PrefBlog

There’s an interesting straw in the wind for junk bonds:

Investors yanked a record volume of cash from BlackRock Inc.’s exchange-traded fund that buys junk bonds as the notes lose value for the first month since May.

The $16.3 billion fund reported an outflow of 2.4 million shares yesterday, equal to about $218.9 million, according to data compiled by Bloomberg. That’s the biggest daily withdrawal in the five-year history of the iShares iBoxx High Yield Corporate Bond Fund, the largest of its kind.

The five largest junk-bond ETFs, which allow investors to speculate on the securities without actually owning them, have lost $1.97 billion of assets since Sept. 20 as investors wager that a four-year rally in the debt is running out of steam. High-yield bonds in the U.S. are losing 0.14 percent this month after posting 12.9 percent returns this year through October, according to Bank of America Merrill Lynch index data.

Regulation is wonderful:

Since 1998, ABS [the non-profit American Bureau of Shipping] has hired four former Coast Guard admirals as executives. They include retired Admiral Robert Kramek, who led the Coast Guard as commandant from 1994 to 1998. It was Kramek who signed an agreement with ABS in 1995 that expanded the nonprofit’s powers to inspect independently owned ships on the Coast Guard’s behalf.

In June 1998, three years after Kramek signed that inspection agreement, ABS hired him as president of its Americas division.

Jack Devanney, a retired executive of companies that own ships that used ABS services, says this revolving door is bad for ship safety.

“When you give Kramek a nice job, you’re sending a message to all the Coast Guard guys that they’ve got a second career at ABS,” says Devanney, who has a Ph.D. in management science from the Massachusetts Institute of Technology. “If you rock the boat, that opportunity’s not going to be available to you.”

S&P has released a fascinating report titled A Tale Of Two Countries: U.S. And Canadian Banks’ Contrasting Profitability Dynamics:

Profit dynamics for a company or an industry are highly sensitive to shifting operating and regulatory conditions and, as a result, are likely to change over time. Profits are important because they can be a significant generator of capital–for the companies that retain them in a meaningful amount. A careful review of bank profitability in both the U.S. and Canada indicates that Canadian banks have been more profitable than their U.S. counterparts in recent years. This gap has widened in the postcrisis years. This is partly because of Canadian banks’ higher leverage that largely arises from structural differences. We also note that the leverage ratio gap between the U.S. and Canada is sensitive to definition. Alternative definitions of leverage ratio for U.S. banks, for example using Standard & Poor’s adjusted common equity to adjusted assets, also show that U.S. banks have lower leverage than Canadian banks, but the gap is much smaller.
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As for Canada, the Office of the Superintendent of Financial Institutions (OSFI) will issue a new Basel III capital guideline before the end of 2012–for implementation in the first fiscal quarter of 2013. Of the 29 G-SIBs that the Financial Stability Board (FSB) identified in November 2011, none were Canadian banks. However, there are plans to identify domestic systemically important banks (D-SIBs) and recommend that a capital surcharge be applied to them. But Canadian banking regulators have not offered any detailed views on this yet. Therefore, we anticipate Canadian banks, on average, will continue to have higher leverage than U.S. banks, particularly the largest and most complex. We believe that at least part of the tolerance for higher leverage may be due to the accumulation of relatively low-risk weighted assets, like government-insured mortgages

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It was another mixed day for the Canadian preferred share market, with PerpetualPremiums up 3bp, FixedResets gaining 2bp and DeemedRetractibles off 1bp. Volatility was non-existent. Volume was low.

PerpetualDiscounts now yield 4.91%, equivalent to 6.38% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 220bp, a slight (and perhaps spurious) increase from the 215bp reported November 7.

Today’s inspiring photograph has been taken from the website of a company owned by a distant relative.

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It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 1bp, FixedResets off 5bp and DeemedRetractibles gaining 3bp. Volatility was low. Volume was relatively heavy, with quite a few issues breaking the 100,000 barrier as the RBC desk did land-office business.

Bloomberg has an interesting bit of gossip about algorithmic trading:

Wall Street’s credit-derivatives traders, who before the financial crisis commanded $2 million of annual pay, are being replaced by machines as banks cut costs and heed new regulations.

