PrefBlog

Nothing happened today.

The Canadian preferred share market pulled back today, with PerpetualDiscounts losing 10bp, FixedResets off 2bp and DeemedRetractibles down 4bp. Floaters did quite well, but apart from them there was little volatility. Volume was pathetic.

Moody’s has assigned a negative outlook to Ontario:

Moody’s Investors Service has today changed the outlook on the Province of Ontario’s debt and issuer ratings to negative from stable, and at the same time affirmed the Aa2 ratings. This affects approximately CAD 250 billion in debt securities. Moody’s P-1 rating on Ontario’s commercial paper program remains unchanged.

The change in the outlook reflects Moody’s assessment of risks surrounding the province’s ability to meet its medium term fiscal targets. After several years of weak to moderate economic growth, and higher than previously anticipated deficits projected for the next two years, the province is facing a greater challenge to return to balanced outcomes than previously anticipated. Although the province has exceeded fiscal targets in recent years, consolidated deficits have shown little change over the period 2011/12-2013/14, averaging -9.9% of revenues. The required revenue growth, in an environment of continued slower than average economic growth, and necessary operating expense control to achieve fiscal targets will require a considerable shift from recent trends. The province also continues to face large, ongoing capital expenditures which also places pressure on the province’s fiscal position.
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Ontario’s rating could be downgraded if the province fails to provide clear signals of its ability and willingness to implement the required measures to redress the current fiscal pressures. Furthermore, if medium-term debt affordability were to deteriorate due to higher-than-expected increases in debt levels or a significant rise in interest rates, the province’s fiscal flexibility would be reduced, exerting downward pressure on the rating.

The outlook could return to stable if the province demonstrates through concrete measures that it will be able to achieve the very constrained expenditure growth rates and expected revenue growth over the term of its fiscal plan.

Oh well. I’m sure the new Ontario Retirement Pension Plan will be a big investor in Ontario bonds.

The political response is standard:

But top cabinet ministers said they were unconcerned about the note from Moody’s.

“The bankers aren’t freaking here,” Finance Minister Charles Sousa said as he headed into a cabinet meeting at Queen’s Park Thursday. “We have controlled our spending, we have taken the necessary steps and we’re not done just yet. We’re still finding more savings in the system.”

Deputy Premier Deb Matthews , who was appointed President of the Treasury Board last week with the task of balancing the budget in three years, brushed off Moody’s warning and said another credit downgrade would not be particularly expensive.

Comrade Peace Prize has taken a firm stand against merit pay:

President Barack Obama criticized the bonus-driven culture of financial trading desks at Wall Street banks as a risk to the stability of the financial system.

Obama said in an interview to be aired tomorrow on American Public Media’s Marketplace radio program that an “unfinished piece of business” is to address banks that “take big risks because the profit incentive and the bonus incentive is there for them.”

Obama said banks need to change “how they work internally” to alter incentives for traders.

“Right now, if you are in one of the big banks, the profit center is the trading desk, and you can generate a huge amount of bonuses by making some big bets,” Obama said. In the event of “a really bad bet,” he added, “you might end up leaving the shop, but in the meantime everybody else is left holding the bag.”

I’m not sure how he reconciles all that with the Volcker Rule, or with the concept of management risk controls, but never mind.

There was a superb US jobs number:

Employers who added 288,000 jobs in June showed they might be taking a more serious look at resumes from the long-term unemployed, who last month accounted for the smallest proportion of U.S. jobless ranks in five years.

Those out of work 27 weeks or longer made up 32.8 percent of unemployed Americans as the overall unemployment rate dropped to an almost six-year low of 6.1 percent, according to Labor Department data released this morning in Washington.
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The share of long-term unemployed remains more than twice the historical average of 15.1 percent in data going back to 1948. Other measures of labor market health, including underemployment and participation rates, haven’t returned to pre-recession levels, according to a dashboard of indicators that Federal Reserve Chair Janet Yellen has said she monitors to judge the economic outlook.

About half of the drop in unemployment in the past year is due to the decline among the long-term jobless.

I love it when guys pull a fast one:

A man exploited the perks of business -class travel to feast for free 35 times in a year at Deutsche Lufthansa AG (LHA)’s Munich airport lounge — without ever taking off.

