PrefBlog

So the Canadian jobs number wasn’t as bad as expected, because we’re all working for the government:

Canadian employment fell by 6,400 in June on the biggest decline in part-time work in more than four years, sustaining the view the economy is losing steam and may require another jolt of stimulus from the central bank.

The unemployment rate remained at 6.8 percent for a fifth month, Statistics Canada said Friday in Ottawa. Part-time work fell 71,200, exceeding the 64,800 gain in full-time work. Quebec posted a decline of 33,300, the most since May 2005.
…
Private companies cut 26,300 workers, tempering gains in public-sector employment, which rose by 42,200.

Meanwhile, Yellen continues to expect a Fed hike:

Federal Reserve Chair Janet Yellen, speaking after weeks of financial-market turmoil over China and Greece, maintained her call for an interest-rate increase this year as the U.S. economy improves.

“I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy,” Yellen said in her first public remarks since the June meeting of the Federal Open Market Committee.

Yellen added a note of caution, saying that “the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step.” In her only mention of Greece in a 14-page speech delivered Friday in Cleveland, she identified that nation’s debt crisis as one cause of uncertainty.

And worrying about Greece is, like, getting old, you know?

Stock investors got jolted in a zigzag week, with plunges around the world giving way to the biggest rallies in at least three years for China and Europe.

Spurred by optimism on Greece, the Stoxx Europe 600 Index climbed 4.3 percent on Thursday and Friday, erasing earlier losses with the biggest two-day advance since 2011. The Shanghai Stock Exchange Composite Index jumped 11 percent in two sessions, the most in almost seven years, while the Standard & Poor’s 500 Index added 1.2 percent Friday to wipe out a weekly decline.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 19bp, FixedResets gaining 45bp and DeemedRetractibles down 21bp. Floaters bounced back from yesterday‘s downdraft. The Performance Highlights table is again very lengthy, but skewed towards positive returns this time. Volume was extremely high.

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

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

Here’s TRP:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 21.80 to be $0.35 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.42 cheap at its bid price of 15.76.

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The fit is horrible today, and Implied Volatility has dropped precipitously.

Most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 16.96 to be $1.25 rich, while MFC.PR.N, resetting at +230bp on 2020-3-19, and which has a very low bid that does not seem reflective of market conditions (see the Performance Highlights Table) is bid at 20.61 to be $1.17 cheap.

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The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 20.00 to be $0.85 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.07 and appears to be $0.70 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 21.50, 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 21.31 and is $0.33 cheap.

The calculated level of implied volatility declined today, but is still higher than I would expect; reversion to a lower level will imply underperformance of the lower-spread issues.

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The change of scale on the chart means there are no outliers today!

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.02% (which seems a little extreme!).

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

What causes high tuition? The same thing that drives high house prices, according to David O. Lucca, Taylor Nadauld, and Karen Shen of the New York Fed:

When students fund their education through loans, changes in student borrowing and tuition are interlinked. Higher tuition costs raise loan demand, but loan supply also affects equilibrium tuition costs—for example, by relaxing students’ funding constraints. To resolve this simultaneity problem, we exploit detailed student-level financial data and changes in federal student aid programs to identify the impact of increased student loan funding on tuition. We find that institutions more exposed to changes in the subsidized federal loan program increased their tuition disproportionately around these policy changes, with a sizable pass-through effect on tuition of about 65 percent. We also find that Pell Grant aid and the unsubsidized federal loan program have pass-through effects on tuition, although these are economically and statistically not as strong. The subsidized loan effect on tuition is most pronounced for expensive, private institutions that are somewhat, but not among the most, selective.

Bloomberg provides estimates of R&D spending by country for the period 2007-12:

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Way to go, Canada! Significantly below the world average while our biggest trading partner is well above the world average! That’s what I call an economic action plan!

The CD Howe Institute has published Mortgage Insurance as a Macroprudential Tool: Dealing with the Risk of a Housing Market Crash in Canad:

Our recommendations:

• • Redesign the government backstop to focus on events that include a severe housing crash along with rising unemployment. The backstop should be organized as a standalone fund that accumulates reserves in advance of a housing crisis up to a target level and has the capacity to borrow against future revenue if needed.
• • The Financial Institutions Supervisory Committee (FISC) should oversee the backstop fund, particularly its pricing policy, accumulation of reserves and target level for reserves.
• • Mortgage insurance backstop should be available only for the residential ownership market.
  
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  I can’t say I’m particularly impressed. To me, the most insidious part of government insurance is the bloating of bank balance sheets as illustrated by their chart above. The reduction of the risk-weight assigned to mortgages when they are government insured has contributed to this bloating, but this effect is not discussed in their paper.

  Separately, they are calling for no BoC rate cuts, with a slow rise to 1.00% (from 0.75%) over the next year, but there are some dissenting doves:

  While the majority of Council members called for the overnight rate target to stay at 0.75 percent next week and in September, four called for the Bank of Canada to cut its target to 0.50 percent next week and hold it there in September. By January 2016, five members called for 0.75 percent and three for 0.50 percent, while three called for an increase to 1.00 percent. By July 2016, three members called for 0.75 percent and one for 0.50 percent, with the majority of members calling for an increase (four looking for 1.00 percent and three for 1.25 percent).

  The split between members favouring no change and those favouring a cut, and the gradual pace of increases envisioned even by those favouring rate hikes over the coming year, reflected disappointment about recent Canadian growth, and concern that the disinflationary output gap in the Canadian economy will take time to close. Several members commented on divergent indicators, and although Labour Force Survey measures of employment growth are inevitably volatile, more than one member suggested that Friday’s employment figures should affect the Bank’s interest-rate decision.

  Meanwhile the IMF has cut growth projections:

  In its quarterly World Economic Outlook update released Thursday morning, the IMF forecast that Canada’s real gross domestic product would grow just 1.5 per cent this year, down sharply from 2.2 per cent in its April outlook. It’s the third successive quarter that the global financial body has reduced its 2015 forecast for Canada, and by far its most drastic reduction – reflecting mounting evidence that the Canadian economy dramatically underperformed expectations in the second quarter of the year.