UBS AG (UBSN), Switzerland’s biggest bank, fired its head of credit-default swaps index trading, David Gallers, last week, with no plan to fill the position, according to two people familiar with the matter. Instead, the bank replaced Gallers with computer algorithms that trade using mathematical models, said the people, who asked not to be identified because moves are private.

UBS joins Barclays Plc (BARC), Credit Suisse Group AG (CSGN) and Goldman Sachs Group Inc. (GS) in using computer programs to trade financial instruments that once generated some of their biggest fees. With regulators preparing rules under the 2010 Dodd-Frank financial reform that will push swaps toward exchange-like systems to improve transparency, credit dealers are going digital as automated trading makes humans too expensive.

What makes the trend so interesting is that there should be an equilibrium reached at some point. Most – not all – traders know nothing about the markets and they’re not paid to know anything about the markets. They’re paid to know lots of people who trade and who will give good old Bob the order because Bob made a really good point about that story in Wall Street Journal the other day.

But one thing that’s happening is the buy-side culture is shifting – slowly – to electronic execution. So the old-line salesmen are losing clients to the electronic execution vendors. There will be some disruption as all this plays out, but sales (as opposed to technical wizardry) will be as important in the future as it has been in the past.

I’ve complained in the past that the concept of “first mover advantage” as it relates to hedge fund returns is a red herring … there’s at least one guy who agrees with me:

Investors and other industry observers say that for perhaps the first time since the phrase hedge fund entered the lexicon, hot or gimmicky strategies aren’t worth investing in at all. It’s the manager that counts.

“It’s a return to the roots of the hedge-fund industry, when it was a small group of highly talented stockpickers and fundamental investors,” says John Bailey, founder and chief executive of Spruce Private Investors, which invests in 30 different hedge funds for foundations and endowments.

It’s not so much “first mover advantage” in this or anything else, really: it’s more that some smart guys found a niche, made stupid amounts of money … and were promptly copied by every glib smiley-boy in town.

It was stunning when European corporates started trading through sovereigns. This is gobsmackery on a grand scale:

Bonds of Exxon Mobil and Johnson & Johnson are trading with yields below those of comparable Treasurys, a sign that investors perceive them as a safer bet. It is a rare phenomenon that some market observers said could be the beginning of a new era for debt markets. It could ultimately mean some companies will borrow at lower rates than the U.S. government.

For now, just a handful of relatively short-term bonds yield less than comparable Treasury bonds.

The banks’ role as secret policemen is causing problems:

U.S. banks in Colorado and Washington state, where voters last week legalized recreational marijuana use, shouldn’t disregard federal laws that consider pot sales criminal, a bank regulator said today.

“I think institutions have to protect themselves,” said Daniel Stipano, acting chief counsel of the Office of the Comptroller of the Currency, at an anti-money laundering conference today run by the American Bankers Association. “The problem is that it remains a crime under federal law.”

The Bank Secrecy Act requires banks to file suspicious- activity reports if they suspect customer’s involvement in federal crimes. It’s meant as a protection against U.S. financial institutions being used to launder illegal gains from criminal activity.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 7bp, FixedResets up 6bp and DeemedRetractibles off 6bp. Volatility picked up a little, with IAG on the downside (although both issues made the “Wide Spreads” report and all trades were well above the closing bid) and PWF on the upside. Volume was ridiculously pathetic.

We’ll probably never know just what the rights of the matters are … but it sure is entertaining!

Weber, who was chief investigator in the inspector general’s office, raised allegations in March that H. David Kotz, the agency’s former inspector general, may have had personal relationships that tainted reports on the SEC’s failure to catch the Bernard Madoff and R. Allen Stanford Ponzi schemes.

Weeks later, a number of Weber’s co-workers submitted complaints that he was creating a hostile work environment through his suggestions that he and others should be able to carry guns on the job. The SEC used an external security consultant to review whether Weber was a threat and then placed him on administrative leave in May.

Weber also reported to the SEC that he found evidence of possible espionage by foreign nationals related to a case he was investigating. The matter involved unencrypted computer hard drives that contained sensitive stock exchange information.

Cary Hansel, Weber’s lawyer, said that Weber received a letter from the SEC last week informing him he had been fired.

