PrefBlog

Morgan Stanley’s got an interesting view on the next Fed move – more easing!

Morgan Stanley, one of the 22 primary dealers that trade directly with the Fed, says its clients began discussing the possibility that central bankers will resume bond purchases — or cut interest rates to below zero — after a weaker-than-forecast U.S. employment report last week. The firm recommends buying medium-term Treasuries.

Another set of bond purchases would be the fourth round of the Fed’s program known as quantitative easing, dubbed QE4 by traders.

“Almost immediately after September nonfarm payrolls figures flashed on the screen, the phones started ringing,” Matthew Hornbach, Morgan Stanley’s head of global interest rate strategy in New York, wrote in a report Oct. 6. “What’s more likely: QE4 or negative rates?”

Deutsche Bank is writing off $7-billion:

The firm said it expects to book a 5.8 billion-euro writedown as higher capital requirements reduce the value of its investment bank and it adjusts the estimate of what it will receive in the disposal of its Postbank unit. The Frankfurt-based lender also is adding about 1.2 billion euros to its litigation reserves.
…
[Deutsche Bank AG co-Chief Executive Officer John] Cryan is seeking to avoid tapping shareholders for funds while focusing on reorganizing the bank to meet growing demands for buffers from regulators.
…
Deutsche Bank had turned to Postbank to diversify its funding mix by boosting consumer deposits in the midst of the global financial crisis. With its disposal, Deutsche Bank will cut its workforce by about 15,000, and the lender is considering cutting 8,000 additional jobs, a person with knowledge of the matter said last month.

Hillary Clinton attacked the markets today:

Hillary Clinton will propose a tax aimed at penalizing “harmful” high-frequency trading strategies and offer ways to strengthen the Volcker Rule, among other measures, as she unveils another set of proposals Thursday aimed at what she has termed risky Wall Street behavior.

The Democratic presidential front-runner plans to call for a tax targeting trading strategies that rely heavily on order cancellations, a Clinton aide said Wednesday, previewing her announcements on the condition of anonymity.
…
She will also suggest adjusting the Volcker Rule, by eliminating a provision that allows banks to invest up to three percent of their capital in hedge funds and reinstating the “swaps push-out” rule of Dodd-Frank, which was removed last year.

Swaps push-out rule?

Specifically, certain un-cleared credit default swaps comprised most of the contracts that were included in the push-out rule, or Section 716 of the Dodd-Frank Act. The rule requires banks that wished engaged in this activity to place them in separate affiliates with higher capital requirements. As such, they would not be funded through the deposit gathering activities of banks, seen as an important lesson from the financial crisis.

“It is illogical to repeal the 716 push out requirement,” Federal Deposit Insurance Corporation vice chairman Thomas Hoenig, a former Federal Reserve Bank regional president, said last week. ”The main items that must be pushed out under 716 are uncleared credit default swaps (CDS), equity derivatives and commodities derivatives. These are, in relative terms, much smaller and where the greater risks and capital subsidy is most useful to these banking firms,” he said.

According to industry estimates, such contracts represent only 5 percent of the swaps universe. As Hoenig also noted, most firms have ”broker-dealer affiliates where they can place these activities, but these affiliates are not as richly subsidized, which helps explain these firms’ resistance to 716 push out.”

She also voiced discontent with the TPP:

Democratic presidential candidate Hillary Clinton voiced her opposition Wednesday to the Trans-Pacific Partnership trade deal, bucking her former boss and creating more distance between herself and possible primary rival Vice President Joe Biden.

“What I know about it, as of today, I am not in favor of what I have learned about it,” the former secretary of state said in an interview with PBS News Hour. “I don’t believe it’s going to meet the high bar I have set.”

Clinton was generally supportive of the deal during her four years working in President Barack Obama’s administration and allowed for some wiggle room to still support TPP or other future trade deals. In a written statement sent after the interview was released, she stipulated that she is “continuing to learn about the deals” of the agreement.
…
Vermont Senator Bernie Sanders, Clinton’s main challenger in the race, drew attention to the amount of time it took her to come to a verdict on an issue he has long opposed.

“I’m glad that she reached that conclusion,” he told reporters in Washington. “This is a conclusion that I reached on day one.”

