PrefBlog

Today’s parable illustrates the adage that you should never trust a stockbroker:

The Securities and Exchange Commission today announced that ITG Inc. and its affiliate AlterNet Securities have agreed to pay $20.3 million to settle charges that they operated a secret trading desk and misused the confidential trading information of dark pool subscribers.

An SEC investigation found that despite telling the public that it was an “agency-only” broker whose interests don’t conflict with its customers, ITG operated an undisclosed proprietary trading desk known as “Project Omega” for more than a year. While ITG claimed to protect the confidentiality of its dark pool subscribers’ trading information, during an eight-month period Project Omega accessed live feeds of order and execution information of its subscribers and used it to implement high-frequency algorithmic trading strategies, including one in which it traded against subscribers in ITG’s dark pool called POSIT.

ITG agreed to admit wrongdoing and pay disgorgement of $2,081,034 (the total proprietary revenues generated by Project Omega) plus prejudgment interest of $256,532 and a penalty of $18 million that is the SEC’s largest to date against an alternative trading system.
…
According to the SEC’s order instituting a settled administrative proceeding:

• • Project Omega traded a total of approximately 1.3 billion shares, including approximately 262 million shares with unsuspecting subscribers in ITG’s own dark pool.
• • Project Omega employed an algorithmic trading strategy called the “Facilitation Strategy” in which it executed trades based on a live feed of information concerning orders that its sell-side subscribers sent to ITG’s algorithms for handling.
• • Project Omega accessed the feed by connecting to a software utility that was used by ITG’s sales and support teams. As a result, Project Omega had a real-time view of subscriber orders being placed through ITG’s algorithms.
• • From April to December 2010, the Facilitation Strategy was designed to detect open orders of sell-side subscribers being handled by ITG. Based on that information, Project Omega opened positions in displayed markets on the same side of the market as the detected orders, and then closed these positions in POSIT by trading against the detected orders. By employing this strategy, Project Omega sought to capture the full “bid-ask spread” between the National Best Bid and Offer (NBBO).
• • Project Omega had access to the identities of POSIT subscribers and used this information to identify sell-side subscribers and trade with them in the dark pool in connection with the Facilitation Strategy.
• • To earn the full “bid-ask spread” in connection with the Facilitation Strategy, Project Omega needed the subscribers with which it traded in POSIT to be configured to trade “aggressively” so that the subscribers would “cross the spread” to trade with Project Omega. Project Omega took steps to ensure that the sell-side subscribers were configured to trade aggressively in POSIT.
• • Project Omega’s other primary strategy called the “Heatmap Strategy” involved trading on markets other than POSIT based on a live feed of confidential information relating to customer executions in other dark pools. Based on customer executions, Project Omega’s Heatmap algorithm was designed to open positions in specific securities in displayed markets at the bid or the offer and then close them at midpoint or better in the external dark pools where customers had received midpoint executions. The goal of this strategy was to earn a “half spread” or better based on knowledge of ITG customers’ executions.

My Christ. Front-running with a vengeance ITG’s press release states, in part:

ITG is an independent execution broker and research provider that partners with global portfolio managers and traders to provide unique data-driven insights throughout the investment process.

ITG was once recommended to me by an influential and knowledgeable guy as having good algorithms that I could use for accounts held in third-party custody; I never had any need for them, but tucked away the information for potential use. Well, I’ve scratched out that memo. I hope they get sued for bazillions (having admitted wrongdoing!), go bankrupt and have all members of management starve to death on the streets. But we’ll see.

Brookfield Asset Management has announced:

it has received approval from the Toronto Stock Exchange (“TSX”) for its proposed normal course issuer bid to purchase up to 10% of the public float of each series of the company’s outstanding Class A Preference Shares, excluding the Series 14 Class A Preference Shares, that are listed on the TSX (the “Preferred Shares”). Purchases under the bid will be made through the facilities of the TSX. The period of the normal course issuer bid will extend from August 12, 2015 to August 11, 2016, or an earlier date should Brookfield complete its purchases. Brookfield will pay the market price at the time of acquisition for any Preferred Shares purchased. All Preferred Shares acquired by Brookfield under this bid will be cancelled. Brookfield has not repurchased any Preferred Shares in the past 12 months.

Under the normal course issuer bid, Brookfield is authorized to repurchase each respective series of the Preferred Shares as follows: … [list of all preferred shares, with data on daily and total maximal purchases]

This press release, which was brought to my attention by Assiduous Reader Louisprefs, follows the June 23 announcement of a NCIB by BRF and the June 29 follow-up to this announcing an automatic purchase plan with its designated broker. As it turns out, this NCIB was real (they’re usually just cheerleading) and I’ll post about the results soon.

CU Inc., proud issuer of CIU.PR.A and CIU.PR.C was confirmed at Pfd-2(high) by DBRS:

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Unsecured Debentures & Medium Term Notes rating of CU Inc. (CUI or the Company) at A (high), Commercial Paper rating at R-1 (low), and Cumulative Preferred Shares rating at Pfd-2 (high). All trends are Stable. The confirmation reflects DBRS’s expectation that (1) the quality of transmission and distribution regulatory regimes in Alberta, which has shown signs of deterioration in 2015, will remain reasonable for the current rating category; (2) CUI’s diversification across different energy segments will continue to support the stability of earnings and cash flow; and (3) overall key credit metrics will remain within the “A” rating category despite the continued large capital expenditure (capex) program over the next two years. The debt-to-cash flow ratio, which is currently at the lower end of the “A” rating range, is expected to improve gradually over the next three years.
…
With the downshifting of Alberta’s economy and expected completion of the “big build” associated with electric transmission infrastructure over the next two years, capex will likely further normalize, while earnings and cash flow will benefit from a higher rate base. As a result, DBRS expects free cash flow before dividends to become positive in 2017, and the cash flow-to-debt ratio to gradually recover to around historical levels (15%) more consistent with the current rating category. The rating assumes excess cash, which is not required to maintain the regulatory capital structure, will flow up to its parent company, Canadian Utilities Limited (rated “A” by DBRS).