The man used the flexibility of the one-way fare to Zurich to repeatedly reschedule his travel plans after gaining access to food and drink, Munich district court said in a statement. Lufthansa canceled the ticket after more than a year and refunded the price, only for the man to purchase a replacement.

The court ruled that lounge services are provided on the assumption that travelers will seek to fly, and ordered the man to pay Lufthansa 1,980 euros ($2,705), equal to about 55 euros per visit or more than twice the cost of the 744.46-euro ticket. Lufthansa pursued a prosecution only after the man bought the second ticket with the intention of resuming his foraging raids.

Clearly, the Germans have no sense of humour.

And the Mexicans are getting more auto investment – for good reasons and bad:

Mexico has won new auto investments worth $2.4-billion (U.S.) in one week, just $800-million less than the $3.2-billion invested by auto makers in Canada since 2010.

BMW AG said Thursday it will spend $1-billion to build a new plant in Mexico, on the heels of an announcement last week by Daimler AG and Nissan Motor Co. Ltd. that they will invest $1.4-billion to build luxury cars.
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In addition to significantly lower labour costs than both Canada and the United States, Mexico is also an export powerhouse, boasting free-trade agreements with more than 40 countries and ports on both the Atlantic and Pacific oceans that operate year-round.

“The large number of international free trade agreements – within the NAFTA area, with the European Union and the MERCOSUR member states, for example – was a decisive factor in the choice of location,” BMW said in a statement announcing the investment.

Mexico’s foreign investment agency, ProMexico, is aggressively courting auto investments and offers generous incentives, industry sources have said.
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The federal and Ontario governments offer incentives to auto makers to locate in Canada. But a report issued last year by the Canadian Automotive Partnership Council, an industry-union group set up to advise the governments on the auto sector, complained about the way the Canadian funds are administered.

“In Mexico, for example, rarely will one see repayable contributions or restrictive covenants that can claw back co-investment programs,” the report said. “Through ProMexico, companies can secure cash grants with no strings attached.”

It was another positive day for the Canadian preferred share market, with PerpetualDiscounts gaining 6bp, FixedResets winning 17bp and DeemedRetractibles up 10bp. Volatility was minimal. Volume was low.

AltaGas Ltd. has announced:

that it has closed its previously announced public offering of 8,000,000 Cumulative Redeemable Rate Reset Preferred Shares, Series G (the “Series G Preferred Shares”), at a price of $25.00 per Series G Preferred Share (“the Offering”) for aggregate gross proceeds of $200 million, including 2,000,000 Series G Preferred Shares pursuant to the exercise in full of an underwriters’ option.

The Offering was first announced on June 23, 2014 when AltaGas entered into an agreement with a syndicate of underwriters co-led by RBC Capital Markets, Scotiabank and TD Securities Inc.

Net proceeds will be used to reduce outstanding indebtedness and for general corporate purposes.

The Series G Preferred Shares will commence trading today on the Toronto Stock Exchange (“TSX”) under the symbol ALA.PR.G.

AltaGas is an energy infrastructure business with a focus on natural gas, power and regulated utilities. AltaGas creates value by acquiring, growing and optimizing its energy infrastructure, including a focus on clean energy sources. For more information visit: www.altagas.ca

ALA.PR.G is a FixedReset, 4.75%+306, announced June 23. It will be tracked by HIMIPref™ but relegated to the Scraps subindex on credit concerns. It has been rated Pfd-3 [Stable] by DBRS.

The issue traded 703,300 shares today in a range of 25.05-18 before closing at 25.11-14, 10×62. Vital statistics are:

Something amazing has been said about dark pools:

While money managers don’t always like what happens in the $23 trillion U.S. stock market, they’re too fond of dark pools to let them go extinct, according to a professor whose research was presented to the Senate.

“Dark pools have existed forever,” Robert Battalio of the University of Notre Dame said in a phone interview last week. “You can shut down these dark pools and just new forms will arise somewhere else.”
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“There are bad dentists out there, there are bad store clerks, so you’ve got to separate the structure from the bad apple,” Battalio said. “Order flow will always have multiple venues to execute on — upstairs markets — because one size doesn’t fit all.”
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The best way for investors to avoid mistreatment is to analyze the performance of their brokers to make sure they’re getting a fair shake, Battalio said.

