PrefBlog

The New York Times touts an online personal finance video series:

After all, there are few entirely conflict-free places where investors can educate themselves on the topic, and there’s little to no money-related guidance offered within the public school system, which is where the financial groundwork should really be laid.

Joshua Rauh, a finance professor at the Stanford Graduate School of Business, is acutely aware of that. And it’s why he felt compelled to open his graduate-level course on the finance of retirement and pensions to the masses. “My goal is to try to empower people to make better decisions about their finances with an eye toward retirement and for retirees who are thinking about managing their money,” Professor Rauh said, “whether it is buying an annuity or having a spending rule.”

The course, which is offered free online, begins on Monday. I sat for nearly half of his online video lectures — on topics like “saving for retirement” and “making smart decisions as a stock market investor” — earlier this week. Watching remotely means you won’t be party to the discussion that will emerge from the Socratic method Professor Rauh uses in his traditional classroom on campus. And there are already 13,000 students, so it’s hard to expect any personal attention.

DBRS confirmed Advantaged Preferred Share Trust at STA-2 (middle):

Since October 2012, the performance of the Portfolio has been fairly stable. The weighted-average yield of the Portfolio is approximately 5.18%, as of September 30, 2013. The Trust’s current net income (including a regular additional payment under the forward agreement to offset operating expenses) covers the full distribution paid out to Unitholders. As a result, the rating of STA-2 (middle) on the Units has been confirmed. The main constraints to the rating are the interest rate risk of the Portfolio and the potential for capital losses and reductions in income resulting from underlying securities being called for redemption by their respective issuers.

DBRS confirmed TDS.PR.C at Pfd-2:

On October 18, 2012, DBRS upgraded the ratings on the Class C Preferred Shares to Pfd-2 from Pfd-2 (low), due to a steady increase in downside protection in the months leading up to the rating action, as well as a greatly improved dividend coverage ratio. Since then, performance has been generally positive, with the net asset value (NAV) of the Company fluctuating around $30.00 before increasing to $33.51 as of October 10, 2013. Downside protection available to holders of the Class C Preferred Shares increased to 70.2% as of October 2013, compared with 66.1% in October 2012. As a result, the rating of the Class C Preferred Shares has been confirmed at Pfd-2.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 6bp, FixedResets off 7bp and DeemedRetractibles up 8bp. A surprisingly lengthy performance highlights table was dominated by FixedResets, both winners and losers. Volume was enormous.

It appears that some people are ecstatic that Armageddon has been delayed by three months:

U.S. stocks rose, sending the Standard & Poor’s 500 Index to a record, as speculation grew that the Federal Reserve will maintain the pace of stimulus after Congress ended the budget standoff.
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The S&P 500 rose 0.7 percent to 1,733.15 at 4 p.m. in New York, surpassing the previous record of 1,725.52 from Sept. 18. The Dow Jones Industrial Average fell 2.18 points to 15,371.65, held down by IBM and Goldman Sachs. About 6.6 billion shares changed hands on U.S. exchanges, 12 percent above the three-month average.

“The taper seems a little bit further out, certainly than anybody expected eight weeks ago and maybe even just a couple of weeks ago,” Walter Todd, chief investment officer at Greenwood Capital Inc., said in a phone interview from Greenwood, South Carolina. He helps manage $950 million. “It keeps a lid on rates and provides more liquidity for risk assets like stocks. People are back to focusing on the individual company dynamics that occur during earnings season.”

The S&P 500 gained 2.4 percent during the 16-day government closure that ended yesterday after President Barack Obama signed a bill to fund the government through Jan. 15 and extend the borrowing authority through Feb. 7.

My favourite Fed President, Richard Fisher, has some interesting views on US housing:

A top Federal Reserve official said on Thursday he is seeing fresh signs of a U.S. “housing bubble” and warned about the central bank’s ongoing purchases of mortgage-based bonds.

“I’m beginning to see signs not just in my district but across the country that we are entering, once again, a housing bubble,” Dallas Fed President Richard Fisher told reporters after a speech in New York. “So that leads me … to be very cautious about our mortgage-backed securities purchase program.”
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Fisher, a vocal hawk on monetary policy, repeated he would not support a reduction in the quantitative easing (QE) program at a Fed meeting later this month in large part because of the fiscal “mess” in Washington.

