PrefBlog

The federal Competition Bureau has heretofore been best known for its decision, reported July 4, 2012, to allow the banks to reduce competition in the Canadian financial market, provided extra payments were made to their buddies at the OSC. It would seem that the Bureau has been very impressed by the OSC’s ability to fund puppet groups providing employment for their buddies at taxpayer expense and have decided that this is just too good a deal to turn down:

As part of a consent agreement with the Competition Bureau, Telus will issue rebates of up to $7.34 million to certain current and former wireless customers after the Bureau concluded that Telus made, or permitted to be made, false or misleading representations in advertisements for premium text messages in pop‑up ads, apps and on social media.
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Telus will also donate a total of $250,000 to the Ryerson University Privacy and Big Data Institute; Éducaloi, a non‑profit organization dedicated to helping the public understand their rights and responsibilities under the law; and the Centre de recherche en droit public de l’Université de Montréal.

It’s nice work, if you can get it!

Canadian preferred share investors celebrated the first calendar week of No More Tax Loss Selling!

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It was an excellent day overall for the Canadian preferred share market, although DeemedRetractibles provided a reminder of what 2015 was like, with PerpetualDiscounts gaining 63bp, FixedResets up 93bp and DeemedRetractibles off 18bp. The Performance Highlights table continues to show lots of churn. Volume was virtually non-existent.

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.A, which resets 2019-12-31 at +192, is bid at 16.46 to be $0.50 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.03 cheap at its bid price of 12.70.

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Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 20.42 to be 0.47 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 22.59 to be 0.66 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 16.80 to be $1.56 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 22.10 and appears to be $0.73 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 19.13, 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 18.40 and is $0.53 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.09%, with two outliers above -0.50%, including the newly created GWO.PR.N / GWO.PR.O pair. There are four junk outliers above -0.50%, including the newly created FFH.PR.I / FFH.PR.J pair.

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

New Year’s is prediction season!

Bond returns will probably be ho-hum next year — just as they have been in 2015 — according to the biggest investors.

JPMorgan Chase & Co., Fidelity Investments, Pacific Investment Management Co. and Goldman Sachs Group Inc. are all cautioning investors not to be too optimistic. Goldman Sachs predicts benchmark U.S. 10-year yields will climb to 3 percent by the end of 2016 from 2.30 percent Wednesday.
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The odds of at least one more increase in 2016 are 94 percent, futures contracts indicate, threatening to push bond yields higher worldwide.
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An investor would lose 3.2 percent if Goldman Sachs’s yield forecast proves to be accurate, data compiled by Bloomberg show.

There is another interesting column on risk in Bloomberg, penned by Justin Fox:

Twenty years ago, Dutch journalist Sheila Sitalsing sat down with a demographer at the country’s statistics office to talk about how aging would change the Netherlands. His prediction, she recounts in a column that’s the most-read thing on the website of the Dutch newspaper de Volkskrant, was that aging would “change the atmosphere and the mentality of the country.” For example:

Things that come with being young — taking risks, seizing opportunities, daring to do things, diving into the deep end without thought and without water wings, doing drugs, making noise, calling after girls on the street corner, embracing the strange and the new — would become less common. The atmosphere would be determined by the concerns of the old: avoiding risk, being careful, preserving what you have, saying goodbye, keeping quiet, suspicion of the foreign, avoiding fuss and noise — absolutely no fuss and noise! — and seizing every possible occasion to complain at length about alleged fuss and noise.

Among other things, I was impressed that (in Holland, twenty years ago) it was possible to say anything about cat-calling girls in terms other than the deepest deprecation, and still get published!

It was a superb no-more-tax-loss-selling day for the Canadian preferred share market today, with PerpetualDiscounts up 111bp, FixedResets winning 169bp and DeemedRetractibles gaining 37bp. The Performance Highlights table is as ridiculously long as you might expect, with only a single loser. Volume was, again, pathetically low.

