PrefBlog

It’s nice to see University of Toronto as a major partner in a new advance in energy storage:

Now, a group of researchers led by Professor Ted Sargent at the University of Toronto’s Faculty of Applied Science & Engineering may have a solution inspired by nature.

The team has designed the most efficient catalyst for storing energy in chemical form, by splitting water into hydrogen and oxygen, just like plants do during photosynthesis. Oxygen is released harmlessly into the atmosphere, and hydrogen, as H2, can be converted back into energy using hydrogen fuel cells.
…
You may have seen the popular high-school science demonstration where the teacher splits water into its component elements, hydrogen and oxygen, by running electricity through it. Today this requires so much electrical input that it’s impractical to store energy this way — too great proportion of the energy generated is lost in the process of storing it.

This new catalyst facilitates the oxygen-evolution portion of the chemical reaction, making the conversion from H2O into O2 and H2 more energy-efficient than ever before. The intrinsic efficiency of the new catalyst material is over three times more efficient than the best state-of-the-art catalyst.

The new catalyst is made of abundant and low-cost metals tungsten, iron and cobalt, which are much less expensive than state-of-the-art catalysts based on precious metals. It showed no signs of degradation over more than 500 hours of continuous activity, unlike other efficient but short-lived catalysts. Their work was published online today in the leading journal Science.

The US 1 year break-even inflation rate is getting reasonable:

The Treasury market is signaling inflation expectations are rising, and one metric shows traders anticipate cost increases will reach Federal Reserve Chair Janet Yellen’s 2 percent target.

The difference between yields on one-year U.S. government securities and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, climbed to 2.11 percentage points Tuesday. The figure was the highest in two years.

Inflation expectations for the next decade rose to 1.67 percent this week, the highest level since August.

Click for Big

‘Off-the-run’ junk names are getting harder to trade:

Traders are getting increasingly punished for trying to sell unpopular debt at the wrong time. The result has been a growing number of hedge-fund failures, increasing risk aversion by Wall Street traders and further cutbacks at big banks.

This all simply reinforces the lack of trading in less-common bonds and loans. At best, this spiral is inconvenient, especially for mutual funds and exchange-traded funds that rely on being able to sell assets to meet daily redemptions. At worst, it could set the stage for another credit seizure given the right catalyst — perhaps a sudden, unexpected corporate default or two, or the implosion of a relatively big mutual fund.

To give a feeling for just how inactive parts of the market have become, consider this: About 40 percent of the bonds in the $1.4 trillion U.S. junk-debt market didn’t trade at all in the first two months of this year, according to data compiled from Finra’s Trace and Bloomberg. While corporate-debt trading has generally increased by volume this year, more of the activity is concentrated in a fewer number of bonds.
…
“The biggest issue that the market faces is that you have an increasing amount of participants that require daily liquidity in an asset class that really doesn’t offer daily liquidity any more,” said Michael Pohly, the portfolio manager at hedge fund Kingdon Credit.

That’s a little scary. The good news so far is that these trading woes haven’t yet triggered another credit crisis. The bad news is it’s only getting harder to transact in riskier debt, making the market increasingly fragile and prone to seizures going forward.

James Bullard contributes to the discussion of the Fed’s next move, standing with the hawks:

Federal Reserve Bank of St. Louis President James Bullard said policy makers should consider raising interest rates at their next meeting amid a broadly unchanged economic outlook and prospects of inflation and unemployment exceeding targets.

“You get another strong jobs report, it looks like labor markets are improving, you could probably make a case for moving in April,” Bullard said in a Bloomberg interview in New York Wednesday, in which he criticized the Fed’s practice of publishing officials’ projections on the path of interest rates. “I think we are going to end up overshooting on inflation” and the natural rate of unemployment, he said.

David Berman of the Globe loves high-spread FixedResets:

But there’s one cash-gusher that deserves a closer look: the high-yielding preferred shares that Canada’s big banks have been issuing over the past several months without much fanfare.