  Thomson Reuters Corporation, proud issuer of TRI.PR.B, was confirmed at Pfd-3(high) by DBRS:

  DBRS Limited (DBRS) has confirmed Thomson Reuters Corporation’s (Thomson Reuters or the Company) Issuer Rating as well as its Unsecured Medium-Term Notes and Unsecured Debentures ratings at BBB (high). DBRS has also confirmed Thomson Reuters’ Commercial Paper rating at R-2 (high) and its Preferred Shares rating at Pfd-3 (high). All trends are Stable. The ratings continue to reflect the Company’s well-entrenched market position, the diverse nature of its customer base and its strong free cash flow-generating capacity. The rating confirmations also consider intensifying competition, the need for constant innovation and the risks associated with the Company’s ongoing acquisitions and divestitures.
  …
  Going forward, DBRS expects that revenue growth will be flat in 2015 as continued weakness in the Financial & Risk segment is likely to offset modest growth across all other divisions. DBRS expects the Company to complete its legacy product and platform migrations in 2015 that are likely to position Financial & Risk to return to a positive growth path in 2016. EBITDA margins are expected to be constrained (around 27%) in 2015 as the Company’s revenue growth from migration of key products and platforms in Financial & Risk is likely to be temporarily curbed by the pricing dynamics of new offerings.

  As recorded in the publication The Dreadful Story of the Preferred Share Market, there was once an investor who hoped the market would be on fire today:

  
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  Editor’s Note: This story is adapted from The Dreadful Story of the Matches, part of the excellent StruwwelPeter; a collection of cautionary tales for children.

  Managing Editor’s Note: If you liked “The Producers” or other such mockery, you will also enjoy StruwwelHitler, which is not available on-line but can be purchased from Amazon. It’s hilarious 1940 British propaganda.

  Publisher’s note: Hitler and Nazism should be mocked more often. I often think we’re doing ourselves a disservice by demonizing Hitler, for all that he’s the top western candidate from the twentieth century. By demonizing him, we’re separating ourselves from him and we would do better to remember that he was, at bottom, just another politician; one who was able to expose and exploit the demon that resides in all of us to some extent. Golding got it right in Lord of the Flies; but of course there are relatively few people alive today who knew him mainly from newsreels and newspapers of the thirties.

  President’s note: All of this moral philosophy is a whole lot more fun than looking at the preferred share market’s returns, I assure you!

  The Canadian preferred share market got whacked again today, with PerpetualDiscounts down 137bp, FixedResets losing 175bp and DeemedRetractibles off 35bp. Floaters got destroyed – for those who are keeping track, this means that total return since January 6, 2010 has been negative, although there’s a long way to go yet before we hit the depths of the Credit Crunch. As one might guess, the Performance Highlights table is enormous, with five issues losing over 5% on the day – a figure that is normally indicative of a reporting or quotation problem, as opposed to a market problem. Volume was extremely high.

  Who knows how much longer this will last? The market was reasonably firm in the afternoon after a precipitous morning decline, as shown by the chart of CPD for the day:

  
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  … but now I suspect that people are selling simply because the market has gone down. With long corporates still yielding about 3.95%, the Seniority Spread is at about 300bp, which makes PerpetualDiscounts look cheap … and yet TD came out with a new issue today!

  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 14.56 to be $0.36 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.50 cheap at its bid price of 15.55.

  
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  Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

  Most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 17.00 to be $0.94 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 20.50 to be $0.94 cheap.

  
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  The cheapest issue relative to its peers is BAM.PF.B, resetting at +263bp on 2019-3-31, bid at 19.96 to be $0.92 cheap. BAM.PR.X, resetting at +180bp 2017-6-30 is bid at 16.47 and appears to be $0.76 rich.

  
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  FTS.PR.K, with a spread of +205bp, and bid at 21.24, looks $0.48 expensive and resets 2019-3-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 22.40 and is $0.44 cheap.

  Note that there has been a very sharp rise in calculated implied volatility lately; that is that the lower-spread issues strongly outperformed their higher-spread siblings. The current calculated level of implied volatility is currently unreasonably high; reversion to a lower level will imply underperformance of the lower-spread issues.

  
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  I’ve had to change the scale on the chart since so many of the break-even rates went negative today!

  Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.02% (which seems a little extreme!). On the junk side, one of the six pairs is an outlier, with an implied rate exceeding 1.00%.

  
  Click for Big

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

  HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly
  Index	Mean Current Yield (at bid)	Median YTW	Median Average Trading Value	Median Mod Dur (YTW)	Issues	Day’s Perf.	Index Value
  Ratchet	0.00 %	0.00 %	0	0.00	0	-6.9710 %	1,961.7
  FixedFloater	0.00 %	0.00 %	0	0.00	0	-6.9710 %	3,429.9
  Floater	3.95 %	3.98 %	59,130	17.50	3	-6.9710 %	2,085.4
  OpRet	0.00 %	0.00 %	0	0.00	0	0.4324 %	2,760.7
  SplitShare	4.61 %	4.90 %	68,816	3.22	3	0.4324 %	3,235.4
  Interest-Bearing	0.00 %	0.00 %	0	0.00	0	0.4324 %	2,524.4
  Perpetual-Premium	5.51 %	3.74 %	66,320	0.08	13	-0.2673 %	2,513.4
  Perpetual-Discount	5.42 %	5.35 %	92,475	14.84	21	-1.3662 %	2,643.0
  FixedReset	4.70 %	3.82 %	219,660	16.10	88	-1.7469 %	2,238.3
  Deemed-Retractible	5.02 %	3.68 %	106,150	0.79	34	-0.3477 %	2,623.0
  FloatingReset	2.53 %	3.18 %	56,355	6.07	10	-1.3034 %	2,278.2

