PrefBlog

Not much going on. TD issued sub-debt last week:

The Toronto-Dominion Bank (“TD” or the “Bank”) today announced a domestic public offering of $1.5 billion of medium term notes (non-viability contingent capital (NVCC)) constituting subordinated indebtedness of the Bank (the “Notes”). The Notes will be issued and sold through a dealer syndicate led by TD Securities Inc. The Notes will qualify as Tier 2 capital of the Bank.

The Notes are expected to be issued on June 24, 2015 and will bear interest at a fixed rate of 2.692% per annum (paid semi-annually) until June 24, 2020, and at the three-month bankers’ acceptance rate plus 1.21% thereafter (paid quarterly) until maturity on June 24, 2025.

The Bank may, at its option, with the prior approval of the Superintendent of Financial Institutions (Canada), redeem the Notes on or after June 24, 2020, in whole or in part, at par plus accrued and unpaid interest on not more than 60 nor less than 30 days’ notice to holders. Net proceeds from the issuance of the Notes will be used for general corporate purposes.

The potential for getting rid of supply management is increasing:

Canada’s protected dairy and poultry industries are in the crosshairs of the United States and other farm export powers as momentum builds toward a massive Pacific Rim trade deal.

Negotiations on the Trans-Pacific Partnership (TPP) are expected to resume shortly, with a deal possible as early as August.

The breakthrough came Wednesday when the U.S. Senate voted 60-38 to give President Barack Obama unfettered power to negotiate new trade deals.

Japan, Canada and other countries have resisted making final concessions in politically touchy areas, such as agriculture, until Congress gave Mr. Obama those trade negotiating powers.

The price of entry for Canada – one of 12 countries in the TPP talks – is expected to be a surge of duty-free dairy and chicken imports from countries such as the U.S., Australia and New Zealand.

Price of entry? That’s not a price – that’s a pay-off!

Manulife Financial Corporation, proud issuer of MFC.PR.B, MFC.PR.C, MFC.PR.F, MFC.PR.G, MFC.PR.H, MFC.PR.I, MFC.PR.J, MFC.PR.K, MFC.PR.L, MFC.PR.M and MFC.PR.N, was confirmed at Pfd-2(high) by DBRS:

DBRS Limited (DBRS) has today confirmed its ratings on Manulife Financial Corporation (Manulife or the Company) and its affiliates including The Manufacturers Life Insurance Company, its primary operating company. All trends are Stable.

The ratings reflect the Company’s strong position in a number of geographic and product markets including Canada, the United States through the John Hancock brand and in the fast-growing Asian market through the Manulife brand. The Company is also well diversified by customer, distribution channel and product line. Risk management policies and procedures are thorough and supported with advanced modelling techniques. The Company’s general account has a diversified high-quality asset portfolio. Legacy issues associated with the Company’s prior product designs continue to be a potential source of adverse reserve development, given the uncertainty in macroeconomic and regulatory environments and potential adverse policyholder behaviour. DBRS regards the Company’s reduction of market-related risks over the past few years as having been critical to maintaining its high rating. DBRS also notes that, under its methodology, with Manulife’s unexceptional financial risk metrics, it is the Company’s franchise strength and business which provide most of the rating strength.

The Company has set out a strategy to build more interactions directly with the end purchaser to augment and enhance its existing distribution channels. Manulife is in the process of implementing this strategy, which entails a significant investment in technology and new processes as well as an accompanying cultural shift. This change presents both new opportunities and risks for the organization.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 45bp, FixedResets gaining 2bp and DeemedRetractibles off 10bp. The Performance Highlights table is very lengthy, with a lot of volatility amongst the (misleadingly calm overall) FixedResets. Volume was average.

PerpetualDiscounts now yield 5.20%, equivalent to 6.76% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.15%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 260bp, a significant widening from the 250bp reported June 10.

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 20.30 to be $0.76 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.76 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). The lowest spread issue, MFC.PR.F, is again noticeably off the line defined by the higher-spread issues.

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 22.77 to be $0.73 rich, while MFC.PR.M, resetting at +236bp on 2019-12-19, is bid at 22.20 to be $0.87 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.05 to be $1.15 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 22.85 and appears to be $1.14 rich.

Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.41, looks $0.40 cheap and resets 2020-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.50 and is $0.49 rich.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.35%, including the outliers TRP.PR.A / TRP.PR.F at -0.38% and FTS.PR.H / FTS.PR.I at +1.15%. On the junk side there are four outliers: FFH.PR.E / FFH.PR.F at -0.88%; and BRF.PR.A / BRF.PR.B at -0.69%.

