudley’s comments reinforced the idea that next month is in the crosshairs for an increase, and placed the focus on upcoming employment and other economic data.

The market noticed:

Bonds are falling around the world as traders increased odds to more than 50 percent that the Federal Reserve will raise interest rates this year.

Benchmark 10-year Treasury yields climbed to a seven-week high of 2.24 percent on Wednesday after Fed Chair Janet Yellen said policy makers may move as soon as their December meeting. German yields reached a two-week high. Australian 10-year yields rose for a sixth day Thursday.

It was a strong day for the Canadian preferred share market, with PerpetualDiscounts up 52bp, FixedResets winning 77bp and DeemedRetractibles gaining 15bp. There are a lot of winners on the Performance Highlights table! Volume was well above average.

PerpetualDiscounts now yield 5.62%, equivalent to 7.31% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little under 4.4%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 290bp, a very significant narrowing from the 310bp reported October 28.

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 19.51 to be $0.65 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.69 cheap at its bid price of 13.55.

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Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 20.48 to be 0.75 rich, while MFC.PR.I resetting at +286bp on 2017-9-19, is bid at 21.41 to be 0.63 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 16.58 to be $1.26 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 20.65 and appears to be $1.48 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 18.75, looks $0.50 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.15 and is $0.58 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.53%, with two outliers above 0.00% and none below -2.00%. There are three junk outliers above 0.00% and one below -2.00%.

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

There is a lot of confusion about Bombardier valuation:

On Monday, Mr. Tyerman cut his rating on the beleaguered stock to “sell” from “hold” and slashed his one-year price target on the company’s subordinated voting Class B shares to $1.10 from $1.35.
…
On Tuesday, Mr. Tyerman grounded his previous call. His new target has soared to $1.40, with a restored, turbulence-free rating of “hold.” He’s still got a downside target on the stock should Canada invest, but it is now $1.20, not 60 cents.
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The reason for his change of course? Mr. Tyerman credits a “revised view of how a possible Canadian federal government investment in the C Series could play out,” apparently based on subsequent discussions with Bombardier. The analyst’s previously published view was that if Canada matched Quebec, the two governments would own a combined 99 per cent of the airliner project, leaving just 1 per cent of the economics of the plane for existing investors to share, and missing out on most of the upside if the poor selling plane actually becomes popular. That was based on Quebec securing 49.5 per cent ownership of the C Series program as part of its investment.

But Mr. Tyerman’s revised view is that the company “will retain more of the C Series economics than in our previous target,” or a one-third economic interest even if Canada were to put in a full $1-billion.

Huh. So the valuation of the common has been improved because of some feeling that the feds are going to get taken to the cleaners. Well, I suppose that’s even better than simply bailing them out in the first place, eh? Still, trouble with the C Series has returned Bombardier to its core competency:

Bombardier Inc. has increased lobbying of Canada’s federal government to an eight-year high, reinforcing its Ottawa connections as officials there prepare to review whether to join Quebec in helping bail out the struggling CSeries jet.

Canada’s largest aerospace company communicated 50 times with federal officials since Jan. 1, more than any full year in records dating to 2007, according to the government’s lobbyist registry. The total for 2014 was 48.
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“Government relations have historically been at the heart of what Bombardier does,” Louis Hebert, a management strategy professor at the HEC Montreal business school, said in a telephone interview. “They are returning to their traditional competitive advantage.”

Industry Minister James Moore and staff of the industry department were the most frequent points of contact for Bombardier representatives, with at least 21 reported communications this year, the data show. Bombardier officials also met International Trade Minister Ed Fast and Finance Minister Joe Oliver.

Bombardier also spent more time lobbying Prime Minister Stephen Harper’s office this year, the records show. The company communicated with officials from Harper’s office seven times this year, compared with three times in 2014 and once in 2013.

Meanwhile, all the other piggies at the trough are jostling for position as the slops come into view:

Before the first dime of public money is spent, a strong made-in-Canada supply policy needs to be firmly in place. Without that, new jobs will not be created and existing ones will not be preserved. That policy needs to be paired with a review of a domestic playing field that leaves many Canadian companies at a disadvantage to cheap, subsidized imports.

At the same time, the government needs to reinvigorate the federal steel caucus, including MPs from all ridings where steel is manufactured.

