PrefBlog

The Fed has a new slogan – Twist & Shout!:

The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities. Specifically, the Committee intends to purchase Treasury securities with remaining maturities of 6 years to 30 years at the current pace and to sell or redeem an equal amount of Treasury securities with remaining maturities of approximately 3 years or less. This continuation of the maturity extension program should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The Committee is prepared to take further action as appropriate to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.
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Voting against the action was Jeffrey M. Lacker, who opposed continuation of the maturity extension program.

With any luck, there will be increased pressure to end milkfare:

Canada has set an ambitious trade agenda that includes separate proposed deals with the EU, Japan and South Korea, along with entry into the Trans-Pacific Partnership negotiations. The issues on the table differ from negotiation to negotiation: Japan and South Korea want Canada to reduce or eliminate a 6.1 per cent tariff on imported automobiles and parts; The EU and United States are requesting a change in Canadian intellectual property laws.

One issue, however, is common to all negotiations: Our trading partners want to see an end to supply management of our dairy and poultry industries.

The tariffs that buttress the system range between 200 and 300 per cent on imported dairy products, with milk facing a 241 per cent tax and butter one of 298.5 per cent. These tariffs make foreign products prohibitively expensive and keep domestic prices among the highest in the world.

Spend-Every-Penny continues to micromanage the economy:

The federal government is moving again to tighten the rules on mortgage lending in Canada amid growing concerns that the housing market is overheated and household debt levels are climbing to perilous levels.

The country’s biggest banks were caught off guard on Wednesday night as the Department of Finance confirmed that it is clamping down on mortgages by reducing the maximum amortization for a government-insured mortgage to 25 years from 30.

Ottawa will also limit the amount of equity that can be borrowed against a home to 80 per cent of the property’s value, down from 85 per cent.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 21bp, FixedResets off 1bp and DeemedRetractibles gaining 3bp. There was a good dollop of volatility, with no clear pattern showing up in the Performance Highlights table. Volume was low.

PerpetualDiscounts now yield 5.06%, equivalent to 6.58% interest at the standard conversion factor of 1.3x. Long corporates continue to yield about 4.4%, 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 June 13.

The insurance companies have figured out a new way to sell annuities:

General Motors Co. (GM)’s deal to cut pension obligations by $26 billion and shift plans to Prudential Financial Inc. (PRU) is poised to fuel more transfers as U.S. firms face a retirement-funding shortfall the size of Greece’s debt.

MetLife Inc. (MET) and Prudential are among insurers that expect the GM deal to encourage more corporations to offload plans. Pension liabilities exceed assets by more than $435 billion, according to a Bloomberg review of data disclosed by firms in the Russell 1000 Index of large U.S. companies. Greece, facing demands for austerity measures in exchange for rescue funds, had total debt of about $450 billion at the end of 2011.

Employers who endured two stock-market crashes in a decade and 10-year Treasury yields near a record low may be tempted to follow GM’s lead by paying insurers to take the risk that market returns are inadequate or that beneficiaries live longer than expected. Transferring the obligations can reduce swings in earnings tied to securities and relieve companies of the need to manage large pools of money.

There’s a very revealing quote out about High Frequency Trading:

The advocates argue that “ ‘It’s the way of the world, people who are in denial are Luddites,’ that whole school of thought,” [, chief executive officer of the Investment Industry Regulatory Organization of Canada ] Ms. Wolburgh Jenah says. “Then there’s the school of thought that is ‘We don’t understand the markets any more, this new breed of participant has come in and taken over.’ ”

The wickle boys don’t like the idea that they might have to learn something new, or the young and the hungry will eat their lunch. Boo Hoo Hoo. See the February 8 post for more mockery of the incompetent.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 3bp, FixedResets winning 17bp and DeemedRetractibles gaining 10bp. Volatility was minor. Volume was low, but with a few issues showing very good volume.

The Europeans have a grave problem: they’re being criticized by parties they don’t regulate:

Tensions between Europe and the rest of the G20 broke wide open in Los Cabos as the president of the European Commission laid bare his frustration with the constant lecturing from outsiders, including Canada.
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The president of the European Commission, José Manuel Barroso, reacted tersely when asked to respond to recent comments from Prime Minister Stephen Harper that Europe does not need outside help to stabilize its economy.

