PrefBlog

Moody’s downgraded Japan:

Moody’s Investors Service on Monday downgraded Japan’s sovereign debt rating by one notch to A1, citing rising uncertainty over the country’s ability to hit its debt-reduction goal.

The announcement briefly sent the yen to a seven-year low against the dollar and pushed 10-year Japanese government bond (JGB) futures down by 10 ticks.
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The U.S. rating agency said the outlook was stable.

Tom Byrne, regional credit officer of Moody’s, said the downgrade was closely linked to [Japanese Prime Minister] Mr. [Shinzo] Abe’s decision to delay next year’s scheduled sales tax hike, which made it more challenging for Japan to achieve its target of reducing the primary budget deficit in fiscal 2020.

“There is concern that fiscal policy in its current state will not achieve the long-term fiscal goals,” he said.

Hours before Moody’s announcement, Mr. Abe had stressed in a televised public debate that Japan remained committed to fiscal reform, and that the Bank of Japan’s ultraloose policy was not aimed at monetizing public debt.

But Moody’s warned that the BOJ’s efforts to achieve its 2-per-cent inflation target through aggressive money printing may push up bond yields and raise government borrowing costs.

Remember that US recovery that would save the world?

U.S. stocks fell for a second day as weaker data on Black Friday sales and China manufacturing overshadowed a rebound in oil and expansion in American factories.

Retailers in the Standard & Poor’s 500 Index (SPX) fell the most in a month as post-Thanksgiving holiday sales came in below forecasts. Apple Inc. fell as much as 6.4 percent in early trading before paring the loss in half. Chevron Corp. and Exxon Mobil Corp. gained at least 2 percent as crude oil ended a four-day skid.

The S&P 500 fell 0.7 percent to 2,053.44 at 4 p.m. in New York. The Dow Jones Industrial Average slumped 51.44 points, or 0.3 percent, to 17,776.8. The technology-heavy Nasdaq 100 Index lost 1.2 percent. About 7.6 billion listed shares changed hands in the U.S., 13 percent higher than the three-month daily average.

Black Friday, as noted above, was a fizzle:

Spending tumbled an estimated 11 percent over the weekend from a year earlier, the Washington-based National Retail Federation said yesterday. And more than 6 million shoppers who had been expected to hit stores never showed up.

Consumers were unmoved by retailers’ aggressive discounts and longer Thanksgiving hours, raising concern that signs of recovery in recent months won’t endure. Retailers also were targeted by protesters, who called on consumers to boycott Black Friday to make a statement about police violence. Still, the NRF cast the decline in a positive light, saying it showed shoppers were confident enough to skip the initial rush for discounts.

There may be relatively little effect on Canada, though, as Roy Osing reminds us that our main product is mewling sycophancy:

… I was less than impressed with the organization structure he proposed. It was a structure I had “lived with” in my previous life and could see the pluses and minuses.

When asked whether I could support the proposed structure, I asked for time to consider it before declaring my position.

One of my peers virtually condemned it and with his “outside voice” declared his non-support; he left the company soon thereafter.

A previous president once told me “Roy, if your boss puts forward what you consider to be a ‘dumb idea’, you only have two choices: one, support it and try to make it work; or two, leave.”

And there’s the usual amount of rate punditry:

Poloz will keep his benchmark overnight rate at 1 percent Dec. 3 according to all 22 economists surveyed by Bloomberg News through Nov. 28, stretching the pause that began with Mark Carney in 2010. That would make it the longest since February 1944 to September 1950, exceeding the October 1950 to January 1955 hiatus.
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While Fed policy makers debate the language they might use to flag potential policy-rate increases, their Canadian counterparts say they remain focused on providing stimulus to bring the world’s 11th-largest economy back to full output over the next two years.

Canada’s economic growth slowed to a 2.8 percent annualized pace in the third quarter from 3.6 percent the prior three months, Statistics Canada reported Nov. 28. In contrast, U.S. growth came in at 3.9 percent.
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Poloz won’t raise rates until the fourth quarter of next year, according to a Bloomberg economist survey. The quarter-point increase forecast for Canada compares with an estimated Fed move to 1 percent from 0.25 percent over that time.