It should also introduce a mechanism that adjusts import levels based on domestic capacity utilization. When Canadian steel production falls below a certain threshold, companies would be stabilized by the trigger of variable duties.

The BCSC has announced a new way to spend money:

The British Columbia Securities Commission (BCSC) today released the Smarter Investor Study, national research that examines client-advisor relationships in Canada, and introduces a new lens for understanding how personality affects Canadians’ investment decisions.

“Our Smarter Investor Study identifies five personality types within our sample group – confident, diligent, impulsive, reserved, and tumultuous,” said Brenda Leong, Chair and CEO of the BCSC. “What we found is that your personality plays a role when it comes to how you invest, particularly when you work with an advisor,”

Investors can find out their own personality and how it impacts their investing decisions by taking the Smarter Investor Quiz.
…
One key finding reveals that while Canadians in general-investors and non-investors alike-index at 62 on the 100-point scale. Those who work with an advisor are at 70 out of 100.

Other key findings include:

• •While 30% of Canadians 35 and older invest with an advisor, more than half are not sure what they pay and less than one in five knows how their advisor is paid or have never asked about compensation.
• •Six in 10 Canadians (61%) who invest with an advisor say that they always read the statements they received.
• •Less than half (46%) of Canadians who invest with an advisor report having checked into the advisor’s background before they began working with them.
• •Of those who say they did a background check, slightly more than half (53%) checked their advisor’s registration.
• •30% of Canadians 35 and older invest with an advisor. Of the 70% who do not, 19% are DIY investors (those who invest but do not work with an advisor). A further 52% do not have any investments.
• •Investors recognize that they have responsibilities. The study asked which of various responsibilities investors believed were either wholly or partially theirs when working with an advisor. The highest agreement for any one item was 76% (asking questions), while only 40% agreed that doing independent research was a part of their responsibility.

Accoording to the full report, the research was undertaken by Innovative Research Group Inc. I looked at their website; they are very shy about identifying themselves:

Who we are

We come from the client’s side. We came to research because we needed it to help us achieve our goals and we remain focused on serving our clients’ needs first.

We’re team players. We build successful, long-term partnerships with our clients and guide them through the intricacies of research, strategy and problem solving.

The core INNOVATIVE team is composed of seasoned practitioners with a proven track record over a wide array of challenges, and dedicated specialists with a unique command of critical skills.

INNOVATIVE complements its core team through relationships with leading research academics and professionals, connecting our staff to the latest in research techniques.

That’s it. No names, no pack-drill, nothing. It is also of interest to learn that the Canada 2020 Panel important in the preparation of the paper is self-selected, at least in part.

I don’t see the point of this research, frankly, but I suppose it helps get rid of a little excess money.

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts up 25bp, FixedResets gaining 16bp and DeemedRetractibles off 5bp. The Performance Highlights table is again lengthy, indicating continued churn in the market. 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 19.16 to be $0.57 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.80 cheap at its bid price of 13.20.

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Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 20.35 to be 0.96 rich, while MFC.PR.F resetting at +141bp on 2016-6-19, is bid at 14.35 to be 0.69 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 16.30 to be $1.40 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 20.65 and appears to be $1.62 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 18.90, looks $0.73 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 $0.46 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.72%, with two outliers above 0.00% and none below -2.00%. The distribution is just barely bimodal, with bank NVCC non-compliant pairs averaging -0.53% and other issues averaging -0.71%; note that the relative values have reversed today! There are four junk outliers above 0.00% and one below -2.00%.

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

The West’s fear of competition is leading for calls to recruit more Secret Policemen to enforce the laws of foreign countries:

Moving money in small increments to avoid reporting requirements is called “smurfing,” after the little blue cartoon characters who as small individuals constitute a larger whole. A record $194 billion exited China in September, according to a Bloomberg gauge estimating capital flows. The Chinese use numerous tactics to transfer money abroad, and smurfing is routine, with some of the cash flowing into overheated property markets in Vancouver, Hong Kong, New York and Sydney.

Now, as Chinese citizens bypass the country’s limit of converting $50,000 a person per year by enlisting friends, relatives and even employees to send out cash on their behalf, banks and regulators around the world are being forced to decide: Is it okay to knowingly allow Chinese citizens to evade their government’s controls if it doesn’t break your own country’s laws?