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 5bp, FixedResets gaining 17bp and DeemedRetractibles up 25bp. TRP issues are again notable in the bad part of the Performance Highlights table, while ENB FixedResets occupy a more desirable neighborhood. Volume was very low.

PerpetualDiscounts now yield 5.44%, equivalent to 7.07% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.95%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread” is now about 310bp, a small (and perhaps spurious) widening from the 305bp reported August 5.

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 13.75 to be $0.76 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.79 cheap at its bid price of 14.02.

Click for Big

Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 24.84 to be 0.59 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.32 to be $0.48 cheap.

Click for Big

The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.Z, resetting at +296bp on 2017-12-31, bid at 21.85 to be $1.12 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.75 and appears to be $1.28 rich.

Click for Big

FTS.PR.M, with a spread of +248bp, and bid at 23.35, looks $0.38 expensive and resets 2019-12-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 20.09 and is $0.83 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.30%, with no outliers. There is one junk outlier below -1.00% and one above +1.00%.

Click for Big

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

The SEC took down a major trading operation today:

While the SEC has uncovered and successfully litigated hacking and trading schemes in the past, today’s international case is unprecedented in terms of the scope of the hacking at issue; the number of traders involved; the number of securities unlawfully traded; and the amount of profits generated. Over the course of 5 years, the 32 defendants named in this complaint are charged with carrying out a brazen scheme to steal non-public earnings information for hundreds of publicly traded companies, and then placing thousands of trades through a network of U.S. and overseas traders located in the Russian Federation, Ukraine, Malta, Cyprus, France, New York, Pennsylvania and Georgia—geographies electronically connected by this illicit network.

According to the complaint, these traders located across the globe executed thousands of illicit trades on the basis of this material, nonpublic information, concealing their scheme by spreading the transactions across multiple accounts held in the names of many individuals and entities. And, the traders were market savvy, using equities, options and contracts-for-differences to maximize their profits.

Two Ukrainian hackers are charged with spearheading the scheme, Ivan Turchynov and Okelsandr Ieremenko. Along with the 30 other defendants, they are collectively alleged to have made more than $100 million in illegal profits by trading based on pre-release corporate earnings announcements stolen from multiple newswire services. We charged these defendants in a complaint unsealed today with multiple securities fraud violations, seeking disgorgement and penalties, and we obtained an asset freeze against the overseas traders, which secured at least $20 million of the defendants’ ill-gotten gains. And the SEC’s investigation continues.

Ontario has released some more details of the Ontario Retirement Pension Plan:

Employers and employees who participate in a comparable pension plan will not be required to participate in the ORPP.
…
There are considerable differences between DB and DC pension plans. For example, DC plans do not require employer matching. They also do not allow for the pooled longevity and investment risk that provide people the assurance they will not outlive their savings, and protect them from market volatility.

Actuarial analysis has been conducted to place a value on these differences, and determine a contribution rate that would be able to reliably deliver the same level of retirement income replacement as the ORPP. For this reason, to be considered comparable, a DC plan must:

• •Have a minimum annual contribution rate of 8 per cent
• •Require at least 50 per cent matching of the minimum rate from employers.

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Holy Smokes, but they don’t like DC plans, do they? Eight percent contribution rate? Craziness. And nobody in their right mind will start a DB plan.

Oil got whacked today:

Crude closed at the lowest level in more than six years in New York as OPEC production climbed while China’s devaluation of the yuan bolstered concern that the world’s second-biggest economy will slow.

West Texas Intermediate futures tumbled 4.2 percent. The Organization of Petroleum Exporting Countries raised output by 100,700 barrels a day to 31.5 million last month, the most since June 2012, the group said in its monthly report, citing external sources. The Chinese move may curb demand as import costs rise.
…
WTI for September delivery fell $1.88 to $43.08 a barrel on the New York Mercantile Exchange. It was the lowest settlement since March 2009. The contract touched $42.69, the lowest intraday price since March 18.

… and emerging market currencies were whacked in the fallout from the Yuan devaluation reported yesterday:

China’s devaluation will spark another wave of declines, said David Woo, Bank of America Corp.’s head of rates and foreign-exchange research in New York. The Asian nation is vital to the global economy, accounting for about 27 percent of growth.

“This will trigger competitive devaluation around the world that will start in Asia but definitely not end in Asia,” said Woo, who’s been predicting China would act since January.

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There are local repercussions as well:

The Canadian dollar closed at 76.31 cents (U.S), down 0.61 cents (U.S) from Monday’s close of 76.92 cents (U.S).
…
There is speculation that the much anticipated rate hike in September from the U.S. Federal reserve may be put on hold after China’s move to depreciate its currency

It was a mixed-negative day for the Canadian preferred market, with PerpetualDiscounts flat, FixedResets off 39bp and DeemedRetractibles gaining 4bp. TRP issues were notable on the unfortunate side of the Performance Highlights table. Volume was low.

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 13.91 to be $0.81 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.82 cheap at its bid price of 14.10.

Click for Big

Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 24.50 to be 0.41 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.23 to be $0.41 cheap.

Click for Big

The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.Z, resetting at +296bp on 2017-12-31, bid at 21.80 to be $1.26 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.71 and appears to be $1.20 rich.

Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.05, looks $0.56 expensive and resets 2020-6-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 19.93 and is $0.78 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.17%, with no outliers. There is one junk outlier below -1.00%.

Click for Big

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

If you spend a lot of time arguing about Supply Management (I particularly enjoy trolling the comment sections of the Dairy Farmers’ of Ontario ads on Facebook) you will inevitably run up against the argument that US subsidies are higher than the effective subsidy supplied by quota. So I was pleased to find a paper by Peter Slade
and Getu Hailu of the University of Guelph titled Efficiency and Regulation: A Comparison of Dairy Farms in Ontario and New York State:

We study the efficiency of dairy farms operating under two different regulatory regimes. While neo-classical economic theory suggests that farms should maximize their efficiency regardless of their regulatory system, we find farms operating in a more regulated environment have, on average, a lower cost efficiency. In contrast to much of the previous literature on regulation and efficiency, we attribute the bulk of the difference in cost efficiency to the allocative decisions of farms. In particular, we find farms in the more regulated environment to be overcapitalized, and overly reliant on homegrown feed. To calculate efficiency we employ recent advancements in bootstrapped data envelopment analysis, and stochastic distance function estimation. We discuss the implications of these results for welfare and policy.