But citing rising year-on-year house prices in Texas cities, and elsewhere in the country, he warned that the central bank’s hyper-accommodative policies could be inflating dangerous asset price bubbles.

It was a fine day for the Canadian preferred share market, with PerpetualDiscounts winning 42bp, FixedResets gaining 5bp and DeemedRetractibles up 20bp. The Performance Highlights table is heavily skewed towards the two better classes. Volume was high, with the Volume Highlights table comprised entirely of FixedResets.

The GSE debate is resurfacing, just like all the other Hallowe’en zombies:

President Barack Obama and lawmakers from both parties have called for the two mortgage-finance companies to be replaced by a new U.S. housing system. While the official position hasn’t changed, a bipartisan group of U.S. senators writing legislation is grappling with how to ensure that changes to Fannie Mae and Freddie Mac don’t disrupt the recovering housing market.

Some Democrats said they are leery of engineering a switch that would liquidate the government-sponsored enterprises, or GSEs, leaving it to private entities to risk their own capital on home loans.
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Since they nearly collapsed during the 2008 credit crisis, the two companies have drawn $187.5 billion from taxpayers and have been considered too politically toxic to be preserved. While the U.S. holds controlling stakes, the outcome will affect private investors including hedge funds Perry Capital and Paulson and Co., which have accumulated preferred shares and have spent months lobbying for Fannie Mae and Freddie Mac to be recapitalized.
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Driving investor hopes and the change in tone are the record profits Fannie Mae and Freddie Mac (FMCC) have been posting as the housing market rebounds from the worst recession since the 1930s. The companies are required to send almost all of those profits back to the Treasury. So far, they’ve remitted about $146 billion, which under terms of the bailout counts as a return on the U.S. investment rather than a repayment.

Shareholders including Perry Capital and Fairholme Funds Inc. have sued the U.S., charging that Treasury is expropriating the value of its investors’ preferred shares in Fannie Mae and Freddie Mac. Those suits are adding urgency to lawmakers’ efforts.

James Hamilton of Econbrowser commented in August:

I have not seen the details of the specific proposals favored by Senators Corker and Warner or President Obama. If the suggestion is to return Fannie and Freddie to the status of supposedly non-governmental entities, insisting that this time the government really, truly would not bail them out if they get into trouble, I would not support the plan. We tried that idea, and it’s just not operational. The notion that a truly private company could plausibly earn its profit by guaranteeing trillions of dollars in mortgages is on its face implausible, because there is no private strategy that could truly diversify or hedge away the risk associated with major aggregate disruptions. What Fannie or Freddie really did was “guarantee” the loans as long as times were good, and count on federal assistance when times were bad.

If instead the proposal is to keep Fannie and Freddie in government receivership, and with that authority gradually slow and eventually stop the GSEs’ issuance of new debt and guarantees, then I am all on board.

The Tea Party is in a tizzy about China:

The U.S. must “shoulder its responsibility” as the world’s biggest economy and holder of the main reserve currency and “take concrete measures before Oct. 17 to avoid a default,” Deputy Finance Minister Zhu Guangyao said at a briefing with reporters yesterday in Beijing in which he referred to “the attitude of the Tea Party.”

Lawmakers tied to the Tea Party didn’t appreciate the advice, even from a nation that holds almost a quarter of foreign-owned Treasuries — $1.28 trillion as of July.

“They need to stay out of our politics,” Representative Blake Farenthold, a Tea Party-backed Texas Republican, said in an interview. China’s criticism “almost sounds like a threat,” said Representative Ted Yoho, a Florida Republican. “For them to say something derogatory about the Tea Party, I take offense to that.”

It would appear that the Tea Party needs remedial education about the relationship between “paying the piper” and “calling the tune”. But they may have actually gone too far this time:

But some of them had to be queasy when they saw an NBC News-Wall Street Journal poll last week: Only 24 percent of Americans had a favorable view of the Republican Party, the lowest ever. By eight points, the public said it preferred a Congress controlled by the Democrats over one in Republican hands. Positive feelings toward the Tea Party fell to an all-time low.