So up to now, it looks like the Lone Loony-Toon, right? But:

Weber’s original complaints prompted the SEC to bring in David Williams, the inspector general of the U.S. Postal Service, to conduct a review. Williams concluded that Kotz violated ethics rules by overseeing probes that involved people with whom he has “personal relationships.” Kotz resigned in January amid questions about his tactics and conduct.

Williams also said in his report that he didn’t find any evidence that indicated Weber’s conduct was improper or raised security concerns. Based on the report, Weber asked the SEC to reinstate him.

Humans are complex! When will we realize that an insistence on perfection in every area deprives us of talent? There’s Petraeus:

CIA Director David H. Petraeus, the retired four-star general widely commended for his oversight of the U.S. wars in Iraq and Afghanistan, resigned from his position due to an extramarital affair.

“After being married for over 37 years, I showed extremely poor judgment by engaging in an extramarital affair,” Petraeus wrote in a letter today to Central Intelligence Agency employees. “Such behavior is unacceptable, both as a husband and as the leader of an organization such as ours.”

… and Kubasik:

Christopher E. Kubasik, who was to become the next chief executive officer of Lockheed Martin Corp. (LMT), resigned after the company discovered he had a “close personal relationship” with a subordinate.

The company’s board elected Marillyn A. Hewson president and chief operating officer effective immediately. She is to become CEO on Jan. 1, Lockheed said today in a statement.

Robert Stevens, chairman and CEO of Lockheed, the world’s largest defense contractor, said he asked for Kubasik’s resignation after ascertaining Kubasik had a “lengthy, close and personal relationship with a subordinate who worked for him.”

It would be most interesting to get the inside dirt on these affairs. Not the “affairs”, I mean (as far as I can tell, that’s the business of exactly three people), but the decisions to “resign”. Are Obama and Stevens weeping crocodile tears over the necessity of firing fatally flawed employees? If they had been more cooperative, would they have got one of the special Get Out of Jail Free cards like a certain French politician I remember?

Guess what? An Income Trust is not an equity (according to Octagon Capital):

By letters dated June 27, 2008 and January 23, 2009, Octagon responded saying: … Regarding suitability, it is not unreasonable for a retired person who does not derive much of their income from their investments to split their investments into 50% equities (common shares) and 50% income producing securities (like income trusts).

For all it’s tough talk about “Naming and Shaming”, OBSI doesn’t identify the broker involved: it appears to be Randal William Harding. So nice that all responsibility is corporate, isn’t it? Personal responsibility is so … distasteful. For instance, there aren’t any NAMES of actual PEOPLE making the decisions at Octagon; “Octagon points out …” and “Octagon argues …” The closest is actually gets to actual naming and shaming is:

We discussed the complaint with Octagon’s Chief Compliance Officer, Mr. L.

“Mr. L.”?

Small brokerages are having a tough time:

GMP Capital Inc. has had another rough quarter, and its chief executive can’t pinpoint when things will turn around.

But Harris Fricker hopes a top-to-bottom review of Canada’s second-largest independent brokerage will spur “significant initiatives” that will pay off in 2013.

“Make no mistake, the goal is to increase the torque of our business, the financial benefit of which will become obvious in better market conditions,” Mr. Fricker said on the company’s third-quarter earnings call Friday after GMP reported a net loss of $358,000. “We remain confident we have the right people, platform and global market capabilities to make it happen,” he said.
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Canada’s largest independent brokerage, Canaccord Financial Inc., also reported earnings this week, and it is finding ways to retool its own business to get through the persistently poor economic conditions. Canaccord posted a net loss of $14.8-million for its second quarter of fiscal 2013, as compared to a loss of $5.3-million in the same quarter in 2012.

The company said that the plan to close underperforming branches of its wealth management business (predominantly in smaller markets) is coming along well. “To date, seven branches have already been closed, with the remainder to close before the end of December,” said Canaccord CEO Paul Reynolds. He indicated this would allow the company to invest more heavily in the unit.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums off 1bp, FixedResets gaining 12bp and DeemedRetractibles up 20bp. Lots of volatility, with insurance issues notable on the upside. Volume returned to well below average levels.