In Vancouver, a Supreme Court case showed that one lender, Canadian Imperial Bank of Commerce, had assisted such transactions. The case arose when a CIBC financial adviser allowed a wealthy Chinese client to route two deposits of $50,000 through her private accounts to buy a home, leading to the dismissal of the banker for “commingling” her own funds with her client’s.
..
Elsewhere in China, examples include a company that ordered employees to use their accounts to wire money to Canada for private property purchases, according to Christine Duhaime, a Canadian lawyer specializing in financial crime.

China’s rules are being “made a mockery of,” she said. “I wouldn’t do it if I ran the banks.”

Coming up next – banks will be put in charge of Canada’s efforts to stamp out Falun Gong. After all, if the Chinese government says something’s the right thing to do, how could it possibly be wrong? Another Bloomberg story illustrates other ways of getting money out of China, for those interested in a new career. However, it’s an an ill wind that blows nobody any good:

The Royal Bank of Canada scrapped an internal limit on mortgage-loan size for immigrants in the spring to tap into surging demand for financing on multi-million-dollar houses from newcomers to Vancouver.

Wealthy buyers, mostly from China, are fuelling a booming mortgage business in Vancouver, where the median price for a detached home in the desirable west side jumped 31 per cent to $2.87-million in the last two years.

RBC, Canada’s largest bank, removed its $1.25-million cap on loans to borrowers with no local credit history in May, said Christine Shisler, the bank’s director of multicultural markets, who works with an immigrant clientele.

“We’re seeing a lot of affluent newcomers looking to buy high purchase-price homes,” she said. “Now we can actually service any mortgage amount.”

Nevertheless, it’s clear that anti-money-laundering laws, foisted on a gullible public on the basis of Fighting Crime and Eliminating Terrorism, are actually being used as a non-tariff impediment to real-estate transactions. So what else is new?

Regulators in six provinces have announced a Finalized Offering Memorandum Exemption:

The following are some of the key investor protection measures included in the offering memorandum exemption:

• •Non-reporting issuers will be required to, among other measures, provide investors with audited annual financial statements and an annual notice describing how the proceeds raised under the offering memorandum exemption were used.
• •Any marketing materials will be required to be incorporated by reference in the offering memorandum so that they are subject to the same liability as the disclosure provided in the offering memorandum in the event of a misrepresentation.
• •Individual investors relying on the offering memorandum exemption will be subject to investment limits in most cases.
• •All investors will be required to sign a risk acknowledgement form.

The offering memorandum exemption was designed to facilitate capital-raising by allowing issuers to solicit investments from a wider range of investors than they would be able to under other prospectus exemptions, provided that certain conditions are met.

Provided all necessary ministerial approvals are obtained, the final amendments will come into force in Ontario on January 13, 2016 and in Alberta, New Brunswick, Nova Scotia, Québec and Saskatchewan on April 30, 2016.

The final amendments do not modify the OM exemption that exists in any CSA jurisdiction other than the participating jurisdictions.

The list of amendments to NI 45-106 notes:

The participating jurisdictions have adopted investment limits for both eligible and non-eligible investors that are individuals (other than those that qualify as accredited investors or under the family, friends and business associates exemption). These limits will not apply to non-individual investors, whether eligible or non-eligible. The final amendments permit a higher investment threshold for eligible investors when a portfolio manager, investment dealer or exempt market dealer has made a positive suitability assessment.

The investment limits will apply to all securities acquired under the OM exemption as follows:

• • in the case of a non-eligible investor that is an individual, the acquisition cost of all securities acquired by the purchaser under the OM exemption in the preceding 12 months cannot exceed $10,000,
• • in the case of an eligible investor that is an individual, the acquisition cost of all securities acquired by the purchaser under the OM exemption in the preceding 12 months cannot exceed $30,000, and
• • in the case of an eligible investor that is an individual and that receives advice from a portfolio manager, investment dealer or exempt market dealer that the investment above $30,000 is suitable, the acquisition cost of all securities acquired by the purchaser under the OM exemption in the preceding 12 months cannot exceed $100,000.

I’m not sure whether there are any possible implications for Malachite Aggressive Preferred Fund, but you can bet I’ll be asking my lawyer! Davies Ward Phillips & Vineberg LLP comments:

The OM Exemption reflects a balancing of interests: issuers are provided with the opportunity to tap into a larger pool of investors, but must have in place the financial and human resources to prepare an offering memorandum and produce audited annual financial statements. For non-reporting issuers, the OM Exemption can best be thought of as a stepping stone to becoming a public company.