Meanwhile, fear is taking its toll:

Investors pulled $41.6 billion from U.S. money-market mutual funds in the past week, or 1.6 percent of total assets, as concern grew over lawmakers’ inability to strike a budget deal that would avert a default on Treasury securities.

The exodus in the seven days through yesterday was punctuated by the withdrawal of $21.6 billion on Oct. 11, according to research firm Crane Data LLC in Westborough, Massachusetts. Investors pulled $15.7 billion in the preceeding seven days.

While the spike appeared connected to the approaching debt ceiling, it was exacerbated by companies moving cash to make bi-monthly payroll and meet a quarterly tax payment deadline on the next business day, Peter Crane, president of Crane Data, said in an interview.

The capitalist folk hero has commented on US bank regulation:

Billionaire investor Warren Buffett said JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon will withstand litigation and legal probes that led his bank to take a $7.2 billion charge in the third quarter.

“If a cop follows you for 500 miles (800 kilometers), you’re going to get a ticket,” Buffett, the chairman and CEO of Berkshire Hathaway Inc. (BRK/A), said today in an interview on CNBC. “And believe me, you’ve had a lot of cops that have been following a long time, and they’re going to write some tickets.”
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Banks rely on so many licenses that the threat of criminal charges can undermine their business, Buffett said. The billionaire served as interim chairman and CEO of Salomon Inc. in 1991 and 1992 as the company sought to recover from involvement in a Treasury debt auction scandal.

“A large financial institution just can’t take that,” he said. “You are in a terrible negotiating position, and I’ve been in that position. If they want to take a pound of flesh, they can take a pound of flesh. But if they want to take a ton of flesh, they can take that, too.”

The Feds have succeeded in driving away foreign capital:

Egyptian telecom investor Naguib Sawiris vows to never again consider investing in Canada after the federal government’s decision to block a $520-million bid for Manitoba Telecom Services Inc.’s Allstream division, according to a published report.

“I am finished with Canada, I tell you,” Mr. Sawiris is quoted in a lengthy article in Ahram Online, the English-language website of Egyptian news organization Al-Ahram.

I was very pleased to learn of a proposal to mitigate the effects of the dairy monopoly:

The Canadian government has struck a tentative trade deal with the European Union but is now seeking the consent of all the provinces before agreeing to the accord, sources say.
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The development comes after a breakthrough in long-running talks where Ottawa agreed to more than double the amount of European cheese that can enter this country without facing steep protectionist tariffs.

Getting unanimous provincial consent sounds like a job and a half, but perhaps somebody will convince Marois that Muslims don’t eat dairy products. Regrettably:

NDP Leader Thomas Mulcair signalled he’s girding to fight the deal on the grounds it would allow in more than 13,500 additional tonnes of European cheese each year, a development that threatens to crowd out Canadian product.

I have sent the following eMail to my NDP MP:

I was very disappointed to learn ([LINK]) that the NDP intends to oppose an increase in the amount of European cheese that can enter this country without facing steep protectionist tariffs.

Why does the NDP favour charging single mums and kids extortionate rates for their dairy products in order to prop up a grossly inefficient industry that has as its main purpose the subsidization of bucolic lifestyles for the favoured few?

Why are you making it more difficult for working Canadians to provide nutritious food to their families?

But don’t worry, Big Government fans! There are plenty of little piggies waiting for their turn at the trough:

Newspaper publisher turned wannabe oilman David Black says he’s looking for $8-billion in loan guarantees from Ottawa to help cover the costs of his planned $26-billion oil refinery project. Mr. Black argues the undertaking is crucial to the country’s economy, and could even help build the energy partnership between Alberta and British Columbia.

It’s a black day for the professionalism of the Canadian investment management industry, such as it is. It looks like the OTPP’s foray into politics (sneered at on October 7) comes straight from the top:

Ontario’s proposal to create a voluntary disclosure rule to boost women on boards is unlikely to cause much improvement and will likely have to be turned into a quota, warns the head of Ontario Teachers’ Pension Plan.

Speaking at a public forum Wednesday hosted by the Ontario Securities Commission, Jim Leech said Canada has a smaller proportion of women on corporate boards than countries like Turkey and Poland. He said voluntary disclosure rules can be tried for three or four years, but will probably end up being rejected as inadequate.