“analyze the performance of their brokers”? It will never happen, but it’s nice to know I’m not the only guy making ridiculous suggestions.

There’s a new marketing proposal designed to tighten the hegemony of the usual suspects over Canadian finance:

Canada’s newest planned stock exchange is a step closer to reality, as regulators laid out the grounds under which the Aequitas exchange could be approved and sought comments from market users on some of the more controversial aspects.

Aequitas’s Neo Exchange is designed to appeal to traders who are concerned that their trades might be bait for predatory high-frequency trading strategies (a la those detailed in the book Flash Boys), and so has been carefully constructed to try to ensure any such strategies won’t work.
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Aequitas is owned by a group of investors that spans brokers and investors, including Barclays, Royal Bank of Canada, BCE Inc., CI Investments, ITG Canada, and OMERS.

This will also appeal to traders who don’t want to analyze the performance of their brokers and are willing to pay extra to avoid having to learn something new.

Bloomberg has a good editorial on the BNP Paribas affair:

Some will argue that the bank got off too lightly. A more telling criticism is that no individuals have been prosecuted.

The documents show that top managers knowingly — flagrantly — conspired to skirt U.S. sanctions. Employees acted on orders from Paris and Geneva-based managers who didn’t want to lose the lucrative business of Sudanese, Cuban and Iranian entities. Those countries were willing to pay dearly to be able to trade internationally while under U.S. embargo. BNP ultimately handled $190 billion in transactions for them.

An excellent jobs indicator hammered Treasuries today:

Treasuries fell a second day after a private jobs report boosted speculation growth is strong enough for the Federal Reserve to consider higher rates. U.S. stocks were little changed near records, while emerging-market equities climbed to a 13-month high and copper gained.
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The 10-year Treasury yield rose six basis points to 2.62 percent.
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U.S. companies added 281,000 workers to their payrolls in June, figures from the ADP Research Institute showed today, before the Labor Department’s monthly job’s report tomorrow. A gauge of global equities closed at an all-time high yesterday after data showed manufacturing activity expanding in countries from China to the U.K. and the U.S. Federal Reserve Chair Janet Yellen said there is no need to change current monetary policy to address financial stability concerns.
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Yellen said last month that accommodative monetary policy, rising property and equity prices and the improving global economy should lead to above-trend growth. She emphasized the need to put more Americans back to work and downplayed concerns about asset-price bubbles and incipient inflation.

Yellen said today that regulatory tools, and not interest rates, should be the main way to promote financial stability. The comments are significant because economists worry that central banks may now be causing a worldwide reach for yield as interest rates are suppressed by monetary policy.

… and a bounce in the loonie is causing concern:

The dollar first hit the 94-cent mark yesterday, during the Canada Day holiday, and pushed higher today to reach 94.1 cents, before slipping below to about 93.8 cents by early afternoon.

Ms. Sutton, Scotiabank’s chief currency strategist, expects the loonie has further room to run, though that has to stop at some point.

“Is it sustainable that CAD sits at 94?” she said, referring to the currency by its symbol.

“It’s probably making the Bank of Canada incredibly uncomfortable, as well as exporters,” Ms. Sutton added, speculating that the central bank will cite the stronger currency in its next policy outing later this month.

The Bank of Canada under Governor Stephen Poloz is counting on stronger exports, which cost less in the U.S. market when the loonie declines.

Bloomberg has an interesting piece on the de-malling of America:

A Dying Breed: What some writers used to call the malling of America is done. Try to find anyone breaking ground for a new regional shopping mall, those hulking structures with 100-plus stores surrounded by vast asphalt parking lots. Since 1990, when 16 million-square-feet of mall space opened, building has tailed off, and 2007 was the first year in more than four decades when no large malls opened in the U.S. Only one has opened since then, in 2012.
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Holdout Politicians: Malls are, in large measure, creations of tax policy and regulatory benefits. Mall construction took off in the 1950s, and again in the early 1980s, when changes to the tax code let financiers recover their investments faster with accelerated depreciation schedules, according to historian Thomas Hanchett of the Levine Museum of the New South in Charlotte, North Carolina. Mall developers also took advantage of legal changes in the 1960s and 1970s that allowed companies known as real estate investment trusts to pass almost all of their income through to investors tax-free.