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:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.95 to be $0.62 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.19 cheap at its bid price of 12.60.

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Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 20.25 to be 0.60 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 22.33 to be 0.67 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 16.39 to be $1.85 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 20.50 and appears to be $0.80 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 18.85, looks $0.64 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.10 and is $0.59 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.35%, with one outlier above -0.50%. There are two junk outliers 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?

Looks like we may be looking at a Tobin Tax:

Chinese securities regulators are preparing some of the world’s strictest regulations on a trading practice at the heart of the global debate over high-speed computerized markets.

The draft rules are designed to prevent traders from flooding exchanges with orders they don’t fill by charging market participants fees for habitual cancellations. The proposal, which could come into force next year, echoes a plan by U.S. presidential hopeful Hillary Clinton to discourage high-speed trading strategies that she says could destabilize markets.

As regulators around the world grapple with the most effective ways to police computer-driven markets, they have focused on how to stop traders from using bogus orders to unfairly move prices in their favor. Critics contend that the tactic makes markets less fair and enables some traders to engage in a manipulative practice known as spoofing. Opponents of the proposed taxes on canceled orders say they would harm legitimate market makers and raise costs for the average investor.
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China’s proposals on algorithmic trading, revealed around the same time in October as Clinton’s, state that “frequently placing and withdrawing orders where the ratio of trades concluded is abnormally low” would be prohibited, according to a translation by law firm Linklaters LLP. Traders who cancel more than 40 percent of their submitted orders in any given day would be charged a fee of 2 yuan (31 cents) per transaction.
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Other measures suggested by the CSRC include forcing traders who use automated orders to provide a detailed description of their strategies to regulators and wait for a review before they’re allowed to execute trades. That proposal has raised concern among some international investors who don’t want to disclose their proprietary trading algorithms, according to Calvin Tai, the head of global clearing at Hong Kong’s stock exchange.

Clinton, the front-runner to win the Democratic nomination for president, called for a fee on canceled orders in October and explicitly linked the idea to curbing high-frequency traders. Her plan is designed to target “harmful” high-frequency trading that makes markets “less stable and less fair,” Clinton’s campaign said at the time.

There is nothing intrinsically wrong with an exchange fee for cancelled orders. A 96% cancellation rate will obviously strain the system more than will a lower rate and require increased investment by all serious participants, in bandwidth and a ticker-plant. However, when charges such as China’s $0.31/transaction become exorbitant it becomes clear that this is just a revenue grab that will lead to migration of the markets to more trader-friendly nations, as well as having all the usual effects of ‘stamp charges’ on market liquidity. Compare the $0.31/transaction fee to the Toronto Stock Exchange’s Maker-Taker fees, which net out to $0.0004 / share. [I’ll save you the trouble: that means the Exchange would charge as much for a cancelled order as for an execution of 775 shares].

As I stated on April 3, 2014:

However, it is quite apparent that Tobin taxes harm market quality. One possibility where the AR PL and I might have a meeting of minds is the potential for an exchange to impose a fee for the placement of an order – generally, once you’re permitted to place orders on the exchange, the only fees remaining are charged for executed transactions.

Schwab is upset about the number of orders:

High-frequency trading pumped out over 300,000 trade inquiries each second last year, up from just 50,000 only seven years earlier. Yet actual trade volume on the exchanges has remained relatively flat over that period. It’s an explosion of head-fake ephemeral orders – not to lock in real trades, but to skim pennies off the public markets by the billions.
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Added systems burdens, costs and distortions of rapid-fire quote activity: Ephemeral quotes, also called “quote stuffing,” that are cancelled and reposted in milliseconds distort the tape and present risk to the resiliency and integrity of critical market data and trading infrastructure. The tremendous added costs associated with the expanded capacity and bandwidth necessary to support this added data traffic is ultimately borne in part by individual investors.