“Let’s skip this intermediate step we don’t think is going to work,” Mr. Leech proposed.

Teachers has urged regulators to instead require all public company boards to have at least three women directors.

Maybe Leech is sucking political arse in hopes of a position with the proposed Ontario Pension Plan.

Ottawa’s busy with another idiotic throne speech:

“Our government will introduce balanced-budget legislation,” the speech, read by Governor-General David Johnston Wednesday, said.
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There are loopholes in the balanced-budget legislation if the economic turns sour. “It will require balanced budgets during normal economic times and [set] concrete timelines for returning to balance in the event of an economic crisis,” the Throne Speech said.

Balanced-budget legislation has been criticized as gimmicky because a future government could simply pass a bill repealing it.

So Spend-Every-Penny is up to his usual tricks – claiming that a balanced budget is a major accomplishment, while doing absolutely nothing to run a surplus in good times.

There’s an interesting trend on Wall Street:

Inside One Equity Partners are as many as eight Olympians and even more of their world- or Olympic gold medals, said managing partner Dick Cashin, who competed internationally as a rower and now hires former college athletes while recommending others do the same.

“Everybody thinks sports is about winning,” says the 60-year-old Cashin, who didn’t earn a medal as a member of the 1972 U.S. Olympic team. “For me, it’s more about losing and then figuring out a way to win. It’s those things that make working with athletes and hiring former athletes a reasonable thing to consider.”

I don’t have the experience to endorse the idea – and, more importantly, I don’t have the experience for you guys to accept any endorsement of mine as meaning anything – but there is a similarity to my favouring of science grads. Science grads make great analytical employees because they have the attitude that for every question, there is exactly one right answer. We can’t get there, but we can get close, and the closer your answer is to the Platonic ideal, the better it is. An athlete’s win/loss mentality is similar. Leave second place to the Arts students.

DBRS has confirmed LB.PR.E (PerpetualDiscount) and LB.PR.F (FixedReset) at Pfd-3(low) with a Positive Trend:

Laurentian’s improved earnings profile has contributed to its ability to sustain profitability from core businesses, despite a slowing Québec economy. Segment and geographic diversification continues to improve with the growth of B2B Bank (organically and through acquisitions). Notwithstanding, geographic concentration continues to be a challenge, with 62% of the loans based in Québec at the end of Q3 2013. The Bank has been able to generate consistently respectable levels of profitability in the face of maintaining conservative credit and financial risk profiles. There have been some gains made in Laurentian’s expense ratio from 2012 to the first nine months of 2013, but the cost structure remains high.

DBRS has confirmed CWB.PR.A at Pfd-3(high) [Stable]:

CWB’s most important strengths are its strong asset quality as evidenced by its very long history of low write-off rates, its proven niche strategy using relationship-based lending, its low cost base (partially due to business mix) and its strong internal capital generation. Additionally, funding diversification has improved over the past several years. CWB recently recorded its 101st consecutive profitable quarter.

Challenges remain, including concentration in the loan book, both geographically (Alberta and British Columbia) and by industry (commercial, construction and real estate lending), although the secured nature of the loan book and low write-off rates suggest this issue has been well managed throughout the Bank’s history.

It was a mildly negative day for the Canadian preferred share market, with PerpetualDiscounts off 2bp, FixedResets losing 17bp and DeemedRetractibles down 3bp. Given such lack of movement the Performance Highlights table is surprisingly lengthy, featuring losing FixedResets. Volume was above average.

Update: US uncertainty resolved… for a while:

The U.S. Congress voted to halt the 16-day government shutdown and raise the U.S. debt limit, ending the nation’s fiscal impasse.

The House of Representatives voted 285-144 to clear a measure that now heads to President Barack Obama for his signature. The House vote was less than three hours after the Senate passed the bill, 81-18.
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The agreement negotiated by Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell will fund the government at Republican-backed spending levels through Jan. 15, 2014, and suspend the debt limit through Feb. 7, setting up another round of confrontations then.

All of the votes against the proposal in the Senate were from Republicans. One senator, Republican James Inhofe of Oklahoma, was absent.

