PrefBlog

Good news! Litvak’s won his appeal!

In a ruling that will shape how the U.S. Justice Department and Securities and Exchange Commission pursue several similar cases already in the pipeline, a federal appeals court threw out Jesse Litvak’s March 2014 conviction for defrauding the U.S. Troubled Asset Relief Program and making false statements to the government. Prosecutors will retry charges of lying to buyers and sellers of mortgage-backed securities.

Tuesday’s decision forces the U.S. to bolster its case that traders who lie to customers are committing fraud. In it, the appeals court faulted the judge for excluding some defense evidence, saying the accused must be allowed to show that his actions were in keeping with how Wall Street does business.
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A central issue in the Litvak case is whether it’s important for the buyer of a bond to know how much a trader paid for it. Prosecutors argued that Litvak’s lies about how much he paid constituted fraud. Litvak’s team compared their client to used-car salesman who isn’t expected to be honest about what he paid for a car: If a sophisticated bond-buyer agrees the price is fair, they argued, it doesn’t matter what the dealer originally paid.

Litvak’s case was last discussed on PrefBlog on August 13.

The Bank of Canada has acknowledged that its policy options have been widened:

Policy makers still have firepower to spur growth even with borrowing costs near zero, Bank of Canada Governor Stephen Poloz said, citing unconventional policies and fiscal stimulus.

While the central bank doesn’t expect another crisis that will force it to resort to such policies, a number of tools are still available, including charging banks for deposits, forward guidance and asset purchases, Poloz said. Fiscal stimulus could be even more effective than monetary policy in extreme circumstances, he said.

“I certainly hope we won’t ever have to use these tools,” Poloz said Tuesday during a speech in Toronto. “However, in an uncertain world, a central bank has to be prepared for all eventualities.”

While Poloz sought to highlight the hypothetical nature of his comments, the speech comes amid growing concern for Canada’s economy as fresh signs of weakness in China and growing concerns about a global oil glut damp the outlook for commodity-producing nations.

Swaps trading suggests investors are pricing in a 25 percent chance of another rate cut by May, following two reductions this year that brought the benchmark rate to 0.5 percent.

I’m not reading much into this. The central banks just want to make their toolbox transparent, so that during the next crisis there will be fewer surprises to worry about. During the Credit Crunch you could almost see the Fed moving down the list … ‘do this, tick the box, see if it’s enough ….’

Meanwhile the central planners are touting micro-management of the economy:

“There are significant pockets of vulnerability created by the growth in mortgage debt in recent years,” according to Craig Alexander, a C.D. Howe researcher and former chief economist at Toronto Dominion Bank, and Paul Jacobson, president of the Canadian Association for Business Economics. “The majority of Canadians have been responsible in their borrowing, but the sustained low interest rate environment has encouraged a significant minority to take on considerably more mortgage debt relative to after-tax income.”

New Finance Minister Bill Morneau, who was chairman of C.D. Howe before entering politics, has said housing is one of the first briefings he took from his officials. Canada has long faced international warnings about the need to head off a housing crash like those seen in the U.S., the U.K. and Spain, and former Finance Minister Jim Flaherty acted several times to tighten lending rules.

Putting in new restrictions is difficult because those past changes have already slowed credit growth, and because the risks now are in a few segments of the market that make using a “blunt tool” approach counter-productive, the authors said.

Policy makers could set tougher underwriting rules on criteria such as credit scores and debt-service ratios, or raise the interest rate that tests a borrower’s ability to pay up later, Alexander and Jacobson wrote.

One tool to target Vancouver and Toronto would be raising the down payment requirement on more expensive homes, the report said. That echoes a proposal the finance department has been making this year, according to people familiar with those talks.