  Performance Highlights
  Issue	Index	Change	Notes
  BAM.PR.B	Floater	-7.25 %	This is reasonably accurate; the low for the day was equal to the close at 12.95, with most of the last twenty-five trades being a few pennies above 13.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 12.79 Evaluated at bid price : 12.79 Bid-YTW : 3.92 %
  BAM.PR.C	Floater	-7.06 %	This is also reasonable, as late-afternoon weakness took almost all of the last twenty-five trades of the day to or below 12.75. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 12.50 Evaluated at bid price : 12.50 Bid-YTW : 4.01 %
  BAM.PR.K	Floater	-6.59 %	Reasonable, given that the low was also the close for the day at 12.82, although there were few trades in the afternoon when the price of Floaters (see above) simply collapsed. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 12.61 Evaluated at bid price : 12.61 Bid-YTW : 3.98 %
  NA.PR.S	FixedReset	-5.46 %	Nothing wrong with the closing bid of 21.98; a lot of trades in the late afternoon were well below this figure, with a low for the day of 21.76. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.68 Evaluated at bid price : 21.98 Bid-YTW : 3.76 %
  ENB.PR.N	FixedReset	-5.42 %	Yep, there were lots of trades in the last two minutes near the closing bid of 17.45, and the low for the day was 17.22. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 17.45 Evaluated at bid price : 17.45 Bid-YTW : 5.12 %
  ENB.PR.P	FixedReset	-4.83 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 16.95 Evaluated at bid price : 16.95 Bid-YTW : 5.10 %
  TD.PF.A	FixedReset	-4.76 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.00 Evaluated at bid price : 21.00 Bid-YTW : 3.80 %
  NA.PR.W	FixedReset	-4.73 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 20.96 Evaluated at bid price : 20.96 Bid-YTW : 3.82 %
  MFC.PR.K	FixedReset	-4.65 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.50 Bid-YTW : 5.82 %
  ENB.PR.Y	FixedReset	-4.60 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 16.60 Evaluated at bid price : 16.60 Bid-YTW : 5.10 %
  BAM.PR.M	Perpetual-Discount	-4.56 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 19.90 Evaluated at bid price : 19.90 Bid-YTW : 6.02 %
  BAM.PF.E	FixedReset	-4.53 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.07 Evaluated at bid price : 21.07 Bid-YTW : 4.28 %
  RY.PR.Z	FixedReset	-4.49 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.38 Evaluated at bid price : 21.69 Bid-YTW : 3.67 %
  MFC.PR.J	FixedReset	-4.14 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.40 Bid-YTW : 4.44 %
  BAM.PF.D	Perpetual-Discount	-4.06 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 20.57 Evaluated at bid price : 20.57 Bid-YTW : 6.01 %
  CU.PR.E	Perpetual-Discount	-3.91 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 22.78 Evaluated at bid price : 23.11 Bid-YTW : 5.35 %
  RY.PR.H	FixedReset	-3.89 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 3.81 %
  BAM.PR.N	Perpetual-Discount	-3.85 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 20.00 Evaluated at bid price : 20.00 Bid-YTW : 5.99 %
  BAM.PF.C	Perpetual-Discount	-3.79 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 20.30 Evaluated at bid price : 20.30 Bid-YTW : 6.03 %
  CU.PR.D	Perpetual-Discount	-3.78 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 22.81 Evaluated at bid price : 23.14 Bid-YTW : 5.35 %
  ENB.PR.T	FixedReset	-3.71 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 17.15 Evaluated at bid price : 17.15 Bid-YTW : 5.06 %
  VNR.PR.A	FixedReset	-3.66 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.66 Evaluated at bid price : 22.10 Bid-YTW : 4.12 %
  BAM.PF.B	FixedReset	-3.62 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 19.96 Evaluated at bid price : 19.96 Bid-YTW : 4.49 %
  BAM.PF.G	FixedReset	-3.53 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.91 Evaluated at bid price : 22.39 Bid-YTW : 4.27 %
  BAM.PR.R	FixedReset	-3.48 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 18.05 Evaluated at bid price : 18.05 Bid-YTW : 4.41 %
  HSE.PR.E	FixedReset	-3.46 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 22.39 Evaluated at bid price : 23.17 Bid-YTW : 4.70 %
  TRP.PR.A	FixedReset	-3.37 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 18.94 Evaluated at bid price : 18.94 Bid-YTW : 3.74 %
  TD.PF.E	FixedReset	-3.25 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 22.81 Evaluated at bid price : 24.11 Bid-YTW : 3.69 %
  BAM.PR.X	FixedReset	-3.12 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 16.47 Evaluated at bid price : 16.47 Bid-YTW : 4.22 %
  PWF.PR.P	FixedReset	-3.11 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 17.13 Evaluated at bid price : 17.13 Bid-YTW : 3.50 %
  TD.PF.B	FixedReset	-3.02 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.21 Evaluated at bid price : 21.21 Bid-YTW : 3.76 %
  TRP.PR.F	FloatingReset	-3.01 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 18.04 Evaluated at bid price : 18.04 Bid-YTW : 3.40 %
  HSE.PR.C	FixedReset	-2.96 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 22.07 Evaluated at bid price : 22.61 Bid-YTW : 4.46 %
  IFC.PR.A	FixedReset	-2.91 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 19.00 Bid-YTW : 6.49 %
  ENB.PR.H	FixedReset	-2.79 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 15.70 Evaluated at bid price : 15.70 Bid-YTW : 4.97 %
  ENB.PR.F	FixedReset	-2.73 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 16.75 Evaluated at bid price : 16.75 Bid-YTW : 5.13 %
  ENB.PF.C	FixedReset	-2.73 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 18.19 Evaluated at bid price : 18.19 Bid-YTW : 5.10 %
  SLF.PR.H	FixedReset	-2.71 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.10 Bid-YTW : 5.79 %
  MFC.PR.M	FixedReset	-2.59 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.48 Bid-YTW : 5.48 %
  ENB.PF.E	FixedReset	-2.40 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 18.30 Evaluated at bid price : 18.30 Bid-YTW : 5.10 %
  SLF.PR.I	FixedReset	-2.36 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.03 Bid-YTW : 4.16 %
  BNS.PR.D	FloatingReset	-2.26 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.06 Bid-YTW : 3.48 %
  IAG.PR.G	FixedReset	-2.25 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.30 Bid-YTW : 4.15 %
  BAM.PR.T	FixedReset	-2.16 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 4.25 %
  TD.PF.C	FixedReset	-2.13 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.09 Evaluated at bid price : 21.09 Bid-YTW : 3.77 %
  IFC.PR.C	FixedReset	-2.13 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.02 Bid-YTW : 5.15 %
  ENB.PR.D	FixedReset	-2.13 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 16.54 Evaluated at bid price : 16.54 Bid-YTW : 4.99 %
  BMO.PR.T	FixedReset	-2.11 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.32 Evaluated at bid price : 21.32 Bid-YTW : 3.78 %
  SLF.PR.C	Deemed-Retractible	-2.11 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.30 Bid-YTW : 6.00 %
  ENB.PF.A	FixedReset	-2.04 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 18.22 Evaluated at bid price : 18.22 Bid-YTW : 5.09 %
  CM.PR.Q	FixedReset	-2.02 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 22.86 Evaluated at bid price : 24.20 Bid-YTW : 3.58 %
  MFC.PR.L	FixedReset	-2.00 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.02 Bid-YTW : 5.59 %
  BNS.PR.B	FloatingReset	-1.99 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.19 Bid-YTW : 3.37 %
  BAM.PF.F	FixedReset	-1.98 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 22.21 Evaluated at bid price : 22.80 Bid-YTW : 4.16 %
  ENB.PF.G	FixedReset	-1.91 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 18.44 Evaluated at bid price : 18.44 Bid-YTW : 5.10 %
  GWO.PR.I	Deemed-Retractible	-1.90 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.77 Bid-YTW : 5.77 %
  TRP.PR.G	FixedReset	-1.82 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 22.88 Evaluated at bid price : 24.30 Bid-YTW : 3.78 %
  MFC.PR.G	FixedReset	-1.79 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.75 Bid-YTW : 3.95 %
  PWF.PR.T	FixedReset	-1.76 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 22.93 Evaluated at bid price : 24.07 Bid-YTW : 3.35 %
  TRP.PR.C	FixedReset	-1.58 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 15.55 Evaluated at bid price : 15.55 Bid-YTW : 3.76 %
  BMO.PR.S	FixedReset	-1.57 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.62 Evaluated at bid price : 21.90 Bid-YTW : 3.75 %
  SLF.PR.B	Deemed-Retractible	-1.51 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.53 Bid-YTW : 5.65 %
  SLF.PR.E	Deemed-Retractible	-1.48 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.66 Bid-YTW : 5.84 %
  HSE.PR.A	FixedReset	-1.46 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 15.55 Evaluated at bid price : 15.55 Bid-YTW : 4.17 %
  BMO.PR.W	FixedReset	-1.45 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.10 Evaluated at bid price : 21.10 Bid-YTW : 3.79 %
  BAM.PF.A	FixedReset	-1.43 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.73 Evaluated at bid price : 22.00 Bid-YTW : 4.33 %
  SLF.PR.D	Deemed-Retractible	-1.33 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.31 Bid-YTW : 5.99 %
  TD.PR.Z	FloatingReset	-1.30 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.45 Bid-YTW : 3.16 %
  PWF.PR.L	Perpetual-Discount	-1.25 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 24.21 Evaluated at bid price : 24.50 Bid-YTW : 5.20 %
  CM.PR.O	FixedReset	-1.18 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.41 Evaluated at bid price : 21.74 Bid-YTW : 3.72 %
  SLF.PR.G	FixedReset	-1.15 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 16.40 Bid-YTW : 7.32 %
  PWF.PR.R	Perpetual-Premium	-1.13 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2020-04-30 Maturity Price : 25.25 Evaluated at bid price : 25.46 Bid-YTW : 5.20 %
  MFC.PR.H	FixedReset	-1.12 %	YTW SCENARIO Maturity Type : Call Maturity Date : 2017-03-19 Maturity Price : 25.00 Evaluated at bid price : 25.51 Bid-YTW : 3.52 %
  CU.PR.F	Perpetual-Discount	-1.12 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.67 Evaluated at bid price : 22.00 Bid-YTW : 5.16 %
  RY.PR.K	FloatingReset	-1.12 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.93 Bid-YTW : 3.17 %
  BNS.PR.A	FloatingReset	-1.11 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.95 Bid-YTW : 3.18 %
  BNS.PR.Y	FixedReset	-1.07 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.26 Bid-YTW : 3.69 %
  BMO.PR.R	FloatingReset	-1.05 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.60 Bid-YTW : 3.12 %
  RY.PR.J	FixedReset	-1.02 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 22.85 Evaluated at bid price : 24.15 Bid-YTW : 3.59 %
  PVS.PR.B	SplitShare	1.02 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2019-01-10 Maturity Price : 25.00 Evaluated at bid price : 24.77 Bid-YTW : 4.78 %
  HSE.PR.G	FixedReset	1.05 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 22.84 Evaluated at bid price : 24.15 Bid-YTW : 4.47 %
  GWO.PR.N	FixedReset	1.09 %	YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 16.70 Bid-YTW : 7.03 %
  FTS.PR.M	FixedReset	1.82 %	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.94 Evaluated at bid price : 22.40 Bid-YTW : 3.83 %