There’s an interesting comment in the BoC’s 2014–15 Debt Management Strategy Consultations:

Non-residents now hold about 28 per cent of Government of Canada marketable debt securities, approximately double the average for the five years preceding the financial crisis. Increased demand for Government of Canada securities by non-residents helps to diversify the investor base. At the same time, some market participants suggest that the growing share of securities held by foreign institutional investors, in particular, central banks and sovereign wealth funds, may be affecting the liquidity of certain sectors of the Government of Canada securities market, since some of these investors may not actively lend their securities in the repo market. Anecdotal evidence gathered by the Bank of Canada suggests that large increases in foreign official Canadian-dollar holdings have coincided with the more frequent “specials” in the Canadian debt markets. [Footnote] More research is necessary, however, to determine to what extent this relationship is causal and not explained by other factors.

Footnote reads: A security that is “on special” is an asset that is subject to elevated demand in the repo market. This causes securities borrowers in the repo market to compete for the asset by offering to lend cash below prevailing interest rates.

Specials are a wonderful opportunity for alert active portfolio managers to outperform, since the price of ‘special’ securities will rise as the shorts frantically try to square their positions. Regrettably, this may be exploited only from a ‘long-only’ perspective: shorting the temporarily expensive security carries a very high probability that all your profits from price movements will be eaten up by the cost of borrowing the security.

There is also an acknowledgment of the regulatory aspect of financial repression:

Demand for Government of Canada securities is being affected by several other important factors. Regulatory initiatives are increasing the need for high-quality collateral, which in Canada is reflected in greater demand for treasury bills and short-term bonds. In addition, the federal government and a number of provincial governments, as well as some corporations have put in place new prudential liquidity and contingency measures that have large, stable allocations to Government of Canada securities, especially treasury bills and short-term bonds. Structural changes, such as Canada’s new central counterparty for the fixed-income market and, in particular, the introduction of central clearing for blind repo trades for interdealer brokers, may also be influencing dynamics in the repo market.

One of the questions is of great interest:

In the Debt Management Strategy for 2013–14, the government announced the continuation of the temporary increase in the issuance of 10- and 30-year bonds and signalled that it would be assessing the potential benefits of issuing bonds with a maturity of 40 years or longer.

How would you characterize the demand for long-term bonds since yields began rising in May 2013 and how do you see it evolving?

All together, folks! WE WANT FORTIES! WE WANT FORTIES!

Many readers will find the following section fascinating:

Fixed-income products in Canada are typically traded over the counter (OTC), whereas equities are traded on public exchanges. Many financial institutions, institutional investors and wealth managers participate in electronic marketplaces to facilitate the trading of fixed-income securities. However, for retail investors, acquiring a position in fixed-income securities often involves buying money market and bond mutual funds or exchange-traded funds (ETFs). Wealth managers offer another avenue for retail investors to acquire fixed-income securities by leveraging institutional buying of fixed-income securities. Retail investors that prefer not to pay the asset-management fees associated with mutual funds, ETFs
and wealth managers can buy and sell fixed-income securities through an online or discount brokerage account. However, the relative opaqueness of the OTC market has led to criticism of broker compensation, transaction fees and the cost of trading from one’s own broker account. Changes implemented by the Canadian Securities Administrators to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations seek to enhance registrants’ relationships with their clients (retail investors) through an expansion of cost and registrant compensation disclosure, as well as the introduction of performance reporting.

16. Of those retail investors with an online or discount brokerage account, what proportion use their account to buy fixed-income securities in general and Government of Canada securities specifically?

17. What are your views on the impact of the additional fee, commission and cost transparency required under National Instrument 31-103 for dealer and broker activities? Will these changes help to promote greater price transparency for retail investors?

18. What measures could the Government of Canada take to facilitate easier retail investor access to its debt securities?

I would be very pleased to see a Canadian programme run along the lines of Treasury Direct. On the other hand, retail is grossly over-invested in Canadas – they’re paying an enormous liquidity premium that they will never, ever need, and a smaller, but still large, regulatory premium that is simply not applicable.

Market-Timers are busily retiming the timing of their timing:

Incredibly, retail investors are now moving back into bonds. September U.S. mutual fund flow data is now out, and last month three of the four highest net inflows went into bond and credit funds, according to Morningstar. Non-traditional bonds led the way, then high yield bonds, then short-term bonds. Institutional clients don’t seem so scared either, considered how they plowed money into the Verizon Communication’s record debt offering.

