PrefBlog

Lawrence Schembri, Deputy Governor of the Bank of Canada is assiduously sucking up to the politicians:

From my perspective, the FSB is a unique international organization that has certain qualities that many associate with Canadians, qualities I believe will help ensure its success in making the global financial system more resilient. A resilient global financial system is not an end in itself, but a necessary foundation for strong, sustainable and balanced global economic growth, leading to higher employment and improved living standards.

The FSB was born of necessity in the aftermath of the financial crisis. Its raison d’être stems from one overarching fact: the global financial system is highly integrated.2 Financial institutions and markets are interconnected and interdependent within and across various sectors, including banking, insurance, and pension and investment funds, and, increasingly, across national jurisdictions.

Thus, to achieve a comprehensive and coherent approach to the financial regulation and oversight necessary to attain the global public good of financial stability, coordination is essential across countries, across all of the elements of the reforms, and across many different regulators and supervisors. Failure to coordinate would lead to the fragmentation of the financial system, which would impede the global recovery. This need for effective coordination is why the G-20 established the FSB in 2009.

Can’t blame him, really – it worked for Lapdog Carney!

There’s some apocalyptic commentary on the potential for a US default:

Anyone who remembers the collapse of Lehman Brothers Holdings Inc. little more than five years ago knows what a global financial disaster is. A U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen.
Failure by the world’s largest borrower to pay its debt — unprecedented in modern history — will devastate stock markets from Brazil to Zurich, halt a $5 trillion lending mechanism for investors who rely on Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the U.S. and world economies into a recession that probably would become a depression. Among the dozens of money managers, economists, bankers, traders and former government officials interviewed for this story, few view a U.S. default as anything but a financial apocalypse.
…
While none of the people interviewed for this story expect the world’s largest economy to default this time either, most say the chances of it happening now are higher than in the past.
“It would be insane to default, but it’s no longer a zero-percent probability,” said Simon Johnson, a former chief economist of the International Monetary Fund who teaches economics at the Massachusetts Institute of Technology and is a columnist for Bloomberg View.

I consider it all a little hysterical – but hey! In the financial markets, the hysterics are sometimes right!

I’ve lost a lot of business over the years by admitting there are things I don’t understand – financial guys are supposed to know just precisely how the price of eggs in Spain relates to Brazilian interest rates. But I’m in good company:

Ben S. Bernanke, the world’s most-powerful central banker, says he doesn’t understand gold prices. If his peers had paid attention, they might have stopped expanding reserves that lost $545 billion in value since bullion peaked in 2011.

Bernanke, who holds economics degrees from Harvard College and the Massachusetts Institute of Technology and led the Federal Reserve through the biggest financial disaster since the Great Depression, told the Senate Banking Committee in July that “nobody really understands gold prices and I don’t pretend to really understand them either.”

I generally have a lot of respect for the OTPP. Not this time:

The Ontario Teachers’ Pension Plan is urging the province’s securities regulator to require all public companies have at least three women on their boards, or else risk being delisted from the Toronto Stock Exchange.

Teachers outlines the proposal in a letter submitted to the Ontario Securities Commission in response to its call for comments on a possible new “comply or explain” disclosure rule to boost the number of women on boards. The OSC proposal would require companies to report annually on their efforts to improve board diversity or else explain why they have opted not to make the disclosure.

This is just political nonsense. If Teachers’ really believed that more diverse boards produced better results than less diverse boards and if they were truly interested in outperforming on behalf of their beneficiaries – they would promote a laissez faire in which there were all sorts of boards and they invested in those with more diverse boards on the grounds that these companies would kick the asses of those that were less diverse. You know, in the marketplace. I am very disappointed that Teachers’ is pursuing a political agenda.

Now that Ontario has bought up all the expensive solar panels Mexico is getting the cheap ones:

Mexico, poised to allow foreign oil extraction for the first time in 75 years, is finding its abundant natural resources also appeal to investors in a much cleaner energy: sunshine.

First Solar Inc. (FSLR) of the U.S. has bought its first projects in Mexico, while more than a dozen other developers including Germany’s Saferay GmbH and Spain’s Grupotec Tecnologia Solar SL own licenses there. Local investor Gauss Energia opened Latin America’s largest photovoltaic plant in the country last month.
…
Gauss and Portugal’s Martifer SGPS SA opened a 30-megawatt plant in La Paz, Baja California, on Sept. 12 with funding from International Finance Corp. and Nacional Financiera SNC bank. While Mexico doesn’t subsidize large solar, the $100 million project offered an economic alternative to fossil-fueled power in the area, where solar radiation exceeds the national average.

No subsidies and lots of investments! Gee, Mexico must have one of those ‘competitive advantage’ thingamajigs over Ontario when it comes to sunshine! Whoever woulda thunk it?

