PrefBlog

There’s some interesting news about drones:

Amazon.com Inc.’s proposed use of drones could drive down the cost to deliver small packages crosstown to about $1 — a fraction of existing same-day delivery options, according to a study by a financial research company.

The report from New York-based ARK Invest also suggests deliveries may arrive in as soon as 30 minutes. The research tried to quantify the savings from the use of drones compared with delivery trucks and couriers.

Amazon has pushed the U.S. government for permission to test unmanned aircraft as it seeks to develop drones to speed shipping products. The Federal Aviation Administration gave the Seattle-based online retailer a waiver allowing flights as fast as 100 miles (161 kilometers) an hour and as high as 400 feet off the ground, according to a letter from the agency dated Wednesday.
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Amazon would need to hire thousands of operators, each capable of monitoring multiple drones simultaneously, to ensure safe takeoffs and landings, according to the study, which included the personnel cost in its calculations. Most of the drone flight would be automated, according to the study, which assumes each package weighs as much as 5 pounds and each delivery is no more than 10 miles.

This is of interest on many levels: primarily, of course, I’m interested in getting the things that I ordered quickly – when I buy the latest installment of Teenage Vampire Stewardesses Go To Nursing School, I want it right away! Additionally, there is the potential for skeet shooting with prizes! And finally, what happens when more than one company does it? Will we need to have drone Air Traffic Controllers? Or, given that the potential for death and injury is less with package-delivering drones, will it be enough to have some kind of automated system? Will an automated system work with visual sensors, echo-location or self-responding with GPS and transponders? Stay tuned!

It will not have escaped notice that immediately following the publication of the story in which I discussed upcoming dividend cuts on reset, the preferred share market tanked, particularly FixedResets. The enormous amount of influence I have over the market has also impressed a lot of my groupies, who send me gushing eMails:

Your comments on preferred share recently were totally out of line. Irresponsible comments about the yields on all rate reset preffered. shares. You should be sued on those comments. I am too poor to sue you but I wish I could.

Politics is getting really complicated. First there was the Wildrose Party in Alberta and now I understand there’s a new political movement in Saskatchewan:

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Saskatchewan is clamping down on the sale of the province’s farmland to major Canadian pension funds and institutional investors, restricting deep-pocketed groups at a time when land prices are climbing.

Agriculture Minister Lyle Stewart said Monday that Saskatchewan will undertake a review of provincial farmland ownership rules. In the meantime, pension plans, administrators of pension fund assets and trusts will not be allowed to purchase land, adding to the already stringent rules in place to prevent foreign investors from profiting from the industry.
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The move to change ownership rules comes after Canada Pension Plan Investment Board paid $128-million for 115,000 acres of Saskatchewan farmland that produced wheat, barley, canola and other crops in 2013. The acquisition has become a hot-button issue as the province seeks to protect small farmers while encouraging growth in its agriculture industry.

Used to be that a buck was a buck; in fact, I understand that that’s why money was invented. But it seems very fashionable to declare that some dollars are better than other dollars; the system of licenses might even get some senior bureaucrats some very nice dinners and hockey tickets.

This story about abusive staffing practices rang a bell for me:

Gap Inc. and other retailers were told by New York’s attorney general that using on-call shifts may be illegal, bringing fresh criticism to a practice that forces workers to make themselves available on short notice.

Attorney General Eric Schneiderman sent letters to 13 retailers on April 10 seeking information about their reliance on the staffing approach. He warned the companies that making workers stay on call may be violating state employment law.

The attorney general said he received reports that a growing number of employees are working such shifts, which require them to check in as little as a few hours in advance to see if they’re needed. A range of clothing and department-store chains, including Sears Holdings Corp., Abercrombie & Fitch Co. and Target Corp., all received letters on the issue — the latest attempt by the high-profile prosecutor to rein in what he sees as unscrupulous retail practices.