Fig. 1 Mean annual milk price in Ontario and New York (2000-2009)
Source: Authors’ calculations

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Fig. 2 Producer subsidy equivalent percentage for Canadian and United State dairy support programs (2000-2009)
Source: [OECD LINK]

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Figure 1 presents the farm-gate price of milk in Ontario and New York for the period 2000-2009. Throughout this period the price is significantly higher in Ontario than in New York. A simple price comparison is somewhat misleading however, as New York farms receive supports not captured in the price of milk. Figure 2 presents the producer subsidy equivalent percentage for the Canadian and US dairy industries. The producer subsidy equivalent percentage is calculated by the Organization for Economic Co-operation and Development. As its name suggests, this metric converts all government supports received by an average producer into a single \subsidy equivalent”, and divides this support by the total farm receipts. With the exception of 2001, Canadian farms enjoyed higher support than their American counterparts
between 2000 and 2009.

For aspiring FB Dairy Farmer Trolls, I also recommend the Ontario Dairy Farm Accounting Project, which demonstrates that small farms are less efficient than large ones (surprise, surpise) and has the advantage, from an advocacy perspective, of being published on the DFO’s own site and being one of the DFO’s own projects.

US education financing gets ever more ridiculous:

Laura Strong, a 29-year-old in suburban Chicago, owes $245,000 on student loans for the psychology Ph.D. she finished in 2013.
…
Strong pays about $100 a month on her federal loans, which she used to finance her graduate studies at Argosy University, a for-profit institution.
…
Income-based repayment was introduced under President Clinton, but the programs weren’t heavily promoted until late 2013, when the Obama administration began sending e-mails to borrowers, including Strong, telling them, “Your initial payment could be as low as $0 a month.” The number of people using these plans has quadrupled since 2012. About half of outstanding balances in the Department of Education’s Grad Plus loans, which finance advanced-degree studies, are in income-driven plans. Most borrowers in the programs have payments capped at 15 percent of income, with allowances for housing and other expenses. In December the Obama administration is expected to expand the number of borrowers eligible for a payment cap of 10 percent. In a July 27 speech at the University of Maryland’s Baltimore campus, Secretary of Education Arne Duncan said the plans protect people going into socially valuable but low-paying lines of work from crushing debt. “That’s good for them. That’s good for our economy. It’s good for our society,” he said.

Critics say the plans are a hidden subsidy to well-off students and colleges, which can justify tuition increases by reassuring students that they may not have to repay their debt.

It’s a funny world when I don’t even understand what’s at issue in Google’s European anti-trust problems:

For example, when someone in a European city searched for the best restaurants, nearby dentists, or airplane flights, Google linked to its own maps and other services instead of displaying links to the best content from elsewhere on the Web.
…
On April 15, 2015, Almunia’s successor, Margrethe Vestager, a 47-year-old former finance minister from Denmark, approached the same Berlaymont podium in the same auditorium. “Dominant companies can’t abuse their dominant position to create advantage in related markets,” she said bluntly, formally accusing Google of exploiting its supremacy in general search to dominate the market for online product searches—the equivalent of an indictment, the very move that Almunia had sought to avoid through the private settlement at Davos.

That wasn’t all. Vestager (pronounced Vestayer) announced a new investigation into whether Google had abused its dominant position with the Android operating system for smartphones. She suggested other cases were possible, too—regarding Google’s expansion into the markets for local search, maps, images, travel, etc.

China has devalued the Yuan:

China devalued the yuan by the most in two decades, ending a de facto peg to the dollar that’s been in place since March and battered exports.

The People’s Bank of China cut its daily reference rate for the currency by a record 1.9 percent, triggering the yuan’s biggest one-day loss since China unified official and market exchange rates in January 1994. The change was a one-time adjustment, the central bank said in a statement, adding that it plans to keep the yuan stable at a “reasonable” level and will strengthen the market’s role in determining the fixing.
…
The PBOC had been supporting the yuan to deter capital outflows and encourage greater global usage as China pushes for official reserve status at the International Monetary Fund. The intervention contributed to a $300 billion slide in the nation’s foreign-exchange reserves over the last four quarters and made the yuan the best performer in emerging markets, eroding the competitiveness of Chinese exports.

The currency dropped 1.4 percent to 6.2980 per dollar as of 11:12 a.m. in Shanghai, and slid 1.6 percent in Hong Kong’s offshore trading. The onshore spot rate was 1.1 percent weaker than the reference rate of 6.2298, within the 2 percent limit allowed by the central bank.

It will be interesting to see how China’s neighbors and competitors react!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 4bp, FixedResets gaining 19bp and DeemedRetractibles down 12bp. The good side of the Performance Highlights table is comprised entirely of FixedResets, with a notable ENB contingent. Volume was very low.

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 13.96 to be $0.45 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.67 cheap at its bid price of 14.60.

Click for Big

Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 24.62 to be 0.45 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.19 to be $0.49 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 17.95 to be $1.11 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 17.29 and appears to be $1.44 rich.

Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.41, looks $0.43 expensive and resets 2020-6-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 20.13 and is $0.83 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.16%, with one outlier above 1.00%. There is one junk outlier below -1.00%.

Click for Big

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

Jobs, jobs, jobs!

Employers added 215,000 jobs in July and the unemployment rate held at a seven-year low of 5.3 percent, a Labor Department report showed Friday in Washington. The gain in payrolls last month followed a 231,000 advance in June that was bigger than previously estimated.
…
While the data also showed a pickup in hours worked, average hourly earnings climbed a less-than-forecast 2.1 percent from a year earlier, indicating little momentum in wage growth.