But attacking the market is quite fashionable – even Blackrock is in on the action:

BlackRock Inc., the world’s biggest asset manager, has its own remedy for days of extraordinary volatility in the U.S. equity market: Shut it down.

Among the fund company’s suggestions: The entire $23 trillion market should automatically come to a halt if a certain number of shares stop trading, giving traders time to regroup on a wild day, according to BlackRock. Tweaking the rules on halts and making all stock openings electronic are among other ideas in a paper published Wednesday by the firm.
…
Among other concerns are the widespread use of stop orders by retail investors, which many on Wall Street believe contributed to the volatility. Two people familiar with the matter said there have been discussions with brokers that offer stop orders about educating their clients on how to use them.

While stop orders sound like they can protect an investor, they actually send an instruction to an exchange to execute a trade immediately at any price, commonly known as a market order. In volatile markets, that can mean orders to sell securities as prices are plunging. Data from NYSE show that it had nine times the number of market orders on Aug. 24 compared with an average day. Market orders as a percent of executed volume were four times higher than usual.

“Excessive use of market and stop-loss orders that seek ‘liquidity at any price’ inflamed the situation,” said the BlackRock paper, which recommended investors use limit orders instead.

As we all know by now, Canadians have a right to buy a house wherever they want at a price of their own choosing. This God-given right is attracting wider attention:

Despite British Columbia’s aversion to pipelines and affection for pot, housing affordability has pushed both aside as the number one issue raised by area residents in the run-up to Canada’s election this month. It’s not completely surprising given that Vancouver has become North America’s most expensive city.

Surging purchase prices have triggered protest movements like #donthave1million, started by a group of young professionals frustrated at being shut out of home ownership. They complain of having to delay starting families as they remain bunked in with roommates, often into their 30s and beyond.

The affordability issue speaks to broader campaign themes: the difficulty young people face getting established in the labor market, the economic anxieties of the middle class, growing concerns about income inequality, support for families with children. Residents also increasingly point fingers at wealthy Chinese immigrants and investors whose lavish embrace of the Pacific metropolis of 2.5 million has inspired reality TV shows with such gaudy names as “Ultra Rich Asian Girls in Vancouver.”

It’s happening in Japan, too:

Realty agencies in Beijing are organizing twice-monthly tours to Tokyo and Osaka, where 40 Chinese at a time come for three-day property-shopping trips, seeking safe places to invest their cash abroad. They’re being prompted by the yen’s decline to 22-year lows and excitement over the 2020 Tokyo Olympics driving up prices, as they did in Beijing in 2008. Property tours will soon start from Shanghai too.

Partly as a result of nascent Chinese buying, Tokyo apartment prices have reached the highest levels since the early 1990s, up 11 percent over two years, according to the Real Estate Economic Institute Co.
…
While the home price-to-income ratio — the cost of a home relative to a buyer’s average annual income — rose to more than 10 times in Tokyo last year, according to according to property appraisal company Tokyo Kantei Co., it’s still below the 18 times it reached during the bubble era in the late 1980s and early 1990s.

Yet another federal candidate has been dumped by his party:

A party spokeswoman said Tuesday night that Grewal’s comments “are not reflective of the views of the Conservative Party of Canada.”

We are getting to the point at which only three all-encompassing political stances, carefully vetted by the party leaders’ offices, will be permitted in the House of Commons. This will give us more opportunity to complain that MPs are nothing more than trained seals, so that’s good, right?

It was another poor day for the Canadian preferred share market, with PerpetualDiscounts down 18bp, FixedResets off 5bp and DeemedRetractibles losing 33bp. Insurance issues and TRP were again prominent on the bad side of the lengthy Performance Highlights table. Volume was high.

PerpetualDiscounts now yield 5.79%, equivalent to 7.53% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 4.2%, so the pre-tax interest-equivalent spread is now about 330bp, a slight (and perhaps spurious) widening from the 325bp reported September 30.

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

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

Here’s TRP:

Click for Big

Implied Volatility remained at an unreasonable level today.

TRP.PR.A, which resets 2019-12-31 at +192, is bid at 15.00 to be $0.61 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.69 cheap at its bid price of 11.80.

