PrefBlog

Bernanke used his Monetary Policy Report to clarify his ‘tapering’ comments:

I emphasize that, because our asset purchases depend on economic and financial developments, they are by no means on a preset course. On the one hand, if economic conditions were to improve faster than expected, and inflation appeared to be rising decisively back toward our objective, the pace of asset purchases could be reduced somewhat more quickly. On the other hand, if the outlook for employment were to become relatively less favorable, if inflation did not appear to be moving back toward 2 percent, or if financial conditions–which have tightened recently–were judged to be insufficiently accommodative to allow us to attain our mandated objectives, the current pace of purchases could be maintained for longer. Indeed, if needed, the Committee would be prepared to employ all of its tools, including an increase the pace of purchases for a time, to promote a return to maximum employment in a context of price stability.

Industrial Alliance is buying a conglomerator:

Consistent with its strategy to beef up its asset management arm, insurer Industrial Alliance is scooping up Jovian Capital, a holding company that owns stakes in a number of small asset managers, for $94-million. The deal adds roughly $7-billion of assets to the insurer’s existing $45-billion portfolio.
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At first glance, Jovian may seem like a bit of an odd choice. The company hasn’t produced positive cash flow in the past few years, and it posted a $7.5-million loss from continuing operations in 2012.

Plus, last year some shareholders were outraged after Jovian’s management team cut themselves a $12-million compensation cheque amidst the weak performance. Shareholders wanted this cash for themselves.

Jovian is the sponsor of Jov Leon Frazer Preferred Equity fund, which has struggled since inception.

The Bank of Canada is maintaining the overnight rate at 1%:

Inflation has been low in recent months and is expected to remain subdued in the near term. The weakness in core inflation reflects persistent material excess capacity, heightened competitive pressures on retailers, relatively subdued wage increases, and some temporary sector-specific factors. Total CPI inflation has also been restrained by declining mortgage interest costs. As the economy gradually returns to full capacity and with inflation expectations well-anchored, both core and total CPI inflation are expected to return to 2 per cent around mid-2015.

Against this backdrop, the Bank has decided to maintain the target for the overnight rate at 1 per cent. As long as there is significant slack in the Canadian economy, the inflation outlook remains muted, and imbalances in the household sector continue to evolve constructively, the considerable monetary policy stimulus currently in place will remain appropriate. Over time, as the normalization of these conditions unfolds, a gradual normalization of policy interest rates can also be expected, consistent with achieving the 2 per cent inflation target.

TransAlta is taking drastic action:

TransAlta Corp., the worst-performing power generation stock in North America the past year, is betting a spinoff of its wind and hydroelectric power plants will increase the company’s value and help reverse two years of losses.

Canada’s largest publicly traded electricity generator gained 9.7 percent since the company said on June 26 it plans an initial public offering of some renewable energy assets. TransAlta has expanded its wind and hydro power capacity to about 25 percent from 15 percent in 2008 with developments in eastern Canada and parts of the U.S., even as power prices in its main markets of Alberta and Washington State declined.

“Investors are willing to pay more for renewables,” Jeremy Rosenfield, an analyst at Dejardins Capital Markets in Montreal, said by phone July 4.

The spinoff could help boost TransAlta’s shares to C$15.50 from C$14.54 at 4:05 p.m. in Toronto today, said Benjamin Pham, a BMO Capital Markets analyst, in a June 27 note. TransAlta’s renewable portfolio has been undervalued for years, he said.

“The structure of the spinoff is designed to permit TransAlta to retain control of its renewable energy fleet while unlocking value to the benefit of shareholders and to accelerate development and acquisition opportunities,” he said.

TransAlta is expected to raise C$200 million ($190 million) to C$250 million in the IPO when it closes in August, the company said in a statement. It will retain an 80 percent to 85 percent stake in the unit.

It hasn’t done their preferreds much good – TA.PR.D, TA.PR.F and TA.PR.H got whacked today. I have no idea why.

It looks like Parakeet Poluz has been given his script:

Stephen Poloz has spelled out what he expects to see from the economy before the Bank of Canada hikes interest rates, and the timeline appears to be a long one.

The new central bank governor sees holding the benchmark overnight rate at its current low level as long as there is significant excess capacity in the economy, the outlook for inflation remains muted, and households continue to get a better handle on their personal debts.

Also, the Conservatives have to get re-elected. That’s very important.

Interesting piece on the decline of the work ethic:

“Absenteeism is often explained around levels in workplace stress,” says Wolfgang Lehmann, a professor of sociology at the University of Western Ontario.