Retail and professional business services led the industries adding to headcounts in July, followed by health care and leisure and hospitality. Manufacturing payrolls rose by the most in six months on gains among non-durable goods producers. More jobs were also added in construction.

The report also showed a jump in full-time employment, while the number of part-time workers declined.
…
The average work week for all employees increased 6 minutes to 34.6 hours. A longer workweek often amounts to greater take-home pay for many employees.

The labor force participation rate, which indicates the share of working-age people who are employed or looking for work, held at 62.6 percent.

Factories boosted payrolls by 15,000, the most since January. The gains were led by more hiring in the non-durables industries, including food, plastics and paper.

Retailers added almost 36,000 workers and employment in the health care and leisure industries each climbed by about 30,000 in July.

We have another hilarious example of the law of unintended consequences:

London’s swankiest neighborhoods of Knightsbridge and Belgravia are becoming no-go areas for even the wealthiest property investors.

They are being driven out by higher sales taxes introduced by Chancellor of the Exchequer George Osborne in December, which rise to as much as 12 percent of the cost of the most expensive homes.

Buying agent Camilla Dell says that her clients are spending an average of 2 million pounds ($3.1 million) less on each transaction this year and they’re more interested in cheaper areas such as Hackney and Shoreditch. That’s because an investor buying a 5 million-pound home pays almost 364,000 pounds more in tax than if they spent the same amount of money on 10 apartments costing 500,000 pounds each.
…
With investors now buying more homes in less expensive districts, prices below Osborne’s threshold are climbing and owner-occupiers, who should have benefited from his tax cuts, are being penalized, Dell said. The tax increases kick in at 937,000 pounds.

“The very buyers Osborne was setting out to help, he’s put at a disadvantage,” she said. “At the same time, sales at the higher end have frozen. It was a very, very bad move.”
…
Investors who buy multiple apartments for about 500,000 pounds in London typically receive a rental yield of 4 percent to 5 percent, compared with about 2 percent for a luxury home in London’s best districts, Morris said.

And, interestingly with respect to Supply Management and the TPP, there is a global oversupply of milk:

Just months after the European Union lifted caps on milk production, there’s too much of it and some farmers are going broke. EU prices have tumbled to a five-year low, compounded by a global surplus and shrinking demand that’s disrupted exports. China is cutting back purchases and Russia, once the largest buyer of EU butter and cheese, halted imports last year in retaliation for sanctions over its conflict with Ukraine.
…
An EU gauge tracking consumer prices for milk, cheese and eggs has dropped 2.1 percent from last year. Retail prices for whole milk in France fell 5.6 percent since last year, according to the latest government data from June.

With prices so low, there’s little incentive for European producers to increase supply, even after EU regulators in April ended a system that had capped production for 30 years. This year, the EU expects output to rise 1 percent to 161.4 million tons.

The removal of quotas marked a change to an open-market system. Before the limits, government purchases of surpluses were intended to aid farmers but instead led to overproduction.
…
The plunge in dairy costs helped push down a gauge of global food prices in July to the lowest since September 2009, the United Nations’ Food & Agriculture Organization said Thursday.

It’s nice to see Rob Ford fairly treated:

DBRS notes that the City’s operating fiscal discipline has improved notably in recent years, with nearly $1.0 billion in ongoing operational savings or efficiencies achieved from 2011 to 2014 through a comprehensive service review process and through negotiated provisions in collective agreements.

There’s more fuss at the SEC about the Pay-Ratio Disclosure Rule discussed August 5, with Piwowar adding to his remarks:

The pay ratio disclosure rulemaking has flaws throughout. I further enumerate a number of those defects below.

I. The Proposing Release did not provide sufficient notice under the Administrative Procedure Act.[2]
…
II. Once the Commission decided what objectives Section 953(b) was intended to accomplish, it failed to publicly disclose such understanding prior to adoption.
…
III. The Commission failed to consider what the quantitative effects of providing flexibility would be on the accuracy of the pay ratio. By not evaluating such quantitative effects, the Commission acted in an arbitrary and capricious manner when it limited the de minimis exclusion of non-U.S. employees to 5%.
…
IV. The Commission acted arbitrarily and capriciously when it defined “employee” to include contract workers only if they are employed by an unaffiliated third party.
…
V. The Commission’s economic analysis failed to consider academic studies as to whether the pay ratio might create pressure to increase CEO compensation.
…
VI. Use of the pay ratio for comparative purposes among companies may violate an investment adviser’s fiduciary duty under the Investment Advisers Act of 1940.[69]
…
VII. Conclusion

I have many objections to the pay ratio disclosure, as set forth in my remarks at the Commission’s open meeting and my comments above. Should the final rule become effective, I have one request for companies. Please keep track of your compliance costs and consider voluntarily disclosing that information alongside your pay ratio. The Commission and others should have an understanding of your actual compliance costs, and voluntary disclosures would make the likely incredibly high costs evident. But even then, be careful; such information must be “clearly identified, not misleading, and not presented with greater prominence than the required ratio.”[76]

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts winning 32bp, FixedResets up 5bp and DeemedRetractibles gaining 2bp. PerpetualDiscounts were notable on the good side of the Performance Highlights table. Volume was very low.

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 13.90 to be $0.44 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.84 cheap at its bid price of 14.50.

Click for Big

Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 24.58 to be 0.46 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.09 to be $0.49 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 18.05 to be $1.16 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 17.30 and appears to be $1.30 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 20.46, looks $0.54 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 19.98 and is $0.84 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.08%, with one outlier above 1.00%. There is one junk outlier below -1.00%.

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

Walmart’s run into a little labour trouble after raising their in-house minimum wage because the tier above wants to keep their increment:

When Wal-Mart Stores Inc. chief Doug McMillon announced plans to boost store workers’ minimum wage earlier this year, he said the move was intended to improve morale and retain employees.

Yet for some of the hundreds of thousands of workers getting no raise, the policy is having the opposite effect.