Click for Big

Another good fit today for MFC, with Implied Volatility easing a bit.

Most expensive is MFC.PR.M, resetting at +236bp on 2019-12-19, bid at 19.36 to be 0.66 rich, while MFC.PR.J resetting at +261bp on 2018-3-19, is bid at 19.36 to be 0.38 cheap.

Click for Big

The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 15.31 to be $0.82 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 14.45 and appears to be $0.91 rich.

Click for Big

Implied Volatility increased again today to an even more ridiculously high level.

FTS.PR.K, with a spread of +205bp, and bid at 17.00, looks $0.37 expensive and resets 2019-3-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 18.05 and is $0.18 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.01%, with one outlier above 0.00%. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -1.32% and other issues averaging -0.57%. There are three junk outliers above 0.00%.

Click for Big

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

There are a lot of unsolved mysteries in life. How do they get the caramel into a Caramilk bar? Why did that hot chick in high school go out with jerks instead of me? Was Lehman insolvent or merely illiquid?:

At issue that September, six years ago, was whether the Fed could save a major investment bank whose failure might threaten the entire economy.

The firm was Lehman Brothers. And the answer for some inside the Fed was yes, the government could bail out Lehman, according to new accounts by Fed officials who were there at the time.
…
Ben S. Bernanke, the Fed chairman at the time, Henry M. Paulson Jr., the former Treasury Secretary, and Timothy F. Geithner, who was then president of the New York Fed, have all argued that Lehman Brothers was in such a deep hole from its risky real estate investments that Fed did not have the legal authority to rescue it.
…
Whether to save Lehman came down to a crucial question: Did Lehman have enough solid assets to back a loan from the Fed? Finding the answer fell to two teams of financial experts at the New York Fed. Those teams had provisionally concluded that Lehman might, in fact, be a candidate for rescue, but members of those teams said they never briefed Mr. Geithner, who said he did not know of the results.
…
Mr. Bernanke and Mr. Paulson said in recent interviews with The Times that they did not know about the Fed analysis or its conclusions.

Interviews with half a dozen Fed officials, who spoke on the condition they not be named, so as not to breach the Fed’s unofficial vow of silence, suggest some Fed insiders believed that the government had the authority to throw Lehman Brothers a lifeline, even if the bank was nearly broke. The Fed earlier came to the rescue of Bear Stearns, after doing little analysis, and only days later saved the American International Group. The government subsequently saved the likes of Bank of America, Citigroup, Goldman Sachs and Morgan Stanley. Ultimately, whether Lehman should have gotten Fed support was a judgment call, not a matter of strict statute, these people said.
…
A group of bankers summoned to the Fed by Mr. Paulson, who was hoping they would mount a private rescue, did not accept Lehman’s $50 billion valuation for its real estate and could not decide whether Lehman was solvent. But potential private rescuers had a motive to lowball Lehman’s value. Fed officials involved in the valuation stressed that the Fed could hold distressed assets for much longer than private parties, allowing time for those assets to recover in value. Also, because the Fed sets monetary policy, it exerts enormous influence over the assets’ ultimate value.

“There can’t be any reasonable doubt that had the Fed rescued Lehman, that very act would have pushed up the value of its assets,” [economics professor at Princeton and former vice chairman of the Fed] Mr. [Alan S.] Blinder said.

While the Fed team did not come up with a precise value for Lehman’s illiquid assets, it provided a range that was far more generous in its valuations than the private sector had been.
…
Argument continues today over the value of Lehman’s assets. A report compiled by Anton R. Valukas, a Chicago lawyer, at the behest of the bankruptcy court overseeing Lehman concluded in 2010 that nearly all of the firm’s real estate valuations were reasonable. It also suggested that Lehman’s chaotic bankruptcy caused many of the losses later borne by the firm’s creditors. Other analysts have argued that Lehman was deeply insolvent.

Ultimately, the appraisals of the New York Fed teams did not matter. Their preliminary finding was that Lehman was solvent and that what it faced was essentially a bank run, according to members of the group. Researchers working on the value of Lehman’s collateral said they thought they would be delivering those findings to Mr. Geithner that September weekend.