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

It’s nice to see a hint of due process in the war on banks:

First there was one. Then three. Now the U.K. Financial Conduct Authority is facing nine lawsuits for improperly identifying traders in penalty notices, in what has quickly become a nightmare for the agency.

In a London court Thursday, the FCA faced a roomful of more than 20 lawyers protesting the reputational damage their clients suffered as a result of its failure to sufficiently disguise them in bank settlement reports. The hearing was the first in a series of headaches the FCA faces on the matter and could change the future of U.K. enforcement proceedings.

“Part of deterrence is telling the story and if you’re telling it with one hand behind your back,” because you can’t allude to individuals, it will make things difficult, said FCA Chief Executive Officer Martin Wheatley in a London interview with Bloomberg last week.

The deluge of cases comes after the FCA lost a landmark appeal in May when a judge said it failed to properly hide the identity of Achilles Macris, the former JPMorgan Chase & Co. manager of the London Whale trader, in its settlement with the bank. The FCA is seeking permission to appeal the judgment to the Supreme Court. A judge will rule as soon as Tuesday on whether the other eight pending cases can proceed before the top court makes a decision on the FCA’s Macris appeal.
…
If the Macris ruling stands, the FCA is faced with two choices: taking years to complete investigations to give all parties the chance to participate or publishing anodyne settlements that won’t fully explain the misconduct.
…
While calling someone trader A in a report might seem anonymous, insiders can often figure out who’s who by references to nicknames or even position on the floor. That can damage traders’ reputation, and their ability to get another job, said Ben Rose, a London lawyer at Hickman & Rose.

“It is imperative that regulators and prosecutors prevent ‘join-the-dots’ identification,” Rose said. Regulators must “give those concerned a proper opportunity of being heard before any damaging accusations are made.”

Brookfield Renewable Energy Partners L.P., proud (indirect) issuer of BRF.PR.A, BRF.PR.B, BRF.PR.C, BRF.PR.E and BRF.PR.F, has announced:

that the Toronto Stock Exchange (the “TSX”) accepted notice of Brookfield Renewable Power Preferred Equity Inc.’s (“BRP Equity”) intention to commence a normal course issuer bid for its outstanding Class A Preference Shares (“Preferred Shares”). BRP Equity is a wholly-owned subsidiary of Brookfield Renewable. Brookfield Renewable believes that in the event that the Preferred Shares trade in a price range that does not fully reflect their value, the acquisition of Preferred Shares may represent an attractive use of available funds. There are currently five series of Preferred Shares outstanding.

I take issuer-bid announcements with a grain of salt, which is why this announcement isn’t getting a dedicated post. If they actually buy some, that will be news!

It was yet another poor day for the Canadian preferred share market, with PerpetualDiscounts losing 46bp, FixedResets down 23bp and DeemedRetractibles off 15bp. The Performance Highlights table was dominated by losers, predictably enough. Volume was slightly below average.

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

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

Here’s TRP:

Click for Big

TRP.PR.A, which resets 2019-12-31 at +192, is bid at 20.39 to be $0.96 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.86 cheap at its bid price of 16.05.

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). The lowest spread issue, MFC.PR.F, is again noticeably off the line defined by the higher-spread issues.

Most expensive is MFC.PR.J, resetting at +261bp on 2018-3-19, bid at 24.70 to be $0.53 rich, while MFC.PR.N, resetting at +230bp on 2020-3-19, is bid at 22.39 to be $0.45 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 18.76 to be $1.30 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 22.55 and appears to be $0.97 rich.

Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.40, looks $0.45 cheap and resets 2020-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.44 and is $0.45 rich.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.40%, including the outliers TRP.PR.A / TRP.PR.F at -0.57% and FTS.PR.H / FTS.PR.I at +1.16%. On the junk side there are four outliers: FFH.PR.E / FFH.PR.F at -0.87%; DC.PR.B / DC.PR.D at -0.07%; BRF.PR.A / BRF.PR.B at -0.68%; and FFH.PR.C / FFH.PR.F at +1.26%.

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

John Williams of the San Francisco Fed is sounding very hawkish:

John Williams, president of the Federal Reserve Bank of San Francisco, said the central bank is likely to raise interest rates this year as the economy reaches full employment, though he’s troubled by low inflation.

“I still believe this will be the year for liftoff,” Williams, a voting member of the policy-setting Federal Open Market Committee, said in a speech Friday in San Francisco. Although he’s awaiting more evidence inflation is moving up toward the Fed’s goal, “I see a safer course in starting sooner and proceeding more gradually.”
…
Williams said the U.S. will probably hit his 5.2 percent estimate for the natural rate of unemployment later this year. As of May, the jobless rate stood at 5.5 percent, down from 10 percent in 2009.