“Frankly, we are not coming here to receive lessons in terms of democracy and in terms of how to run an economy because the European Union has a model that we may be very proud of,” Mr. Barroso said.

Maybe … maybe the EU should regulate Canadian politicians, as well as the Credit Rating Agencies! Yeah! Yeah, that would be good!

The Greek election has only shifted the focus in Europe:

Spanish bonds slid, propelling 10- year yields to more than 7 percent, after yesterday’s Greek election failed to convince investors that politicians will be able to tame Europe’s financial woes.

Italian debt also fell and German bunds rose, reversing earlier declines. Spain’s yields climbed to euro-era records as a report today showed the nation’s bad loans increased in April. The securities tumbled last week after the bloc’s fourth-largest economy requested as much as 100 billion euros ($126 billion) of aid on June 9 to support its banks. Greek bonds rose after pro- bailout parties won enough seats to control parliament.

The greenback is cementing its status as a reserve currency:

Central banks rebuilding foreign- exchange reserves at the fastest pace since 2004 are crowding out private investors seeking U.S. dollars, boosting demand even as the Federal Reserve considers printing more currency.

After falling to an all-time low of 60.5 percent in the second quarter of last year, the dollar’s share of global reserves rose 1.6 percentage points to 62.1 percent in December, the latest International Monetary Fund figures show. The buying has left the private sector with $2 trillion less than it needs, according to investment-flow data by Morgan Stanley, which sees the dollar gaining 8.2 percent in 2012, the most in seven years.

While the Fed has created more than $2 trillion under its stimulus programs since 2008, the flows signal that there may actually be a shortage of dollars to meet demand as Europe’s debt crisis deepens and the global economy slows.

ING Canada got downgraded:

The cauldron of financial turmoil bubbling over in Europe is now seeing its hot water trickle into Canada. Late Friday, rating agency Moody’s Investors Service announced the downgrade of ING Bank of Canada’s senior deposit ratings from Baa1 from A2.

This comes on the heels of the rating agency’s downgrade of ING’s parent, ING Bank NV, to C- for financial strength.

Small investors prone to panic are reminded that ING Bank Canada is a CDIC member and that:

Up to $100,000 of your savings are eligible for deposit insurance offered by CDIC. Your savings must be:
Held in…
A Eligible deposits—for example, savings, chequing and GICs of 5 years or less
+ Held at…
B Banks and other financial institutions—eligible deposits must be held at a CDIC member.
+ And held in…
C Canadian dollars—U.S. dollar and other foreign currency deposits are not eligible.

Meanwhile, in the True North Strong and Free Google reports:

We received a request from the Passport Canada office to remove a YouTube video of a Canadian citizen urinating on his passport and flushing it down the toilet. We did not comply with this request.

And we have problems even talking about trade:

Canada’s bid to join was hampered by the slow progress it made at enacting stronger prohibitions against the theft of digital intellectual property as well as its staunch protectionism for dairy and poultry producers who are shielded from foreign competition.

Another one of What-Debt’s favourite companies is going to do again what it does best:

Pension woes are back at the top of Air Canada’s concerns as the carrier seeks a new reprieve from retirement funding to avert a looming financial crisis.

Faced with a cash crunch in 2014, the country’s largest airline is preparing to ask Ottawa for another moratorium on company contributions to pensions, and to request other measures to ease the pressure.
…
The Montreal-based carrier’s pension solvency deficit stood at $2.1-billion on Jan. 1, 2011, and analysts expect the airline to report a sharply higher deficit for Jan. 1, 2012.

BBD.PR.D got whacked again today, down 1.42 to close at 14.93. Strangely, BBD.PR.B, the RatchetRate issue with which it interconverts effective August 1, was also hammered, down 0.65 to close at 14.30. The interconversion has been discussed on PrefBlog; BBD.PR.D will reset to 255% of GoC5 – which at current levels will be only a hair above 3%.

It was a mildly positive day for the Canadian preferred share market, with PerpetualPremiums winning 9bp, FixedResets up 1bp and DeemedRetractibles gaining 3bp. Volatility was muted. Volume was very low.