But Mr. Geithner had already been diverted to A.I.G., which was facing its own crisis.
…
Those at the Fed who have contended that Lehman was insolvent have never provided any basis for that conclusion, other than references to the estimates of Wall Street firms and other anecdotal evidence. The Financial Crisis Inquiry Commission asked for such evidence several times, but the Fed never provided it. The members of the New York Fed teams said that they did not prepare a formal, written report, and that no one asked them for any notes or work papers or asked them to elaborate on their findings. Scott G. Alvarez, the Fed’s general counsel, told the commission that there was “no time” that weekend for a written analysis.

All this has become news again because Bernanke used ‘Fed-Speak’ in congressional testimony:

“In congressional testimony immediately after Lehman’s collapse, Paulson and I were deliberately quite vague when discussing whether we could have saved Lehman,” Mr. Bernanke writes [in his new memoir, “The Courage to Act: A Memoir of a Crisis and Its Aftermath.”]. “But we had agreed in advance to be vague because we were intensely concerned that acknowledging our inability to save Lehman would hurt market confidence and increase pressure on other vulnerable firms.”
…
Of course, there will always be those who believe that the decision was a political one. “I understand why some have concluded that Lehman’s failure was a choice,” Mr. Bernanke writes. “In a way, it is a backhanded compliment: We had shown such resourcefulness to that point, it is hard to imagine that we could not have come up with some solution to Lehman.”

He writes that it was simply impossible to save Lehman, pointing to the nearly $200 billion of losses that Lehman’s creditors have since suffered. No one has come forward on the record, nor has any contemporaneous document been produced in the past seven years that said the government had found a way to save the company and specifically chose not to do so for political reasons, a point Mr. Bernanke alludes to in his book. “I do not want the notion that Lehman’s failure could have been avoided, and that its failure was consequently a policy choice, to become the received wisdom, for the simple reason that it is not true,” he writes. “We did everything we could think of to avoid it.”

I certainly hope that the entire episode has become a very high-powered case study at the Fed, other central banks and in business schools on the topic of ‘How decisions get made. I mean, really get made, in high-stakes conditions of total chaos and conflicting opinion.’

After all, emerging economies want to know!

As part of the Trans-Pacific Partnership deal, emerging markets want to know what Federal Reserve Chair Janet Yellen is thinking.

As a sidebar to the largest trade pact in two decades, the U.S. and 11 other Pacific Rim countries agreed not to manipulate foreign-exchange rates and to consult on monetary policies.

Economies like Vietnam and Malaysia, which rely heavily on exports, promised not to devalue their currencies in order to gain a competitive advantage. In exchange, they want to get more insights into U.S. monetary policy.
…
During the negotiations, some of the smaller economies highlighted the far-reaching impact monetary policies in larger developed countries — read the U.S. — have on them, according to a person familiar with the negotiations, who asked not to be named because the details of the talks aren’t public.

Participants have agreed that consultations will take place among senior-government officials, although the precise framework has yet to be determined, the person said. And of course, such talks don’t mean the U.S. central bank will need to follow other countries’ wishes.

“Questions about Fed policy will be filtered through the Treasury, and in no way will the Fed be committed or compromised.” said Hufbauer.

DBRS has released a report titled Effect of the Oil Price Shock on Canada, with one line so important I’m going to give it its own blockquote:

Therefore, we view the near term outlook for Canada to be mainly dependent on the external environment.

This should not be news to the meanest intelligence, but turns into a long, boring useless debate every election time. Sure, the governments of the days can do things at the margins, and the things they do at the margins can be good or bad and are important enough to become election issues. I have no problems with that. I do have problems with the idea that Canadian government policy is a significant driver of the Canadian economy.

Anyway, the report states:

There are two areas of concern: the risk that higher U.S. interest rates will lead to sharply higher Canadian mortgage rates, and given the high level of household leverage in an unstable macro environment, this could pose a risk to financial stability. A second and larger concern is how the economy will adjust to a moderate recovery in the United States and to the weaker exchange rate.

So far, the policy response in Canada has averted a Japan- or Eurozone-style crisis, in which jumpstarting domestic demand is proving to be a major challenge. Nevertheless, monetary easing and fiscal tightening have not avoided a shallow recession in Canada. The emphasis in Canada on whether the Federal budget is in surplus or in deficit suggests that the policy choices are limited: the issue is weak growth; not whether the budget is in surplus. Significant fiscal expansion appears to be ruled out, in spite of the recession; and when the economy does return to growth it will almost certainly be a weak recovery. This is the big challenge for the next administration following the elections on October 19.