OSFI’s Deputy Superintendent Mark Zelmer gave a speech to the C.D. Howe Institute, Toronto, Ontario, December 8, 2015 titled Asset Managers and Global Financial Stability:

Liquidity mismatches could potentially contribute to instability in important financial markets

The first topic I would like to address relates to liquidity mismatches. Combining less liquid investments with short-notice redemption features for fund units gives rise to a potential misalignment between the redeemability of investment fund units versus the actual liquidity of their underlying investments. This mismatch may result in fragile demand for those investments if investors think they are more liquid than they really are. When times are good, everyone benefits. But if prospects dim and investors suddenly decide to rush to the exit gates, it could prove very disruptive for the markets in question, particularly if a fund has to quickly liquidate large blocks of securities to meet the redemption requests.
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While most funds are well positioned to cope with normal redemption flows, their ability to cope with an unexpectedly large surge in redemption requests merits further exploration. As we shine light down this corridor, however, we should resist the temptation to treat investment fund liquidity management practices as a macro-prudential tool for cushioning markets from the actions of end-investors. Taken to extremes, that would slow markets’ processing of new information, which could give rise to some easy arbitrage opportunities. I do not think we need to give more sophisticated and nimble market participants new ways to profit at the expense of everyone else.

Leverage comes in many forms
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Investment funds of all types also make use of financial derivatives to hedge risks and as a cheap way to establish investment positions. The latter is often prevalent in situations where cash markets are less liquid and positions can be established at lower cost through derivatives markets. This can, however, result in the creation of leverage within a fund when the values of the derivatives’ exposures change over the life of the contracts.

As was shown by the failure of Long-term Capital Management in 1998, global financial stability concerns can emerge in situations where banks supply the financing for these investment funds or serve as the principal counterparties for investment fund derivatives transactions. Of course, much has changed since then. There have been advances in asset manager and bank risk management practices, plus a number of regulatory measures to contain the amount of leverage in the global financial system.

Transferring investment mandates may not be as easy as some people think

The third potential vulnerability I want to highlight focuses on the challenges of replacing asset managers. Now, let me stress at the outset that the asset management industry has plenty of experience in transferring investment mandates from one asset manager to another, with no disruptions to markets or other parts of the financial system. A lot of credit is due to the asset managers in question, their advisers, custodians and the firms that specialize in providing transition services. But, if you take a snapshot of the global asset management sector at any point in time, you will see a small group of asset managers that clearly stands out from the rest in terms of the amount of assets they have under management. This begs the question of how easy would it be to transfer their investment mandates to other asset managers on short notice, especially if the need arose in a period when markets are under stress.

Presumably, such an event is most likely to arise in a situation where a very large asset manager is experiencing operational difficulties or challenges that inhibit its ability to deliver services as per investor expectations. If the issues are serious enough and the disruptions sufficiently prolonged, it is conceivable that investors could lose confidence in the funds offered by the asset manager and seek to either move their funds or accounts to another manager, or even liquidate their investments and re-establish them with another manager. Similar issues could also arise from a reputational risk perspective.
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Nevertheless, it does beg the issue of what steps could be taken to quickly transfer investment mandates from one manager to another in a smooth fashion, so as to minimise the need for any actual redemptions of fund units by end-investors that would then trigger transactions in financial markets. As I noted at the outset, the asset management industry argues that such processes operate fairly smoothly in practice, given the role that transition managers and custodians play in facilitating transfers of funds and investor accounts from one manager to another. The industry is also quick to cite the recent PIMCO experience as a good example to that effect. And, certainly, that has been the experience to date. But, one cannot help but wonder whether the PIMCO episode would have played out so smoothly had it happened say, in the autumn of 2008, when the global financial system as a whole was in the midst of trying to cope with a major crisis.

Huh. That last point could be laying the ground for expropriation of investment management contracts.

On another note, it appears that nowadays even your car will rat you out:

“Attention!” the automated call from the black Ford Escort’s vehicle emergency system had said after detecting a crash and calling emergency number 911.

“A crash has occurred in a Ford vehicle. Press 1 at any time for location information or press 0 to speak with vehicle occupants.”

A recording of the call obtained by local station WPBF features Bernstein, a 57-year-old from Port Lucie, Florida, telling the dispatcher (repeatedly) that there hadn’t been any accident and that no, she hadn’t been drinking.
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Although Bernstein initially denied it, there had, in fact, been two accidents.

The first was a hit-and-run on Monday afternoon last week (30 November).

The victim, Anna Preston, said she was struck from behind by a black vehicle that took off.