“We’re making good progress across most measures of the labor market,” he said. “Now that wage growth is starting to take off across multiple measures, it further confirms that the labor market is nearly healed.”

Employers added 280,000 positions in May, the most in five months. Average hourly earnings accelerated to a 2.3 percent year-over-year pace, the fastest since August 2013.

What’s more, Williams said economic growth in the first quarter of 2015 probably wasn’t as weak as official figures, which showed a 0.7 percent contraction, suggest.

“On closer inspection, the numbers weren’t nearly as bad as they appeared,” Williams said, citing San Francisco Fed research suggesting that the economy may have expanded at a 1.5 percent annual pace in the first three months of the year.

There is some wailing that robo-advisors might be programmed to sell the sponsor’s products:

But some might believe Power’s new alliance with Wealthsimple, as well as the entry by other large financial companies into the robo-adviser space, raises the spectre of a potentially revolutionary platform being slowly co-opted by those more interested in just selling their own products.

“That’s not necessarily bad, but it raises a bit of an issue,” said Mark Yamada, chief executive at Pur Investing Inc., a financial planner in Toronto. “Here we have an innovation that held great promise in providing investments at low cost to different generations of investors and it’s quickly being gobbled up by product folks who are looking for a new and different distribution channel.”

Battle lines on this front are already drawn in the U.S. where financial giants such as Charles Schwab Corp. and The Vanguard Group Inc. have recently jumped into the automated advice space to the chagrin of pure-play robo-advisers such as WealthFront Inc. and Betterment LLC.

WealthFront’s chief executive Adam Nash has been particularly critical of Schwab’s Intelligent Portfolios, which use proprietary ETFs as well as other companies’ funds, for not acting in the best interests of clients.

Greece had a bad week last week:

Failure to reach an agreement between Greek and European Union leaders last week spelled bad news for the banking system of the Hellenic Republic. Talk of capital controls is heating up, and with it the amount of money being pulled from Greece appears to be accelerating.

JPMorgan analysts led by Nikolaos Panigirtzoglou estimate that Greek banks lost about 6 billion euros in the week ending June 19. That takes total deposit outflows from Greece to about 44 billion euros since the beginning of the year. The analysts use Greeks’ purchases of offshore money market funds as a proxy to generate early estimates of those numbers.

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Hard on the heels of my post regarding liquidity implications of the OSC report The Canadian Fixed Income Market: 2014 comes some cheery news about the liquidity of the Canadian market relative to those of other sovereigns:

How — or whether — investors can trade without having prices move against them has become a major worry as bonds globally tanked in the past few months. As a result, liquidity, or the lack of it, is skewing markets in new and surprising ways.

Spain, for instance, must pay more to borrow money than Italy for 30 years, even though Spain is considered safer by credit raters. Why? The Italian bond market is twice as big as the Spanish one — and, therefore, more liquid.

The same thing is happening around the world. Bonds in smaller, less-traded markets like Finland, Singapore and Canada are starting to fall out of favor. And with the Federal Reserve preparing to raise U.S. interest rates, investors want to know they can sell in a hurry if debt markets turn volatile.

“Liquidity is our number-one criteria in country selection,” said Olivier de Larouziere, the head of European interest rates in Paris at Natixis Asset Management, which oversees about $367 billion.
…
Some investors aren’t waiting to find out. In Spain, where a slump in repurchase agreements and trading of bills sent government-debt turnover in April to lows not seen since at least 2012, they’re starting to demand a bigger premium to own the securities, data compiled by Bloomberg show.

Yields on 10-year Spanish bonds reached 2.54 percent on June 16, and rose to the highest versus Italian securities since the end of 2013. For much of the past year, the relationship was reversed as investors preferred Spain.

Part of the shift has to do with the rising cost of trading as liquidity dries up. The difference in yields for buyers and sellers of Spain’s 10-year notes — known as the bid-ask spread — is almost double that in Italy, the data show.
…
“Highly rated, small bond markets can become relatively illiquid,” said Chris Wightman, a London-based money manager at Wells Fargo Asset Management, which oversees about $493 billion. “Providing liquidity for our underlying clients is a paramount investment criteria for us.”
…
That hasn’t stopped some investors such as Canada’s Mawer Investment Management from looking toward bigger, more-liquid bond markets as a way to diversify. The Calgary-based firm, which oversees $24 billion, started its first foreign bond fund last week and will invest in the U.S., the U.K. and Europe.

“We recognize that other larger markets are more liquid than the Canadian bond market, which does naturally make Canada more vulnerable,” said James Redpath, a fund manager at Mawer.

Meanwhile, some managers are preparing for lift-off by indulging in market timing:

TCW Group Inc. is taking the possibility of a bond-market selloff seriously.