My cutie is a nurse. As many of you know, the complete absence of anybody with any kind of brain in the health care system means that many, if not most, nurses can only find part-time jobs. One of her jobs is at a hospital, as a casual, which means she has to provide them with a minimum amount of availability every month, with a minimum amount of that to be weekends. If they need her, they’ll call her; I believe a health minister read a newspaper article about ‘Just In Time Inventory’ one day and decided that this would be his legacy. So anyway, it’s not bad enough that she’ll get called at 4:30am to leave the house at 5:00am to commute to a 6:00am shift start time; the worst part is, she’s neither paid for the availability, nor is she guaranteed a certain proportion of calls. So it’s entirely possible that she could block out 20 shifts availability over a month, not get a single call, and get a grand total of zero on her paycheque.

The system may have been inspired by a politician, but it was definitely designed by an MBA. And then the news is filled with interviews with the big shots, utterly baffled regarding why so many young nurses leave the profession. Why do so many go to the States? Hell, how much experience of life do you really need before you realize that if you treat your staff like shit, you get shit staff?

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts losing 55bp, FixedResets down 32bp and DeemedRetractibles off 7bp. The lengthy Performance Highlights table is dominated by FixedReset losers, but there were quite a few winners on the day. Volume was very 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 23.60 to be $1.38 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.88 cheap at its bid price of 15.60.

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Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. 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.M, resetting at +236 on 2019-12-19, bid at 24.00 to be $0.60 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.16 to be $0.90 cheap. The lowest spread issue, MFC.PR.F, is noticeably off the curve defined by its peers.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 18.87 to be $1.31 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 23.10 and appears to be $1.27 rich.

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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 15.25, looks $1.34 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 21.62 and is $0.52 rich.

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Investment-grade pairs other than TRP.PR.A / TRP.PR.F now predict an average over the next five years of about 0.30%. TRP.PR.A / TRP.PR.F remains an outlier, predicting 0.84%. The DC.PR.B / DC.PR.D pair is still off the charts and now predicts an average bill rate over the next 4 3/4 years of -0.76%.

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

Sometimes you just can’t win:

Vladimir Putin is facing a problem few could have anticipated: The ruble is becoming too strong.

Last year’s worst-performing major currency is this year’s best and while that’s buoying the nation’s bonds, driving yields to the lowest in four months, it’s also crimping Russia’s export revenue. Even though oil is little changed in dollars this year, the price when converted to rubles has plunged to the lowest since 2011.

The currency rout in 2014 helped Russia to keep its budget deficit within 1 percent of gross domestic product as the ruble weakened in lockstep with a 50 percent slump in oil. Now, with the cease-fire in Ukraine and the allure of higher-yielding assets attracting investors to ruble debt, the government is seeing the opposite effect.

“The current ruble level is already uncomfortable for the budget considering the oil price in rubles is already low,” Vladimir Bragin, head of research at Alfa Capital in Moscow, said by phone on Thursday. “In order to reach macroeconomic stability, Russia needs to limit its budget deficit and a weaker ruble is an easy way to do that.”

It looks like there will be another triumph for regulatory extortion:

Deutsche Bank AG is close to resolving a multi-year probe by U.S. and U.K. authorities into interest-rate manipulation, with a U.K. subsidiary expected to plead guilty, according to two people familiar with the matter.

Germany’s biggest bank will probably finalize a settlement this month, these people said. The unit expected to plead is Deutsche Bank Group Services, one of the people said.

The bank is also expected to pay penalties of more than $1.5 billion to wrap up probes by the U.S. Justice Department, the Commodity Futures Trading Commission, New York’s Department of Financial Services and the U.K.’s Financial Conduct Authority, according to one of the people. The penalty could be larger than those levied against other global banks for interest-rate rigging claims.
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In October, the bank said it was in discussions with some authorities about a resolution. The German lender previously was fined 725 million euros ($773 million) by the European Union for manipulating yen Libor and the euro interbank offered rate.
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Deutsche Bank set aside 3.6 billion euros in legal and operational risk provisions at the end of December. The bank doesn’t provide details on the reserves. Over the last three years, the bank’s litigation expenses totaled about 7.1 billion euros.

As an aside, I confess to being fascinated and horrified by the Valentina Lisitsa / Toronto Symphony Orchestra scandal. In the first place, I agree with Vinay Menon of the Toronto Star:

The TSO sacrificed its own artistic integrity. It was remarkably tone deaf. It set a dangerous precedent and, in doing so, made a mockery of the arts in this city. Canceling these concerts was about as absurd and unwarranted as that time mayor June Rowlands banned the Barenaked Ladies because the band’s name objectified women.