  Volume Highlights
  Issue	Index	Shares Traded	Notes
  BMO.PR.S	FixedReset	223,171	RBC crossed six blocks totalling 145,200 shares, all at 21.90. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.62 Evaluated at bid price : 21.90 Bid-YTW : 3.75 %
  TD.PF.D	FixedReset	146,020	Desjardins crossed 29,700 at 24.10; RBC crossed blocks of 50,000 and 25,000 at the same price. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 22.77 Evaluated at bid price : 24.00 Bid-YTW : 3.62 %
  TRP.PR.D	FixedReset	131,131	RBC Crossed three blocks of 25,000 each, all at 21.55. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.31 Evaluated at bid price : 21.31 Bid-YTW : 3.88 %
  FTS.PR.M	FixedReset	82,714	RBC crossed blocks of 23,800 at 24,500, both at 22.85. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.94 Evaluated at bid price : 22.40 Bid-YTW : 3.83 %
  CM.PR.O	FixedReset	79,049	RBC crossed 46,700 at 21.65. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.41 Evaluated at bid price : 21.74 Bid-YTW : 3.72 %
  RY.PR.Z	FixedReset	70,757	YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 21.38 Evaluated at bid price : 21.69 Bid-YTW : 3.67 %
  There were 70 other index-included issues trading in excess of 10,000 shares.

  Wide Spread Highlights
  Issue	Index	Quote Data and Yield Notes
  MFC.PR.K	FixedReset	Quote: 20.50 – 22.64 Spot Rate : 2.1400 Average : 1.2800 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.50 Bid-YTW : 5.82 %
  SLF.PR.I	FixedReset	Quote: 24.03 – 24.90 Spot Rate : 0.8700 Average : 0.5897 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.03 Bid-YTW : 4.16 %
  TRP.PR.F	FloatingReset	Quote: 18.04 – 18.82 Spot Rate : 0.7800 Average : 0.5253 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 18.04 Evaluated at bid price : 18.04 Bid-YTW : 3.40 %
  PWF.PR.P	FixedReset	Quote: 17.13 – 17.70 Spot Rate : 0.5700 Average : 0.3623 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 17.13 Evaluated at bid price : 17.13 Bid-YTW : 3.50 %
  SLF.PR.H	FixedReset	Quote: 20.10 – 20.75 Spot Rate : 0.6500 Average : 0.4463 YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.10 Bid-YTW : 5.79 %
  RY.PR.J	FixedReset	Quote: 24.15 – 24.75 Spot Rate : 0.6000 Average : 0.4000 YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2045-07-09 Maturity Price : 22.85 Evaluated at bid price : 24.15 Bid-YTW : 3.59 %

The NYSE was not open for much of the day:

A computer malfunction that knocked out trading at the New York Stock Exchange for more than three hours Wednesday probably stemmed from a software update that went awry, said two people briefed on a preliminary review.

The NYSE must now verify the cause and report its conclusions to the U.S. Securities and Exchange Commission, said the people who asked not to be named because the inquiry isn’t public. The SEC will use those findings to investigate whether any rule violations occurred, the people said.

Fortunately, the accidentally distributed architecture of US equity trading saved the day:

While often the focus of criticism, the fragmented nature of the U.S. equity market helped shares keep trading on NYSE competitors such as Nasdaq OMX Group Inc. and Bats Global Markets Inc. No single market handles more than 16 percent of overall volume. Farley used this as part of his decision-making today.