So seriously that the Los Angeles-based money manager, which oversees almost $140 billion of U.S. debt, has been accumulating more and more cash in its credit funds, with the proportion rising to the highest since the 2008 crisis.

“We never realize what the tipping point is until after it happens,” said Jerry Cudzil, TCW Group’s head of U.S. credit trading. “We’re as defensive as we’ve been since pre-crisis.”

TCW isn’t alone: Bond funds are holding about 8 percent of their assets as cash-like securities, the highest proportion since at least 1999, according to FTN Financial, citing Investment Company Institute data.

And still other managers are upset because now credit analysis means looking at four pieces of paper rather than three:

Institutional investors are rewriting their old rules so they can buy bonds assigned credit ratings by a broader variety of firms, according to Kroll Bond Rating Agency Inc. and Morningstar Inc.

Over the past year, more than 30 investment firms have eased internal guidelines that limited them to bonds rated by at least one or two of the top three graders: Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, said Kim Diamond, Kroll’s head of structured finance.

The loosening comes as some of the biggest bond buyers vocalize frustration that the so-called Big Three ratings firms are being hired less, resulting in fewer bond offerings from which they can choose.
…
Underwriters seeking maximum investor participation in bonds also have become frustrated with the “antiquated” restrictions, Deutsche Bank analyst Ashley Hooper wrote in a May report on the market for commercial mortgage-backed securities. Ratings competition has heated up substantially in that market as well this year.

But what of the systemic importance of individual money managers?:

Pimco’s ability to cope with a stampede of investor withdrawals after Bill Gross’s departure gives credence to arguments that mutual funds don’t threaten the broader financial system, the chairman of a global group of market regulators said Monday.

The lack of market turmoil when Pacific Investment Management Co. and the famed bond investor parted ways last year also shows regulators should refrain from treating asset managers like big banks, said Greg Medcraft, chairman of the International Organization of Securities Commissions. While a run on deposits can trigger insolvency for lenders, mutual funds are prepared to deal with surges in redemptions, he said.

“Pimco being able to wind back its positions quickly in a matter of days, it was a pretty damn good test of the liquidity of markets,” Medcraft said.

The world’s biggest money managers won a reprieve last week from being labeled systemically important, which can bring tough oversight and capital rules, when IOSCO said it would instead focus on studying broad “activities” of the asset-management industry. Medcraft said market watchdogs will be “more assertive” in pushing back on claims mutual funds should face strict rules written by bank regulators.
…
“We’re no longer the poor cousin” of the banking regulators who predominate at the FSB, Medcraft said. “I’ve already asked for more say and we’re getting more members” on the board, he said.

While I support the end result, the rationale seems very facile to me. It’s reasonably safe to assume that most of the $27.5-billion in October 2014 redemptions were reinvested in funds or other vehicles with a similar mandate; to the extent that that hypothesis is true, most of Pimco’s selling pressure will have been offset by other managers’ buying pressure. However, the final paragraph makes it clear that this is just another turf-battle for influence between regulators.

But all this talk of bond liquidity is a distraction from the real liquidity and valuation sink-hole:

The push to attract new institutional investors is ramping up at Manulife Financial Corp., as the insurer brings on new leaders to fuel the five-year expansion plan for its private markets business.

Manulife said Monday that it appointed three senior managers to newly created roles, a response to some early success the asset management group has seen since being formed in late 2013.

Manulife’s growing private markets group was created to attract new institutional investment in several target areas, including commercial real estate equity, commercial mortgage lending, and private placements. This built on Manulife’s existing Hancock Natural Resource Group, a trio of farmland, timber and renewable energy investments, as well as private equity and oil and gas investment arms. Manulife Asset Management Private Markets had $98-billion in assets as of the end of March, including assets managed for the company’s general fund.

It was yet another poor day for the Canadian preferred share market, with PerpetualDiscounts down 17bp, FixedResets losing 30bp and DeemedRetractibles off 13bp. The lengthy Performance Highlights table is, unsurprisingly, dominated by losers. Volume was below average.

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

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

Here’s TRP:

Click for Big

TRP.PR.A, which resets 2019-12-31 at +192, is bid at 20.51 to be $1.13 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.84 cheap at its bid price of 16.03.

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). The lowest spread issue, MFC.PR.F, is again noticeably off the line defined by the higher-spread issues.

Most expensive is MFC.PR.J, resetting at +261bp on 2018-3-19, bid at 24.71 to be $0.50 rich, while MFC.PR.N, resetting at +230bp on 2020-3-19, is bid at 22.57 to be $0.31 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.15 to be $1.06 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 22.45 and appears to be $0.71 rich.

Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.25, looks $0.60 cheap and resets 2020-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.45 and is $0.46 rich.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.45%, including the outliers TRP.PR.A / TRP.PR.F at -0.65% and FTS.PR.H / FTS.PR.I at +1.34%. On the junk side there are three outliers: FFH.PR.E / FFH.PR.F at -0.91%; DC.PR.B / DC.PR.D at -0.30%; and BRF.PR.A / BRF.PR.B at -0.47%.

Click for Big

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

Click for Big

It’s time for … Battling Robots!

Vanguard has an ally in Palo Alto, California–based Wealthfront. The company’s algorithms direct about 90 percent of the average portfolio to Vanguard funds. The firms don’t have a financial relationship, and they’re chasing different markets. Yet their CEOs praise each other’s strategies. “I’m a big fan of what’s happened in the robo-world,” Vanguard CEO Bill McNabb says.
…
Fidelity is embracing the robo-product route via the 3,200 independent advisory firms for which it clears trades and holds about $1.5 trillion in assets. Boston-based Fidelity teamed up with No. 2 robo-firm Betterment in October to steer those advisers toward Betterment’s software. The robo-programs pick portfolios, often based on Vanguard funds, and automatically rebalance them to cut time and costs. Fidelity gets a referral fee, which it won’t disclose, from its New York–based partner. “Financial firms can no longer wait for the emerging affluent to appear at their doorstep when they have enough assets,” says David Canter, who heads a Fidelity unit serving independent advisers. “You have to think about them now.”
…
In the rising robo-rivalry between Fidelity and Vanguard, the winner may be … Charles Schwab Corp. The largest independent U.S. brokerage by client assets started a robo-offering for retail investors on March 9. By the end of May, the new program had $2.4 billion in client money and about 33,000 accounts. “The pressure is on,” Aite’s Pirker says.

So far, at any rate, there doesn’t appear to be any big threat to human advisors; everything’s happening in the discount space and clients are those who were already willing to go it alone, but are willing to pay a few bucks for some reassurance. Eventually I’m quite certain that every comprehensive fund family – and who is more comprehensive than Vanguard? – will have one.

Bond ETF outflows are rising:

Investors in U.S. exchange-traded funds have sold the most bonds in June in 15 months. So far, it’s proving to be a winning bet.

They pulled $2.14 billion out of fixed-income funds since May 31, on course to be the biggest monthly withdrawal since March 2014, according to data compiled by Bloomberg.

With everyone getting ready for the Federal Reserve to raise interest rates, Treasuries have fallen almost 1 percent since the end of May, based on Bloomberg World Bond Indexes. It’s the biggest monthly decline since February.

Tim Kiladze of the Globe notes the current disaffection with FixedResets:

A sudden change of heart from retail investors is making financing decisions much tougher for Canada’s biggest companies.

Until recently, retail investors were happy to buy new issues of rate reset preferred shares from companies such as Royal Bank of Canada, TransCanada Corp. and Husky Energy Inc.

Such a heavy appetite for the product made it easy for these issuers to raise cash. In 2014, $14-billion worth of these securities were gobbled up.

But lately, retail investors are giving rate reset preferred shares the cold shoulder. Burned by poor performing issues, they are much less willing to buy new offerings of these securities.

My comments of June 16 regarding the Brondesbury Group report on Mutual Fund Fee Research commissioned by the OSC attracted some attention from a well-known activist … so I replied with an eMail:

At the risk of putting words in your mouth, I’ll suggest that you’re concerned with the 1-5% (?) of cases in which the salesman-client relationship goes badly wrong.

I am concerned about these cases, but in the same way I’m concerned about murder and burglary. When people clearly do wrong, catch ’em and punish ’em, I say – I do not advocate that we require people to prove that they have no intention of murdering or burglarizing anybody, and to prove that they have adequate supervision to ensure they don’t go astray. Nor do I advocate that police check everybody’s house annually to ensure the locks are up to the latest standards and the ‘safe-room’ is adequately secured against armed marauders, or that the citizen sign a release stating that he does not want these things and file it with the proper authorities.

I am more concerned with the effects on capital markets of a blanket fiduciary standard. Mainly, capital markets do not exist for the purpose of giving Granny a safe investment; giving Granny a good place to put her $50,000 is only a means to an end. Capital markets exist for the purpose of transmitting money from savers to direct investors – companies that need a few billion to build a pipeline, or a factory or whatever. All regulation must not only recognize this, but recognize that all other aspects of capital markets are subordinate to this purpose.

So my major problem with a blanket fiduciary standard is: who’s going to do the selling? Selling is hard work and it’s valuable to the entity whose goods are being sold. So we have new issue commissions, paid directly from the issuer to the salesman, just like happens with the friendly salesman at your local electronics store. So who are these people going to be?