One impediment for non-reporting issuers is that the offering memorandum and marketing materials filed with the Ontario Securities Commission will be publicly filed and therefore available to all of the issuer’s employees, customers, suppliers and competitors. In addition, small, early-stage issuers may not find the OM Exemption attractive due to the costs associated with preparing an offering memorandum and audited financial statements, ongoing disclosure obligations and potentially being designated as a market participant.

Reporting issuers, particularly junior issuers, may find the OM Exemption to be a cheaper and less time-consuming alternative to a prospectus offering.

The OM Exemption does not limit or affect the availability to issuers of other prospectus exemptions, such as the accredited investor or minimum amount exemptions.

Time will tell whether the OM Exemption is adopted and accepted by the capital markets. Although using the OM Exemption could help smaller issuers tap into a larger market, it comes at a cost that may be too high for some issuers to entertain.

I’ll be most interested in reading a comparison between this regime and the SEC’s crowdfunding initiative discussed on October 30; if anybody sees such a thing, be sure to let me know!

It would seem that the Fed’s proposed rules on ‘bail-in’ capital (discussed October 30) may well have the intended effect, according to S&P:

• •Following the release last week of the Federal Reserve’s notice of proposed rulemaking, Standard & Poor’s is reviewing the resolution regime for U.S. banks to consider its effectiveness and impact on our ratings.
• •We expect the outcome of the review will be that extraordinary government support will no longer be factored into the ratings on the eight U.S. global systemically important banks (GSIBs) and that this will result in lower ratings on these banks’ nonoperating holding companies (NOHCs). As a result, we are placing on CreditWatch with negative implications our NOHC ratings on the U.S. GSIBs: Bank of America Corp., Bank of New York Mellon Corp., Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley, State Street Corp., The Goldman Sachs Group, and Wells Fargo & Co.
• •But, due to the construct of the U.S. resolution regime, in which NOHC creditors could ultimately provide capital support to the operating entity, we are taking no negative actions on these banks’ operating entities, and, on certain banks taking positive rating actions, despite
  the likely removal of extraordinary government support.

• •As part of our review of the U.S. resolution regime, we are also
  reviewing our current treatment of nondeferrable subordinated debt (NDSD) in the U.S. and considering whether it can absorb losses in advance of an entity’s nonviability or as part of a resolution without senior unsecured creditors being in default. A change in our treatment of NDSD would extend to all rated U.S. banks, and not just the GSIBs, but would have
  limited ratings impact

It was a mixed day for the Canadian preferred share market, with PerptualDiscounts off 10bp, FixedResets down 71bp and DeemedRetractibles gaining 1bp. MFC FixedResets were prominent on the bad side of a lengthy Performance Highlights table. Volume was a touch on the low side.

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

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

Here’s TRP:

Click for Big

TRP.PR.B, which resets 2020-6-30 at +128, is bid at 12.90 to be $0.54 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.52 cheap at its bid price of 13.31.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 20.07 to be 0.63 rich, while MFC.PR.I resetting at +286bp on 2017-9-19, is bid at 21.28 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 16.26 to be $1.27 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 21.01 and appears to be $0.70 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 18.70, looks $0.58 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.30 and is $0.31 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.72%, with one outlier above 0.00% and one below -2.00%. The distribution is just barely bimodal, with bank NVCC non-compliant pairs averaging -0.84% and other issues averaging -0.51%. There are four 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?

In today’s economy, the absence of bad news is greeted ecstatically:

Canada’s economy grew for a third month in August, cementing a rebound from an oil shock that had pulled the nation toward recession in the first half of this year.

Gross domestic product increased 0.1 percent to an annualized C$1.66 trillion ($1.26 trillion), Statistics Canada said Friday in Ottawa, following gains of 0.4 percent and 0.3 percent in June and July.

The August increase was led by manufacturing, which grew 0.4 percent to C$175 billion on production of chemicals and paper. Oil and gas extraction rose by 0.3 percent and retailing increased 0.6 percent led by food, automobiles and furniture.
…
Gross domestic product has grown 0.9 percent in August from the same month in 2014, Statistics Canada said.

