PrefBlog

Yessir, one has to admire all those hard-nosed market timers who positioned themselves for “rising interest rates”:

Treasury 30-year bonds yields are tumbling to record lows as the collapse in oil and commodity prices smothers inflation and hampers global economic growth.

Global sovereign yields fell to records in the U.K., France, Canada and Japan as a report showed retail sales in the U.S. slumped in December by the most in almost a year, reflecting a broad-based retreat that may prompt economists to cut growth forecasts. The slide prompted traders to push back expectations for the timing of the first Federal Reserve interest-rate increase into December less than a month after speculating that rates could rise as soon as April.
…
Even at the record low yield of 2.39 percent reached today, 30-year Treasuries are attractive to global investors looking at negative returns on the sovereign debt of nations including German with the European Central Bank expected to add to its bond-buying program as policy makers seek to avert deflation.

The Treasury sold $13 billion of 30-year bonds at an auction-record-low yield of 2.430 percent.

Thirty-year bond yields dropped five basis points, or 0.05 percentage point, to 2.45 percent as of 2:31 p.m. in New York, according to Bloomberg Bond Trader data. The momentum that caused the previous record low of 2.44 percent set on July 26, 2012, to be eclipsed is being driven by the following factors.

• GLOBAL SLOWDOWN THREAT …
• LOW INFLATION …
• RELATIVE RETURNS…
• FED TIMING …

Larry Berman of the Globe passes on chief markets economist at Capital Economics John Higgins’ reasons, one of which was missed in the above:

Two, financial institutions are adapting to stricter regulations regarding leverage and assets, creating more demand for safe government bonds.

JPMorgan’s Jamie Dimon is complaining about the regulatory three-ring circus:

Jamie Dimon, grappling with multibillion-dollar legal costs and rising capital requirements at JPMorgan Chase & Co. (JPM), said overlapping efforts by U.S. regulators place banks “under assault.”

“We have five or six regulators or people coming after us on every different issue,” Dimon, 58, said today on a call with reporters after New York-based JPMorgan reported fourth-quarter results. “It’s a hard thing to deal with.”

JPMorgan, the largest U.S. bank by assets, posted a drop in fourth-quarter profit amid $990 million of legal expenses, about double what some analysts predicted. The legal costs, mostly tied to probes into currency rate-rigging, follow even bigger payments in 2013 related to mortgage bonds sold before the 2008 crisis by JPMorgan and firms it acquired.
…
Dimon, who was lauded during the crisis for JPMorgan’s role in buying Bear Stearns Cos. and Washington Mutual Inc.’s banking operations, has criticized the government for penalizing JPMorgan for those firms’ actions.
…
“In the old days, you dealt with one regulator when you had an issue, maybe two,” said Dimon, 58. “Now it’s five or six. It makes it very difficult and very complicated. You all should ask the question about how American that is. And how fair that is. And how complex that is for companies.”

Another hilarious spoofing case in US markets:

And then there is Aleksander Milrud, who allegedly built his spoofing robot out of lots of human traders in China and Korea and maybe elsewhere. Milrud was charged with spoofing today by federal prosecutors and the Securities and Exchange Commission, making him by my count only the second person to be charged with criminal spoofing. The claim is that Milrud recruited lots of traders in China and Korea, and then assigned them to spoof stocks from two accounts each. In the “dirty” account, a trader would enter lots of spoof orders to move the market. In the “clean” account, he’d enter a few orders the other way, to take advantage of the market move. The connections between those accounts, and between them and Milrud, were then further obscured by a series of tubes or whatever. 2 The traders could move fast because “Milrud worked with a gaming software company to develop ‘hot keys’ that allowed his traders to quickly place and cancel multiple orders via their computers with only a few strokes of their keyboards.” Because the next best thing to being an algorithm is being a human with a really fancy keyboard.

I see no reason that spoofing should be a crime. To the extent that it causes additional limit orders to be on the board, spoofing is good! I’m not concerned about the spoofees, because they’re just traders, playing a traders’ games. A fundamental investor can only be helped by spoofing.

One argument that can be made in favour of outlawing spoofing is that the ‘bad’ orders will drive out the ‘good’ – i.e., that legitimate speculative market makers will exit the market because they don’t understand it any more. I’m not so sure that this will be the case; I haven’t seen any evidence to support this view, although if may very well be that lots exists.

It was another poor day for the Canadian preferred share market, with PerpetualDiscounts down 7bp, FixedResets losing 22bp and DeemedRetractibles off 3bp. There is another lengthy Performance Highlights table, dominated by losing FixedResets. Volume was low.