Under a blanket fiduciary standard, it obviously cannot be the fiduciary, so Granny can’t buy a new issue bond and capture (to some extent) the new issue concession. Granny must buy whatever is available on the secondary market and pay a markup that is (proportionately) pretty big. Granny can’t buy a GIC either, because GICs have the profit margin and sales commission (or salary, if it’s a teller doing the work) built in to the offered yield (taken off the top!) and are therefore (according to some) inherently evil.

However, fiduciaries are a valuable part of capital markets. I should know – I’m a fiduciary myself. Fiduciaries allow for a certain amount of trust in a relationship between naive client and big-shot markets guy, thereby encouraging more direct participation by clients in the capital market’s purpose of turning cash under the mattress into new skyscrapers.

So we need fiduciaries and we need salesmen in our idealized capital markets – and guess what? We have that already! There are lots of fiduciaries around for those that want them; there are lots of salesmen around for those who want them, too. There will be lots of individuals who will want relationships with both types of professional; and, I suggest, there will be lots of investors who will maintain accounts with salesmen only when an objective evaluation will suggest a fiduciary. ‘Why should I pay this fiduciary?’ they will ask. ‘Last year he only did two trades and charged me $3,000!’

What we don’t have is strict separation of functions. Given the huge amount of money that’s made from new issue commissions (as I mentioned on June 16, this exceeds mutual fund commission revenue at the major brokerages), it should be clear that strict separation is necessary. Not only should any individual market professional be prohibited from being both a salesman and a fiduciary (even to different clients), but any given corporate group should be prohibited from assuming both roles. If X is a sales channel and Y is a fiduciary channel and Z owns both X and Y … there will be problems, conflicts of interest and leakages. Guaranteed. So all investment professionals and all their employers must be forced to make the choice. Sell Side or Buy Side? Choose!

It won’t happen. There are a lot of very large corporate interests that make very good money by being all things to all people and there are lots of regulators and politicians who want to work for these large corporations in their futures at double the paycheque. So we’ll keep muddling along, true to the ideal that we can all achieve moral perfection as long as there are enough rules and enough people to enforce them and enough money spent on compliance instead of laying bricks for the new factory.

Actually, this eMail turned out rather longer than I expected and I like it. So I’m going to publish it on my blog tonight (your name will not be mentioned).

By the way, I have a small and nascent sideline providing expert witness reports for negligence and misconduct cases involving preferred shares; it’s something I think can grow, since I have the belief that the guys in the big firms won’t work for plaintiffs. You might want to keep me in mind when one of the 1-5% (?) of relationships crosses your desk.

Sincerely,

Actually, I should have also pointed out that the typical problem I see when reviewing portfolios is not that investors have too much equity, but that they have too little. Not only are they grossly overweighted in fixed-income, but that fixed income is short term, and not only is it short term, but it’s federal debt. If anything, commissions on selling equities should be increased because people simply aren’t holding enough of them.

On cue, Rob Carrick writes a piece in the Globe about fee based accounts:

Fee-based advice is where the momentum is in the investment industry today. PriceMetrix says the percentage of fee-based assets rose to 35 per cent in 2014 from 31 per cent in 2013, while the percentage of total fee revenue from fee-based accounts rose to 53 per cent from 47 per cent. “More and more advisers are realizing that operating on a fee-for-service basis is simply a more productive way to grow your business,” said Patrick Kennedy, co-founder and chief customer officer at Toronto-based PriceMetrix.
…
The general unavailability of fee information is a problem, though. Try this: Google the name of an investment firm you know and see if there’s a “fees” or “pricing” tab on their website. Outside of some online robo-adviser firms, I couldn’t find a single example of a company doing this.
…
Fee secrecy is good for business. Clients are told what the costs are and they have no context to judge them. They can negotiate, but without the knowledge that there may be other firms doing the same kind of work for half a percentage point less. On a $500,000 portfolio, that difference amounts to $2,500 per year.

It’s not just fee information that is hard to get (I publish my fees!) but, more critically, it is performance information that is very difficult to get. I didn’t mention it in my long eMail, above, but I think anybody charging a fee for discretionary asset management should be required to publish a comprehensive performance report, going back to inception. Composites can be created either by asset type or account characteristics (or both!), I don’t care, but performance must be published! What’s more, returns should be reported using Time-Weighted returns, not the Dollar-Weighted returns so beloved of regulators and morons (see November 26, 2012 for the initial fluttering of eyelashes; the eventual decision to mandate dollar-weighted returns was discussed in greater detail in PrefLetter).