The flexibility of the economy is associated with labor productivity, and productivity has taken a turn for the worse. This is being driven by a fall in manufacturing, construction, agriculture, and other sectors, and only somewhat offset by services. We suspect that reforms to raise worker productivity and greater investment in infrastructure, could help close the output gap and raise potential GDP.

It would be interesting to learn just what “reforms to raise worker productivity” DBRS has in mind; the TPP will help a little, but only a little. As briefly mentioned on September 21, I don’t see how anybody could spend a lot of capital on productivity equipment when you know it will just get dusty every time the index goes above 110:

Click for Big

But “greater investment in infrastructure”? That should be a no-brainer, especially since Canada’s infrastructure is crumbling. But instead we are blessed with morons who believe balancing the budget each and every year is a sign of fiscal responsibility and nobody ever talks about the more important ‘through-the-cycle’ figure; preferring instead to discuss a modern version of sumptuary laws.

Meanwhile:

The International Monetary Fund cast a pessimistic view on Canada’s economic prospects for next year, warning that the depressed commodity prices that have slowed the Canadian and global economies in 2015 will remain a major threat to growth in 2016.

In its quarterly World Economic Outlook, entitled Adjusting to Lower Commodity Prices, the IMF once again reduced its gross domestic product forecasts for both Canada and the world as a whole, extending and deepening this year’s trend of falling expectations. The global finance agency’s forecast for Canadian GDP growth in 2015 is now just 1 per cent – down a half a percentage point from the previous forecast in July, and down 1.3 percentage points from a year ago.

On a cheerier note, the US is finding that spying costs money:

Safe Harbor was adopted by the European Commission in 2000 and recognizes a set of privacy principles by the U.S. Department of Commerce “as providing adequate protection for the purposes of personal data transfers from the EU,” according to the EU executive body. It has become a key trans-Atlantic data transfer mechanism, with more than 4,000 U.S. companies self-certified under it.
…
The ECJ struck down the Safe Harbor decision without providing companies with the option of a transition period. It will affect “countless organizations, who are now considering whether to turn to other data transfer mechanisms, including standard contractual clauses or consent, instead of relying on the current Safe Harbor,” said Bridget Treacy, a lawyer and privacy specialist at law firm Hunton & Williams. EU-U.S. data transfers now have to be blocked by national data protection authorities if they’re asked to investigate.

While two trends combine in an interesting way: small-scale equity crowdfunding for a drone manufacturer!

UAS Drone Corp., a developer of unmanned aerial vehicles for the law enforcement and first responder market (the “Company”), announced that it has commenced its Initial Public Offering of its common stock. The offering is being conducted directly by officers and directors of the Company through the Fundable.com equity crowdfunding platform.

It was back to normal for the Canadian preferred share market today, with PerpetualDiscounts off 13bp, FixedResets losing 52bp and DeemedRetractibles down 32bp. There is yet another lengthy Performance Highlights table, with insurance issues and TRP notable in the bad part. 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

Implied Volatility remained at an unreasonable level today.

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.00 to be $0.41 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.71 cheap at its bid price of 11.84.

Click for Big

Another good fit today for MFC, with Implied Volatility climbing substantially.

Most expensive is MFC.PR.M, resetting at +236bp on 2019-12-19, bid at 19.51 to be 0.71 rich, while MFC.PR.F resetting at +141bp on 2016-6-19, is bid at 14.04 to be 0.28 cheap.

Click for Big

The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PF.A, resetting at +290bp on 2018-9-30, bid at 18.47 to be $0.61 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 19.36 and appears to be $0.59 rich.

Click for Big

Implied Volatility increased again today to an even more ridiculously high level.

FTS.PR.K, with a spread of +205bp, and bid at 17.12, looks $0.32 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.00 and is $0.15 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.02%, with one outlier above 0.00%. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -1.36% and other issues averaging -0.55%. There are three junk outliers above 0.00%.