The anticipation of rising Fed rates has is already helping keep Canadian bond yields lower than Treasuries. Canada’s five-year bonds had a 1.35 percent yield at 9:25 a.m. Toronto time today, while similar Treasuries yielded 1.46 percent.

In honour of Cyber Monday, the Canadian preferred share market was on sale today, with PerpetualDiscounts down 12bp, FixedResets losing 18bp and DeemedRetractibles off 11bp. Volatility was high and comprised almost entirely of losers. Volume was below average.

Update, 2014-11-30: A large portion of the material previously published in this post has been given its own dedicated post, Prof. Jeffrey MacIntosh on the National Securities Regulator

European inflation is still elusive:

Consumer prices rose 0.3 percent from a year earlier, the European Union’s statistics office in Luxembourg said today. That was in line with the median forecast of 41 economists in a Bloomberg News survey. Unemployment (UMRTEMU) held at 11.5 percent in October, Eurostat said in a separate report.
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The Eurostat report showed that energy prices fell 2.5 percent in November from a year earlier. Crude oil has plunged more than 30 percent in the past three months. Food, alcohol and tobacco prices increased 0.5 percent.

Core inflation, which strips out volatile items such as energy, food, tobacco and alcohol, stayed at 0.7 percent in November, according to Eurostat.

“The only crumb of comfort for the ECB –- and it is not much -– is that November’s renewed drop in inflation was entirely due to an increased year-on-year drop in energy prices,” said Howard Archer, chief European economist at IHS Global Insight in London.

… and at least one pundit is muttering that the oil price graph will not be V-shaped:

But Andy Xie, the often-contrarian former top Asia-Pacific economist for Morgan Stanley, warned that the massive investment overhang in China, valued at more than $6-trillion, will dramatically affect its energy demand growth, and will, as a result, rein in oil prices for a long time to come.

“China’s energy demand, the only source of growth for a decade, has fallen sharply,” he said in an interview. “There are several conspiracy theories out there. None can affect demand supply balance, which determines prices.”

In mid-September, more than a month before Goldman Sachs rocked markets with its prediction that oil prices would fall to $70 a barrel, Mr. Xie told a conference in Kuwait that he expected oil prices to nosedive to $60. The audience laughed. Now, he’s being invited back to speak again.

BMO Capital Trust is redeeming a big slug of Innovative Tier 1 Capital (or AT1, as the cool guys call it):

BMO Capital Trust (the “Trust”), a subsidiary of Bank of Montreal, today announced its intention to redeem at par all of its Trust Capital Securities – Series D (“BMO BOaTS – Series D”), on December 31, 2014. The BMO BOaTS – Series D are redeemable at the Trust’s option from December 31, 2014, at a redemption amount equal to $1,000 plus unpaid indicated distributions. Notice will be delivered to BMO BOaTS – Series D holders in accordance with the terms outlined in the BMO BOaTS – Series D prospectus.

After December 31, 2014, holders of BMO BOaTS – Series D will be entitled only to receiving the redemption price and will no longer be entitled to indicated distributions and exercising any other rights.

According to the 2013 Annual Report:

After December 31, 2014, the distribution [on BOaTS Series D] will be at the Bankers’ Acceptance Rate plus 1.5%.
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The BMO BOaTS Series D and E and BMO T1Ns – Series A will each be automatically exchanged for 40 Class B non-cumulative preferred shares of the bank, Series 11, 12 and 20, respectively, without the consent of the holders on the occurrence of specific events, such as a wind-up of the bank, a regulatory requirement to increase capital or violations of regulatory capital requirements.

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

The performance of the Portfolio has experienced some volatility over the past few months, with the downside protection fluctuating between 46.4% and 52.0% from July to October. As of October 31, 2014, the downside protection available to the Preferred Shares is approximately 49.2% and the dividend coverage ratio is about 1.1 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.

The main constraints to the rating are (1) the Company’s dependence on the value and dividend policies of the securities in the Portfolio and (2) the reliance on the manager to generate a high yield on the Portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

The Asset Coverage Ratio for this issue was 2.1-:1 as of November 27.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 26bp, FixedResets off 9bp and DeemedRetractibles gaining 4bp. Volatility was high, with the winners being exclusively BAM PerpetualDiscounts. Volume was quite low.