John Heinzl in the Globe gave a sensible response to a small investor wailing about preferred share prices:

A few years ago I started accounts worth $5,000 for each of two grandchildren, and invested all of the money in BCE preferred shares (BCE.PR.K). The value of these accounts has since fallen to about $3,900, but my adviser recommends we leave them as is. The funds will not be needed for the grandchildren until about 15 years from now. I have thought about dumping the shares but feel the capital loss at this point would be significant, and perhaps the shares will pick up in the years to come?
…
Two other factors to consider are the time horizon and diversification. If the money will not be needed for 15 years, you might wish to consider investing in something that provides more growth potential (preferred shares are usually purchased for income, not growth). Investing the entire account in a single stock is probably not a good idea, however, because it entails too much risk; a low-cost index exchange-traded fund or mutual fund – particularly one that allows full reinvestment of dividends to maximize compounding – will give you both growth potential and diversification.

Fifteen year time horizon? For the kids? There are only two legitimate choices:

• Canadian equity ETF
• One, maybe two, single stocks

I’ll also note that ‘selling things because they’ve gone down’ is as common as it is silly; it’s probably a factor in the current very long stretch of drip-drip-drip losses.

One of the best investments I ever made (well, it was made on my behalf, but never mind that) was 100 shares (or so) of Irwin Toy when I was about ten years old. Investment returns were no great shakes, and I’m not even sure if I got dividend cheques, but it was a company whose products I was familiar with AND I could watch the stock price AND I could read a little bit of the quarterly reports (although I found them pretty boring – I was only ten!) AND, best of all, Irwin Toy had a Junior Shareholders Club, and if we went to the annual meeting we got a present. I still wonder, from time to time, whether there were a few boys from Marketting in attendance, making notes about kids reactions to the game or toy they received.

Anyway, it was a superb introduction to the concept of stocks. So while the investor didn’t say anything about his personal circumstances, I suggest that those with a little bit of breathing room in their finances would be well advised to buy their kids a few shares (not necessarily a board lot, but worth enough that a ten year old will consider it a significant investment) in something like Walt Disney common. Or Apple. Or Loblaw. Or Cineplex. Or Hudson’s Bay Company. Or Restaurant Brands. Are these good investments, by the standards of my very astute Assiduous Readers? I don’t know. Who cares?

Getting back to economics for a moment, numbers released today were soft:

Canada’s consumer prices advanced 0.9 per cent in May from a year earlier while retail sales for April posted a surprise decline, signs the second-quarter recovery the central bank is counting on remains in doubt.

Core inflation, which excludes eight volatile products, slowed to 2.2 per cent from 2.3 per cent in April, Statistics Canada said Friday from Ottawa. April retail sales fell 0.1 per cent on declines in food and electronics. Economists had expected sales to rise 0.7 per cent, according to the median forecast in a Bloomberg News survey.

Total inflation, while exceeding April’s 0.8 per cent pace, is still outside the Bank of Canada’s 1 per cent to 3 per cent target range. The 0.1 per cent April decline in retail sales exceeded even the most bearish economist forecast, suggesting economic weakness in the first quarter from lower crude oil prices is lingering into the second.

And, just to cap the week, Barrie McKenna wrote about one of our favourite off-topics:

At the moment, demand is growing for butter and cream, but it’s flat for fluid milk. The excess skim milk is turned into powder for baby formula, used as animal feed, or thrown away.

Trade is generally not an option. Canada is severally limited in what it can export because the World Trade Organization deems the fixed domestic milk prices a subsidy.
…
Imports have been growing rapidly, and will continue to rise when the free-trade deal with Europe is put in place. If Canada eventually joins the Trans-Pacific Partnership, experts say even more imported dairy products will pour into the country.

Canada’s trade deficit in dairy products has more than doubled since 2006. In 2014, dairy imports reached $900-million versus exports of $281-million, and the trend has accelerated in the first three months of this year. Exports were lower in 2014 than they were in 2006.

“Canada’s dairy sector is being seriously squeezed and faces a growing trade deficit,” according to a report slated to be released Monday by the Canadian Agri-Food Policy Institute. “This is hardly a growth formula for one of Canada’s largest agri-food sectors, but more importantly, a significant threat to the current system.”

The dairy industry is a great example of the long-term evils of trade protectionism.

It was another bad day for the Canadian preferred share market, with PerpetualDiscounts and FixedResets both down 30bp and DeemedRetractibles off 10bp. FixedResets dominated the bad part of the Performance Highlights table; the good part wasn’t big enough to be worth noticing. Volume was below average.

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

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

Here’s TRP:

Click for Big

TRP.PR.A, which resets 2019-12-31 at +192, is bid at 20.20 to be $0.84 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.51 cheap at its bid price of 16.27.