According to my fingers and toes, these numbers are exceeded by inflation, but let’s ignore that and accentuate the positive! Like, for instance, what Canada does best:

Quebec plans to ask Canada’s federal government to match the province’s $1-billion (U.S.) investment in Bombardier Inc.’s C Series program to round out the funding for the troubled jet and assuage any lingering customer concerns.

“If the federal government comes in, the notion of risk completely changes,” Economy Minister Jacques Daoust said Friday in a telephone interview from Montreal. “If the federal government also put in $1 billion, that would mean the C Series financing package would be complete.”

His comments underscored Quebec’s determination to prop up the marquee aircraft model at Montreal-based Bombardier, which has been draining cash amid missed deadlines, cost overruns and scant interest among major airlines. Bombardier said Thursday that the jet will need an additional $2 billion during the next five years.

But let’s be fair, there are some exciting new businesses growing in Canada:

In granting Mr. Dhaliwal a conditional licence, Carolyn Rogers, head of the provincial Financial Institutions Commission, put the blame [for a mortgage fraud] on Mr. Dhaliwal’s former employer, TD Bank, for putting intense pressure on Mr. Dhaliwal, whom she described as poorly trained and financially naive.

What little coaching Mr. Dhaliwal received on how to properly conduct business, she wrote, “was overwhelmed by a focus on the volume of mortgage business Mr. Dhaliwal was bringing to the bank and relentless pressure to sell creditor protection insurance to as many borrowers as possible.”
…
In an online presentation on fraud and identity theft from 2012, mortgage insurer Canada Guaranty notes that “one in 10 mortgage applications will have some element of fraud.” Credit bureau Equifax says it had been able to flag nearly $1-billion worth of attempted mortgage fraud among its lender clients since 2013.

“It’s happening on such a level that the consumer is aware that this is something that can be done,” says an Ontario mortgage broker who didn’t want his name used and who once complained to federal and provincial regulators after being referred a deal that involved a family looking to buy three homes without any reportable income. “It’s happening on such a level that some bank reps, mobile mortgage reps, have said: Call a mortgage broker, they can probably find a way to make your income higher.”
…
Equifax has noticed the trend of people coming into its offices looking to upgrade their credit score with new employment details using fake job letters. “They’ll use the same template which has the same words spelled incorrectly,” says John Russo, Equifax’s legal counsel and chief privacy officer. Such attempts at “soft fraud” are up 15 to 20 per cent this year, he says. “We’ve seen many instances, in the thousands, come across our desks.”

The Fed has published a bail-in debt rule for comment:

However, several features distinguish eligible internal LTD [Long Term Debt] from eligible external LTD: It would be required to be issued to a parent foreign entity that controls the covered IHC [Intermediate Holding Company], to be contractually subordinated to all third-party liabilities of the covered IHC, and to include a contractual trigger pursuant to which the Board [Board of Governors of the Federal Reserve System] could require the covered IHC to cancel the eligible internal LTD or convert or exchange it into tier 1 common equity on a going-concern basis (that is, without the covered IHC’s entry into a resolution proceeding) if: (a) the Board determines that the covered IHC is “in default or in danger of default”; and (b) any of the following circumstances apply (i) the top-tier foreign banking organization or any subsidiary outside the United States is placed into resolution proceedings, (ii) the home country supervisory authority consents to the cancellation, exchange, or conversion, or does not object to the cancellation, exchange, or conversion following 48 hours’ notice, or (iii) the Board has made a written recommendation to the Secretary of the Treasury that the FDIC should be appointed as receiver of the covered IHC.

So the trigger is Fed fiat. This is very disappointing in light of the fact that:

In general, if a major U.S. bank holding company or non-bank financial company were to fail, it would be resolved under the U.S. Bankruptcy Code.17 Congress recognized, however, that such a company might fail under extraordinary circumstances that would prevent it from being resolved in bankruptcy without serious adverse effects on the financial stability of the United States. Title II therefore provides the Secretary of the Treasury, upon recommendation from other government agencies, with the authority to place a major financial company into an FDIC receivership, rather than bankruptcy.

A sensible feature of the proposal is:

Eligible external LTD would be required to be paid in and issued directly by the covered BHC [Bank Holding Company] itself—that is, by the banking organization’s top-tier holding company. Thus, debt instruments issued by a subsidiary would not qualify as eligible external LTD, even if they do qualify as regulatory capital.