In interviews and in hundreds of comments on Facebook, Wal-Mart employees are calling the move unfair to senior workers who got no increase and now make the same or close to what newer, less experienced colleagues earn. New workers started making a minimum of $9 an hour in April and will get at least $10 an hour in February.

“It is pitting people against each other,” said Charmaine Givens-Thomas, a 10-year veteran who makes $12 an hour at a store near Chicago and belongs to OUR Walmart, a union-backed group that has lobbied for better working conditions. “It hurts morale when people feel like they aren’t being appreciated. I hear people every day talking about looking for other jobs and wanting to remove themselves from Wal-Mart and a job that will make them feel like that.”

And, perhaps not very coincidentally, there are murmurings of disquiet about a US national $15 minimum wage:

As the proposed federal minimum wage goes up and up, economists support it less and less. In January 2014, seven Nobel laureates and eight ex-presidents of the American Economic Association signed a letter backing a federal minimum wage of $10.10 an hour by 2016, up from $7.25. They said it would “provide a much-needed boost” to low-income workers while causing “little or no” job loss. Fifteen dollars an hour is another story. None of those luminaries signed the letter in July that endorsed a Senate bill introduced by presidential candidate Bernie Sanders (D-Vt.) to raise the federal minimum to $15 an hour by 2020.

Regional economic differences are one reason a lot of economists are nervous about jumping to $15: A wage floor that’s right for New York or San Francisco could be too high for Brownsville, Texas; Gadsden, Ala.; or Ponce, Puerto Rico. In such places, $15 an hour “may have large negative employment effects,” Ronald Ehrenberg, a Cornell University labor economist, wrote in an e-mail. He was one of about 600 economists who signed the $10.10 letter last year. He says he wasn’t approached to sign the $15 letter but would have said no if asked.
…
A $15 minimum is just 67 percent of the median wage in high-cost Alaska, so it would have a modest effect if implemented today, lifting pay of people at the bottom but not affecting the middle rungs of the income ladder. In Puerto Rico, though, $15 is 155 percent of the median wage. If the federal minimum were raised to $15 today (rather than in 2020, as Sanders proposes), it would be 55 percent higher than the midpoint of what all Puerto Ricans earn. That would cause severe stress in a financially struggling territory already squeezed by the $7.25 minimum. Even within a single state, it’s hard to come up with a minimum that works everywhere. In California, the median wage varies from more than $28 an hour in Silicon Valley (technically San Benito and Santa Clara counties) to less than $14 in Visalia-Porterville, a farm town 190 miles away by car.

A portion of the justification cited in the Bernie Saunders endorsement letter is the 50-year trend in productivity:

The real, inflation-adjusted, value of the federal minimum wage has fallen dramatically over time. The real value of the federal minimum wage peaked in 1968 at 10.85 an hour, 50 percent above the current level. Moreover, since 1968, average U.S. labor productivity has risen by roughly 140 percent. This means that, if the federal minimum wage had risen in step with both inflation and average labor productivity since 1968, the federal minimum wage today would be $26.00 an hour. (References for all data cited in this petition can be found here: LINK)

So we can take a look at the link and see how their productivity increase was derived:

Labor productivity over time is measured by the BLS Labor Productivity and Costs program (LPC). The specific index used here is for the Business Sector. The index value (base year=2009) in 1968 is 43.503 and 105.998 for 2014, indicating a 143 percent increase in productivity (105.998 /43.503).

They didn’t go into any more detail than that, so we’ll ask FRED and see what the inflation-adjusted minimum wage looks like:

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So the real minimum wage in the States is currently at its 1950 value and has been for the last twenty-five years. There was a significant peak in 1968, as the endorsement letter writers state; I assume this is because all the kids were hippies then (LAZY, SMELLY hippies) or were in Vietnam. But I will leave that to historians and content myself with pointing out that the selection of a starting point for their claim is not representative of long-term conditions.

It’s much the same in Ontario Livio Di Matteo on the Worthwhile Canadian Initiative blog:

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But the other thing they’re doing is sticking productivity into the mix as well. Now, according to the Pew Research Center:

According to the Bureau of Labor Statistics, last year 1.532 million hourly workers earned the federal minimum of $7.25 an hour; nearly 1.8 million more earned less than that because they fell under one of several exemptions (tipped employees, full-time students, certain disabled workers and others), for a total of 3.3 million hourly workers at or below the federal minimum.

That group represents 4.3% of the nation’s 75.9 million hourly-paid workers and 2.6% of all wage and salary workers. In 1979, when the BLS began regularly studying minimum-wage workers, they represented 13.4% of hourly workers and 7.9% of all wage and salary workers. (Bear in mind that the 3.3 million figure doesn’t include salaried workers, although BLS says relatively few salaried workers are paid at what would translate into below-minimum hourly rates. Also, 23 states, as well as the District of Columbia, have higher minimum wages than the federal standard; people who earned the state minimum wage in those jurisdictions aren’t included in the 3.3 million total.)

… and …

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So – freely interpreting here – minimum wage earners are potato peelers, pizza makers, waitresses, store cashiers, manicurists, office cleaners and gardeners.

And my point is: how has the productivity of employees in these occupations increased over the last fifty years? There may have been some marginal improvement – gardeners can now use leaf-blowers and make far louder noises than they used to – but I’ll suggest that, by and large, the productivity in these occupations has not moved much and certainly has not increased by the 143% figure used to derive the justification for the $26.00 figure given in the Sanders endorsement letter.

In fact, I’ll go further and suggest that the uneven distribution of productivity gains over the past fifty years is what is causing income inequality in the first place. Or at least a chunk of it, the chunk that you see when you work at McDonalds and the guy across the street is a systems administrator for a medium sized company.