And that’s it for November!

It’s a tangled web we weave when attempting to control the flow of capital:

Foreigners who illegally buy homes in Australia should face higher fines, a parliamentary committee said, calling on authorities to better police existing rules.

The current A$85,000 ($72,769) fine for foreigners breaching the rules, “seen by many as simply the cost of doing business,” should be replaced with penalties tied to the property’s value, the House Economics Committee said in a report that made 12 recommendations. Third parties who help foreigners break the rules should be fined, and gains from illegally purchased homes should be forfeited to the government, it said.
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The committee started the inquiry in March on concerns that foreign, particularly Chinese, buyers were pricing Australians out of the home market. Sydney’s median asking price for detached houses topped a record A$1 million this month, while prices across the nation’s major cities jumped 9 percent in the 12 months through October to the highest ever.
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To fund better policing, the committee recommended a “modest” administration fee. An A$1,500 fee would generate revenue of A$158.7 million over four years, yet amount to less than 0.3 percent of the purchase price of a home in Sydney or Melbourne, according to the report.

How’s that for good news for sellers? There will be a tax on the sale of a house so the government can ensure that high bidders with deep pockets are disqualified.

Structural subordination is becoming important for European bank bonds:

Senior bonds sold by Barclays Plc and Royal Bank of Scotland Group Plc yield as much as 38 basis points more than equivalent securities issued by the units they use to make loans. There was little difference in yields before this month.

The divergence underscores growing investor concern that senior bonds sold by parent holding companies could suffer losses if a bank fails, while debt of the operating companies will remain intact — a scenario regulators endorse. Investors are also anticipating a surge in issuance of senior debt that can be written down as lenders prepare for the biggest overhaul of financial debt in a generation.
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S&P this week told investors it will probably remove any assumption of government support when assigning senior ratings to bank holding companies, meaning these bonds may be downgraded because of the risk of being bailed in.

It’s a red letter day! The Canadian Securities Administrators are proposing something sensible!

The Canadian Securities Administrators (CSA) today published for comment proposed amendments that would create a streamlined prospectus exemption for rights offerings by reporting issuers.

“Although rights offerings can be one of the fairest ways for issuers to raise capital, in that they allow all existing investors to participate on a pro rata basis, they are seldom used because of the time and costs associated with them,” said Bill Rice, Chair of the CSA and Chair and Chief Executive Officer of the Alberta Securities Commission. “The proposed exemption is designed to make rights offerings more attractive to reporting issuers by decreasing both the time and costs involved.”

One of the key proposals is to remove the current regulatory review process prior to use of the rights offering circular. The CSA anticipates this will significantly decrease the amount of time it takes to conduct an offering. The CSA also proposes increased investor protection through the addition of civil liability for secondary market disclosure, and the introduction of a more user-friendly form of rights offering circular document.

The proposed amendments would also update other rights offering requirements and repeal the prospectus exemption for rights offerings by non-reporting issuers.

The CSA notice and proposed amendments are available on CSA members’ websites. The comment period is open until February 25, 2015.

The price of oil is catching up to the real economy:

West Texas Intermediate oil tumbled 6.3 percent to $69.05 a barrel in electronic trading, as Brent crude fell to its lowest level since 2010. Canadian energy companies sank the most since 2011, dragging the Standard & Poor’s/TSX Composite Index down 0.8 percent by 4:30 p.m. in Toronto.
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The Organization of Petroleum Exporting Countries maintained its collective production ceiling of 30 million barrels a day at a meeting in Vienna, resisting calls from Venezuela that a supply cut was needed to stem the rout that has sent oil prices into a bear market this year. Global energy stocks are down 25 percent in 2014, while fixed-income assets have rallied as the drop in crude damps inflation. German price growth climbed the least since 2010, data today showed, and most U.S. markets were closed for Thanksgiving.
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The ruble weakened to an all-time low of 48.6550 per dollar in Moscow, while Norway’s krone, the second-worst performer against the dollar this year among 16 major currencies, lost 1.4 percent to 6.9272 per dollar. Norway is the biggest oil producer in Western Europe.