PerpetualDiscounts now yield 5.00%, equivalent to 6.50% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.85% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 265bp, unchanged from January 7.

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

So according to this, TRP.PR.A, bid at 21.23, is $0.92 cheap, but it has already reset (at +192). TRP.PR.C, bid at 20.47 and resetting at +154bp on 2016-1-30 is $1.08 rich.

Click for Big

MFC.PR.F continues to be on the line defined by its peers. Implied Volatility continues to be a conundrum. It is far 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).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.53 and appears to be $0.88 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.30 and appears to be $0.89 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.80, looks $0.85 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.24, looks $1.16 expensive and resets 2019-3-1

Click for Big

Pairs equivalence is all over the map.

And, yeah, Bell is still having network problems, and I am still using my ‘phone as a Wi-Fi hotspot. But don’t worry! Our beloved government will continue to protect us from the evils of American competition, so nobody will lose his job over this fiasco.

So today the Prime Minister’s Office admitted the oil price drop is bad via one of its flunkies:

The plunge in oil prices is “on the whole” a negative for Canada’s economy and may delay its return to full potential, Bank of Canada Deputy Governor Tim Lane said.

“We will closely monitor its broader impacts on growth and the delay it may cause to the economy’s return to its production potential,” Lane said in a speech today in Madison, Wisconsin.

Economists are interpreting his remarks as confirmation the central bank will hold off raising interest rates for the time being. Governor Stephen Poloz and fellow members of the bank’s governing council will publish their next rate decision on Jan. 21, along with a quarterly policy report that will provide a detailed impact analysis of falling oil prices.
…
Canada’s dollar rose 0.2 percent to C$1.1953 per U.S. dollar at 3:58 p.m. Toronto time. It has depreciated by more than 10 percent in the last six months, as the price of benchmark crude oil has plunged 54 percent. A depreciating currency makes Canadian goods cheaper to foreign customers.

“Despite the mitigating factors I enumerated, lower oil prices are likely, on the whole, to be bad for Canada,” Lane said. “Estimating the magnitude of that overall impact requires carefully analyzing the interplay between the various effects as they work through the economy.”

Suncor agreed:

Suncor Energy Inc. (SU), Canada’s largest oil company, said it will cut 1,000 jobs, lower its 2015 capital budget by about 13 percent and delay projects to weather collapsing prices.

The company will spend C$1 billion ($836 million) less this year than originally forecast in November, following Canadian Natural Resources Ltd. (CNQ) in revising its budget lower this week. Suncor also plans to reduce operating expenses by C$600 million to C$800 million in two years, according to a company statement today.

So what do you do when you have too much oil?

Refiners, tankage firms and traders that invested in oil storage capacity are benefiting as the slump in crude to below $45 a barrel deepened what’s called contango, a relatively rare situation where prices for oil delivery later this year are higher than current prices. Vitol Group, Mercuria Energy Group Ltd. and Gunvor Group Ltd. are among the commodity houses poised to profit by storing oil and petroleum products to sell in the future.

“There is significant storage demand from traders wanting to cash in on that specific opportunity,” Martijn den Drijver, an analyst at SNS Securities in Amsterdam, said in an interview.

Mercuria, the fourth-largest independent oil trader, owns about 40 million barrels of storage in locations from Texas, South Africa and China to Belgium and the Netherlands, according to its website. The firm is looking primarily at its land-based storage facilities to play the contango, said Matt Lauer, a spokesman for the company with major trading operations in Geneva. Mercuria hasn’t moved to secure any floating storage in tankers at sea

I mentioned the Caisse’s intention to build transit in Quebec yesterday. DBRS is sanguine, but assumes independence:

DBRS Limited (DBRS) today notes that the Caisse de dép?t et placement du Québec (the Caisse) has entered into an agreement with the Government of Québec (the Government) to execute major infrastructure projects in the province. This new agreement is consistent with the Caisse’s strategy to grow its private market holdings, particularly infrastructure investments, amid the current low interest rate environment. Further, it allows the Caisse to capitalize on its unique understanding of the Québec market and address growing infrastructure needs in the province. Additionally, the Caisse’s current Québec concentration levels will not be affected. DBRS notes that the agreement is of a commercial nature, and importantly, the independence of the Caisse is a key feature and is by no means compromised by this agreement. This move has no implications on DBRS’s current ratings of the Caisse or its financing subsidiary, CDP Financial Inc.
…
Operationalization of the agreement will be dependent upon the introduction of legislative amendments, which is expected in the coming months. The new legislation will allow for the creation of the new infrastructure subsidiary, CDPQ Infra. Also, it will expand the Caisse’s current practice of merely investing in infrastructure projects, to accommodate the new business model, which will include project planning, development, construction and operation. Once established, it is expected that over time CDPQ Infra will expand its mandate to build, finance and operate infrastructure projects globally.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 8bp, FixedResets down 55bp and DeemedRetractibles off 2bp. The Performance Highlights table is suitably lengthy with quite a few FixedReset losers and one solitary winner – a PerpetualDiscount. 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