Now don’t get me wrong! I support an increased minimum wage and I would even like it to be indexed not to inflation, but to inflation +50bp (say), so that we can increase the incentive to modernize all these marginal jobs. If we want to redistribute the fruits of productivity gains – and I will not dismiss the idea outright – that is something we should be doing through the tax system, in what is usually referred to as a guaranteed annual income:

According to several Queen’s University professors, the cost of replacing social assistance (which includes welfare and disability support) and Old Age Security (which includes a top-up for low-income seniors), plus providing every adult with an annual income of $20,000 and children with an income guarantee of $6,000, would be $40-billion. The Fraser Institute calculates the total cost of Canada’s current income support system (payout plus administrative costs) at $185-billion in 2013.

Our own estimates, which build on existing social programs, range from a gross annual cost of $17-billion for a program that (in today’s dollars) is slightly more generous than was offered in Dauphin, to a “Cadillac” version costing $58-billion that would guarantee everyone a minimum income equal to the low-income cutoff and pay at least some benefits to people earning well above the low-income cutoff.

The cost of a GAI depends on how generous it is, how quickly benefits are phased out with additional income and how existing social programs are affected.

Sadly, however, the political trend is in the other direction – with some idiots touting narrowly targeted tax credits in order to create jobs for tax lawyers and CRA auditors, while other idiots tout means-tested benefits in order to impose ludicrous effective marginal tax rates on recipients to ensure they remain dependent and don’t get uppity. I’m sure I’ve discussed means-testing of benefits and marginal tax rates on PrefBlog, and referred to a Congressional Budget Office study on the matter, but can’t find the reference! [Update: try Illustrative Examples of Effective Marginal Tax Rates Faced by Married and Single Taxpayers: Supplemental Material for Effective Marginal Tax Rates for Low- and Moderate-Income Workers, which isn’t exactly the one I remember, but it’s close!]

Meanwhile, cord-cutters are cutting prices:

Cord-cutting millennials who shun cable TV have long plagued the entertainment industry. Now they’re wreaking havoc on Wall Street.

Media companies led by Walt Disney Co. lost more than $60 billion in market capitalization in two days on mounting evidence of shrinking demand for cable TV and networks like ESPN that make money from ads. So-called cord cutters, who quit paying for pay-TV packages of hundreds of channels and favor online streaming services like Netflix Inc., are undermining a business model that has sustained the TV industry for decades.

It took Disney, a company with a stellar record of sales and profit, to deliver the wake-up call and end Wall Street’s 6 1/2 year love affair with traditional media. Disney’s disappointing results Tuesday night led to what long-time cable analyst Craig Moffett called swift and unprecedented carnage. The S&P 500 Media Index has since dropped 11 percent — on pace to be the worst two-day slump since 2008.

… and Treasuries are jumpy:

For the past six years, a Federal Reserve rate interest-rate hike wasn’t on anyone’s radar screen. Now, even minor data points are provoking outsized reactions given a real possibility the central bank may raise rates next month for the first time in almost a decade.

The weak employment cost index report on July 31 sent Treasury 10-year yields tumbling four basis points in five minutes, more than six times the average move after the past year’s reports. On Wednesday, yields slid three basis points in 10 minutes on disappointing data on private-sector job creation, reversed course, then continued to climb after a strong reading on service-sector growth.

There was an interesting piece in the Globe regarding the potential for corporate ownership of law firms:

Australia’s Slater & Gordon Ltd. became the first law firm in the world to be listed on a stock exchange in 2007. And despite its critics, it has since been busy growing revenue at a rapid clip, gobbling up rivals at home and in Britain. It now has its eyes on Canada.
…
The concept was an issue in Law Society of Upper Canada elections earlier this year. The Ontario Trial Lawyers Association (OTLA), which represents personal injury lawyers likely to face competitive pressure if Slater & Gordon enters Canada, endorsed a list of candidates opposed to the idea. Twenty-seven of the 40 lawyers who won what are known as “bencher” seats on the law society’s governing body were OTLA-approved. A follow-up report on the idea is expected to come before the law society this fall.

Proponents say allowing law firms to attract capital from non-lawyers means they can use it to expand and provide innovative new legal services, such as those offered in kiosks in department stores or via the Web. They say these new services will help deal with the “access to justice” problem, which sees many Canadians unable to afford a lawyer.

But naysayers warn the reforms would force lawyers to answer to bottom-line-focused shareholders, instead of just to their clients and the greater good. They say this would create new ethical and conflict-of-interest land mines, if the interests of a law firm’s owners and its clients clash. Critics also charge that there is no evidence these new structures help those who cannot afford a lawyer to hire one.

Of the naysayer’s points, only the second, regarding ethics and conflict-of-interest, carries much weight with me. To suggest that practitioner-owned firms think only of their clients and the greater good is to put these firms on rather a higher pedestal than I think is warranted; the third point is irrelevant because the onus is on the regulators to prove that harm is likely, rather than on innovators to prove that improvement is likely.

The Law Society of Upper Canada has published Alternative Business Structures and the Legal Profession in Ontario: A Discussion Paper in which is stated:

Legal service regulation ensures that clients have competent, independent legal representation provided with candour and confidentiality. It also protects society by ensuring that legal services are provided with fidelity to the cause of justice, the rule of law and the administration of justice. These professional values would have to be safeguarded in any move to liberalize ownership or structure including ABS.

Many of those who are sceptical of ABS express particular concern about protection of these professional values.[22] On the other hand, ABS proponents do not dismiss the importance of these professional values, but rather believe that these values can be properly protected in an ABS model.[23]

Footnote 22 refers to a paper by Nick Robinson of Harvard Law School titled When Lawyers Don’t Get All the Profits: Non-Lawyer Ownership of Legal Services, Access, and Professionalism:

With multiple countries now allowing for non-lawyer ownership of legal services, and other jurisdictions considering a similar shift, the legal profession is in the midst of a global regulatory moment. Where non-lawyer ownership has been allowed, personal injury firms have listed on stock exchanges, major insurance companies have bought law firms, and brands best known for their grocery stores have started offering legal services. Proponents argue that these developments will spur investment and innovation, promoting access to justice by making legal services more affordable and reliable. However, there has been little empirical research to test this proposition.