More to the point though is the TSO’s Jeff Melanson’s delusions of grandeur. If – as many fervently believe – she has crossed the line into hate speech … we have laws for that. Publicly available laws, with case law constructed from the precedents. We have a judicial system that will – publicly – make a finding based on the (publicly disclosed) facts of the case; we can attend the trial if we wish to, to verify that the decision is on the up-and-up. We have a police force that will perform any necessary investigation and many crown attorneys who will make a decision as to whether to proceed with charges on the basis of that investigation. We have a judicial system that will – publicly – make a finding based on the (publicly disclosed) facts of the case; we can attend the trial if we wish to, to verify that the decision is on the up-and-up. We do not need Jeff Melanson of the TSO to pin on his Junior Secret Policeman badge and indulge in a little career-wrecking in the apparent belief that artists are supposed to be nice people.

These vitriolic moral crusades harm the body politic more than anything Ms. Lisitsa has said and the promotion of two-bit bureaucrats to Official Moral Arbiters is even worse, as discussed on January 6, 2015 with respect to the Dalhousie dentists.

Update: This is delicious in light of the Valentina Lisitsa scandal with the TSO … at the height of the furor regarding the presence of Queers Against Israeli Apartheid in Toronto’s Gay Pride parade, a few institutions made a joint statement in support of the group:

Delicious.

Inspired by Easter, investors in Canadian preferred shares have participated in other religious ceremonies in the past week:

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It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 5bp, FixedResets off 51bp and DeemedRetractibles gaining 3bp. The Performance Highlights table is predictably enormous, dominated by low-spread FixedReset losers. 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:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 23.02 to be $0.96 rich, while TRP.PR.B, resetting 2015-6-30 at +128, is $0.76 cheap at its bid price of 13.79.

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Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. 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.L, resetting at +216 on 2019-6-19, bid at 23.45 to be $0.60 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.16 to be $0.91 cheap. The lowest spread issue, MFC.PR.F, is noticeably off the curve defined by its peers.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 19.07 to be $1.26 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 23.30 and appears to be $1.03 rich.

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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 15.40, looks $1.65 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 22.59 and is $0.95 rich.

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Investment-grade pairs other than TRP.PR.A / TRP.PR.F now predict an average over the next five years of about 0.25%, a slight decrease from yesterday’s value of 0.30%. TRP.PR.A / TRP.PR.F remains an outlier, predicting 1.46%. The DC.PR.B / DC.PR.D pair is still off the charts and now predicts an average bill rate over the next 4 3/4 years of -2.05%.

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

Shareholder activism is rearing its head:

Bond investors face growing risk as activist shareholders are targeting more companies in 2015 than last year, threatening further damage to corporate credit quality, according to Moody’s Investors Service.
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Investors have sought change at 54 companies including General Motors Co. and MGM Resorts International this year, up from 43 during the same period in 2014, Moody’s said. The record 222 companies targeted last year was up from 220 in 2013. Assets managed by activist hedge funds increased to about $120 billion in 2014 from about $105 billion in 2013, according to Hedge Fund Research data cited by Moody’s.

They’re lured by the “huge cash pile” at U.S. non-financial companies, which had $1.65 trillion on their balance sheets in October 2014, according to the report. Technology companies, which as of October carried more than half of the cash held by the largest non-financial U.S. companies, accounted for 20 percent of shareholder activism last year. Along with its cash, the sector’s minimal dividends and low debt levels will continue to draw attention from these investors, Moody’s said.

The bureaucrats at the IMF have recommended hiring more bureaucrats:

Bond funds may be exposing customers and the financial system to more risk than some investors realize as money managers seek higher returns in less liquid assets, the International Monetary Fund said in a report recommending improved oversight.