And what with one thing and another, the Great Game is making a comeback!

Russian President Vladimir Putin will seek to bolster energy ties with India on a visit next month, his latest move to expand trade links with Asian nations to counter sanctions from the U.S. and its allies.
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Gas exporter OAO Gazprom (OGZD) reached a $400 billion deal with China in May to build a pipeline and start supplies after more than a decade of talks. In September, Putin offered to sell a stake in Vankor, the country’s second-biggest oil project, to “Chinese friends.” OAO Russian Railways is seeking to build a 2.8 trillion-ruble, high-speed line linking Moscow and Beijing.

“India is looking very closely at that — it’ll want to get in on the action,” said Sinderpal Singh, a senior research fellow at the Singapore-based Institute of South Asian Studies. “The Russians want to diversify, India wants hydrocarbons. Trade imperatives bind all these countries.”

India, which spent $143 billion to import crude last year, may look to diversify suppliers by buying more oil from Russia and Latin America to guard against geopolitical risks, Oil Minister Dharmendra Pradhan said in an October interview.

Economic ties between India and Russia are largely limited to arms transfers, and those have decreased over the past few decades. While the Soviet Union was India’s largest trading partner in 1981, Russia wasn’t among its top 15 commercial partners last year, according to data compiled by Bloomberg.

Russia and the Soviet Union have been India’s biggest weapons suppliers, accounting for about 70 percent of its arms imports since 1950, according to data compiled by the Stockholm International Peace Research Institute. The U.S. surpassed Russia as India’s top supplier of defense equipment in the three years to March, according to Indian government data.

US consumers aren’t spending:

The U.S. Commerce Department reported Wednesday that personal consumption spending increased a slim 0.2 per cent in October from September, less than economists had expected after September’s flat reading. The U.S. economy is accelerating, but consumer spending isn’t. For the past 12 months, real (i.e. inflation-adjusted) disposable personal income has risen 2.5 per cent, the fastest pace in nearly two years; but personal consumption expenditures are up 2.2 per cent, the lowest in eight months.

The U.S. Conference Board’s latest consumer confidence index reading, released this week, was at a five-month low. Somehow, the combination of third-quarter economic growth of nearly 4 per cent annualized, strong employment growth and tumbling gasoline prices isn’t enough to impress our grumpy old Uncle Spender.

I don’t quote Willem Buiter much any more, which is a shame. But he has favoured us with his golden wisdom:

The initiative requiring the Swiss National Bank to hold a fixed portion of its assets in gold makes no sense, according to Citigroup Inc., which said the metal was the equivalent of the virtual currency bitcoin.

“There is no economic or financial case for a central bank to hold any single commodity, even if this commodity had intrinsic value,” Willem Buiter, the bank’s chief economist and a former Bank of England policy maker, wrote in a report dated yesterday. “Forbidding a central bank from ever selling any gold it owns reduces the value of those gold holdings to zero.”
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Like bitcoin, gold has no intrinsic value and is costly to produce and store, Buiter wrote. “If the central bank is to invest in commodities, better to have a balanced portfolio of commodities or, more conveniently, a balanced portfolio of commodity ETFs or other derivatives,” he said.

And I have to admit, Japanese bond yields are more amusing than usual:

The Bank of Japan’s record bond buying is crowding out individual buyers, narrowing the investor base on which the world’s second-largest bond market stands.

The government last month canceled sales of sovereign notes maturing in 2016 through financial companies to households because buyers would have to pay more in broker fees than they would get in interest, according to the Ministry of Finance. The BOJ’s 80 trillion yen ($681 billion) a year in debt purchases has cut yields, with the latest two-year securities offering a 0.038 percent coupon, less than half the rate in June last year, and compared with about 0.02 percent interest on bank deposits.
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The ratio of government bonds held by individuals was 2 percent at the end of June, compared with 21.2 percent for the BOJ and 57.7 percent for banks, life insurers and mutual funds, according to central bank data.

But despite these efforts…:

Japan’s consumer price gains slowed for a third straight month, challenging Bank of Japan Governor Haruhiko Kuroda’s effort to stoke faster inflation.