As the New York Daily News reports, after her car ratted her out, police went by Bernstein’s house to have a chat with her.

There, they saw the black Ford with a wrecked front-end, with silver paint from Preston’s car still on it.

So I understand they’re making a movie based on the Canadian preferred share market:

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It was an incredibly awful day for the Canadian preferred share market, with PerpetualDiscounts off 82bp, FixedResets losing an awesome 261bp and DeemedRetractibles down 97bp. The yield-to-worst on the HIMIPref™ FixedReset subindex is now 4.99% – a level not seen since late May, 2009. The Performance Highlights table is, of course, ridiculous, with bank issues being more prominent at the extreme bad end than usual. Volume was enormous – I’m not sure whether it is unprecedentedly enormous or not, but it’s certainly among the historic highs.

For those keeping score, TXPR is now down about 5.69% on the month to date and is now down to October 16 levels – about 2.53% above the low of October 14.

TXPL is down about 6.88% on the month to date and is also down to October 16 levels – about 2.81% above the October 14 low.

But take heart! There was a late day rally in TXPR:

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… and in TXPL:

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Oil got whacked today:

Oil fell to the lowest level in more than six years amid speculation that a record global glut will be prolonged after OPEC effectively abandoned its longtime strategy of limiting output to control prices.
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West Texas Intermediate for January delivery sank $2.32, or 5.8 percent, to settle at $37.65 a barrel on the New York Mercantile Exchange, the lowest close since February 2009. The volume of all futures traded was 63 percent above the 100-day average at 2:40 p.m.
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Tumbling oil helped spur a rout in energy stocks, which were the worst performers on the Standard & Poor’s 500 Index. Williams Cos., a pipeline company, dropped 17 percent, making it the worst performer on the S&P 500 Monday. Exxon Mobil Corp. and Chevron Corp., the biggest U.S. energy producers, fell 2.9 percent and 2.6 percent, respectively. The pain wasn’t limited to the U.S., as BP Plc slipped 3.4 percent and Royal Dutch Shell Plc decreased 4.2 percent.

Other places, too!

Oil’s struggles mean more suffering for the Canadian dollar. It fell .84 of a cent to 74 cents (U.S.) on Monday, its lowest since June of 2004. Energy products represented roughly a quarter of Canada’s exports last year, and oil’s slump has been the key factor in the loonie’s 21-per-cent nosedive against its U.S. counterpart since the middle of 2014.
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The Toronto Stock Exchange’s oil and gas index tumbled 6 per cent, the main factor in a 2.4-per-cent slide in the S&P/TSX composite index. Energy stocks make up nearly a fifth of the composite index. Companies with the highest debt levels and focus on oil took the biggest hits. Penn West Petroleum Ltd. sank nearly18 per cent, and Baytex Energy Corp. fell 17 per cent.

Things may seem bleak, but take heart! There’s some more drone news today:

The ranks of older and frail adults are growing rapidly in the developed world, raising alarms about how society is going to help them take care of themselves in their own homes.

Naira Hovakimyan has an idea: drones.

The University of Illinois roboticist recently received a $1.5 million grant from the National Science Foundation to explore the idea of designing small autonomous drones to perform simple household chores, like retrieving a bottle of medicine from another room. Dr. Hovakimyan acknowledged that the idea might seem off-putting to many, but she believes that drones not only will be safe, but will become an everyday fixture in elder care within a decade or two.

And for preferred share investors …

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It was a horrible day for the Canadian preferred share market, with PerpetualDiscounts losing 124bp, FixedResets down 99bp and DeemedRetractibles off 9bp. Let’s just not talk about the Performance Highlights table, OK? Volume was very, very extremely much huge, enlivened by a stack of after-hours contingent crosses by Nesbitt.

For those keeping score, TXPR is now down about 4.12% on the month to date and is now down to October 19 levels – about 4.23% above the low of October 14.

TXPL is down about 5.33% on the month to date and is also down to October 19 levels – about 4.52% above the October 14 low.

Jobs, jobs, jobs!

Employers added more jobs than forecast in November, underscoring Federal Reserve Chair Janet Yellen’s confidence that the U.S. economy is strong enough to withstand higher borrowing costs.