So, presumably, the holding company can go bankrupt without affecting the operating subsidiaries.

It could be quite a significant market:

The largest U.S. banks would face a $120 billion total shortfall of long-term debt under a Federal Reserve proposal aimed at ensuring their failure wouldn’t hurt the broader financial system.

Banks such as Wells Fargo & Co. and JPMorgan Chase & Co. will be required to hold enough debt that could be converted into equity if they were to falter, according to a Fed rule that was approved by a unanimous vote on Friday. The Fed’s proposal, which applies to eight of the biggest U.S. banks, requires debt and a capital cushion equal to at least 16 percent of risk-weighted assets by 2019 and 18 percent by 2022.

Perhaps of greater ultimate import is today’s SEC announcement of rules to permit equity crowdfunding:

The new crowdfunding rules and forms will be effective 180 days after they are published in the Federal Register. The forms enabling funding portals to register with the Commission will be effective Jan. 29, 2016.
…
More specifically, the recommended rules would:

• • Permit a company to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period;
• • Permit individual investors, over a 12-month period, to invest in the aggregate across all crowdfunding offerings up to:
  • ◦ If either their annual income or net worth is less than $100,000, than the greater of:
    • ◾ $2,000 or
    • ◾ 5 percent of the lesser of their annual income or net worth.
  • ◦ If both their annual income and net worth are equal to or more than $100,000, 10 percent of the lesser of their annual income or net worth; and
• • During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.

Regrettably, as Commissioner Kara M. Stein points out approvingly, there is a requirement for deputized policemen:

Moreover, as the preamble makes clear, the Commission takes seriously the intermediary’s obligations to assess whether it may reasonably rely on the representations. To quote, “the specific steps an intermediary should take to determine whether it can rely on an issuer representation may vary, but should be influenced by and tailored according to the intermediary’s knowledge and comfort with each particular issuer.”[5] In short, an intermediary will need to do a little bit of work to gain confidence that the small business is what it says it is. Intermediaries will also need to develop written policies and procedures for how they will execute these obligations.

There are other incentives built into the structure of the law itself that should also encourage intermediaries to conduct some level of due diligence on issuers.[6] Thus, I am comfortable supporting the measured approach put forward today, and I look forward to seeing how market practice evolves. We may also learn from the examination work of the Commission staff and self-regulatory organizations (SRO) — one of the major benefits of utilizing regulated intermediaries. As we gain experience, we should be prepared to adjust requirements in this area.

But to compensate, she also highlights a rule recognizing the cash position of start-ups:

Surprising as it may seem, another challenge is how to protect crowdfunding investors when a business actually does well. Angel and venture investors are able to protect their interests through a variety of levers. However, the crowd may be unable, practically speaking, to negotiate for or utilize the same types of levers. As a result, the crowd could see its investments heavily diluted in follow-on offerings.

To address this, today’s rules give the crowd a little extra help by aligning the interests of the intermediary with that of the crowd. Specifically, the rules enable an intermediary to take a position in the issuer as compensation for the offering, provided that the securities it takes have the same terms, conditions, and rights as the crowd.[7] This approach has multiple benefits as it also responds to the demands of small businesses that wanted to be able to compensate intermediaries by allowing them to take a stake in the company.

Commissioner Luis Aguilar, who never saw paperwork he didn’t like also approves of deputy policemen:

Importantly, Regulation Crowdfunding also provides a framework to govern how Crowdfunding intermediaries—such as a registered broker-dealer or a funding portal—can conduct securities offerings. Because these intermediaries essentially act as “gatekeepers” for these offerings, this framework should provide additional investor protection. Moreover, since these gatekeepers are indispensable for making Crowdfunding viable, it is critical for the registration regime for funding portals to be ready as soon as today’s Crowdfunding rules go into effect.