“My first concern was, do no harm during the day — those stocks continue to trade elsewhere — get the problem fixed and get it back up and running for the close,” he said. The exchange also chose not to shift operations to its disaster recovery center because that would’ve required customers to connect to that venue, [NYSE President Tom] Farley said.

“We chose the least disruptive option for customers,” he said.

Fortunately, the inherent robustness of distributed architecture has been noted:

The New York Stock Exchange halted trading for 3 1/2 hours because of a computer malfunction, forcing traders to route orders elsewhere in a drama that also highlighted the resilience of U.S. market structure.

The suspension, lasting from 11:32 a.m. to just after 3 p.m. New York time, dropped the largest U.S. share platform out of the network of trading systems that make up the American equity market. That network kept running, however, as exchanges such as the Nasdaq Stock Market and Bats Global Markets Inc. picked up the runoff.

“That’s one of the things to ponder from this, to see the robustness of how the system works when you knock out one critical component,” said Thomas Caldwell, chairman of Caldwell Securities Ltd. in Toronto. “We do have more than one exchange, and that means that if the major market is closed, the orders typically get rerouted to others.”

However, I do not expect the regulators to take any account of this lesson when considering bank holdings of other banks’ paper and central clearing; they will continue their headlong accentuation of vulnerability to single-point-failure because, you know, regulators are pretty damn stupid. And with a distributed system they have to send out more resumes when they seek to leave government employment.

Speaking of stupid policies, how about those electricity rates, eh?:

Soaring electricity rates in Ontario are threatening industries and businesses across the province, with one in 20 reporting they expect to shut down in the next five years, according to a major study by the Ontario Chamber of Commerce (OCC).

Businesses can’t grow, make improvements or investments or even hire new workers because of the increasing rates, which are among the highest in the country and expected to continue to rise over the next 20 years, says the report, Empowering Ontario: Constraining Costs & Staying Competitive in the Electricity Sector, released Wednesday.
…
Jamey Heaton employs 21 people at his North Bay business, Bavarian Link Meat Products Ltd., which he has owned for three years. They produce and sell premium deli meats, sausages, smoked items, specialty bacon and meat snacks.

His electricity costs are more than $110,000 a year – the second-largest cost after salaries. He calls the high electricity prices a “huge burden.”

He says the rates have “slowed our expansion.” “If we spent 50 per cent less, I would invest the $50,000 in new equipment, which would lead to new jobs,” he says. “We have already grown by 25 per cent a year every year over the last three years and could grow more if there were additional funds.”

To keep costs down, he says, they cook mostly with natural gas, but he still has to rely on electricity as the 15,000-square-foot plant is refrigerated.

“We also, as industrial consumers, don’t benefit from time-of-day usage, whereas, if you’re a consumer, you get that time-of-day usage,” he says. “I can switch some of my production to do things at nighttime but there is no advantage for me to do it.”

He wonders why he can’t take advantage of the lower costs.

But China wins the prize:

China’s securities regulator banned major shareholders, corporate executives and directors from selling stakes in listed companies for six months, its latest effort to stop the nation’s $3.5 trillion stock-market rout.

Investors with stakes exceeding 5 percent must maintain their positions, the China Securities Regulatory Commission said in a statement. The rule is intended to guard capital-market stability amid an “unreasonable plunge” in share prices, the CSRC said.

While China has already ordered government-owned institutions to maintain or boost their stock holdings, the CSRC’s directive expands the ban on sales to non-state companies and potentially foreign investors who own major stakes in mainland businesses.
…
Chinese authorities have also suspended initial public offerings, restricted bearish bets via stock-index futures and encouraged financial firms to buy shares. In perhaps the most dramatic effort to prevent investors from selling, local exchanges have allowed at least 1,331 companies to halt trading in their shares.

The new initiative was met with well-deserved scorn:

Templeton Emerging Markets Group calls it an act of “desperation.” UBS Wealth Management labels it “extreme.” And Wells Fargo Funds Management says it just “postpones the inevitable.”

China’s decision to ban major stockholders from selling stakes in listed companies has drawn skepticism from foreign investors. The money managers, with combined assets of almost $4 trillion, say the latest step to stem the country’s equity rout is just another measure to meddle in the market and won’t be enough to restore investors’ confidence.

“It suggests desperation,” Mark Mobius, chairman of Templeton Emerging Markets Group, said by phone. “It actually creates more fear because it shows that they’ve lost control.”
…
“The measure can be effective in the short term because you are not going to allow people to trade,” said Jorge Mariscal, the emerging-markets chief investment officer at UBS Wealth Management, which oversees $1 trillion in invested assets, said by phone. “But they are undermining the credibility on the soundness of the regulatory framework going forward. Things are a little extreme and counter-productive.”

As the record-breaking boom goes bust, President Xi Jinping is intervening in an attempt to prevent the rout from eroding confidence in his leadership. The moves have cast doubt on the Communist Party’s pledge less than two years ago to give market forces a bigger role in the economy, which is part of its largest reform drive since the 1990s.

Fed minutes show the FOMC was worried about this:

Federal Reserve officials in June saw the economy moving toward conditions that would support an interest-rate increase, while also expressing concern about weak consumer spending and risks from China and Greece that have since intensified.

Policy makers “saw economic conditions as continuing to approach those consistent with warranting” tighter monetary policy at some point, according to minutes of their June 16-17 meeting released Wednesday in Washington. All but one “indicated that they would need to see more evidence that economic growth was sufficiently strong.”
…
The minutes of the Federal Open Market Committee showed several officials “mentioned their uncertainty about whether Greece and its official creditors would reach an agreement and about the likely pace of economic growth abroad, particularly in China and other emerging-market economies.”

Separately, Fed Bank of San Francisco President John Williams Wednesday maintained his call for two rate increases this year.

“We will get greater clarity, hopefully, on what’s happening in Greece and the euro area,” by September, Williams, a voting member of the FOMC this year, told reporters after a speech in Los Angeles.

In the Canadian markets were affected by a slow pace of construction:

Canadian building permits fell more than economists forecast in May, with declines across all major types of projects from hospitals to condominiums and industrial sites.

The value of municipal permits fell 14.5 percent to C$6.7 billion ($5.27 billion), giving back part of the gains recorded over the prior two months, Statistics Canada said Wednesday in Ottawa. Economists forecast a 5 percent fall according to the median of 11 responses to a Bloomberg survey.

and there were calls for a policy rate cut:

Bank of Montreal’s Doug Porter and Royal Bank of Canada’s Mark Chandler joined a growing list of economists calling for Canada’s central bank to cut interest rates next week on signs of a faltering recovery.

Porter and Chandler predicted Wednesday the Bank of Canada will reduce its overnight rate to 0.5 percent at the next decision July 15. They changed their predictions after a report Tuesday showed a drop in non-energy exports pushed Canada’s trade deficit to the second-largest on record.

exacerbated by a flight to Treasuries:

Call it trading places in the financial markets. Treasuries are up for the year and U.S. shares are down — an about face from just a few weeks ago.