Malls are still getting breaks. Last year, Minnesota’s legislature approved $250 million in tax benefits to help pay for a doubling in size of the country’s second-biggest mall, Mall of America. The money came from a fund set up to reduce economic disparities between rich and poor areas. New Jersey, meanwhile, has funneled $390 million to a struggling mall project in the Meadowlands known as Xanadu that was supposed to open in 2006. The developers now expect the mall to open in 2016 with a new name — American Dream.

It was another good day for the Canadian preferred share market, as it continued its recent tradition of ignoring the bond market completely (at least on a day-to-day basis); PerpetualDiscounts won 18bp, FixedResets were up 6bp and DeemedRetractibles gained 3bp. Volatility was muted. Volume was low.

PerpetualDiscounts now yield 5.21%, equivalent to 6.77% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.3%, so the pre-tax interest-equivalent spread is now about 245bp, unchanged from the figure reported June 18.

The OSC says it can’t enforce OBSI compensation recommendations:

The Ontario Securities Commission (OSC) says that it does not have the authority to require dealers to comply with compensation recommendations from the Ombudsman for Banking Services and Investments (OBSI).

The OSC published the final version of its statement of priorities for the current fiscal year today, defending its commitment to investor protection and promising to hold a summit this fall to examine seniors’ issues. But it also declared that it couldn’t enforce OBSI’s recommendations even if it wanted to, without first amending securities legislation.

Responding to comments it received on a draft version of the statement, the OSC notes: “Some commenters have suggested that the OSC should compel payments to investors [when OBSI rules in their favour]. The OSC does not have this authority and would need legislation to expand its powers in order to force binding decisions.”

Still, the regulator reiterates its belief in the importance of having a single dispute-resolution service for investors. And it says: “The [Canadian Securities Administrators (CSA)] has committed to continue to work with OBSI to ensure it has the capacity to effectively discharge its mandate.”

Perhaps. But the threat of an investigation into procedures is a pretty big stick, regardless of the ethics of using it. We’ll see how this plays out.

Assiduous Reader JP brings to my attention an article about Australian Solar Power entitled Slash Australians’ power bills by beheading a duck at night. It seems they have an “afternoon chasm” in grid energy demand:

Click for Big

Such a chasm is feared in California, as discussed on June 5. What I found interesting in the article – which talks mainly about reducing peak demand through battery storage in houses with solar panels and improved energy efficiency in those without – was the degree of hidden subsidies:

Indeed, the ENA – the national body representing electricity transmission and distribution businesses throughout Australia – has recently suggested that a power consumer without solar PV panels now pays about A$60 a year more to subsidise homes with solar PV panels, due to “under-recovery of network costs” during summer evening peak periods.

Even so, that A$60 a year cost is much smaller than the subsidy to users of air conditioners.

The Productivity Commission estimates that the installation of each air conditioner adds A$2500 to the capital cost of powerlines and power stations: costs that all power consumers have to cover.

Much of that extra equipment is used for only a few hours each year, mainly on hot summer evenings.

Note that the author is trying on a rhetorical trick by discussing the annual rate of the solar panel subsidy vs. the capital cost of the air conditioner subsidy. The A$60 annual subsidy to solar users is equal to A$4,140 present value if discounted at 3%, or A$1,200 if discounted at 5%, neatly bracketing the A$2,500 present value of the air conditioner subsidy in order to make arguments over discount rates more interesting.

Mind you, though, JP has a rejoinder:

Given your above analysis, the $ solar subsidy is not much different than the effective air conditioning subsidy. So if you are correct about present value, the author’s is factually incorrect when he writes: “[the] A$60 a year [solar] cost is much smaller than the subsidy to users of air conditioners”

I can’t given my limited math check your present value numbers — obviously present value of a flow of funds depends on length of flow — you fail to make explicit your estimate of a solar panel’s life expectancy / the life expectancy of the regulations guaranteeing the solar subsidy. My guess of a reasonable range is 20-40 years.