Commissioner Michael S. Piwowar issued a dissenting statement:

A number of concerns have already been raised as to whether our rules are too restrictive or too burdensome. In fact, many of these restrictions are embedded in the statute itself. For instance, even if you are Warren Buffet or Bill Gates, you are limited to investing no more than $100,000 during any 12-month period in all crowdfunding investments.[4]

In other cases, the majority of the Commission has exercised discretion to make capital raising using crowdfunding even more difficult. In a change from the proposal, the rules will limit the ability to invest in crowdfunding opportunities based on the lesser of annual income or net worth. Because the majority of the Commission cannot trust ordinary Americans – the non-accredited investors – to be able to exercise appropriate judgment in how to spend or invest their resources, our rules will now place smaller limits on the amounts that can be invested.[5] Rather than actually protecting investors, these smaller limits will discourage legitimate companies from engaging in crowdfunding, while simultaneously encouraging less reputable actors to use affinity-based solicitation methods akin to multi-level marketing, a development that could stifle crowdfunding efforts.
…
Throughout this process, our staff put in an incredible amount of effort on these important issues and I commend their exceptionally fine work. The original draft of the crowdfunding rules was consistent with the statute and the original draft to modernize Rule 147 and Rule 504 was thoughtful and sensible. I also acknowledge the extensive interest and involvement of the state securities regulators and the North American Securities Administrators Association, which helped to shape the staff’s work.

This collaboration resulted in two perfect alley-oop passes to the Commission for seemingly can’t-miss slam dunks. However, the majority of the Commission decided to take a few extra unnecessary steps on the crowdfunding rules and the Rule 147 proposal and overshot on both.

For these reasons, I am unable to support the two items we are voting on today. Thank you and I have no questions.

Isn’t the US system great? Look at that … commissioners disagreeing with each other publicly and not mincing their words in public statements while they’re at it. We need this culture in Canada.

Portugal has announced a new defence to economic criticism:

Portuguese prosecutors have asked for Canadian academic Peter Boone to be put on trial after he wrote articles predicting a debt crisis in Portugal similar to Greece’s and then, they say, made nearly $1-million from price moves in that market.
…
Portuguese bond yields started to spike in April 2010 and forced the country to request an international bailout a year later, which it exited last year after stringent austerity measures that put public finances on a stronger footing.

The Lisbon District Prosecutor’s Office said that after a long investigation it had decided to ask for criminal proceedings against the suspect for market manipulation. A judge would have to evaluate the case before any trial is set.

The prosecution says it has evidence that the suspect had a vested interest in Portuguese debt weakening “as only such depreciation allowed the closing of a short position with gains to crystallise his profit” of 819,099.82 euros.

S&P had some things to say about the Valeant/Philidor scandal:

• •Valeant Pharmaceuticals International Inc. has severed ties with its affiliate, specialty pharmacy network Philidor RX Services, after leading pharmacy benefit managers (PBMs) terminated their relationships with Philidor, citing noncompliance with the terms of their agreements.
• •We believe reports of wrongdoing at Philidor weakens Valeant management’s credibility, further harms the company’s already tarnished reputation,
  and that these developments exacerbate potential legal, regulatory, and reputational headwinds for the company. We also believe the reputational issues could potentially compromise the company’s ability to effectively market its products to doctors, beyond this channel.

• •We are lowering our ratings by one notch, including lowering the corporate credit rating to ‘B+’ from ‘BB-‘. Our rating outlook is negative. We are lowering the rating on the senior secured debt to ‘BB’ from ‘BB+’ and lowering the rating on the senior unsecured debt to ‘B-‘ from ‘B’.
• •The negative outlook reflects heightened uncertainty relating to the financial impact from reputational, legal, and regulatory risks associated with the company’s aggressive marketing and drug pricing strategies, as well as potential legal and credibility issues stemming from the lack of earlier disclosure about its relationship with Philador. At the same time, we believe the company can likely absorb these headwinds at the current rating.

There’s been a nice breakthrough in battery technology:

Scientists have developed a working laboratory demonstrator of a lithium-oxygen battery which has very high energy density, is more than 90% efficient, and, to date, can be recharged more than 2000 times, showing how several of the problems holding back the development of these devices could be solved.
…
However, as is the case with other next-generation batteries, there are several practical challenges that need to be addressed before lithium-air batteries become a viable alternative to gasoline.

Now, researchers from the University of Cambridge have demonstrated how some of these obstacles may be overcome, and developed a lab-based demonstrator of a lithium-oxygen battery which has higher capacity, increased energy efficiency and improved stability over previous attempts.

Their demonstrator relies on a highly porous, ‘fluffy’ carbon electrode made from graphene (comprising one-atom-thick sheets of carbon atoms), and additives that alter the chemical reactions at work in the battery, making it more stable and more efficient. While the results, reported in the journal Science, are promising, the researchers caution that a practical lithium-air battery still remains at least a decade away.