Click for Big

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

Here’s another reason why bubbles are bad:

When the housing market was hot, from the late 1990s to 2006, there were many good jobs that didn’t require a college education. For a certain kind of high school grad, paying tuition started looking like a dodgy proposition.

Then the boom went bust.

For one reason or another, the young construction workers and sales agents who skipped college to enter the workforce never went back, opening a schism between the boom-time workers and the college-going generation that came of age after the economy went splat.

That’s the story sketched out in a new working paper, published by National Bureau of Economic Research, from professors Kerwin Kofi Charles and Erik Hurst at the University of Chicago and Matthew Notowidigdo of Northwestern University. The three used Census Bureau, Department of Education, and Labor Department data to track what they call “college attainment” through the housing cycle.

The NBER wants five bucks for the paper. Good luck with that.

The best economic news all year is the agreement on the TPP:

A free-trade deal that opens a small part of the Canadian dairy market to cheaper foreign imports could spell the beginning of the end for the country’s dairy supply management system, and push inefficient farmers out of business, observers say.

The Trans-Pacific Partnership (TPP) deal, a trade pact among 12 countries including Japan, Vietnam and Australia that was reached in Atlanta on Monday, will give foreign dairy producers access to 3.25 per cent of the Canadian market while increasing duty-free access for Canada’s agricultural exports.

The deal was welcomed by large swaths of the agriculture sector, including pork and beef producers and grain farmers, who expect to see new demand for their goods overseas. But the negative effects are expected to be disproportionately felt by Canada’s dairy farmers, who face the prospect of cheaper foreign competition and the gradual erosion of prices paid by the large food companies that make cheese, butter and milk.

Now to get it ratified…

It was a decent day for the Canadian preferred share market, with PerpetualDiscounts gaining 28bp, FixedResets off 2bp and DeemedRetractibles down 4bp. The Performance Highlights table is skewed towards winners. Volume was average.

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

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

Here’s TRP:

Click for Big

Implied Volatility remained at an unreasonable level today.

TRP.PR.B, which resets 2020-6-30 at +128, is bid at 11.85 to be $0.44 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.81 cheap at its bid price of 12.00.

Click for Big

Another good fit today for MFC, with Implied Volatility climbing a bit.

Most expensive is MFC.PR.M, resetting at +236bp on 2019-12-19, bid at 19.75 to be 0.56 rich, while MFC.PR.G resetting at +280bp on 2016-12-19, is bid at 20.91 to be 0.44 cheap.

Click for Big

The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PF.A, resetting at +290bp on 2018-9-30, bid at 18.56 to be $0.65 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 19.70 and appears to be $0.80 rich.

Click for Big

Implied Volatility leaped upwards again today, from an unreasonably high level to a ridiculously high level.

FTS.PR.K, with a spread of +205bp, and bid at 17.32, looks $0.35 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.04 and is $0.30 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.10%, with no outliers. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -1.37% and other issues averaging -0.72%. There are three junk outliers above 0.00%.

Click for Big

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

Jobs, jobs …. whoopsy!

Silver linings were tough to come by in the September jobs data. Payrolls came in at a much-weaker-than-forecast 142,000, while August and July figures were revised down. Wage growth was nonexistent for the month, with average hourly earnings actually falling by a penny on average.

The softness in manufacturing endured, with factory payrolls falling by 9,000 when they were expected to show no change. With dollar appreciation and sluggish overseas growth providing headwinds, it was the biggest back-to-back decline since 2010.

Even service industries, which make up the lion’s share of the economy and are more shielded from global weakness, seem to have shifted into a lower gear. Payroll growth there has slowed for four straight months, the longest such streak since 2001.

Dan Gallagher, whose comments on Dodd-Frank were reported on August 4, has reached the end of the line:

Today is my final day as a Commissioner of the U.S. Securities and Exchange Commission. It has been a privilege and an honor to serve the public during such an important time. I thank my fellow Commissioners and the staff for the time spent working together on critical issues facing investors, issuers, and the markets. After having spent so many years at the SEC in various capacities, departing is certainly bittersweet. As a former SEC staffer, I have particularly enjoyed working so closely again with the Commission’s excellent staff.