It’s time to take notice. These shares yield a dazzling 5.5 per cent, an eye-popping figure in an era during which the five-year Government of Canada bond yields just 0.7 per cent.
…
Even if bond yields slide to a mere 0.2 per cent five years from now, you’ll get a 5-per-cent yield when the rate is reset. In other words, investors are insulated from low or falling interest rates, which is a nice touch when the Canadian economy is struggling and the Bank of Canada is in no hurry to raise its key rate.

There is one catch: The banks can redeem the shares after five years if they want to. Nonetheless, savvy institutional investors have been snapping up these new issues, and smaller investors can get a piece of the action as well.

While exchange-traded funds are a popular choice, direct ownership looks like a better option because it allows you to focus on the banks’ new-and-improved preferred shares and avoid the less attractive ones (and ETF fees).

National Bank has decided to guess the size of Chinese investment in Canadian real estate:

Buyers from China comprised about one-third of purchases of Vancouver’s hot housing market in 2015, according to “back of the envelope calculations” by National Bank of Canada.

Chinese investors spent about C$12.7 billion ($9.6 billion) on real estate in the western Canadian city in 2015, or 33 percent of its C$38.5 billion in total sales, according to a note by financial analyst Peter Routledge on Wednesday. In Toronto, they made up 14 percent of purchases, or about C$9 billion of the C$63 billion in deals. Routledge compiled the data by extrapolating from a Financial Times survey of 77 high-end buyers and data from the U.S. National Association of Realtors.

PerpetualDiscounts now yield 5.64%, equivalent to 7.33% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.15%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 320bp, a slight (and perhaps spurious) narrowing from the 325bp reported March 9.

We’ve blown a lot of money in Ontari-ari-ari-o, but at least the Chileans know how to make solar power useful:

Valhalla Energia is seeking partners to build a 600-megawatt solar project in Chile that will incorporate hydropower to deliver energy 24 hours a day.

The company is in talks with investors to raise as much as 40 percent of the estimated $1.3 billion needed for the project — $900 million for the solar component and $400 million for a 300-megawatt hydropower system — according to Juan Andres Camus, Santiago-based Valhalla’s co-founder and chief executive officer. The rest will come from bank loans.

“We are looking for sponsors that can be part of the project as equity,” Camus said in an interview in Santiago on March 18. “We are in advanced negotiations.”

The Cielos de Tarapaca solar project aims to produce electricity around the clock, using an integrated solar and hydro system that pumps sea water uphill to a reservoir during the day and letting it flow through turbines at night.

And today’s equity tip is: sell your hypodermic syringe manufacturing stock:

A stick-on patch that tracks, and even regulates, blood sugar levels could be used by people with diabetes one day, according to a new study.

Unlike finger pricking — the traditional method of monitoring levels of the blood sugar glucose — the new patch detects the levels of glucose in a person’s sweat. Research has shown that glucose levels in sweat accurately reflect glucose levels in the blood, the researchers said.

The researchers also showed that the patch can deliver the diabetes drug metformin through the skin and that it can reduce high blood glucose levels in mice with diabetes.

Meanwhile, Fed governor Charles Evans took a dovish stance on policy rates:

Federal Reserve Bank of Chicago President Charles Evans said policy makers rightly refrained from raising interest rates this month after a rocky start to the year clouded the economic outlook.

“The rationale for no rate change in March is that economic and financial risks seem somewhat higher for 2016 than we had hoped back last December when we first began raising rates,” Evans said Tuesday in a speech in Chicago. “Most of the Federal Open Market Committee’s cautionary pause in the rate normalization path is about assessing risks and just being careful.”

There was a federal budget today, which will be discussed by many more verbose people than me. So I’ll just say it’s pretty much as expected, with some stuff that looks halfway reasonable at first sight:

The Liberals have set aside $11.9-billion for public transit, affordable housing, wastewater systems and $3.4-billion to upgrade parks, harbours, border crossings, federal airports and to clean up contaminated sites across the country.

…. but looks like a ridiculous feel-good boondoggle at second glance:

Click for Big

… and some stuff which will be popular among morons, but is really just an exceptionally cruel way of ensuring the next generation is brought up in an isolated environment with no jobs, no hope, no future and nothing to do except drink:

Prime Minister Justin Trudeau promised “historic investments” to First Nations and the budget followed through with $8.4-billion for education, housing and clean drinking water.