He partly attributes the rise in absenteeism, which has increased from 8 days lost per worker in 2000 to 9.3 days in 2011, to the stressful impact of layoffs, as well as the strain of caring for both children and elderly parents.

But that’s only part of a complex web of factors, and while it might seem obvious that sunny skies tempt workers to shirk their duties, it’s just another small piece of a puzzle that includes an employee’s gender, education level, and personal happiness.
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Regardless of occupation or demographics, two factors that drive absenteeism are good benefits and bad management, according to Howard Seiden, an expert on workplace absenteeism at the University of Toronto.

“It’s not just a gender thing, or an age thing – it’s an unhappiness thing,” Dr. Seiden says. “People who aren’t happy and don’t like their jobs look for reasons not to come to work.”

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts up 23bp, FixedResets off 4bp and DeemedRetractibles down 9bp. Volatility was average – CU issues did well. Volume was high.

Nothing happened today.

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts up 15bp, FixedResets down 9bp and DeemedRetractibles gaining 1bp. Volatility was average – by long-term standards! – but comprised entirely of losers. Volume was average.

Are the bond vigilantes hanging up their spurs?

U.S. fixed-income mutual funds attracted investor deposits last week, rebounding from redemptions spurred by speculation that the Federal Reserve would scale back its unprecedented stimulus, while bond exchange-traded funds had withdrawals.

Investors put $219 million into U.S. taxable-bond mutual funds while pulling $456 million from bond ETFs in the week ended July 10, Denver-based research firm Lipper said yesterday in an e-mailed statement. They deposited more than $3 billion in bond mutual funds and ETFs combined during the week ended July 3, the first week of net deposits in five weeks. U.S. bond funds had withdrawals of $23.7 billion in the four weeks ended June 26, the most since October 2008, Lipper said.

“Taxable-bond fund investors were of two minds,” Lipper said in the statement. “Neither amount reflected a strong opinion on bonds.”

It’s always nice to see big banks hurt by negative convexity:

JPMorgan Chase & Co (JPM). Chief Executive Officer Jamie Dimon warned investors that higher interest rates could lead to a “dramatic reduction” in the bank’s profits by eroding demand for mortgage refinancing.

The surge in 30-year home-loan rates to 4.46 percent at the end of June from 3.51 percent in mid-May caused second-quarter mortgage-fee revenue to decline 20 percent, the New York-based bank reported today. Refinancing volume could fall as much as 40 percent in the second half if rates remain elevated, Chief Financial Officer Marianne Lake told analysts on a call today.
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Refinancings, which accounted for 76 percent of the industry’s $1.75 trillion in loan originations last year, slumped after 30-year rates surged in May and June, data compiled by Freddie Mac show. Applications to refinance loans fell 42 percent across the industry from May 17 to July 5, according to Joel Kan, an economist at the Mortgage Bankers Association, a Washington-based trade group.

Fortunately for Canadian banks, there is no real competition in Canada so we don’t have thirty-year open mortgages.

Electrical Engineering Professor Reza Iravani of the University of Toronto has come up with a a revolutionary idea for electricity delivery in Toronto:

“The delivery system has to be reinforced so even if you lose a station, the rest of the system can maintain operation without a major blackout,” he said.

Amazing. A system with some redundancy to make it more robust to single-point failure. Give the man a Nobel Prize – and, while you’re at it, a consulting contract to help the Bank of Canada with their Centralized Counterparty idea.

Investors in US Municipals have another thing to worry about:

Detroit bondholders may have a new worry after a judge ruled that Jefferson County, Alabama, could have paid legal bills for its bankruptcy from cash that was going to pay warrant holders owed $3 billion.

The ruling should concern bond investors whose revenue was previously protected from use by municipalities, said R. Dale Ginter, a bankruptcy lawyer at Downey Brand LLP in Sacramento, California. It may force those bondholders to reconsider waging an extensive legal fight to protect their interests, said Ginter, who represented retirees in the bankruptcy of Vallejo, California.
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The ruling could apply to any municipal bankruptcy with debt being paid by pledged revenues such as parking fees, airport lease payments or water and sewer charges, Ginter said. Detroit is in talks to get bondholders and current and former city workers to accept $2 billion in exchange for wiping out the $11.5 billion they may be owed. Kevyn Orr, Detroit’s emergency financial manager, said he may put the city into bankruptcy if they can’t strike a deal.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 20bp, FixedResets off 2bp and DeemedRetractibles flat. Volatility was lower than normal – especially when compared with recent times – but what there was was all positive. Volume was a little below average.