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts down 12bp, FixedResets off 6bp and DeemedRetractibles losing 19bp. The Performance Highlights table was surprisingly short – below average even by long-term standards. Volume was average.

No jobs number today!

The absence of jobs data leaves economists and their investor clients without the month’s most important numbers on which to place bets, ranging from friendly office pools to million-dollar wagers on the health of the world’s largest economy. The Bureau of Labor Statistics, which typically issues the report on the first Friday of each month at 8:30 a.m. in Washington, yesterday said a government shutdown now in its fourth day means the latest data aren’t ready.

Shades of Enron! Investment analysis isn’t the only field where fraud flourishes in a lazy culture:

A Bangladeshi factory that produces garments for The Gap and Old Navy kept two sets of books to conceal how it is coercing employees to perform 17-hour shifts every day of the week, a new report says, underlining the inability of clothing retailers to improve working conditions among their suppliers.
…
“It is easy, because auditors and buyers never come around late at night to check these things,” the factory manager said in an interview. “Sometimes, it is the only way to meet the orders on time.”

The report said it was easy to fool retailers visiting the factory, which is located outside the capital, Dhaka, and employs 3,750 people.

Earlier this summer, the report said, “white foreigners” – buyers from Gap and Old Navy – visited the factory late in the morning of June 22.

A loudspeaker alerted the workers ahead of the visit. They were instructed to respond to questions by claiming that conditions were good and that they needed to do “just two hours of overtime a day.”

There was an interesting wrinkle in the GM bankruptcy:

In 2005, GM lost $10 billion. Researching Nova Scotia notes that year, Truong, the Fortress analyst, called the treasurer of GM Canada and learned that GM Nova Scotia Finance had made intercompany loans to its parent, Truong testified.

Such knowledge would prove useful. Under the 1900 Nova Scotia Companies Act, a company’s owner is obligated to pay the debts of all subsidiaries. Such unlimited liability companies, or ULCs, confer tax advantages on their parents.

Truong believed that GM Nova Scotia Finance’s ULC status would allow creditors to reach up to its parents to collect repayment in the event of a bankruptcy, he wrote in a Dec. 10, 2008, e-mail presented at the trial.

I find it rather odd that an oil-linked currency is a reserve currency, but perhaps that’s the whole point:

Canada now boasts the world’s fifth-largest reserve currency.

According to an International Monetary Fund report this week, central banks boosted their holdings of Canadian money to $108.9-billion in the second quarter of this year, up from $94.9-billion in the first three months of the year and $90.1-billion in the final quarter of 2012.

It was a negative day for the Canadian preferred share market, with PerpetualDiscounts down 10bp, FixedResets off 8bp and DeemedRetractibles flat. Losing FixedResets were notable in the Performance Highlights table. Volume was average.

There is increasing awareness that the economy is not all that great:

Bank of Nova Scotia economists are now raising the possibility of no move in the Bank of Canada’s benchmark interest rate until 2016.

Other observers have speculated on late next year or early in 2015 for the first rate hike by the central bank.

But Scotiabank’s Derek Holt, Mary Webb and Dov Zigler say the Bank of Canada is now signalling a hold of more than two years, citing signs in a recent speech by senior deputy governor Tiff Macklem, among other things.
…
“The BoC probably now envisages spare capacity remaining into 2016,” the Scotiabank economists said, adding the central bank now projects hitting its 2-per-cent target for annual inflation in mid-2015.

They believe the Bank of Canada may change that forecast, to an even later date, when meets later this month and also issues its monetary policy report.

But that’s OK! We’ll all retire on the CPP:

A proposal to boost the retirement benefits for the middle class from the Canada Pension Plan through increases in contributions is rekindling momentum for pension reform ahead of a key December meeting with Finance Minister Jim Flaherty.

Prince Edward Island Finance Minister Wes Sheridan is trying to rally his colleagues around changes that would see the maximum CPP contribution rise to $4,681.20 a year from $2,356.20 starting in 2016, and the maximum annual benefit would increase to $23,400 from $12,150.

Qualifying for the maximum benefit would take an income of $102,000, up sharply from the current maximum insurable earnings cutoff of $51,000. The overall goal is to boost the savings rates of middle-income Canadians who earn less than six figures.

And – surprise! – middle-class jobs are scarce:

The top-10 list suggests there are really two sets of expanding job opportunities, at either end of the income spectrum – and not much in the middle.

If you’re entering the labour market – say you’re young, or you’re a newcomer to Canada – there are lots of points of entry at the low end of the scale. But they are not generally the types of jobs that lead you down a career path to something better, nor do these jobs fully employ many workers’ skill sets. If you are lucky enough to find full-time, full-year work in these types of jobs, paying $13 an hour or less, you would be making $26,000 a year before taxes, or less.