There are solutions. Today there is no restriction to pumping out millions of orders in a matter of seconds, only to reverse the majority of them. It’s the life-blood of high-frequency trading. A simple solution would be to establish cancellation fees to discourage the practice of quote stuffing. The SEC and CFTC floated the idea last year. It has great merit. Make the fees high enough and they will eliminate high-frequency trading entirely.

However, I would support a charge for order entry (or simply order cancellation, assuming that executed orders get charged by other means) only to the extent that it is imposed by the exchanges to recover costs or as a source of competitive advantage. If, once you count amortization of all the required infrastructure, it costs $1 to process 1,000,000 orders, then by all means, charge $0.000001 to process an order. If you want to make a profit and the market will bear it, then by all means, charge $0.000002 to process an order. If your customers complain that they have to process all these orders too, then by all means offer them a kiddie feed at reduced price, transmitting orders only when they have been extant for 10 milliseconds.

But don’t start imposing fees with grandiose visions of Better Living Through Higher Taxation. We all know where that ends up.

Fortis Inc., proud issuer of FTS.PR.E, FTS.PR.F, FTS.PR.G, FTS.PR.H, FTS.PR.I, FTS.PR.J, FTS.PR.K and FTS.PR.M, was confirmed at Pfd-2(low) by DBRS:

DBRS Limited (DBRS) has today confirmed the A (low) Issuer Rating, A (low) Unsecured Debentures rating and Pfd-2 (low) Preferred Shares rating of Fortis Inc. (Fortis, the Parent or the Company) with Stable trends. This action is based on DBRS’s view of the Company’s financial performance to date in 2015 (YTD 2015). The confirmations reflect Fortis’ improved business risk profile following the completion of the Waneta Expansion hydro generation project (Waneta Expansion), no material changes in its regulated subsidiaries and its reasonable consolidated and non-consolidated financial profiles.
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Fortis maintained reasonable consolidated and non-consolidated ratios in YTD 2015 and remained consistent with the current rating. These ratios are expected to improve by the end of 2015 and in the medium term since (i) $230 million non-consolidated debt was reduced after September 30, 2015, with proceeds from the sale of Fortis Properties; (ii) all regulated utilities are expected to maintain their leverage in line with the regulatory capital structure in their respective jurisdictions; and (iii) Fortis’ equity injection to its utilities is expected to be modest and manageable over the next few years.

The cessation of tax-loss selling pressure led to a superb day for the Canadian preferred share market, with PerpetualDiscounts up 94bp, FixedResets winning 121bp and DeemedRetractibles gaining 87bp. The Performance Highlights table is enormous, naturally enough, with only one loser. Volume was very extremely awfully low.

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:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.86 to be $0.91 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.19 cheap at its bid price of 12.30.

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Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 19.68 to be 0.45 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 22.00 to be 0.54 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 16.21 to be $1.60 cheap. BAM.PF.F, resetting at +286bp on 2019-9-30 is bid at 21.95 and appears to be $0.96 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 18.43, 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 17.39 and is $0.80 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.37%, with one outlier above -0.50%. There are two junk outliers above -0.50%.

Click for Big

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

Nothing happened today.

The last day of tax-loss selling season was mixed for the Canadian preferred share market, with PerpetualDiscounts off 5bp, FixedResets gaining 22bp and DeemedRetractibles down 11bp. A lot of churn is still revealed by the Performance Highlights table. Volume was, somewhat surprisingly, above average even though the trading day was foreshortened due to the desire of the most highly paid professionals on earth to get away early.

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:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.50 to be $0.97 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.03 cheap at its bid price of 12.20.

Click for Big

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 19.50 to be 0.47 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 21.63 to be 0.52 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.00 to be $1.54 cheap. BAM.PF.F, resetting at +286bp on 2019-9-30 is bid at 21.72 and appears to be $1.04 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 18.11, looks $0.50 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.20 and is $0.86 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.45%, with one outlier above -0.50%. There are two junk outliers above -0.50% and one below -2.50%.

Click for Big

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