Given all this data, there’s a growing counter-theory, one that hails the ‘not-so-great rotation.’ Last year Bank of America Merrill Lynch put out a report that called “The Bond Era Ends.” Morgan Stanley’s pushing back with its own report, titled “Great Rotation? Probably not.”

On the other hand, market timers are also winning the Nobel Prize, so take your pick:

Fama helped revolutionize the practice of investing by showing it was difficult to predict individual stock prices in the short run. That led to the emergence of index funds as a common investment.

Shiller showed that there’s more predictability in stock and bond markets in the long run. That encouraged the creation of institutional investors, such as hedge funds, that take bets on market trends.

In the late 1990s, Shiller said the stock market was overvalued “and lo and behold he was proven right” when the dot-com bubble burst in 2000, said Nobel committee secretary Peter Englund.

“He also predicted for a long time that the housing market was overvalued and again he was proven right,” Englund said. The U.S. property market suffered a crash in 2007 that helped fuel the global financial crisis.

Englund said he believes the three laureates agree on the findings for which they were awarded. However, Fama and Shiller have different “interpretations of the real world,” he added.

“It’s no secret that for Eugene Fama the sort of null hypothesis is that markets work well and he is willing to believe that until he is proven otherwise whereas for Robert Shiller, I think his null hypothesis is that there are periods of excessive optimism and pessimism,” Englund said.

Swiss Re may join the exodus from US life insurance:

Swiss Re Ltd. (SREN) is considering selling Aurora National Life Assurance Co. as it retreats from the U.S. life and health insurance market, people familiar with the matter said.

The world’s second-largest reinsurer is working with Barclays Plc to find buyers for Aurora National and some other U.S. assets, two people said, asking not to be identified because the matter isn’t public. The sale could fetch more than $400 million, one person said.
The deal would include about $5 billion in insurance assets, including corporate-owned and other life-insurance policies and annuities, said one person.

Corporate bond trading is entering a new era and nobody knows (or cares) where it will end:

A record share of U.S. corporate-bond trading has moved to computers as buyers who traditionally transacted over the phone seek faster ways to buy and sell in a market where Wall Street’s human traders are retreating.

Investment-grade volumes on MarketAxess Holdings Inc.’s electronic system are on pace to exceed $400 billion in 2013 after surging 45 percent to $44 billion in September from a year earlier, according to data from the company, which estimates it captures about 90 percent of electronic trades among the dollar-denominated notes. That’s equal to 14.3 percent of all market activity, including business done over the phone, up from 12.2 percent a year earlier.
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While the dollar-denominated investment-grade bond market has increased 71 percent since 2008 to about $4.3 trillion, the size of each transaction declined to about $565,000 in the three months ended June 30, compared with about $970,000 in the first three months of 2007, according to Trace, Finra’s bond-price reporting system, which tracks both electronic transactions and those negotiated over the phone. The average investment-grade trade on MarketAxess’ system was $600,000, according to Rick McVey, the company’s chief executive officer.

“Dealers do not have the balance-sheet capacity to warehouse large block trades from investors the way they used to, so investors are breaking trades down into smaller sizes,” he said in a telephone interview.
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The biggest U.S. banks’ fixed-income trading revenue probably fell 20 percent in the third quarter from a year earlier on lower volumes, Richard Staite, an analyst at Atlantic Equities LLP, said in a Sept. 23 report.

“It’s a reasonable-size business in terms of revenues for them, but they don’t have the balance sheet capacity to be the backstop for the market,” said Roger Rudisuli, a partner in McKinsey’s corporate and investment banking practice, speaking about dealers generally. “They cannot play this role anymore.”