Consumer prices excluding fresh food increased 2.9 percent in October from a year earlier, the statistics bureau said today in Tokyo, matching the median projection in a Bloomberg News survey (JNCPIXFF) of economists. Stripped of the effect of April’s sales-tax increase, core inflation — the BOJ’s key measure — was 0.9 percent.

Tumbling oil prices are complicating the task of stoking inflation in an economy that slid into recession last quarter. The inflation number is the last key data point on consumer price changes before an election next month, with Prime Minister Shinzo Abe seeking a renewed mandate for his economic growth strategy.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 4bp, FixedResets down 8bp and DeemedRetractibles gaining 3bp. Volatility was average. Volume was very low.

There was an article on Bloomberg about tech worker visas in the US:

Along with temporary deportation relief for millions, President Obama’s executive action will increase the number of U.S. college graduates from abroad who can temporarily be hired by U.S. corporations. That hasn’t satisfied tech companies and trade groups, which contend more green cards or guest worker visas are needed to keep tech industries growing because of a shortage of qualified American workers. But scholars say there’s a problem with that argument: The tech worker shortage doesn’t actually exist.

The argument against the tech worker shortage is presented in a paper by Hal Salzman, Daniel Kuehn, and B. Lindsay Lowell titled Guestworkers in the high-skill U.S. labor market:

This paper reviews and analyzes the science, technology, engineering, and mathematics (STEM) labor market and workforce and the supply of high-skill temporary foreign workers, who serve as “guestworkers.” It addresses three central issues in the ongoing discussion about the need for high-skill guestworkers in the United States:
Is there a problem producing enough STEM-educated students at sufficient performance levels to supply the labor market?
How large is the flow of guestworkers into the STEM workforce and into the information technology (IT) workforce in particular? And what are the characteristics of these workers?

What are the dynamics of the STEM labor market, and what are the employment and wage trends in the IT labor market?

Analysis of these issues provides the basis for assessing the extent of demand for STEM workers and the impact of guestworker flows on the STEM and IT workforces.
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The IT industry was able to attract increasing numbers of domestic graduates during periods of rising wages and employment, leading to a peak in wages and numbers of computer science graduates in the early 2000s. Since that time, the IT industry appears to be functioning with two distinct market patterns: a domestic supply (of workers and students) that responds to wage signals (and other aspects of working conditions such as future career prospects), and a guestworker supply that appears to be abundantly available even in times of relatively weak demand and even when wages decline or are stagnant.

Workers from countries with low wages and limited career opportunities will find the U.S. IT labor market attractive even when wages are too low and career opportunities too limited to increase the IT supply from domestic students and workers. In other words, the data suggest that current U.S. immigration policies that facilitate large flows of guestworkers appear to provide firms with access to labor that will be in plentiful supply at wages that are too low to induce a significantly increased supply from the domestic workforce.

Very interesting, but there are some policy questions left unaddressed. The first is a question of equilibrium – one would hope, from economic theory, that supply and demand for professionals of a given type will result in an equilibrium, as high wages increase supply (of people entering undergraduate studies in the field) and decrease demand (as projects become less profitable due to higher wages.

So question #1 is: given that programming is a well-paid sector (average salary in excess of $80,000, according to Figure K of the paper), and given that the end-product is so easily transported, does it not make sense to grant visas in order to increase the global market share of the US? This isn’t a “TFWs at Timmy’s” issue, these are services that are exported and have major spin-off benefits.

Question #2 (which is actually more relevant to the paper as written) is: is the population of IT guest-workers equivalent in any rough kind o way to the population of domestic workers? There is a huge variation of skill among professional programmers, with what I call ‘teeny-bopper programmers’ at the low end … they can do a competent job of coding as long as you give them their assignments in small chunks … but if they design a large project, you end up with spaghetti code that after a few iterations becomes undebuggable and unimprovable (it is my understanding that that is what happened to dBase). Designing a programme, determining how it will be broken down into modules, which talk to each other this way and rely on these common underlying functions … that’s a very highly skilled job.

So what’s the salary distribution of guest-workers compared to the salary distribution of domestic workers? If guest-workers are all in – say – the top tercile of domestic salaries, then the paper’s argument loses a lot of its validity.