So according to this, TRP.PR.A, bid at 21.66, is $1.12 cheap, but it has already reset (at +192). TRP.PR.C, bid at 21.00 and resetting at +154bp on 2016-1-30 is $1.39 rich.

Click for Big

MFC.PR.F continues to be on the line defined by its peers. Implied Volatility continues to be a conundrum. It is far 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).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.48 and appears to be $0.94 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.41 and appears to be $1.02 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.80, looks $0.96 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.26, looks $1.23 expensive and resets 2019-3-1

Click for Big

Pairs equivalence is all over the map.

And, yeah, Bell is still having network problems, and I am still using my ‘phone as a Wi-Fi hotspot. But don’t worry! Our beloved government will continue to protect us from the evils of American competition, so nobody will lose his job over this fiasco.

Assiduous Readers will remember that implementation of the National Securities Regulator has turned out to be an excuse for the creation of arbitrary government powers. Now some pension funds have joined the attack:

The Healthcare of Ontario Pension Plan (HOOPP), the Ontario Municipal Employees Retirement System (OMERS) and the Ontario Teachers’ Pension Plan Board submitted a joint comment letter in December to federal Finance Minister Joe Oliver urging officials to remove pension plans from the draft Capital Markets Stability Act, which is still under review and has not yet been adopted.

HOOPP chief executive officer Jim Keohane said in an interview the act gives the proposed new regulator unprecedented powers to order companies or funds under its control to do anything it deems necessary to prevent systemic risks in the financial system.

“This act, as it reads right now, gives this regulator unbelievable powers that no other regulator in the world has,” he said.

“It can prohibit or restrict any business activities that we undertake. It could force us not to trade securities. The regulator can at its discretion order us to do anything it deems necessary to address systemic risk. It’s completely open-ended,” Mr. Keohane said.

The Caisse is going to build transit in Quebec:

The Caisse de dépôt et placement du Québec is set to boost its bet on infrastructure under a new deal with Quebec that will see the pension fund take over financing and ownership of new public transit projects in the province.

The pension-fund manager, which has assets of $214-billion, has struck an agreement with Quebec’s Liberal government that will see it be the maître d’oeuvre, or project owner, for new transit projects in the French-speaking province. Details of the deal are scheduled to be made public at a news event in Montreal on Tuesday.

Sources familiar with the agreement described it as “a new way of financing and running public transportation infrastructure” for Quebec that will see the Caisse assume ownership over new transit assets and responsibility for building them. Essentially, the province is privatizing the plan for new public transportation projects but with an investor with which it has an established and privileged relationship.

It’s hard to make this out. Is it a plan for current workers to fund current retirees, by overcharging for services? Or is it a plan to pillage the fund by undercharging? All one can really say is that when Big Government jumps into bed with itself, it’s the public who gets screwed.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 10bp, FixedResets up 14bp and DeemedRetractibles gaining 5bp. There is a lengthy performance highlights table notable for BAM FixedResets on the good side. 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

So according to this, TRP.PR.A, bid at 21.55, is $1.01 cheap, but it has already reset (at +192). TRP.PR.C, bid at 20.99 and resetting at +154bp on 2016-1-30 is $1.18 rich.

**************************************

Having reached this point in the report I lost my internet connection. There were “network problems” at Bell Highspeed and there are still problems. I have been working today using my cell phone as a Wi-Fi hotspot; not a very good substitute, but good enough. Since I don’t work for BCE, I am aware of the value of redundancy!

So this report is foreshortened. Sorry!

**************************************

It’s very fashionable to send people to special classes when they’re caught doing something naughty, with the apparent attitude that there’s no such thing as badness, only ignorance. I’ve always thought this was a wonderful example of preciousness and now I’ve got a perfect counterexample:

Dartmouth College accused 64 students of cheating in a sports ethics class last semester, the latest in a string of cases of academic dishonesty involving athletes at elite U.S. colleges.