The 211,000 increase in payrolls followed a 298,000 gain in October that was bigger than previously estimated, a Labor Department report showed Friday. The median forecast called for a 200,000 advance. The jobless rate held at a more than seven-year low of 5 percent.
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Employee pay increased at a steady pace last month. Average hourly earnings at private employers rose 0.2 percent in November after a 0.4 percent gain. Year-over-year hourly pay rose 2.3 percent after a 2.5 percent gain a month earlier.

Employment in November was spurred by the biggest increase in construction hiring since January 2014. Retailers, health-care providers and leisure and hospitality companies added jobs at a healthy, but slower pace than in October.

Meanwhile in Canada:

Canada’s trade deficit unexpectedly jumped to $2.76-billion in October as exports to the crucial U.S. market dropped by the most in almost two-and-a-half years, Statistics Canada data showed on Friday.

October marked the 14th consecutive monthly trade deficit, reflecting Canadian exporters’ continuing struggles amid a sharp fall in oil prices. Analysts polled by Reuters had forecast a shortfall of $1.70-billion.

… and nothing good is forecast for oil:

OPEC’s refusal to rein in production spells extended pain for Canada’s oil patch, setting the stage for deeper cutbacks as a worldwide glut of crude keeps pressure on U.S. and global prices.

West Texas intermediate oil sank below $40 (U.S.) a barrel on Friday after the Organization of the Petroleum Exporting Countries failed to agree on production limits, effectively maintaining a Saudi Arabia-led policy of pumping record volumes to defend market share.
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The Bank of Canada has estimated that overall capital spending in the industry will fall by 20 per cent in 2016 following a 40-per-cent drop this year.

Remember the Enbridge dropdown that was viewed so unfavourably by S&P, Moody’s and DBRS? It’s an ill wind that blows nobody any good:

Enbridge Inc. (“Enbridge” or “the Company”) (TSX:ENB) (NYSE:ENB) today announced that its Board of Directors has declared a quarterly dividend of $0.53 per common share, payable on March 1, 2016 to shareholders of record on February 16, 2016. The dividend reflects a 14 percent increase from the prior quarterly rate, marking the twenty-first consecutive year of increased dividends for the Company.

“The core of our shareholder value proposition is our reliable business model, which continues to deliver strong and predictable results and dividend growth,” said Al Monaco, President and Chief Executive Officer. “The 14 percent dividend increase reflects the confidence we have in our outlook, underpinned by the strength of our businesses, an industry leading growth program and our sound financial position. Over the last two years, we have increased our dividend by over 50 percent while maintaining strong available cash flow coverage.”

Enbridge also announced a guidance range for 2016 available cash flow from operations (“ACFFO”) per share of $3.80 to $4.50. The growth in the Company’s ACFFO per share guidance range for 2016 reflects growth from its existing businesses and the successful execution of its capital program.

Assiduous Readers will remember my post of June 26,2014, in which I advocated paying cash – always! Now we have more reason to use cash in Canada:

Users beware: The banks are spying on you! It recently emerged that deep inside a TD Canada Trust Visa cardholders agreement are embedded a couple of troubling lines giving the bank the legal right to collect data on everything a person does online.

The scope of these provisions, revealed last week by the CBC, is expansive. They basically give the bank the right to view the content of Google searches, the sort of online videos a cardholder watches, their social media activity and much, much more.

The bank can learn a lot from this information. Are you searching for legal advice on defaulting from a loan? Are you thinking of moving or getting married? Are you straight or gay? Do you prefer cats or dogs?

It was another crummy day for the Canadian preferred share market, with PerpetualDiscounts down 53bp, FixedResets off 44bp, and DeemedRetractibles losing 54bp. The Performance Highlights table is, of course, ridiculous, but at least there were a few winners today! Volume was extremely high.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.45 to be $1.20 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.08 cheap at its bid price of 12.00.

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Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 19.30 to be 0.62 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 17.32 to be 1.11 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 15.02 to be $1.26 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 18.54 and appears to be $0.99 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 17.30, looks $0.70 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 15.95 and is $1.05 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.69%, with no outliers. There is one junk outlier below -1.50% and one above +0.50%.