Speaking of equilibrium labour markets, it’s good times for retailers:

Workers are facing the most favorable job market for seasonal work since the 18-month recession that started in December 2007, getting hired with fewer interviews and in some cases with higher pay.

About 821,000 workers will be hired for retail seasonal jobs this year, up 11 percent from a year ago and the highest since records were started in 1990, estimates Michael Niemira, former director of research for the International Council of Shopping Centers Inc. and now founder of economic forecasting firm The Retail Economist LLC in Tucson, Arizona.
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“I don’t want to say there is pressure on wages but there is an alignment of wages with demand,” said Jack Kleinhenz, chief economist with the National Retail Federation in Washington, who is estimating as many as 800,000 workers will be added. “There is some tightening” in the job market.

The unemployment rate for the retail and wholesale trade sector fell to 5.1 percent in October, the lowest since early 2008 in the initial months of the recession, Labor Department figures show. Wages and salaries for retail workers rose 2.5 percent in the third quarter from the same period in 2013, the biggest increase in more than four years, according to the Bureau of Labor Statistics data.

Seasonal job seekers using the website Snagajob.com are finding work in an average of 28 days this year compared with 45 days last year, company Chief Executive Officer Peter Harrison said. The Richmond, Virginia-based online matching service focuses on part-time and hourly positions.

Investment grade new issues have set a new record:

Investment-grade corporate debt sales have surged to a record $1.15 trillion this year as the most creditworthy borrowers flocked to the U.S. bond market to take advantage of historically low interest rates.

Apple Inc. (AAPL), Verizon Communications Inc. and Oracle Corp. were among borrowers that helped swell issuance this year. JPMorgan Chase & Co. was the the top underwriter for the fifth-straight year, grabbing 12.7 percent of the deals, according to data compiled by Bloomberg.

Alibaba Group Holdings Ltd., Asia’s biggest Internet company, led borrowings of more than $126 billion this month that helped sales breach last year’s record of $1.13 trillion. Companies have raced to the market to lock in borrowing costs that remain within 0.5 percentage point of the all-time low of 2.65 percent reached in 2013, Bank of America Merrill Lynch index data show.

Investors purchasing the debt have reaped 7.3 percent gains in 2014, overcoming the 1.5 percent loss last year, index data show. Investment-grade bonds are rated above Ba1 by Moody’s Investors Service and BB+ at Standard & Poor’s.

But it’s not good news all ’round:

Leveraged loan issuance plummeted in the U.S. this month as investors punished borrowers in an increasingly volatile market for high-yield, high-risk debt.

Borrowers including TransFirst Inc. and Norwegian Cruise Line Holdings Ltd. have sold $6.5 billion of U.S leveraged loans to institutional investors in what’s poised to be the slowest November since 2008, according to data compiled by Bloomberg. Volume was almost $30 billion in October. Fewer deals are getting done after loan prices plunged more than 3 percent last month from a July peak and yields rose to 6.2 percent, the highest in more than two years.
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The drop-off in issuance comes as regulators scrutinize Wall Street’s lending practices and demand for the speculative-grade debt fades. Leveraged loans are typically issued by companies that have ratings of less than Baa3 by Moody’s Investors Service and below BBB- by Standard & Poor’s.

Remember how the Competition Ha-Ha Board (the guys who made the discovery that not all on-line reviews are legitimate) gave the banks permission to extend their hegemony on financial services as long as they paid sufficient money to their regulatory buddies? Well, it’s going to get even better!

The chair of the Ontario Securities Commission has inked a new deal to co-operate on investigations with his former employer, the federal Competition Bureau, which he headed in the early 1990s.

While the two regulatory bodies have far different mandates, they say there are enough areas of mutual interest to work on fraud investigations, exchange “information and intelligence,” and undertake joint education initiatives.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 20bp, FixedResets off 9bp and DeemedRetractibles gaining 13bp. Volatility was good, with a preponderance of FixedReset losers. Volume was above average.

PerpetualDiscounts now yield 5.01%, equivalent to 6.51% interest at the standard equivalency factor of 1.3x. Long Corporates now yield a little under 4.15%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 235bp, unchanged from the November 19 report.