After a weeklong rally through Wednesday, the Bloomberg U.S. Treasury Bond Index has now returned 0.7 percent for 2015. That’s a relief for investors in the world’s biggest bond market following three months of losses from April through June. The Standard & Poor’s 500 Index is down 0.6 percent for the year, with the gauge falling from a record in May.

What changed? Greece is struggling to stay in the euro currency union and Chinese shares are plunging, driving demand for the relative safety of U.S. government debt. The Federal Reserve acknowledged the potential risks from overseas crises, boosting speculation it will delay increasing interest rates until next year.

Five year Canada’s dropped to 0.65% compared to 0.82% on July 2.

So according to the preferred share market …

Click for Big

IT’S THE END OF THE WORLD!!!!!

It was an appalling day for the Canadian preferred share market, with PerpetualDiscounts down 46bp, FixedResets losing an incredible 171bp and DeemedRetractibles off 10bp. The Performance Highlights table is as lengthy as one might expect given the overall numbers, dominated by losing FixedResets with ENB issues particularly notable amongst the worst of the losers. Volume was extremely high.

PerpetualDiscounts now yield 5.37%, equivalent to 6.98% 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”) has rocketed up to about 305bp, an immense leap from the 260bp reported June 24.

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 19.60 to be $0.59 rich, while TRP.PR.D, resetting 2019-4-30 at +238, is $0.57 cheap at its bid price of 21.30.

Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 17.11 to be $0.64 rich, while MFC.PR.M, resetting at +236bp on 2019-12-19, is bid at 22.05 to be $0.67 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 18.70 to be $0.88 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 22.07 and appears to be $1.05 rich.

Click for Big

FTS.PR.G, with a spread of +213bp, and bid at 21.53, looks $0.48 expensive and resets 2018-9-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 22.00 and is $0.66 cheap.

Note that there has been a very sharp rise in calculated implied volatility today; that is that the lower-spread issues strongly outperformed their higher-spread siblings. The current calculated level of implied volatility is currently unreasonably high; reversion to a lower level will imply underperformance of the lower-spread issues.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of 0.21%, including the outliers BMO.PR.M / BMO.PR.R at -0.09%, BNS.PR.Q / BNS.PR.B at -0.24% and BNS.PR.R / BNS.PR.C at -0.12%. On the junk side, three of the six pairs are outliers, two pairs with break-even yields above 1.00%, and one below 0.00%.

Click for Big

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

Pressure on the loonie may lead to pressure on Canadian policy rates:

The outlook for the Canadian dollar just got worse.

The currency has slumped to a three-month low amid declining prices for oil, the nation’s largest export. That’s adding to pressure on the Bank of Canada to cut interest rates after a report Tuesday showed the country posted its second-largest trade deficit ever, led by tumbling exports.
…
Twenty-eight percent of economists surveyed by Bloomberg June 30 to July 2 see the Bank of Canada lowering its benchmark rate from 0.75 percent when it meets next week. That up from 6 percent of participants in a survey conducted June 5-10.

Matt Levine complains that front-running is a phrase that is losing all meaning and points out that it is really … selling liquidity:

The people who bought the stock on Tuesday and sold it to the index funds on Friday performed a market-making function: They knew that there would be a lot of concentrated demand for stock on one day, they knew there wouldn’t be enough “natural” supply to meet that demand, and so they spread that demand backwards in time by buying ahead of the big demand event. They — it’s become a dirty phrase by now, but here it is — supplied liquidity. And they got paid for doing it.4 But trading ahead of anticipated demand looks a lot like front-running, for some definition of front-running,5 so they look a little like villains. Even if they actually helped their supposed victims.
…
One of my little stock-market obsessions is that index funds free-ride on the work done by active investors. Someone needs to make decisions that allocate capital to businesses. A world in which everyone indexes, and in which no one thinks that active managers should be able to charge for their services, is a world that will spend too little time and effort on allocating capital to the right businesses.
…
The index funds have the advantage of free-riding, but the disadvantage of being predictable. Stocks should go up when they join an index. That’s the price that the index funds pay to active traders for picking stocks. Stock picking is valuable; active investors pay for it in fees, while passive investors pay for it in, you know, front-running or whatever.

I have often written about a so-called ‘meta-index’ which would include issues on their announcement date, rather than their effective date. Stocks added to indices tend to rise during the interim period, while deletions fall. The purpose of having the intervening time is to smooth the trading through the change, in order to give index funds a better chance of equalling their benchmark; a side effect is that the index itself underperforms its meta-index through this period. And, it would seem, this has finally attracted some notice:

The traders are simply buying stocks before they’re added to the indexes that, by definition, index funds must track.

As the popularity of index investing soars to new heights, the emergence of index front-running is raising fundamental questions about so-called passive investment strategies, as well as how indexes are compiled and the role the funds themselves play in elevating costs. By one estimate, it gouges owners of funds tracking the Standard & Poor’s 500 Index to the tune of $4.3 billion a year, a sum that can double or even triple the cost of such investments.

“Portfolio managers are aware of it, but some of them will say ‘My clients demand an index fund, and I’m going to give it to them come hell or high water,’” Michael Rawson, an analyst at Morningstar Inc., said from Chicago. “Yes, you matched the index return, but the investor is now worse off. You don’t hear about that as much.”
…
Over a course of a year, front-running — of stocks going into and coming out of indexes — costs investors in S&P 500 tracker funds at least 0.2 percentage points, according to research published last year by Winton Capital Management Ltd., a quantitative hedge fund that analyzed data from 1990 to 2011. That’s equal to $4.3 billion in lost income in 2014.

A study in 2008 by Antti Petajisto, now a money manager at BlackRock Inc., estimated the impact could boost the expense of owning an index fund by as much as 0.28 percentage points.
…
Petajisto and Morningstar’s Rawson also suggest passive funds that buy the entire market can minimize the damage of front-running. By owning almost every stock, there’s barely anything for arbitragers to buy first.

Vanguard’s $411 billion Total Stock Market Index Fund is the most prominent example. In the past decade, it has returned 8.2 percent a year, beating the firm’s own S&P 500 tracker fund by 0.4 percentage points, data compiled by Morningstar show.

The Greek situation looks like it’s passed the table-thumping stage and has reached the ‘take it or leave it’ stage:

After five months of drama, false dawns and unpleasant surprises, Europe’s leaders are finally ready to show Alexis Tsipras the exit.

Behind the doors of the Justus Lipsius building in the heart of the political district in Brussels, the euro-region’s leaders rounded on the Greek prime minister for destabilizing the currency union before Germany’s Angela Merkel emerged to deliver an official ultimatum.