Fitch placed the US on Watch-Negative:

The prolonged negotiations over raising the debt ceiling (following the episode in August 2011) risks undermining confidence in the role of the U.S. dollar as the preeminent global reserve currency, by casting doubt over the full faith and credit of the U.S. This “faith” is a key reason why the U.S. ‘AAA’ rating can tolerate a substantially higher level of public debt than other ‘AAA’ sovereigns.
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The repeated brinkmanship over raising the debt ceiling also dents confidence in the effectiveness of the U.S. government and political institutions, and in the coherence and credibility of economic policy. It will also have some detrimental effect on the U.S. economy.
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In the event of a deal to raise the debt ceiling and to resolve the government shutdown, which Fitch expects, the outcome of a subsequent review of the ratings would take into account the manner and duration of the agreement and the perceived risk of a similar episode occurring in the future. It would also reflect Fitch’s assessment of the following main factors:

– The impact of the debt ceiling brinkmanship and government shutdown on our assessment of the effectiveness of government and political institutions, the coherence and credibility of economic policy, the potential long-term impact on the U.S. sovereign’s cost of funding and cost of capital for the economy as a whole, and the implications for long-term growth.

– Our assessment of the prospects for further deficit-reduction measures in future years necessary to contain government deficits in the face of long-term spending pressures and place public debt on a downward path over the medium to long term.

There’s some interesting data on fast-food wage scales:

Data from the U.S. Census Bureau and public benefit programs show 52 per cent of fast-food cooks, cashiers and other “front-line” staff had relied on at least one form of public assistance, such as Medicaid, food stamps and the Earned Income Tax Credit program, between 2007 and 2011, researchers at the University of California-Berkeley and the University of Illinois said.

In a concurrent report, the pro-labor National Employment Law Project found that the 10 largest fast-food companies in the United States cost taxpayers more than $3.8 billion each year in public assistance because the workers do not make enough to pay for basic necessities themselves.
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The Employment Policies Institute, which has opposed calls for higher fast-food wages in the past, said in a statement that the reports “ignore economic evidence that dramatic wage hikes would make fast food workers worse off” when employers “replace employees with less-costly automated alternatives.”

Replace order-takers? That’s what’s happening in Europe:

McDonalds recently went on a hiring binge in the U.S., adding 62,000 employees to its roster. The hiring picture doesn’t look quite so rosy for Europe, where the fast food chain is drafting 7,000 touch-screen kiosks to handle cashiering duties.

The move is designed to boost efficiency and make ordering more convenient for customers. In an interview with the Financial Times, McDonald’s Europe President Steve Easterbrook notes that the new system will also open up a goldmine of data. McDonald’s could potentially track every Big Mac, McNugget, and large shake you order. A calorie account tally at the end of the year could be a real shocker.

The touch screens will only accept debit or credit cards, adding to the slow death knell of cash and coins.

So we have the slightly unusual situation of Europe being ahead in automation because of low US labour costs. I suggest that this, rather than any bleeding-heartedness, is a good reason to raise the minimum wage. The burger flippers will then, perforce, find something more useful to do.

Everybody’s preparing for a US default:

A default may not disrupt markets as long as the U.S. alerted traders the night before a payment was due that it was probably going to default, giving the Federal Reserve’s Fedwire, an electronic service that transfers securities and payments, enough time to adjust its programs and allow the defaulted debt to be “transferable,” according to JPMorgan Chase & Co. That would allow them to continue to be used as collateral in repo markets.
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The Securities Industry and Financial Markets Association, or Sifma, in a statement this month said if the Treasury were to delay payments on debt it would extend the payment date of the securities one day at a time. The Treasury Market Practice Group, an industry organization sponsored by the Federal Reserve Bank of New York that advises on transactions in U.S. securities, said last month contingency planning developed since the 2011 debt-limit crisis would mitigate yet not eliminate the operational risk posed by government-debt payment delays.

Some clearing firms are preparing for a default, with Citigroup Inc. and State Street Corp. discussing ways to limit the use of short-term Treasury bills as collateral in coming weeks, the Wall Street Journal reported on its website yesterday, citing people familiar with the matter. Citigroup told some clients it would prefer not to take U.S. government debt maturing Oct. 24 or Oct. 31 as security for transactions, the newspaper reported.