There is another cluster of job opportunities that pay median wages of $35 an hour or more, which translates to $70,000 a year before taxes, or more.

There are fewer opportunities in the middle, jobs that pay in the $20-something per hour range.

However, a bright note is that European distressed assets seem to have found a level:

Blackstone Group LP (BX) raised more than $4 billion in 2009 to buy European property assets anticipating that cash-strapped banks would be forced to sell as the region’s debt crisis worsened. Almost all of it sat idle for two years.

Today, the inaction has given way to a surge of deals, as lenders from Lloyds Banking Group Plc (LLOY) to Commerzbank AG (CBK) cut loose soured real estate, corporate and consumer loans. Sales of loan portfolios and other unwanted assets by European Union banks could reach 60 billion euros ($82 billion) in face value this year, according to PricewaterhouseCoopers LLP, the most since the firm began tracking data in 2010.
…
Apollo is among the most active investors, amassing loans with a face value of about 12 billion euros, including 11,000 mortgages in the U.K. Blackstone, the world’s largest alternative-asset manager, last year put $3.5 billion into distressed European mortgages and properties, the most its real estate group has plowed into the region in one year.
Investors also are buying European properties from real estate developers and taking over troubled companies or lending directly to them where banks have scaled back.
EU banks unloaded 29 billion euros of portfolio loans and assets such as mortgage-servicing units and branches in the first half of 2013, according to Richard Thompson, a partner at PwC in London. That compares with sales of 46 billion euros for all of last year, 36 billion euros in 2011 and 11 billion euros in 2010. The majority of sales have been distressed loans, Thompson said.

The arbitrary nature of corporate bond pricing (and hence the opportunity for profit) is well illustrated by this tale of woe:

Goldman Sachs Group Inc. (GS) mistakenly added about $1.5 million of interest costs to a Ford Motor Co. (F) bond sale last week by using the wrong Treasury note as a benchmark for the security, according to two people with knowledge of the transaction.
…
Typically, banks set the price of new corporate securities by using Treasury bonds with similar maturities. If the U.S. government issues notes in the middle of the week, underwriters don’t use that security as a benchmark until the following Monday.

For Dearborn, Michigan-based Ford’s Sept. 26 offering, Goldman Sachs added a 1.45 percentage-point spread to the 1.375 percent Treasury note due September 2018 that was auctioned on Sept. 25, Bloomberg data show. Instead, the bonds should have been based off the 1.5 percent security that matures in August 2018.

Matthew Klein of Bloomberg offers an excellent perspective on endowment investing:

The modern style of institutional investing can be traced to Yale University’s David Swensen, who literally wrote the book on the subject. … Three core ideas inform his thinking.

1. Savers are paid to take risk. If you want to generate big returns you have to be willing to endure large losses at any point.

2. Universities and other institutional investors have long time horizons because they expect to exist forever. This makes them different from regular people who save for retirement.

3. Contrary to standard academic theory, which suggests that savers should invest in broad indexes and avoid fees, market imperfections create opportunities for talented money managers. They can improve a portfolio’s performance through a combination of high returns and diversification benefits.
…
The potential for a mismatch between assets and liabilities is one big problem with the Yale model. Another is the focus on hunting for the best hedge funds, private-equity managers and stock pickers. This is where most of the money is made (and lost) in the endowment business. According to the Yale endowment’s most recent report, “nearly 80 percent of Yale’s outperformance relative to the average Cambridge Associates endowment was attributable to the value added by Yale’s active managers, while only 20 percent was the result of Yale’s asset allocation.” That’s great for Yale, but it’s impossible for every institution to have the best managers.

In general, I think Mr. Klein overstates the need for liquidity – it’s important, but my views are closer to precept 2 than that which he espouses.

I don’t think there’s anything wrong with the Yale model, but there are definitely problems with the implementation – as I told one guy recently, just because I believe the “Warren Buffet style” of investment CAN work, doesn’t mean I think YOU can do it.

The field is filled with ignoramuses and charlatans and institutional boards aren’t any better at picking winners than any other retail investor who handles his investments as a part-time job. Hiring a small group of specialists to farm out the work to third party firms just makes matters worse, because then allocations are made on the basis of two salesmen talking to each other.

For an institution to outperform, I believe that you have to have most, if not all, of the investment expertise in-house. ‘You don’t need to sell anything, guys, you just have to outperform on a rolling four year basis or you’re fired.’ This is the Teachers/OMERS model – and it works.

Canajans, eh? The Bank of Canada has published a working paper by Mikael Khan, Louis Morel and Patrick Sabourin titled The Common Component of CPI:An Alternative Measure of Underlying Inflation for Canada, in which the authors use factor analysis to find a common factor among 54 different components of the Consumer Price Index.