This article draws on case studies and quantitative data from the United Kingdom and Australia, where non-lawyer ownership has been allowed, as well as the United States – where parallels to such ownership have emerged in online and administrative law legal services. Based on this evidence, it argues that the benefits of non-lawyer ownership have been oversold with respect to access to civil legal services for poor and moderate-income populations and it identifies serious new professionalism challenges such ownership can create. While some form of non-lawyer ownership is likely to continue to spread, these conclusions cast doubt on the ability of non-lawyer ownership to substantially improve access to legal services, suggesting that alternative access strategies should be prioritized. They also point towards the need to carefully regulate non-lawyer ownership in some contexts.

Traditionally, academics have been wary that lawyers will capture the regulation of legal services, but non-lawyer ownership, which allows for others to profit from legal services as well, raises the likelihood that new actors may also capture the profession’s regulation. Given this environment, the article recommends that going forward a diverse set of stakeholders, drawing on as much empirical data as possible, develop a tailored approach to the regulation of non-lawyer ownership.

It’s an interesting debate and not much different, as far as I can tell, from the question of whether corporations should be allowed to own Portfolio Management companies. I think the disputing lawyers would be well advised to look at some of the bank-owned asset managers as a case study; I suspect that corporate ownership of law firms will lead to:

• increased access to
• plain vanilla, cookie-cutter legal advice

It was another poor day for the Canadian preferred share market, with PerpetualDiscounts down 38bp, FixedResets losing 46bp and DeemedRetractibles off 2bp. Enbridge issues were particularly notable on the unfortunate side of 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

TRP.PR.A, which resets 2019-12-31 at +192, is bid at 18.55 to be $0.71 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.17 cheap at its bid price of 14.10.

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Another good fit today!

Most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 17.13 to be 0.44 rich, while MFC.PR.M, resetting at +236bp on 2019-122-19, is bid at 21.85 to be $0.46 cheap.

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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 18.00 to be $1.22 cheap. BAM.PF.X, resetting at +180bp on 2017-6-30 is bid at 17.25 and appears to be $1.19 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 20.63, looks $0.42 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 19.75 and is $0.99 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.04%, with one outlier above 1.00%. There is one junk outlier above +1.00%.

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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 more muttering about a September Fed hike:

Traders have never been more convinced of a September rate hike by the Federal Reserve.

The chances of an interest-rate increase next month reached 52 percent Wednesday, up from just 38 percent just two days earlier. What’s fueled the change of heart? Hawkish comments from Fed Bank of Atlanta President Dennis Lockhart on Tuesday, and a surprisingly strong report on U.S. service-sector growth Wednesday morning.
…
Yields on Treasury one-month bills rose Wednesday to the highest since November, while those on two-year notes touched the highest since 2011. Longer maturities slumped as well. Benchmark 10-year yields added five basis points to 2.27 percent.

But historical rules may not apply in this peculiar world:

Treasury two-year yields of just 0.73 percent are low historically, yet they’re looking better and better compared with the alternatives.

The U.S. yield is almost 1 percentage point more than its German counterpart, which is negative 0.25 percent. The premium reached the most this week since 2007. Against Canada, the spread was as much as 33 basis points on Aug. 4, also the most in eight years.
…
While the Fed is getting ready to raise rates, the European Central Bank is buying government bonds to support the economy by putting downward pressure on borrowing costs. The Bank of Canada cut interest rates twice this year.

Yesterday I reported on SEC Commissioner Daniel M. Gallagher’s harsh words reporting Dodd-Frank. Today there’s some more Dodd-Frank idiocy:

The Securities and Exchange Commission today adopted a final rule that requires a public company to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees. The new rule, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, provides companies with flexibility in calculating this pay ratio, and helps inform shareholders when voting on “say on pay.”

This social engineering was endorsed by Commissioner Kara M. Stein, Commissioner Luis A. Aguilar and Chair Mary Jo White, who noted:

To say that the views on the pay ratio disclosure requirement are divided is an obvious understatement. Since it was mandated by Congress, the pay ratio rule has been controversial, spurring a contentious and, at times, heated dialogue. The Commission has received more than 287,400 comment letters, including over 1,500 unique letters, with some asserting the importance of the rule to shareholders as they consider the issue of appropriate CEO compensation and investment decisions, and others asserting that the rule has no benefits and will needlessly cause issuers to incur significant costs.

These differences in views were evident at the time the Commission voted to propose the pay ratio rule. That the Commission was even considering the rule proposal was, for example, criticized as contrary to our mission. We may hear similar thoughts today.

So the three Democrats supported the measure, but the two Republicans opposed it; our friend Commissioner Daniel M. Gallagher stated:

The release does an impressive job of creating out of whole cloth a rationale for this rule: that it could help inform investors in their oversight of executive compensation, including say-on-pay votes.[1] But, to steal a line from Justice Scalia, this is pure applesauce.[2] The purpose of this rule is not to inform a reasonable investor’s voting or investment decision.[3] The AFL-CIO, which lobbied for the rule’s inclusion in Dodd-Frank, has explained for us its true purpose: “Disclosing this pay ratio will shame companies into lowering C.E.O. pay.”[4] And, “They will be embarrassed, and that’s the whole point.”[5] But addressing perceived income inequality is not the province of the securities laws or the Commission. And yet here we are, on the cusp of adopting a nakedly political rule that hijacks the SEC’s disclosure regime to once again effect social change desired by ideologues and special interest groups.

* * *

As an initial matter, we did not have to take up this rule today. Section 953(b) of Dodd-Frank does not have a statutory deadline. There are other, more pressing matters for the Commission, including policymaking with respect to matters actually involving the SEC’s core mission. On the occasion of Dodd-Frank’s fifth anniversary, many have spoken about the law as a fait accompli. But that is far from the truth at the SEC.[6] For example, we have not completed our implementation of Title VII,[7] and we are way past the statutory deadline for adopting mandated rules on stock lending transparency. This rulemaking may well be the most useless of all our Dodd-Frank mandates — that really says something — and it warranted the “caboose” treatment.

and Commissioner Michael S. Piwowar said:

Today’s rulemaking implements a provision of the highly partisan Dodd-Frank Act[2] that pandered to politically-connected special interest groups and, independent of the Act, could not stand on its own merits.[3] I am incredibly disappointed the Commission is stepping into that fray.