… the return of the Subsidies For Sleazebags Programme:

To facilitate access to venture capital for small and medium-sized businesses and support saving by the middle class, Budget 2016 proposes to restore the Labour-Sponsored Venture Capital Corporations (LSVCC) tax credit to 15 per cent for share purchases of provincially registered LSVCCs for 2016 and subsequent tax years. The measure will provide federal tax relief of about $815 million over the 2015–16 to 2020–21 period.

The proposed bail-in regime has been endorsed, at least in principle:

To protect Canadian taxpayers in the unlikely event of a large bank failure, the Government is proposing to implement a bail-in regime that would reinforce that bank shareholders and creditors are responsible for the bank’s risks—not taxpayers. This would allow authorities to convert eligible long-term debt of a failing systemically important bank into common shares to recapitalize the bank and allow it to remain open and operating. Such a measure is in line with international efforts to address the potential risks to the financial system and broader economy of institutions perceived as “too-big-to-fail”.

The Government is proposing to introduce framework legislation for the regime along with accompanying enhancements to Canada’s bank resolution toolkit. Regulations and guidelines setting out further features of the regime will follow. This will provide stakeholders with an additional opportunity to comment on elements of the proposed regime.

So we’ll see how it goes.

I mentioned Google’s proposed sale of Boston Dynamics on March 17. Jack Clark of Bloomberg has some colour commentary on the matter:

Google’s decision to try to shed its Boston Dynamics robotics group highlights a fundamental research problem: software is far easier to develop and test than hardware. That’s especially true when dealing with artificial intelligence and robotics.

Today’s industrial robots tend to be dumb machines, operating on pre-programmed routines, and are housed in metal cages to stop people walking into their zone of movement and potentially getting harmed. With Boston Dynamics, Google was working on machines that could break out of the rigid confines of the factory and perform a broader range of tasks. That requires dealing with a range of unsolved problems, requiring fundamental research.
…
Boston Dynamics’s robots need technology that doesn’t exist yet. The software to control them and give them autonomy is still a research problem being worked on by universities around the world. This is likely why Google thought it would take a decade to develop Boston Dynamics’s technology into a commercial product.

Possible acquirers include the Toyota Research Institute, a division of Toyota Motor Corp., and Amazon.com Inc., which makes robots for its fulfillment centers, according to a person familiar with Google’s plans. Toyota declined to comment, and Amazon didn’t respond to requests for comment.

It’s rare to see a company to build a product that requires such fundamental research in a number of areas, said John Schulman, a researcher with AI group OpenAI. “Having a humanoid robot that goes around and does interesting things in the real world, like maybe cleans up your house, that’s just way beyond the current state of the science.”

But on the other hand, perhaps my robotic 4am pizza delivery will arrive soon!

Domino’s Australia and Domino’s New Zealand have both released teaser videos featuring a sleek-looking new delivery robot – the Domino’s Robotic Unit (DRU). They designed the robot along with the help of Australian startup Marathon Robotics using GPS tracking and sensors to navigate around to customers’ houses.

The four-wheeled robot has multiple compartments that keeps up to 10 pizzas toastie warm, whilst a refrigerating section keeps drinks and desserts cool. The Guardian reports that customers can open the compartments by entering a security code into their smartphone when the robot arrives at their door.

There’s no word yet on when exactly Domino’s will be making the DRU a reality, though. In a statement they announced: “While he won’t be taking to the streets tomorrow, DRU is a big step forward in the work Domino’s is doing in the future commercialisation of this technology.”

And the delivery companies are lobbying for better infrastructure:

Amazon declined requests to comment for this article. But on a recent earnings call, Amazon’s chief financial officer, Brian Olsavsky, explained why Amazon wanted to move more aggressively into delivery.
…
In addition, the company’s shipping costs rose 19 percent, to $5 billion, in 2015. The millions of members of its Prime annual subscription service, Amazon’s most frequent customers, have helped feed the surge. Those customers receive free shipping for many products.
…
Already, the company’s drone push in Washington has had some success. Amazon has worked with NASA, for example, to create an air traffic system that would establish lanes in the sky for drones.