The BoC has released a working paper by Donald Coletti, René Lalonde, Paul Masson, Dirk Muir and Stephen Snudden titled Commodities and Monetary Policy: Implications for Inflation and Price Level Targeting:

We examine the relative ability of simple inflation targeting (IT) and price level targeting (PLT) monetary policy rules to minimize both inflation variability and business cycle fluctuations in Canada for shocks that have important consequences for global commodity prices. We find that commodities can play a key role in affecting the relative merits of the alternative monetary policy frameworks. In particular, large real adjustment costs in energy supply and demand induce highly persistent cost-push pressures in the economy leading to a significant deterioration in the inflation – output gap trade-off available to central banks, particularly to those pursuing price level targeting.

Jonathan Weil of Bloomberg decries dynamic provisioning:

Dynamic provisioning is a euphemism for an old balance- sheet trick called cookie-jar accounting. The point of the technique is to understate past profits and shift them into later periods, so that companies can mask volatility and bury future losses. Spain’s banks began using the method in 2000 because their regulator, the Bank of Spain, required them to.
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The danger with the technique is it can make companies look healthy when they are actually quite ill, sometimes for years, until they finally deplete their excess reserves and crash. The practice also clashed with International Financial Reporting Standards, which Spain adopted several years ago along with the rest of Europe. European Union officials knew this and let Spain proceed with its own brand of accounting anyway.

Assiduous Readers with long memories will remember my post titled FRBB Looks at Dynamic Provisioning. The FRBB paper concluded, in part:

We argue that, had U.S. banks set aside general provisions in positive states of the economy, they would have been in a better position to absorb their portfolios’ loan losses during the recent financial turmoil. The allowances accumulated by means of the hypothetical dynamic provision during the cyclical upswing would have reduced by half the amount of TARP funds required. However, the cyclical buffer for the aggregate U.S. banking system would have been depleted by the first quarter of 2009, which suggests that the proposed provisioning model for expected losses might not entirely solve situations as severe as the one experienced in recent years.

So just remember: just because something is good doesn’t mean it’s a panacea. Ain’t nuthin a panacea.

Meanwhile, Spend-Every-Penny wants countries to guarantee deposits in banks they don’t regulate:

Canada is urging the euro zone to embrace a common bank-deposit guarantee as a concrete step to boost market confidence.

The stand – confirmed Friday in a speech by Finance Minister Jim Flaherty – provides the first specifics as to what Canada will push for next week when Prime Minister Stephen Harper and Mr. Flaherty attend the G20 leaders’ summit in Los Cabos, Mexico.

In his speech in Ottawa, the minister praised a proposal from Mario Draghi, the head of the European Central Bank, who has called for a fund to guarantee bank deposits in the 17-member euro zone.

It’s not clear to me why anybody would think that any rational person would base his finances on the word of a European politician anyway. I wouldn’t have any significant money deposited in any of the shaky-country banks anyway … and, if I lived there, would be inclined to be dubious about any European deposits for fear of post-exit confiscation anyway. My preference would be hard assets, by which I mean a box of Krugerrands and a pistol.

Alpha Trading asks the question – can a bank-owned utility do anything useful?:

Alpha, Canada’s newest stock exchange, wants to become the home to the country’s technology sector.

A Deloitte Inc. study commissioned by Alpha found what most observers of the tech sector in this country already know: that the tech industry is stunted. Tech as a percentage of GDP is below the G-20 average and forecast to fall behind Mexico and Saudi Arabia in a few years, the report found.
…
The report, which included interviews with 22 tech sector leaders, laid out a five-point agenda for fixing the problem. The proposed solutions include more support for crowdfunding, establishing a pre-initial public offering “grey” market in tech securities and creating an exchange that focuses on tech. Alpha wants to be that exchange.

BBD.PR.D got whacked today after the announcement of the reset rate, closing down 1.40, or 7.89%, on heavy volume (for this issue!) of 32,479 shares. However, even at the quote of 15.90-35, it’s still idiotically expensive relative to BBD.PR.B at 14.95-05, with which it is interconvertible. I’ve been warning of this in PrefLetter for months. With charts and diagrams!

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 5bp, FixedResets down 9bp and DeemedRetractibles gaining 15bp. Volatility was average. Volume was very low.