Section 953(b) of Dodd-Frank simply has nothing to do with protecting investors, ensuring fair, orderly, and efficient markets, or facilitating capital formation. The proposing release is candid about the fact that “neither the statute nor the related legislative history directly states the objectives or intended benefits of the provision or of a specific market failure, if any, that is intended to be remedied.”[4]
…
The timing of this vote is quite peculiar given the recent moves by Congress to repeal the pay-ratio provision. Last week, six more co-sponsors signed on to a bill introduced in the House by Representative Bill Huizenga of Michigan to repeal Section 953(b), bringing the total number of co-sponsors to 23 members.[32] Less than a month ago, Senator Mike Rounds of South Dakota introduced a pay-ratio repeal bill in the Senate, which added a co-sponsor two days ago.[33] It does not seem coincidental that our open meeting was scheduled for the week after the House of Representatives adjourned for August recess and one day before the Senate is expected to do the same.[34]

But it ain’t over ’til it’s over … and that might be a while:

Even so, Republicans and business groups still oppose the requirement and said the SEC ignored some of their recommendations to improve it. Groups such as the U.S. Chamber of Commerce or the Business Roundtable are expected to sue the agency over the rule.

“We will continue to review the rule and explore our options for how best to clean up the mess it has created,” the chamber’s David Hirschmann said in a statement Wednesday.

The whole thing is as crazy as it would be to get the securities regulators to encourage greater representation by women on boards and in positions of senior management … oh, wait … we’ve done that … it was a request of the Ontario government. Well, at least it reassures us that everything is perfect in InvestmentLand!

Wonder of wonders, it was a good day for the Canadian preferred share market, something I haven’t had much opportunity to say in he past three months! PerpetualDiscounts gained 29bp, FixedResets won 62bp and DeemedRetractibles were up 32bp. The Performance Highlights table is lengthy and very heavily tilted towards winners. Volume was below average.

PerpetualDiscounts now yield 5.43%, equivalent to 7.06% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.0%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 305bp, a significant increase from the 295bp reported July 29.

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 14.06 to be $0.46 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.81 cheap at its bid price of 14.36.

Click for Big

Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 24.85 to be 0.59 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.20 to be $0.42 cheap.

Click for Big

The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.Z, resetting at +296bp on 2017-12-31, bid at 21.83 to be $1.04 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 23.40 and appears to be $1.17 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 21.18, looks $0.70 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 19.96 and is $1.03 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.03%, with one outlier above 1.00%. There is one junk outlier above +1.00%.

Click for Big

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

There are new indications of a September Fed hike:

Traders are seeing virtually even odds on a September interest-rate increase in the U.S., pushing a gauge of the dollar to a four-month high.

The greenback rallied versus most major peers Tuesday as Federal Reserve Bank of Atlanta President Dennis Lockhart said in an interview with the Wall Street Journal that the central bank is close to raising rates next month for the first time since 2006. A report Friday is forecast to show U.S. employers added more than 200,000 jobs again in July.
…
Traders are pricing in a 48 percent probability that the Fed will raise borrowing costs in September, based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

So I don’t know how this fits in:

Investor demand for longer-maturity Treasuries means they’re willing to accept a smaller yield premium to get the securities. Fidelity Investments says the trend has further to go.

The extra yield on 10-year notes over two-year securities shrank to 147 basis points Tuesday, the narrowest spread in three months. Traders in the world’s biggest bond market call this a flattening of the yield curve. The figure is less than the average of almost 2 percentage points for the past five years.
…
The difference between one-year U.S. yields and those for similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was negative 0.67 percent. It has been below zero for two weeks.

SEC Commissioner Daniel M. Gallagher gave an entertaining speech on Dodd-Frank:

Last month marked the fifth anniversary of the Dodd-Frank Act,[1] meaning that my entire tenure as a Commissioner has occurred in the midst of the first Five-Year Plan for our national economy. And, as is always the case with grandiose central plans, Dodd-Frank has backfired, strangling our economy, increasing the fragility of the financial system, and politicizing our independent financial regulators.
…
Prudential regulation is an important tool for bank regulators to use in supervising banks’ risk-taking activities, so as to ensure that risks are limited to an acceptable level and avoid posing an undue strain on the government insurance backstop — despite the moral hazard and expectations of “no losses” that the insurance itself creates. But in practice, “prudential” regulation can and has evolved into an opaque regulatory system in which the government’s invisible hand replaces the market’s, transcending rule enforcement and becoming the decision maker for ostensibly private enterprises.

The attempts by our prudential regulators and their international counterparts to de-risk the U.S. capital markets and make them look like the banking markets are not just philosophically wrong — they are an attack on U.S. competitiveness. As I have stated before, piling more regulatory burdens on our capital markets will only cause more activity to move overseas, where up-and-coming jurisdictions in Asia and elsewhere would be more than happy to gain market share.[7] And it will stifle domestic economic activity, as companies will be forced to line up for bank loans made scarce by new bank regulations rather than pursuing capital formation opportunities in the market.

It was another rotten day for the Canadian preferred share market, with PerpetualDiscounts and FixedResets both down 27bp and DeemedRetractibles losing 39bp. TRP, ENB and SLF issues are notable on the bad side of the 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

TRP.PR.B, which resets 2020-6-30 at +128, is bid at 14.15 to be $0.84 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.85 cheap at its bid price of 14.30.

Click for Big

Another good fit today!

Most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 16.78 to be 0.36 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.12 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.PR.Z, resetting at +296bp on 2017-12-31, bid at 21.78 to be $1.21 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 23.25 and appears to be $0.95 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 21.40, looks $0.91 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 20.14 and is $0.88 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of +0.03%, with one outlier above 1.00% and one below -1.00%. There is one junk outlier above +1.00%.

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