Amazon has also urged Congress to adopt rules that would allow the retailer to fly drones beyond a pilot’s line of sight, a crucial hurdle to Amazon’s goal of operating drones from its warehouses. This effort is expected to face an important test soon. This month, the Senate Transportation Committee drafted a bill that would ensure rules for delivery drones within two years.
…
Amazon is arguing for changes in many other areas, too. Already, Mr. Misener, the lead lobbyist, has called for an overhaul of an arcane system of international delivery rates that he says give foreign e-commerce rivals an unfair advantage to deliver to American homes.

He also urged the approval of legislation that aims to improve roads, bridges and railways. The bill was passed by Congress and signed into law in December.

Meanwhile, it seems to me that the homogeneity of Treasury buyers brought about by low yields is showing its downside:

The 22 primary dealers held more Treasuries last month than any time in the last two years, Federal Reserve Bank of New York data show. While at first glance that may suggest a bullish stance, the surge in holdings is more likely the result of investors including central banks dumping the debt on the firms, said JPMorgan Chase & Co. strategist Jay Barry. Foreign official accounts sold a net $105 billion of the securities in December and January, an unprecedented liquidation, Treasury Department data show.
…
As the world’s biggest bond dealers — including banks such as Bank of America Corp., Goldman Sachs Group Inc. and JPMorgan — struggled to get rid of the burgeoning pile of debt, the premium for the newest, easiest-to-trade Treasuries soared to the highest since 2011. The firms’ efforts to hedge all the Treasuries collecting on their balance sheets also roiled the futures market and a crucial corner of the financial system where traders lend and borrow securities overnight.
…
Dealers moved to minimize the risk of holding so many tough-to-unload securities by selling, or shorting, benchmark notes, said Barry of JPMorgan. They had the biggest bearish position in the newest 30-year bonds since May in the week ended March 9, according to a Credit Agricole SA analysis of New York Fed data.

Part of the fallout was seen in the $1.6 trillion market for repurchase agreements, or repos, where Wall Street goes to exchange securities for overnight cash.

The combination of dealer demand, a global government-debt rally and reduced auction sizes caused a shortage in the repo market for the securities needed to close short positions in 10-year debt. Failures to deliver 10-year notes surged in the week ended March 9 to the most since at least 2013. For all Treasuries, failures reached the highest since the financial crisis, New York Fed data show.

Demand was so great for the benchmark 10-year note that its repo rate traded at about negative 3 percent for more than a week, before an auction of the debt settled March 15 and eased the shortage. At that level, the cost of borrowing the security in the repo market was steeper than the 3 percent penalty for uncompleted trades, leading more traders to opt to let deals fail.

Two Fed governors are talking up the chances for an early hike – but, of course, this could be merely a ploy to keep the markets honest:

“There is sufficient momentum evidenced by the economic data to justify a further step at one of the coming meetings, possibly as early as the meeting scheduled for end of April,” Federal Reserve Bank of Atlanta President Dennis Lockhart said Monday in Savannah, Georgia.
…
Lockhart is a policy-centrist and doesn’t vote on the FOMC this year. His moderately upbeat assessment of the U.S. economy was shared by San Francisco Fed chief John Williams.

“All else equal, assuming everything else is basically the same and the data flow continues the way I hope and expect, then April or June would definitely be potential times to have an increase in interest rates,” he told Market News International in an interview published earlier on Monday. Williams, a former head of research for Fed Chair Janet Yellen when she ran the San Francisco Fed, also doesn’t vote on policy in 2016.

Nothing happened today.

There is an indication that Google has become a mature company – and that’s not a good thing:

But behind the scenes a more pedestrian drama was playing out. Executives at Google parent Alphabet Inc., absorbed with making sure all the various companies under its corporate umbrella have plans to generate real revenue, concluded that Boston Dynamics isn’t likely to produce a marketable product in the next few years and have put the unit up for sale, according to two people familiar with the company’s plans.