“The role of fixed-income funds, which entail larger contagion risks than traditional equity investment, has expanded considerably,” the IMF said Wednesday in a chapter on asset managers in its latest Global Financial Stability Report.
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While the U.S. mutual fund industry’s regulation regime is based primarily on disclosure, the IMF proposed enhancing “liquidity rules, the definition of liquid assets, investment restrictions, and reporting and disclosure rules.” Not enough is known about the use of leverage and derivatives, said Gaston Gelos, chief of the IMF division that worked on the chapter.
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While asset managers act as a “spare tire” in world’s financial system, providing financing even when banks are distressed, the industry raises risks that call for changes in regulated and oversight, the IMF said.

“Easy redemption options can create risks of runs because of the presence of a first-mover advantage,” the IMF said. “The destabilization of prices in certain asset segments (particularly bonds) can affect other parts of the financial system through funding markets and balance sheet and collateral channels.”

I have tried several times to download the report, but it appears that all their technology budget got spent on junkets; the download hangs pretty quickly. It might work in a couple of days.

Meanwhile it appears that yes, next time might be different:

The gap between how easy it is to trade mutual-fund shares and how hard it is to buy and sell assets such as high-yield bonds and leveraged loans is widening.

In 2015 alone, a year in which the Federal Reserve says it’s still planning to raise interest rates, investors have poured $46 billion into mutual funds and exchange-traded funds focused on corporate bonds, according to data compiled by Wells Fargo & Co.

They now own about 22 percent of outstanding high-yield bonds, up from about 12 percent in 2006, data compiled by JPMorgan Chase & Co. show.

While the size of the U.S. bond market has swelled 23 percent since the end of 2007 through the end of last year, trading has fallen 28 percent in the period, according to data compiled by the Securities Industry & Financial Markets Association.

Warnings about potential scarcity of liquidity when it’s at a premium have moved from academic circles and crackpot blogs to the mainstream:

JPMorgan Chase & Co. head Jamie Dimon said last year’s volatility in U.S. Treasuries is a “warning shot” to investors and that the next financial crisis could be exacerbated by a shortage of the securities.

The Oct. 15 gyration, when Treasury yields fluctuated by almost 0.4 percentage point, was an “unprecedented move” that would have serious consequences in a stressed environment, Dimon, the New York-based bank’s chairman and chief executive officer, said in a letter Wednesday to shareholders. Treasuries are supposed to be among the most stable securities.

Dimon, 59, cited the incident as he waded into a debate about whether bank regulations implemented after the 2008 financial crisis exacerbate price declines by limiting the ability of Wall Street banks to make markets. It’s just a matter of time until some political, economic or market event triggers another financial crisis, he said, without predicting one is imminent.

Hat tip to Assiduous Reader JP for bringing the above to my attention. JP sends me many interesting links, unlike you other bums.

Power Financial sees an opportunity in the robo-advisor business:

Power Financial Corp., which has built an empire around financial planning and investment advice, is now plugging into the world of robots by investing up to $30-million in Wealthsimple Financial Inc.

The partnership of the robo-adviser firm and a major financial institution is the first of its kind in Canada. It will help Power Financial to target more millennials and other Canadians who are less likely to invest through traditional channels, and instead opt for low-cost robo-advisers that provide automated online portfolio management. Under the agreement, pending regulatory approval, Power Financial will initially invest $10-million into Wealthsimple, with an option to put in another $20-million over the next 12 months. Power Financial could potentially make further investments over the next three years under the deal.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 12bp FixedResets down 15bp and DeemedRetractibles gaining 2bp. The Performance Highlights table continues to reflect a lot of churn in the market. 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.E, which resets 2019-10-30 at +235, is bid at 23.18 to be $0.89 rich, while TRP.PR.C, resetting 2016-01-30 at +154, is $0.69 cheap at its bid price of 15.90.

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. 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.M, resetting at +236 on 2019-12-19, bid at 24.25 to be $0.49 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.20 to be $0.93 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 19.14 to be $1.32 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 23.51 and appears to be $1.38 rich.

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 15.35, looks $1.73 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.60 and is $0.91 rich.

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Investment-grade pairs other than TRP.PR.A / TRP.PR.F now predict an average over the next five years of about 0.30%, a slight decrease from yesterday’s value of 0.35%. TRP.PR.A / TRP.PR.F remains an outlier, predicting 1.24%. The DC.PR.B / DC.PR.D pair is still off the charts and now predicts an average bill rate over the next 4 3/4 years of -1.66%.

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