In a tense and at times emotional meeting, Tsipras’s European peers told him he’d failed to appreciate the efforts the continent’s voters and taxpayers had made to help the Greek people and blamed him for escalating tensions across the region.

The Chinese have developed a novel method of preventing stock market declines:

A wave of Chinese companies halted trading in their shares and regulators unveiled new measures to prop up the value of small-cap stocks in the latest attempts to stem a rout that’s wiped more than $3.5 trillion of value.

At least 1,249 companies have halted trading on mainland Chinese exchanges, locking up $2.2 trillion of shares, or about 33 percent of China’s market capitalization.

It didn’t help much:

China’s Shanghai Composite Index plunged amid concern a raft of measures to stabilize equities is failing to stop the bear-market rout as traders unwind margin bets at a record pace.

The Shanghai Composite tumbled as much as 8.2 percent, the most since 2007, before paring losses to 4.8 percent to trade at 3,549.92 at 9:56 a.m. local time. There were four gainers among the 1,106 stocks that trade on the benchmark gauge, which has slumped 28 percent since the June peak. PetroChina Co., the biggest stock, tumbled 4.9 percent as nine out of 10 industry gauges dropped at least 4 percent in the CSI 300 Index.

In the latest attempts to stem losses, the government raised margin requirements for CSI 500 Index futures, while the China Securities Finance Corp. will buy more shares of smaller companies. About 43 percent of the stock market is frozen after more than a thousand companies suspended their shares.

It was a violently mixed day for the Canadian preferred share market, with PerpetualDiscounts up 25bp, FixedResets off 53bp and DeemedRetractibles gaining 23bp. Floaters got hammered. The lengthy Performance Highlights table is dominated by losing FixedResets, with a few winning Straights mixed in. Volume was above average.

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

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

Here’s TRP:

Click for Big

TRP.PR.A, which resets 2019-12-31 at +192, is bid at 19.99 to be $0.59 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.47 cheap at its bid price of 16.27.

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Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.J, resetting at +261bp on 2018-3-19, bid at 24.60 to be $0.33 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 22.23 to be $0.29 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.31 to be $0.81 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 23.45 and appears to be $0.70 rich.

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FTS.PR.G, with a spread of +213bp, and bid at 21.54, looks $0.19 cheap and resets 2018-9-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.34 and is $0.12 rich.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.15%, including the outliers TRP.PR.A / TRP.PR.F at -0.07%, BMO.PR.M / BMO.PR.R at -0.01%, BNS.PR.Q / BNS.PR.B at -0.21% and TRP.PR.B / TRP.PR.H at -0.67% (note that the bid price for TRP.PR.H is silly). On the junk side, three of the six pairs are outliers, two pairs with negative break-even yields, 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 latest worry is Quantitative Easing effects on European corporate bond liquidity:

The European Central Bank’s addition of three listed companies’ notes to a bond-buying program has sparked concerns about how far it may push into the corporate-bond market and the impact this would have on already tight liquidity.

The inclusion of the listed companies, all Italian utilities less than 30 percent state owned, may mark a first step toward buying bonds from any government-backed company, BNP Paribas SA analysts wrote in a note. That may open as much as 157 billion euros ($174 billion) of securities outstanding to potential ECB buying, including notes from Volkswagen AG, Airbus Group SE and Telekom Austria AG, they said.

“Let’s hope the ECB leaves its additions here, but there are plenty more companies that seem to tick its latest box for inclusion,” said Jeroen Van Den Broek, the head of developed-markets credit strategy and research at ING Bank NV in Amsterdam. “With the ECB buying up what little liquidity there is left in euro-zone investment-grade corporates, it pushes real money managers even further down the curve.”

Liquidity has already plunged in the corporate-bond market, with trading tumbling about 90 percent since 2006, according to Royal Bank of Scotland Group Plc. That slump, predominately caused by banks cutting holdings to preserve capital in response to tougher capital rules, has prompted the Bank for International Settlements to warn about liquidity traps.

The Chinese may be relative newcomers to equity markets but they’ve got the official response to downturns down pat:

Rumor-spreading short sellers and foreign investors with a hidden agenda.

If you believe China’s state-run media, those are some of the key culprits for a stock-market rout that erased $3.2 trillion of value in three weeks — or almost $1 million for each minute of trading on mainland exchanges. The underlying message, that market manipulation is fueling the selloff, was reinforced by securities regulators last week as they pledged to crack down on “vicious” short selling.

The problem with that narrative, though, is that the numbers tell a different story. Short positions on the Shanghai Stock Exchange totaled just 1.95 billion yuan ($314 million) on Thursday, or less than 0.03 percent of the country’s market capitalization, as bears closed out more than half their bets since June 12. Foreign money managers own fewer than 3 percent of Chinese shares, and they’ve been adding to holdings in Shanghai as prices tumble.

There has been lots of credit news lately! Greece … Puerto Rico … Ontario:

• •We are lowering our long-term issuer credit and senior unsecured debt ratings on the Province of Ontario to ‘A+’ from ‘AA-‘.
• •At the same time, we are affirming our ‘A-1+’ short-term and commercial paper ratings on the province.
• •The downgrade reflects our view that Ontario is a sustained and projected underperformer on its budgetary performance and debt burden versus domestic and international peers.
• •The stable outlook reflects our expectation that, under our base-case scenario, Ontario will continue to make slow progress in reducing its after-capital deficit in the next two fiscal years and that it will continue with its stated 10-year capital plan.

RATING ACTION
On July 6, 2015, Standard & Poor’s Ratings Services lowered its long-term issuer credit rating and senior unsecured debt ratings on the Province of Ontario to ‘A+’ from ‘AA-‘. At the same time, Standard & Poor’s affirmed its ‘A-1+’ short-term and commercial paper ratings on the province. The outlook is stable.

RATIONALE
The downgrade reflects our view that Ontario is a sustained and projected underperformer on its budgetary performance and debt burden versus domestic and international peers. Although Ontario continues to beat its fiscal targets and expects to close its operating budget gap by fiscal 2018 (year-ended March 31), it will still have to contend with sizable yearly after-capital deficits, given its large net capital spending intentions. Under our base-case scenario, we foresee Ontario’s after-capital deficit remaining above 7% of total adjusted revenues over the next two years. Additional capital revenues from potential asset sales or the cap-and-trade scheme put forward but not articulated in the fiscal 2016 budget could mitigate the province’s medium-term borrowing demands. In the next two years, however, we expect capital funding needs to cause Ontario’s tax-supported debt to peak at 267% of consolidated operating revenues (and its interest payments to remain near 9%of adjusted operating revenues from fiscal years 2015-2017), which we consider very high. While some domestic and international peers display very weak budgetary performances or very high debt burdens similarly, it is the combination of both that sets Ontario apart from the group, leading us to conclude that its credit profile is more consistent with an ‘A+’ rating.