I must confess that the more I think about the VW diesel emissions scandal, the less I understand it. A piece in the Globe notes:

Volkswagen’s cheating on emissions tests has soured the European car industry’s heavy bet on diesel, with Renault, Peugeot and Fiat Chrysler potentially facing bigger long-term setbacks than the company that sparked the crisis.

In the face of that perceived injustice, tensions are mounting behind the united facade that European manufacturers present to regulators, some of their representatives say.

It will be recalled that the whistle-blower was an independent environmental agency that tested the VWs in the expectation that everything would be peachy keen; the VWs had been selling really well because they got great fuel economy AND low emissions AND good performance.

I’m not an automotive engineer, but to me that sounds like a ‘Pick Two’ problem. But the implication is that not once, at any of VWs three competitors, did a senior vice president pound the table and scream ‘Dammit, Hans, they’re killing us on sales volume! Why can’t we do that?’ And not once did the senior project engineer confess ‘Honestly, Gunther, I just can’t figure it out. Mind if I buy one and take it apart?’

It just doesn’t make sense to me.

It was a moderately good day for the Canadian preferred share market, with PerpetualDiscounts up 31bp, FixedResets gaining 14bp and DeemedRetractibles off 7bp. These figures mask an awful lot of violent churning with respect to individual issues though, as illustrated by the lengthy Performance Highlights table. Volume was average.

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

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

Here’s TRP:

Click for Big

Implied Volatility rocketed today, reaching an unreasonable level.

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.30 to be $0.69 rich, while TRP.PR.D (target of a sell programme today; see the Performance Highlights table), resetting 2019-4-30 at +238, is $0.74 cheap at its bid price of 16.04.

Click for Big

Another good fit today for MFC, with Implied Volatility climbing a bit.

Most expensive is MFC.PR.H, resetting at +313bp on 2017-3-19, bid at 22.80 to be 0.54 rich, while MFC.PR.G resetting at +280bp on 2016-12-19, is bid at 20.82 to be 0.70 cheap.

Click for Big

The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PF.A, resetting at +290bp on 2018-9-30, bid at 18.36 to be $0.71 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 19.50 and appears to be $0.74 rich.

Click for Big

Implied Volatility leaped upwards today, from an unreasonably low to an unreasonably high level, as three of the four issues were featured in the Performance Highlights table – two winners, one loser.

FTS.PR.K, with a spread of +205bp, and bid at 17.10, looks $0.20 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.10 and is $0.21 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.20%, with one outlier below -2.00%. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -1.65% and other issues averaging -0.57%. There are three junk outliers above 0.00%.

Click for Big

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

There is official concern about a sharp rise in buy-to-let investments in the UK:

Buy-to-let lending could pose a risk to financial stability.
The actions of buy-to-let investors affect the broader housing and mortgage markets as individuals compete to buy the same pool of properties. Looser lending standards in the buy-to-let sector could contribute to general house price increases and a broader increase in household indebtedness. And in a downswing, investors selling buy-to-let properties into an illiquid market could amplify falls in house prices, potentially raising losses given default for all mortgages. This could be a particular concern in a rising interest rate environment, if properties become unprofitable given higher debt-servicing costs. Buy-to-let borrowers are potentially more vulnerable to rising interest rates because loans are more likely to be interest only and extended on floating-rate terms, and affordability tends to be tested at lower stressed interest rates
than owner-occupied lending.

The FPC continues to monitor closely conditions in UK property markets given high household indebtedness. Aggregate UK household debt to income, while falling gradually since 2010, remains high compared to historical and international norms (Chart F). The distribution of debt has improved marginally, with the tail of households with debt to income ratios greater than 4.0 falling in early 2015. House prices and activity in the housing market have increased again recently, and mortgage rates on many mortgage products are historically low. House prices grew at an annual rate of 5.6% in the three months to May 2015, compared with 3% in 2014 Q4; and 68,000 mortgages were approved in April, compared with 60,000 per month in 2014 Q4. Given this, the FPC judges that the policies it introduced in June 2014 to insure against the risk of a marked loosening in underwriting standards and a further significant rise in the number of highly indebted households remain warranted. In the buy-to-let mortgage market, lending has continued to grow, with buy-to-let mortgage lending now accounting for 15% of the stock of outstanding mortgages and nearly 20% of the flow in 2015 Q1 (Chart G). As it set out in October 2014, HM Treasury will consult later this year on giving to the FPC the power of Direction to limit residential mortgage lending at high loan to value or high debt to income ratios, including interest coverage ratios, for buy-to-let lending. Parliament provided the equivalent powers to the FPC for owner-occupied lending in April this year.