Naturally, this work was not done in Ontario. We blew the budget on not-ready-for-prime-time technology.

New York’s hotels are showing us all how to compete effectively:

Airbnb accounted for $451.4 million in gross revenue in New York alone in the 12 months through Aug. 31, according a report commissioned by the Hotel Association of New York City. That number will jump to $805.3 million in 2018, the group said Friday.
…
Airbnb accounted for 2.9 million, or 7.8 percent, of overnight stays in New York in the latest fiscal year, compared with 33.9 million, or 92 percent, of nightly rentals among hotels, according to the Hotel Association of New York City. Yet hotels brought in a larger portion of sales — 95 percent of gross revenue, or $9.4 billion, thanks to a higher average cost per room.
…
While Airbnb’s share might seem small, consider that the startup didn’t exist seven years ago. It’s now valued at $25.5 billion and enmeshed in a political fight in New York, where the attorney general has scrutinized rentals on Airbnb and pressed the company to crack down on rentals that are run more like unregulated hotels. In its hometown of San Francisco, Airbnb is facing a vote next week on a proposition that would impose regulations and cap rentals at 75 days a year.

The Hotel Association of New York City has donated $25,000 to an organization supporting San Francisco’s Proposition F. Airbnb’s internal polling shows the company leading the measure by 19 percentage points.

Maybe they should hire some consultants from Canada’s banking industry! The most important thing is the effective display of crocodile tears when talking about the burden of regulation.

It was yet another mixed day in a familiar pattern in the Canadian preferred share market, with PerpetualDiscounts up 24bp, FixedResets off 38bp and DeemedRetractibles gaining 10bp. A very lengthy Performance Highlights table is dominated by losers. Volume was average.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 19.15 to be $0.60 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.76 cheap at its bid price of 13.15.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 20.60 to be 0.86 rich, while MFC.PR.F resetting at +141bp on 2016-6-19, is bid at 14.02 to be 1.01 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.47 to be $1.10 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 15.65 and appears to be $0.83 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 19.05, looks $0.83 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.15 and is $0.57 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.87%, with no outliers. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -0.97% and other issues averaging -0.67%. There are four 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?

There are more rumblings about Toronto’s housing market:

In a new quarterly forecast on the housing market, Canada Mortgage and Housing Corp. said it saw scant evidence of serious problems in the Canadian housing market over all, but warned that home prices are now outstripping economic fundamentals in 11 out of 15 major markets and that four cities – Toronto, Winnipeg, Regina and now Saskatoon – face serious headwinds because of high prices and a surge in the supply of new homes under construction.

CMHC previously warned in August that the housing market in the Greater Toronto Area was at “high risk” for a correction amid soaring home prices that have outstripped income growth, along with a glut of unsold condos. Since then, resale prices, particularly of single-detached homes, have continued to soar at double-digit annual rates. At the same time, the region is also faced with high levels of unsold, newly built condos, although the number of units under construction has fallen from earlier in the year and now appears to be manageable, the housing agency said.

It’s a bit strange talking about “the” Toronto housing market – there are at least two: condos and houses. The two segments have certainly decoupled over the past years, but whether this is evidence of an overheated market or simply a reflection of realities such as lack of possible new supply (for houses), growing congestion and increases in the relative incomes of people who can afford houses in the first place is a matter for speculation and conjecture. Everything will be perfectly obvious once it has happened; and the newspapers will heap accolades on the people who guessed right.

It was another mixed day for the Canadian preferred share market in a pattern that is becoming familiar, with PerpetualDiscounts up 39bp, FixedResets off 12bp and DeemedRetractibles gaining 23bp. The Performance Highlights table is relatively manageable today, but still of inordinate length considering the overall market activity when compared to more normal times. 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 19.00 to be $0.66 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.85 cheap at its bid price of 12.93.

Click for Big

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 20.14 to be 0.97 rich, while MFC.PR.J resetting at +261bp on 2018-3-19, is bid at 20.08 to be 1.14 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.46 to be $1.36 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 20.00 and appears to be $0.87 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 19.01, looks $0.75 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 14.05 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 -0.84%, with no outliers. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -1.03% and other issues averaging -0.45%. There are four 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?