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 24.69 to be $0.49 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.70 to be $0.23 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.50 to be $0.92 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 22.70 and appears to be $0.69 rich.

Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.39, looks $0.32 cheap and resets 2020-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.15 and is $0.19 rich.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.45%, including the outliers TRP.PR.A / TRP.PR.F at -0.34% and FTS.PR.H / FTS.PR.I at +1.17%. On the junk side there are two outliers: FFH.PR.E / FFH.PR.F at -0.87% and DC.PR.B / DC.PR.D at -0.46%.

Click for Big

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

The Greek tragedy is approaching a climax:

The European Central Bank plans to hold an emergency session of its Governing Council on Friday to discuss the deteriorating liquidity situation of Greek banks, three people familiar with the matter said.

The call is scheduled for noon Frankfurt time on Friday, and the officials will consider a Bank of Greece request for an increase of more than 3 billion euros in Emergency Liquidity Assistance, one of the people said. All three asked not to be identified as the plans aren’t public. An ECB spokesman declined to comment.

The request comes just a day after Greece received an increase in its liquidity line of 1.1. billion euros ($1.25 billion), which raised the limit to 84.1 billion euros.

The short interval may be a signal that deposit flight is accelerating as the latest bailout talks ended without progress on Thursday.

Frankly, I’m surprised that there’s any money left in the Greek banking system to take flight.

And it looks like there’s a lot of internal politicking in Athens:

Prime Minister Alexis Tsipras’s government said there was an effort under way to spur capital flight, with Finance Minister Yanis Varoufakis later accusing the central bank of stoking fears.

The scaremongering seeks to undermine the financial system and strengthen the position of the country’s creditors, a Greek government official said in an e-mail to reporters.

“These tactics facilitate creditors who want to further blackmail the Greek government,” the official said in the statement. “Greece won’t be blackmailed.”

Further to the discussion of the OSC’s Brondesbury Report on June 16, today saw the publication of the Kenmar Commentary on CSA Fund Fee Report. This polemic does not address the question of new issue commissions, proxy solicitation fees, the willingness of small investors to pay advisors directly or the effects on capital markets of a change in fee schedules; changes are advocated as a method of smuggling in the concept of fiduciary duty.

On a related note, Michael P Regan of Bloomberg passes on a very bullish prediction on robo-advice:

Their popularity is going to explode even more, if new projections from consulting firm A.T. Kearney are in the right ballpark. Assets under management by robo advisers are estimated to increase 68 percent annually to about $2.2 trillion in five years, according to a forecast from the firm. About half of that is expected to come from money that’s already invested and the rest from non-invested assets.

As far as I can tell, Bloomberg just got a review copy of the paper; while the A.T. Kearney website features a front page link to the Bloomberg piece, the paper itself does not appear to be on the site.

I can’t resist passing on another shot at supply management:

Faced with a stagnant domestic market, Montreal-based Saputo Inc. and other major Canadian dairy producers have been investing heavily outside the country, where growth opportunities are better. This has exacerbated the skim milk surplus because dairies aren’t expanding their Canadian production of butter, cream or milk powder.

Martha Hall Findlay, a former Liberal MP and fellow at the University of Calgary School of Public Policy, said the real victims of the wastage are low-income Canadians, who aren’t getting the benefit of lower prices.

In a free market, surpluses would typically lead to lower consumer prices, but that isn’t the case in Canada because prices are fixed, she pointed out. “The system can’t accommodate fluctuations in demand,” said Ms. Findlay, who has written a series of reports advocating the dismantling of the supply management system.

It was another negative day for the Canadian preferred share market, with PerpetualDiscounts losing 59bp, FixedResets off 5bp and DeemedRetractibles down 14bp. PerpetualDiscounts are, predictably, overweighted in the bad part of the Performance Highlights table, while FixedResets are conspicuous on both sides. Volume was slightly 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 20.36 to be $0.73 rich, while TRP.PR.B, which will reset June 30 at 2.152% (+128), is $0.49 cheap at its bid price of 14.78

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). Note that the lowest spread issue, MFC.PR.F, is again clearly off the line defined by the other issues.

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 22.70 to be $0.53 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.40 to be $0.44 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.53 to be $0.94 cheap. BAM.PF.G, resetting at +284bp 2020-6-30 is bid at 24.50 and appears to be $0.65 rich.

Click for Big

FTS.PR.H, with a spread of +145bp, and bid at 16.60, looks $0.40 cheap and resets 2020-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.50 and is $0.25 rich.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of about 0.35%, including the outliers TRP.PR.A / TRP.PR.F at -0.54% and FTS.PR.H / FTS.PR.I at +0.95%. On the junk side there’s only one outlier: FFH.PR.E / FFH.PR.F at -0.93%.

Click for Big

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