Possible acquirers include the Toyota Research Institute, a division of Toyota Motor Corp., and Amazon.com Inc., which makes robots for its fulfillment centers, according to one person. Google and Toyota declined to comment, and Amazon didn’t respond to requests for comment.
…
Boston Dynamics, though, was never folded into Google X and was instead put up for sale. After the division’s latest robot video was posted to YouTube, in February, Google’s public-relations team expressed discomfort that Alphabet would be associated with a push into humanoid robotics. Their subsequent e-mails were also published to the internal online forum and became visible to all Google employees.

“There’s excitement from the tech press, but we’re also starting to see some negative threads about it being terrifying, ready to take humans’ jobs,” wrote Courtney Hohne, a director of communications at Google and the spokeswoman for Google X.

Hohne went on to ask her colleagues to “distance X from this video,” and wrote, “we don’t want to trigger a whole separate media cycle about where BD really is at Google.”

“We’re not going to comment on this video because there’s really not a lot we can add, and we don’t want to answer most of the Qs it triggers,” she wrote.

Demanding instant profitability … terrified of negative press … this is indicative of a company in which the careerists and managers have taken over from the innovators and visionaries. Don’t get me wrong – Google will, I am sure, continue to do excellent work. Just like Microsoft, they will be able to produce very high quality products simply by dint of their ability to spend more money on development than anybody else. But the situation with Boston Dynamics is an indication that their tenure as disruptors is over.

Pembina Pipelines has announced:

that it has entered into agreements to acquire certain sour natural gas processing assets (the “Acquired Assets”) from Paramount Resources (“Paramount”) for cash consideration of approximately $556 million, subject to customary closing adjustments (the “Transaction”).

The Acquired Assets include Paramount’s recently constructed Kakwa sour natural gas processing complex and associated infrastructure including gas gathering pipelines, sales gas pipeline and future disposal wells (the “Kakwa Assets”); and Paramount’s preliminary engineering studies, licenses and surface rights for the future construction of a sour natural gas processing facility (the “6-18 Facility”). The Transaction will add 250 million cubic feet per day (“mmcf/d”) of processing capacity in one of Pembina’s core areas. This will increase total processing capacity under Pembina’s Gas Services business to over 1.7 billion cubic feet per day (“bcf/d”), inclusive of the Musreau III and the Resthaven expansions which are expected to be on-stream by mid-2016, making Pembina one of the largest third-party gas processors serving the Western Canadian Sedimentary Basin.

They later announced:

that it has entered into an agreement with a syndicate of underwriters, co-led by Scotiabank and RBC Capital Markets, pursuant to which the underwriters have agreed to purchase from Pembina on a “bought deal” basis and sell to the public 8,825,000 common shares at a price of $34.00 per share, for gross proceeds of approximately $300 million. Pembina has also granted the underwriters an over-allotment option to purchase, on the same terms and exercisable not more than 30 days after the closing of the offering, up to an additional 1,323,750 common shares for additional gross proceeds of up to $45 million. Closing of the offering is expected to occur on or about March 29, 2016, in which case purchasers under this offering who are shareholders of record on April 25, 2016 (the “Record Date”) will be entitled to receive the Company’s monthly cash dividend payable on May 13, 2016 in respect of any common shares held on the Record Date.

Pembina intends to use the net proceeds from the offering, together with funds available under the Company’s existing credit facilities to finance the purchase price for its proposed acquisition of certain natural gas processing assets from Paramount Resources.

In response, DBRS announced that it:

notes that Pembina Pipeline Corporation (Pembina or the Company; rated BBB with a Stable trend by DBRS) has announced its agreement to acquire the Kakwa Assets and the 6-18 Facility (Acquisition Assets) from Paramount Resources, Inc. (Paramount) for total consideration of $556 million (the Acquisition). The purchase price will be funded by net proceeds from the Company’s concurrently announced $300 million bought deal common share financing and existing capacity under the $2.0 billion revolving credit facility. The Acquisition is expected to close in Q2 2016, pending approval under the Competition Act (Canada) and other customary closing conditions. Based on DBRS’s initial review of the Acquisition Assets and Pembina’s financing plan, DBRS believes that the Acquisition will not have a material impact on the Company’s credit profile.