Students used a hand-held device known as a clicker to answer questions for classmates who were absent, according to Randall Balmer, who teaches the class, “Sports, Ethics and Religion.”

DF.PR.A was confirmed at Pfd-3(low) by DBRS:

Since the last rating confirmation in January 2014, the NAV of the Company has been increasing. As of December 31, 2014, the downside protection available to the Preferred Shares is approximately 40.6%, and the dividend coverage ratio is 0.81 times. The Pfd-3 (low) rating of the Preferred Shares is based primarily on the downside protection available and the additional protection provided by an asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.

FTN.PR.A was confirmed at Pfd-4(high) by DBRS:

Since the last rating confirmation in January 2014, the NAV of the Company has improved slightly, despite volatility in the markets during the year. Downside protection available to holders of the Preferred Shares rose to 43.4% as of December 31, 2014, from 42.2% on December 31, 2013. Despite the increased downside protection, the current dividend coverage ratio of around 0.46 and the reinstatement of Class A Share distributions result in an average grind of approximately 11% over the next two years. As a result, the rating has been confirmed at Pfd-4 (high).

It was a mixed day for the Canadian preferred shares market, with both PerpetualDiscounts and DeemedRetractibles off 5bp, while FixedResets were up 22bp. The volatility table was longer than normal, but indicative of nothing like the extreme volatility of the past month-odd. 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

So according to this, TRP.PR.A, bid at 21.66, is $1.07 cheap, but it has already reset (at +192). TRP.PR.C, bid at 21.01 and resetting at +154bp on 2016-1-30 is $0.95 rich.

Click for Big

MFC.PR.F continues to be on the line defined by its peers. Implied Volatility continues to be a conundrum. It is far 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).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.46 and appears to be $0.97 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.34 and appears to be $1.01 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.80, looks $1.07 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.25, looks $1.09 expensive and resets 2019-3-1

Click for Big

Pairs equivalence is all over the map.

And now it’s time for PrefLetter!

Hurray! The S&P 500 is even on the year!

The Standard & Poor’s 500 Index rallied a second day, wiping out its losses for the year, on speculation central banks will support growth even as the American economy shows signs of strength.

The S&P 500 added 1.8 percent to 2,062.14 at 4 p.m. in New York, after rallying 1.2 percent yesterday to halt a five-day selloff. The Dow Jones Industrial Average jumped 323.35 points, or 1.8 percent, to 17,907.87, also erasing its loss for 2015. The Nasdaq 100 Index soared 1.9 percent and the Dow Jones Transportation Average climbed the most since October. More than 7.3 billion shares changed hands on U.S. exchanges, 4.8 percent above the three-month average.
…
Stocks extended gains after European Central Bank President Mario Draghi said in a letter published today that central bank stimulus measures may include sovereign-bond buying. Producer prices slid more than analysts anticipated in the euro area and German factory orders fell more than forecast in November, underlining the fragile state of Europe’s economy and strengthened the case for more stimulus.

The next interest-rate decision by the ECB is scheduled for Jan. 22 when officials will consider a quantitative-easing package that will probably include buying government bonds. Policy makers disagree about whether action is required, with some arguing deflation risks have increased and others pointing to the stimulating effects of lower prices on the economy.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 11bp, FixedResets off 4bp and DeemedRetractibles gaining 6bp. The Performance Highlights table is surprisingly short and dominated by TRP issues. Volume was low.

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

Remember that all rich /cheap assessments are:

• based on Implied Volatility Theory only
• are relative only to other FixedResets from the same issuer
• assume constant GOC-5 yield
• assume constant Implied Volatility
• assume constant spread

Here’s TRP:

Click for Big

So according to this, TRP.PR.A, bid at 21.60, is $0.92 cheap, but it has already reset (at +192). TRP.PR.C, bid at 21.02 and resetting at +154bp on 2016-1-30 is $1.13 rich.

Click for Big

MFC.PR.F continues to be on the line defined by its peers. Implied Volatility continues to be a conundrum. It is far 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).

Click for Big

There continues to be cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, which is bid at 21.41 and appears to be $0.90 cheap, while BAM.PR.R, resetting at +230bp 2016-6-30 is bid at 25.17 and appears to be $0.95 rich.

It seems clear that the higher-spread issues define a curve with significantly more Implied Volatility than is calculated when the low-spread outlier is included.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 18.77, looks $1.04 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 25.16, looks $1.11 expensive and resets 2019-3-1

Click for Big

Pairs equivalence is all over the map.