I question your >>rhetorical trick by discussing the annual rate of the solar panel subsidy vs. the capital cost of the air conditioner subsidy<< . I agree the "annual rate of a subsidy” is a very different measure than “the capital cost of a subsidy” and employing the two concepts in the same paragraph suggests either 1) lack of rigour, 2)laziness, or 3) an attempt to spin an argument. I suggest the author is guilty of 1) and 2) rather than 3). The author is not contrasting two unrelated and different subsides but I think implicitly suggesting that subsidy to solar over time increases the subsidy for air conditioners (peak power requirements as a % of total demand from big power plants increases as solar increases its penetration.) So its not “[annual] solar panel subsidy vs. the capital cost subsidy” but the combined subsidies resulting in >>the A$350 a year that households without air conditioners are being slugged to subsidise the bills of households running air conditioning at peak times.<< (I am unclear how the A$350 number is arrived at)

I was assuming the solar subsidy was to perpetuity. That may be wrong; but the life of the individual panel is not necessarily a factor in the calculation.

JP also passes along two older stories – one about negative power prices in the US:

Wind power has two advantages. Green energy laws in many states require utilities to buy wind energy under long-term contracts as part of their clean-energy goals and take that power even when they don’t need it. Wind farms also receive a federal tax credit of $22 for every megawatt-hour generated.

Thus, even when there is no demand for the power they produce, operators keep turbines spinning, sending their surplus to the grid because the tax credit assures them a profit.

On gusty days in the five states with the most wind power – – Texas, California, Iowa, Illinois and Oregon — this can flood power grids, causing prices to drop below zero during times when demand is light. Wholesale electricity during off-peak hours in Illinois has sold for an average price of $23.39 per megawatt hour since Jan. 1, after hitting a record low of -$41.08 on Oct. 11, the least since the Midwest Independent Transmission System Operator Inc. began sharing real-time pricing in 2005.

… and one about the pain in Spain:

In May [2013], the tariff deficit reached a whopping $34 billion.

What drove this deficit?

Overly generous renewable energy subsidies are at least partially to blame.

In 2007, Spain paid a premium of $556 per megawatt-hour for electricity that rooftop solar panels supplied to the electric grid, compared with an average $52 paid to competing coal- or gas-fired power plants. By 2012, a whopping $10.6 billion in subsidies were paid out to the renewable energy industry, rising by about 20% from the previous year, and covering more than one third of all electricity generated in Spain.

A recent report explained how Spain has sustained this massive deficit to date:

This debt derives from the financing of the difference between costs and revenues from regulated activities, accumulated in previous years. Most of the outstanding debt (66%) is held by FADE, the Deficit Securitization Fund for the Electricity System, the electricity firms hold 19% and third parties have 15%. The deficit was initially financed by the five largest electricity firms (Endesa, 44.16%; Iberdrola , 35.01%; Gas Natural Fenosa , 13.75%; Hidroeléctrica del Cantábrico, 6.08%; and E.On España, 1.00%), but the firms had transferred most of their deficit collection rights to FADE by the end of 2012. In 2012, FADE issued bonds for 9.9 billion euros at a cost for consumers of 5.617%.

Maybe the Spanish should declare sanctions and then enforce them:

The Federal Reserve on Monday announced a $508 million penalty against BNP Paribas, S.A., Paris, France–the largest penalty ever assessed by the agency–for violations of U.S. sanctions laws. The Federal Reserve also issued a joint cease and desist order with the Autorité de Contrôle et de Prudentiel et de Résolution (ACPR), the home country supervisor of BNP Paribas. The cease and desist order requires BNP Paribas to implement a program to ensure global compliance with U.S. sanctions laws. BNP Paribas continues to operate branches in New York, Chicago, and San Francisco, and an agency in Houston, all of which are covered by the enhanced policies and procedures required by the order.

These actions are taken in conjunction with actions by the Asset Forfeiture and Money Laundering Section of the Criminal Division of the Department of Justice, the Office of the U.S. Attorney for the Southern District of New York, the United States Department of Treasury’s Office of Foreign Assets Control (OFAC), the New York County District Attorney’s Office, and the New York Department of Financial Services for violations of U.S. sanctions laws and various New York State laws. The assessments issued by the agencies, including the Federal Reserve, total $8.9736 billion.

Holy Smokes! Government Motors is getting hammered!