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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

Good news! Europe’s not considered to be in as much trouble as was previously feared! Let’s celebrate!

Equities tumbled around the world and government bonds sank, while the euro rallied the most in six years after the scale of additional stimulus from the European Central Bank disappointed investors just as the Federal Reserve signaled interest-rate increases are imminent.

The Standard & Poor’s 500 Index fell the most in two months and European equities had their worst day since the height of the summer selloff. The euro climbed against all its major peers, stinging traders who had piled on wagers against the currency amid expectations of aggressive easing from the ECB. Yields on 10-year German notes jumped 20 basis points, while rates on similar-maturity Treasuries posted their biggest advance since February. Brent crude rallied from a six-year low before Friday’s OPEC meeting.
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Yields on two-year notes from Germany to Spain had touched record lows before the ECB’s decision. They had been tumbling since Draghi stoked expectations of further easing at his Oct. 22 press conference, pledging that policy makers would re-examine the scope of the central bank’s existing quantitative-easing plan this month.

Treasuries suffered their biggest rout since February, with 10-year yields climbing 14 basis points, or 0.14 percentage point, to 2.32 percent.

And junk bond illiquidity is attracting notice:

Sinkholes are popping up in the credit market.

Specific junk bonds are simply plummeting in value on little trading. For example, nothing all that obvious triggered a plunge in Syniverse Holdings, whose bonds fell to 39 cents on the dollar Monday, from 84.25 cents less than a month earlier. Debt of Intelsat, United States Steel, SandRidge Energy and Ultra Petroleum all lost about 30 percent last month.

Yet looking broadly, there isn’t a financial crisis in developed markets. U.S. stocks are still eking out gains. Companies are still issuing bonds.

So why the precipitous drops without warning?

The explanation is that asset managers are being forced to exit their riskiest positions, either because of withdrawals or to placate increasingly nervous investors, and they’re finding no buyers on the other side. When these fund managers finally get an offer to shed their unwanted holdings, they’re just taking it, even if it means taking a huge loss.

Greater love hath no man than this, that a man lay down his friends for cash.:

Three years ago, the National Whistleblowers Center in Washington dismissed Ms. Williams and Mr. Renner, who are both lawyers, citing mandatory layoffs that stemmed from funding woes and a staff reorganization.
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Now, previously unreleased documents show that the layoffs coincided with an effort by Ms. Williams and Mr. Renner to unionize the whistle-blower center’s small work force. That effort, Ms. Williams and Mr. Renner contend, touched a nerve with the center’s leadership, including Stephen M. Kohn, a prominent lawyer who was a co-founder of the center and has become a national expert on whistle-blower cases.

After their dismissals, Ms. Williams and Mr. Renner took their concerns to the National Labor Relations Board, the documents show. After initially balking at the case, the agency ultimately filed a complaint of unfair labor practices against the whistle-blower center, blaming it for “interfering with, restraining and coercing employees” not to assemble a union.

In effect, Ms. Williams and Mr. Renner became whistle-blowers on their own boss.

Canadian preferred share investors today expressed their appreciation for European monetary policy:

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It was a horrible day for the Canadian preferred share market, with PerpetualDiscounts off 76bp, FixedResets losing 192bp and DeemedRetractibles down 102bp. The Performance Highlights table is extraordinarily lengthy, dominated by FixedResets and devoid of even a single winner. Volume was extremely heavy.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.51 to be $1.12 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.12 cheap at its bid price of 12.12.

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Most expensive is MFC.PR.M, resetting at +236bp on 2019-12-19, bid at 19.65 to be 0.33 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 18.10 to be 0.64 cheap.

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As discussed in the Performance Highlights table, the official bid for BAM.PF.G is ridiculous, so for the purposes of this calculation I have adjusted the bid to 19.50, about 1% below the last price.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 15.16 to be $1.19 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 18.40 and appears to be $0.80 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 17.79, looks $0.82 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 16.50 and is $0.87 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.56%, with no outliers. There is one junk outlier below -1.50% and one above +0.50%.

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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?