Norway has a very good Sovereign Wealth Fund policy – but even they have a problem involving politicians on one hand and a large pot of money on the other:

The Labor government, which resigned yesterday, presented what it called a “cautious” budget, saying it would use 135 billion kroner ($22 billion) of Norway’s oil wealth to plug deficits next year, equal to 5.5 percent of mainland gross domestic product. That leaves Solberg’s administration with 54 billion kroner to spend before it breaches the nation’s fiscal policy rule.
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Solberg and her coalition partner, the Progress Party, have until early November to adjust the spending plan put forward by the outgoing administration. While she has promised to stick to the fiscal rule, which caps expenditure of Norway’s oil income at 4 percent of its wealth fund, the two parties have signaled they want to spend more on infrastructure, education and health care. Those measures will come on top of planned tax cuts.

DBRS has published its Quarterly Split Share Market Report:

DBRS has today published its quarterly surveillance report covering the Canadian split share market for Q3 2013. The report provides insight into recent market activity and summarizes the performance of split share funds rated by DBRS. Three main areas are covered in the report: equity performance, existing fund activity and new fund market activity. The appendix provides details on all of the preferred shares and securities rated by DBRS, including current ratings and recent downside protection levels.

A copy of this commentary is available by contacting us at info@dbrs.com.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 7bp, FixedResets off 2bp and DeemedRetractibles gaining 1bp. The Performance Highlights table is longer than one might expect given these quiet figures, but Floaters continued to plunge. Volume was low.

The witch-hunt against traders continues:

The U.S. Justice Department has opened a criminal investigation of possible manipulation of the $5.3 trillion-a-day foreign exchange market, a person familiar with the matter said.

The Federal Bureau of Investigation, which is also looking into alleged rigging of interest rates associated with the London interbank offered rate, or Libor, is in the early stages of its currency market probe, said the person, who asked not to be identified because the inquiry is confidential.

The U.S. investigation comes as the U.K. Financial Conduct Authority said in June it was reviewing potential manipulation of exchange rates. That month, allegations that dealers at banks pooled information through instant messages and used client orders to move benchmark currency rates were reported by Bloomberg News. Regulators are probing the alleged abuse of financial benchmarks used in markets from oil to interest rate swaps by the firms that play a central role in setting them.

Readers will remember that the shocking allegations are that traders would position their inventories to meet known pending client orders.

You can like or dislike Obama but he’s got one thing right:

President Barack Obama knows who is the boss: the bond market.

“Ultimately, what matters is: What do the people who are buying Treasury bills think?” the president told reporters this week, when discussing measures he could take to end the threat of a historic default on the nation’s debt.

Coming up next: courses on how to cheat on personality tests:

They can drive cars, win Jeopardy and find your soon-to-be favorite song. Machines are also learning to decipher the most human qualities about you — and help businesses predict your potential to be their next star employee.

A handful of technology companies from Knack.it Corp. to Evolv Inc. are doing just that, developing video games and online questionnaires that measure personality attributes in a job applicant. Based on patterns of how a company’s best performers responded in these assessments, the software estimates a candidate’s suitability to be everything from a warehouse worker to an investment bank analyst.

Once in my twenties, when I was so desperate for work I would apply for jobs at banks and undergo the ordeal of speaking to stupid people, I was required to take a personality test. Multiple choice. Page one of the test was how you thought of yourself with respect to various attributes. Page two – cunningly designed so you couldn’t see your answsrs to page 1 when filling in page 2 – was how you thought other people perceived you with respect to those same attributes. Fortunately, I’d heard of this ridiculous piece of HR ass-covering, and knew that what you said didn’t matter much – they were interested in how closely page 1 and 2 matched. So I made the responses almost identical.

In many ways, it must be nice to be American. A constitution that actually means something, a culture that supports it and an independent judiciary that enforces it:

New York’s ban on outdoor smoking in state parks was blocked by a judge after a smokers’-rights group argued that the Office of Parks, Recreation & Historic Preservation exceeded its authority.

Supreme Court Justice George B. Ceresia Jr. in Troy, in a ruling dated Oct. 8 and made public today, permanently blocked the office from implementing or enforcing the ban and ordered it to remove any signs referring to it.

The office “extended its reach beyond interstitial rule-making and into the realm of legislating,” Ceresia wrote in his ruling, saying state law doesn’t give the parks office the right to promulgate rules “regulating conduct bearing any tenuous relationship to park patrons’ health or welfare.”

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 9bp, FixedResets off 3bp and DeemedRetractibles gaining 1bp. No particular patterns are observable on the moderately sized Performance Highlights table. Volume was very low.