GM Canada’s market share in the Greater Toronto Area plunged more than 50 per cent between 2008 and 2013, hitting just 5.6 per cent last year, according to the suit by 17 Toronto-area dealers. The list of dealers includes operators of some of the biggest GM dealerships in the country and some whose relationship with the company goes back to the 1920s.
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Each of the Toronto area dealers reported new vehicle sales last year that were their lowest in the 2010-2013 period, and several of them are unprofitable, the statement of claim says.

The suit noted that GM Canada has more dealers in the Greater Toronto Area than any other manufacturer except Chrysler Canada Inc., and its dealers sold the smallest number of new vehicles of any of the major auto makers in the Canadian market.

GM dealers in the Toronto area sold an average of 531 vehicles last year, compared with 1,194 for the average Honda Canada Inc. dealer – a number that leads the market. Chrysler dealers sold 721 vehicles on average.

The BIS Annual Report includes a section titled Debt and the financial cycle: domestic and global:

Signals are mixed for advanced economies that did not see an outright crisis in recent years. Australia, Canada and the Nordic countries experienced large financial booms in the mid- to late 2000s. But the global and European debt crises dented these dynamics; asset prices fluctuated widely and corporate borrowing fell as global economic activity deteriorated. This pushed the medium-term financial cycle indicator on a downward trend, even though households in all these economies continued to borrow, albeit at a slower pace. But the strong increase in commodity prices in recent years prevented a lasting turn of the cycle, and over the last four quarters real property price and (total) credit growth in Australia and Canada has picked up to levels close to or in line with developments in large EMEs.
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Credit-to-GDP gaps in many EMEs and Switzerland are well above the threshold that indicates potential trouble (Table IV.1). The historical record shows that credit-to-GDP gaps (the difference between the credit-to-GDP ratio and its long-term trend) above 10 percentage points have usually been followed by serious banking strains within three years.5 Residential property price gaps (the deviation of real residential property prices from their long-term trend) also point to risks: they tend to build up during a credit boom and fall two to three years before a crisis. Indeed, the Swiss authorities have reacted to the build-up of financial vulnerabilities by increasing countercyclical capital buffer requirements from 1% to 2% of risk-weighted positions secured by domestic residential property.

Debt service ratios send a less worrying signal. These ratios, which measure the share of income used to service debt (Box IV.B), remain low in many economies. Taken at face value, they suggest that borrowers in China are currently especially vulnerable. But rising rates would push debt service ratios in several other economies into critical territory (Table IV.1, last column). To illustrate, assume that money market rates rise by 250 basis points, in line with the 2004 tightening episode.6 At constant credit-to-GDP ratios, this would push debt service ratios in most of the booming economies above critical thresholds. Experience indicates that debt service ratios tend to remain low for long periods, only to shoot up rapidly one or two years before a crisis, typically in response to interest rate increases.7 Low values therefore do not necessarily mean that the financial system is safe.

There’s a really poorly produced table attached to the report as a JPG, which is just a blur to these old eyes. Interestingly, they also hint that regulation of asset allocation might be … convenient:

Finally, the sheer volume of assets managed by large asset management companies implies that their asset allocation decisions have significant and systemic implications for EME financial markets. For instance, a relatively small (5 percentage point) reallocation of the $70 trillion in assets managed by large asset management companies from advanced economies to EMEs would result in additional portfolio flows of $3.5 trillion. This is equivalent to 13% of the $27 trillion stock of EME bonds and equities. And the ratio could be significantly larger in smaller open economies. Actions taken by asset managers have particularly strong effects if they are correlated across funds. This could be because of top-down management of different portfolios, as is the case for some major bond funds, similar benchmarks or similar risk management systems (Chapter VI).

Can’t wait.

The Canadian preferred share market closed the quarter on a strong note, with PerpetualDiscounts winning 38bp, FixedResets up 11bp and DeemedRetractibles gaining 2bp. Volatility was above average, dominated by winners. Volume was pathetic, since those of us in the highest paid profession on earth can’t be bothered to show up for work immediately prior to a holiday; this gives us more time to sneer at the laziness of bartenders, waitresses and shop clerks.

Nothing happened today.

It was another good day for the Canadian preferred share market, with PerpetualDiscounts gaining 3bp, FixedResets up 10bp and DeemedRetractibles winning 17bp. A lengthy Performance Highlights table is comprised entirely of winners. Volume was average.