I just hope they’ve accounted for the near-certainty that the millions of tourists coming here for the Pan-Scam Games will be so impressed by our enormous solar power research, engineering and production industry that they place huge orders.

Margaret Wente had a thought-provoking piece in the Globe on the weekend, The world’s nicest, most law-abiding generation:

Social norms have changed a lot since then. The past 50 years have been a watershed for attitudes toward everything from sexism and human rights to littering (now almost a capital offence). By almost any measure you can find, people across the developed world today are the least violent, most law-abiding, hardest-working and most tolerant generation who ever lived.

The biggest measurable change is in violent crime. After peaking in the 1990s, crime rates have plummeted across the developed world, even in the famously violent United States. In Canada, crime rates are now back to where they were in the 1960s. Although theories abound, nobody really knows why.
…
What explains this remarkable progress in conduct and morality? Harvard psychologist Stephen Pinker argues that they are simply the continuation of a long-term evolution in behaviour that began centuries ago. Since medieval times, Northern Europeans have gradually grown less cruel, less violent, and more self-restrained. As society became more complex, it rewarded people who were more diligent, prudent and mild-mannered, and punished people with poor impulse control.
…
This evolution hasn’t stopped. As Simon Kuper suggested in the Financial Times this week, modern society increasingly rewards restraint. Discipline, self-control, compliance and the ability to get along with others are more important than they’ve ever been. Parents increasingly seek to instill those values in their children. They know there’s no frontier to escape to any more. They know that if their kid can’t manage to sit still and behave himself in school for a minimum of 12 to 14 years, that kid will be a loser.

Simon Kuper’s piece in the Financial Times, Why safety now trumps freedom suggests:

Elias’s great work, The Civilizing Process, argued that humans have been getting less violent since medieval times. States forced them to behave, and growing trade encouraged them to. Sadly, Elias’s timing was terrible. His book appeared in German in 1939, just as civilisation was collapsing. But today his argument sounds more credible. We now have evidence — which Elias didn’t — that western homicides have fallen fairly steadily for 700 years.

One disciple of Elias, the Harvard psychologist Steven Pinker, argues that in the 1990s western countries embarked on one of their periodic “civilising processes”. Governments got “tough on crime”. Social norms changed too. The 1960s ethos of “do your own thing, let it all hang out, take a walk on the wild side” lost favour.
…
“Safety” is such a magic word that American campuses now often ban controversial speakers because students must feel “safe” — an attitude that would have baffled 1960s campus activists. Western governments plead security to spy on citizens, and most citizens accept it. They have learnt to love Big Brother.

I suggest that the world’s wimpification stems from technological progress. Since the second war, technology has grown by leaps and bounds, exponentially. We have no idea of what tomorrow might bring, so we seek solace in making our personal lives more predictable.

There are many secondary effects as well; technology has made us immeasurably more productive than we used to be, making it possible to employ far more people as regulators of various sorts, whether these regulators are actually government regulators, police, jail guards, teachers or simply busybodies with time on their hands who achieve a measure of personal satisfaction and social acclaim for telling people they’re not behaving properly.

Increasing technology has, as Ms. Wente states, made school and education more important and has done so at a time when elementary and secondary teaching has become feminized. There are now two types of elementary school teacher: women and reckless idiots. Secondary school has not gone quite so far down that road, but far enough to make a difference. When I was about ten, there was a period when I got into a fist-fight every single day when school let out for lunch, with a guy I loved to hate. We were just kids, as full of piss and vinegar as ten-year-old boys can be. Nowadays we’d be sent for psychiatric evaluation by the horrified female teaching staff.

And we no longer despise informers; we celebrate them as whistle-blowers and see no shame in paying them.

Where will it end? If Wente’s sources are to be believed, it won’t. If my explanation is to be believed, it will end when the populace as a whole becomes inured to technological change and no longer fears innovation. We will see!

Another aspect of all this is that despite (or perhaps due to) all this regimentation and niceness, people are becoming less empathetic:

The research, led by Sara H. Konrath of the University of Michigan at Ann Arbor and published online in August in Personality and Social Psychology Review, found that college students’ self-reported empathy has declined since 1980, with an especially steep drop in the past 10 years. To make matters worse, during this same period students’ self-reported narcissism has reached new heights, according to research by Jean M. Twenge, a psychologist at San Diego State University.

… and that acceptance of social norms masks a hidden agenda:

The study, co-authored by Millennials expert Jean M. Twenge, was really three studies in one. All three are based on surveys that captured the values of millions of American 18-year-olds and college freshman between 1966 and 2009.

The first part looked at life goals. It turns out Millennials and GenX’ers (born between 1962 and 1981) rated being very well off financially, being a leader in the community (which is correlated with a desire for fame), living close to relatives, and having administrative responsibility over others as more important to them than Boomers—born 1946 to 1961—did when they were in their late teens.

Boomers—mostly over the age of 50 now—rated developing a meaningful philosophy of life, finding purpose and meaning, keeping up-to-date with politics, and becoming involved in programs to clean up the environment as more important when they were young than Millennials. Being “very well off financially” was the eighth most important life goal (out of 12) for Boomers; now, it’s consistently ranked most important.

If all this is true, then it suggests we are heading for a new Victorian era, in which social norms are extravagantly and viciously enforced (see my discussion of the Junior Justice League on May 12, amongst other places) while vice and hypocrisy flourish (Mayhew estimated 80,000 prostitutes in London, serving a total population of about 2.8-million; but note that Mayhew included what would now be called lovers and/or mistresses in his count).

It was a good day for the Canadian preferred share market, with PerpetualDiscounts up 17bp, FixedResets gaining 9bp and DeemedRetractibles winning 30bp. The Performance Highlights table has a good length. 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.A, which resets 2019-12-31 at +192, is bid at 20.01 to be $0.64 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.49 cheap at its bid price of 16.20.

Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.J, resetting at +261bp on 2018-3-19, bid at 24.82 to be $0.45 rich, while MFC.PR.M, resetting at +236bp on 2019-12-19, is bid at 23.05 to be $0.30 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.17 to be $0.80 cheap. BAM.PR.X, resetting at +180bp 2017-6-30 is bid at 17.27 and appears to be $0.54 rich.

Click for Big

FTS.PR.G, with a spread of +213bp, and bid at 21.46, looks $0.20 cheap and resets 2018-9-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 23.70 and is $0.12 rich.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.39%, including the outlier TRP.PR.A / TRP.PR.F at -0.19%. On the junk side, four of the six pairs are outliers, all with negative break-even yields.

Click for Big

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