This has already attracted the interest of the Central Planners:

Landlords are being offered the largest number of buy-to-let mortgage deals since the financial crisis as banks try to profit from older savers cashing in their pensions to buy property.

There are now more than 1,000 buy-to-let products on the market for the first time since April 2008, according to data analyst Moneyfacts.

The rise was attributed to the new pension freedoms introduced in April. Under the rules savers have unlimited access to their funds from age 55, and many older investors have said they will spend the cash on properties to let to students or City workers. Banks are spotting the opportunity to attract wealthy customers and have offered attractive new deals.
…
But experts now believe the entire market could begin to collapse following changes to tax laws which were announced by George Osborne in July.

The Chancellor said that by 2020 higher-rate taxpayers will no longer be able to deduct the cost of their mortgage interest from their rental income when they calculate a profit on which to pay tax. Only basic-rate relief will be available.

BCE Inc., proud issuer of a huge number of preferred shares, has been confirmed at Pfd-3(high) by DBRS:

DBRS Limited (DBRS) has today confirmed the long- and short-term ratings of Bell Canada (Bell Canada or the Company) and its parent company BCE Inc. (BCE) at A (low)/R-1 (low) and BBB (high)/R-1 (low), respectively. DBRS has also confirmed the ratings of Bell Canada’s Subordinated Debentures at BBB. All trends remain Stable. It should be noted that BCE’s ratings are linked to the ratings of Bell Canada and reflect the structural subordination of debt (currently none outstanding) and its preferred share obligations relative to Bell Canada. The ratings acknowledge the increase in financial leverage resulting from the acquisition of Astral Media and privatization of Bell Aliant (which DBRS believes enhanced the Company’s scale and diversification), but also reflect the expectation for deleveraging over the medium term. The ratings continue to be supported by the Company’s large and established subscriber base and quad-play offerings, and also consider intensifying competition and the risks associated with regulatory change.

The fourth quarter began with a return to normal in the Canadian preferred share market, by which I mean it was a lousy day, with PerpetualDiscounts losing 74bp, FixedResets down 49bp and DeemedRetractibles off 3bp. It looks like a sell programme kicked in at about 3:40pm – until then, the market was off a little, but nothing too serious:

Click for Big

One really has to wonder how the decision to execute this sell programme was rationalized. On the one hand, it seems very strange to start executing mass sales late in the day in a little backwater market like Canadian preferred shares. On the other hand … for the past nine months, executors of aggressive sell programmes have been patting themselves on the back a little while later, regretting only that they didn’t execute a few days earlier.

The Performance Highlights table is its usually lengthy self, highlighted by four issues that got caught by the late day sales and lost more than 5% (bid/bid). Volume was average.

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

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

Here’s TRP:

Click for Big

Implied Volatility dropped significantly today.

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.73 to be $0.96 rich, while TRP.PR.C, resetting 2016-1-30 at +164, is $0.48 cheap at its bid price of 12.10.

Click for Big

Another good fit today for MFC, with Implied Volatility unchanged.

Most expensive is MFC.PR.M, resetting at +236bp on 2019-12-19, bid at 20.00 to be 0.64 rich, while MFC.PR.I, resetting at +286bp on 2017-9-19, is bid at 20.92 to be 0.57 cheap.

Click for Big

The fit on the BAM issues continues to be horrible. Note that the pending new issue has been added with a price of 25.00; the valuation effects of the rate floor have been ignored.

The cheapest issue relative to its peers is BAM.PF.A, resetting at +290bp on 2018-9-30, bid at 18.48 to be $0.63 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 19.70 and appears to be $0.90 rich.

Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 13.65, looks $0.41 expensive and resets 2020-6-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 16.85 and is $0.39 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.19%, with one outlier above 0.00%. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -1.74% and other issues averaging -0.42%. There are four junk outliers above 0.00%.

Click for Big

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