Click for Big

But, you ask, which of these 54 series was best correlated with this single underlying factor? Well, I’m glad you asked that question:

Table 2. Relationship between common component and individual components of the CPI

CPI components (y/y)	Correlation	% of explained variance
Alcoholic beverages served in licensed establishments	0.86	0.74

This suggests a new currency ….

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts getting whacked for 40bp, FixedResets off 3bp and DeemedRetractibles gaining 4bp. Predictably, the Performance Highlights table is heavily populated by losing PerpetualDiscounts. Volume was slightly above average.

SEC Chair Mary Jo White gave a speech titled Focusing on Fundamentals: The Path to Address Equity Market Structure. All the usual blather, but there was one point of interest:

So, today, I am pleased to announce a new initiative we are launching that is designed to promote a fuller empirical understanding of the equity markets. SEC staff has prepared and assembled resources and data on the SEC’s web site focusing exclusively on equity market structure. The new web site should be available as early as next week and will serve as a central location for us to publicly share evolving data, research, and analysis.

Part of this initiative will be to disseminate data and related observations drawn from MIDAS that address the nature and quality of displayed liquidity across the full range of U.S.-listed equities –from the life-time of quotes, to the speed of the market, to the nature of order cancellations.
…
The new web site will also feature staff research papers based on a variety of data sources and staff reviews that identify and assemble information from the expanding economic literature on market structure topics. One paper, using order audit trail data on off-exchange trading, provides key metrics describing the underlying nature of off-exchange trading by the 44 alternative trading systems that trade equity securities. The staff’s primary observation is that ATS trading looks very similar in many respects to exchange trading.[20] Another paper summarizes current studies that address market fragmentation – both visible and dark. Additional research papers and reviews are already planned.

Maneuvering over the US debt limit continues:

Lew and President Barack Obama have said they won’t negotiate on the limit, which is tied to obligations the U.S. has already incurred. Boehner, an Ohio Republican, has issued a list of demands before he’ll support raising the ceiling. His conditions include approval of TransCanada Corp. (TRP)’s Keystone XL pipeline, major revisions to the tax code and a one-year delay of the insurance mandate in the Obama health-care law.
…
The U.S. government is already limited in action after Republicans and Democrats in Congress failed to agree on funding for the new fiscal year that began yesterday. That led to a partial shutdown of the government at midnight, forcing about 800,000 federal workers off the job. The shutdown could cost the economy as much as $10 billion a week, the White House said on its website.

DS is having a good year with US junk:

Royal Bank of Canada is on pace to join the ranks of the 10 largest underwriters of high-yield debt in the U.S. for the first time as the largest Canadian lender seeks profits abroad with issuance slowing at home.

Royal Bank’s RBC Capital Markets ranks 10th among arrangers of speculative-grade bonds at the end of the third quarter after luring bankers from firms including Deutsche Bank AG (DBK) and Credit Suisse Group AG. (CSGN) The Toronto-based firm has never been a top-10 underwriter for non-investment-grade debt in the U.S. on any given year, according to data compiled by Bloomberg.
…
While RBC expects total sales of junk bonds in the U.S. market to surpass last year’s record $353 billion, on Sept. 4 it cut its annual forecast for Canadian issuance to as little as C$4 billion ($3.9 billion) from about C$6 billion. The firm boosted the headcount in its U.S. credit team by 15 percent in the past two years, hiring almost 20 people, including 10 sales staff and eight traders. Last month Neil Yaris, who has held jobs at Credit Suisse and Bank of America Corp., joined as co-head of high-yield debt trading.
…
Royal Bank’s long-standing goal to be a Top 10 investment bank in the U.S. contrasts with retrenchment in other areas of banking. The company sold its unprofitable U.S. lender RBC Bank to PNC Financial Services Group Inc. in March 2012, ending an unsuccessful decade-long foray into U.S. retail banking.

In Canada, RBC slipped to the third spot among underwriters of high-yield debt, from No. 1 in 2012. Still, the firm has led arrangers of investment-grade company bonds in Canada for at least 14 years.

I’m in the wrong business:

Carnegie Hall employs five full-time stagehands and uses part-timers as needed, a spokeswoman, Synneve Carlino, said in an e-mail.

The full-timers earned an average of $420,000 in 2011, according to the tax return. They move equipment in and out of the building and prepare three stages for performances, while operating audiovisual and other equipment. They work on holidays and weekends.

Oh, they work on holidays and weekends. Well, I’m glad that’s cleared up.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 15bp, FixedResets gaining 7bp and DeemedRetractibles off 2bp. The Performance Highlights table is average sized – by standards of the last few months – with BAM issues notable on the downside. Volume was average.

PerpetualDiscounts yield 5.56%, equivalent to 7.23% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.8%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 245bp, a significant increase from the 235bp reported September 25, as long corporate yields have declined about 10bp on the week, while PerpetualDiscounts haven’t done much of anything.