PrefBlog

Surprisingly, a business-hostile government isn’t getting much help from business:

French companies aren’t investing much at home these days.

A no-growth economy had already damped spending when President Francois Hollande’s government late last month unveiled a budget that slaps companies with 10 billion euros ($13.1 billion) of tax increases for next year. Executives are returning the favor by suspending investments.

Perhaps Lapdog Carney could go over and give them some pointers.

Assiduous Reader AA sent me a link to a NYT article titled A Hard Landing for University Endowments:

Today, it’s hard to find a college or university that stuck with the older and far simpler allocation between stocks and bonds. Hedge funds alone currently have what is estimated at over $2 trillion in assets, much of it from large institutions.
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Even more startling, data compiled by the National Association of College and University Business Officers for the 2011 fiscal year (the most recent available) show that large, medium and small endowments all underperformed a simple mix of 60 percent stocks and 40 percent bonds over one-, three-and five–year periods. The 91 percent of endowments with less than $1 billion in assets underperformed in every time period since records have been maintained. Given the weak results being reported this year, that underperformance is likely to be even more pronounced when the fiscal year 2012 results are included.

I don’t think it’s necessary to resort to fancy arguments like “first-mover advantage” and “changing market” to explain this. I suggest that some smart guys who knew what they were doing had the idea and did very well. Then the salesmen moved in …

DBRS confirmed NA at Pfd-2:

National’s asset quality metrics, with respect to its lending operation, outperformed most of its peers through the recession and continue to do so. National’s capital metrics have declined slightly over the first nine months of 2012 largely as a result of the application of IFRS, increased risk-weighted assets driven by organic loan growth and the acquisition of a 35% interest in Fiera Capital Corporation. However, the Bank’s tangible common equity and Tier 1 ratios still remain within the middle of the Canadian bank peer group and compare favourably relative to international peers, at 9.5% and 12.7%, respectively.

National’s long-term deposits and senior debt rating at AA (low) is composed of an Intrinsic Assessment of A (high) and a Support Assessment of SA2 (reflecting the expectation of systemic and timely external support by the Government of Canada), which results in a one notch increase from the Intrinsic Assessment to the Issuer Rating, Deposits and Senior Debt and Subordinated Debt ratings.

It was another mildly positive day for the Canadian preferred share market, with PerpetualPremiums up 6bp, FixedResets flat and DeemedRetractibles gaining 5bp. Volatility was minor. Volume was very low.

Red letter day! There was an intelligent quote about high frequency trading in the papers:

Murray Leith, director of investment research at Vancouver-based Odlum Brown Ltd., agrees that markets should be policed properly to eliminate flash crashes and maintain investor confidence.

But, he says, he’s interested in finding investments that are undervalued but will rise to their true value in the long term, as opposed to the minute machinations that high-frequency traders are interested in.

“If I see something that I like at the right price, I buy it. If it’s not at the right price, I don’t. It’s as simple as that.”

He adds that there can even be a bright side of volatility – “it potentially creates opportunity that may not otherwise exist.”

Naturally, this was balanced by something moronic:

Opponents cite increased volatility in the markets, which makes pricing less efficient, as well as the erosion of investor confidence – especially because of a few unsettling, extreme events in which high-frequency trading played a role. One of those occurred in August, when Knight Capital Group Inc. lost $440-million (U.S.) after an upgrade to its computerized trading system went awry, causing share prices on the New York Stock Exchange to fluctuate wildly after Knight put out a huge number of buy and sell orders.

The Knight Capital Group whoopsy had nothing to do with High Frequency Trading. Nothing.

And something a little puzzling…

To really understand high-frequency trading, investors have to grasp three concepts about markets, [professor at the University of Toronto’s Rotman School of Management who also holds the John H. Watson chair in value investing] Prof. [Eric] Kirzner says.
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The third is that there are two basic types of traders, high-frequency and slow-moving. For the latter, think mutual-fund companies, pension funds and everyday retail investors.

Happy to agree that everyday retail investors are slow-moving. But by and large, HFT helps them by narrowing the spread; retail is very fond of market orders.

But slow-moving mutual-fund companies and pension funds? Why are they slow moving? Do they not charge high enough fees to compete properly? If their incompetence is having a measurable effect on performance, why aren’t they fired?

There’s some noticable capital flight from Greece:

Coca-Cola Hellenic Bottling SA, (EEEK) the world’s second-largest Coca-Cola bottler, plans to move its main stock listing from Athens to London as Greece’s largest company by market value flees the epicenter of Europe’s debt crisis.

The move will make it eligible for inclusion in the benchmark FTSE 100 Index. A new company established in Switzerland by one of the bottler’s main shareholders will make a share-exchange offer for Coca-Cola Hellenic and seek a primary listing in London, according to an Athens bourse filing today. Coca-Cola HBC AG will also seek to list in New York.
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Coca-Cola HBC operates in 28 countries across three continents and employs more than 40,000 people, generating sales last year of 6.9 billion euros ($8.9 billion). Ninety-five percent of its business and shareholders are outside Greece.

Switzerland was chosen as the location for the new company because of its stable economy and regulatory environment and the ease of doing business there, according to the statement. The country is among the existing markets of the business.

Here’s why we need space exploration: one-hundred bazillion carats!

New research suggests that a massive, star-scorched planet in the Cancer constellation, not far from our solar system, is made in large part of diamonds, opening new vistas on the way scientists understand how planets are created.

The planet, 55 Cancri e, is twice the size of Earth and so rich in carbon that it holds at least three times our planet’s mass in diamonds, according to a new paper that has been accepted for publication in the journal Astrophysical Journal Letters.
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“We’re talking about a rocky planet. Not much gas, almost entirely solid. The outermost layer is at an extremely high temperature … There could also be a lot of diamonds on the surface because of the geophysical movements in the interior. The diamonds could come to the surface very easily,” Dr. [Nikku] Madhusudhan [a fellow at Yale University’s Center for Astronomy & Astrophysics] said in an interview.

“But just below the surface there is a very thick layer, about a third of the whole radius [of the planet], just in diamonds.”

It was a mildly positive day for the Canadian preferred share market, with PerpetualPremiums up 5bp, FixedResets flat and DeemedRetractibles gaining 2bp. Volume was low, despite the closing of two new issues, GWO.PR.R and BRF.PR.C.

Australia’s debt market is not what it used to be:

Australia sold A$3.25 billion ($3.3 billion) of notes due in 16 1/2 years, the longest-maturity bonds on record in government data going back to 1982, matching its largest ever offering.

The 3.25 percent April 2029 security was placed via syndication and yielded 3.595 percent, according to an e-mailed statement from the Australian Office of Financial Management. Notes due April 2027 were previously the nation’s longest-dated debt.

Foreign investors seeking the world’s highest-yielding AAA rated sovereign debt hold a near-record 77.5 percent of Australian government bonds, government data show. The U.K. gilt due July 2052 offers the highest top-graded rates outside of Australian securities, at 3.24 percent. Prime Minister Julia Gillard’s plan to end four years of budget deficits has also driven demand for federal debt. The benchmark 10-year note touched an all-time low of 2.698 percent in June.

The 10-year rate was at 3.08 percent as of 3:45 p.m. in Sydney, while the 15-year yield was 3.39 percent. The Australian dollar bought $1.0220.

Larry Fink appears to favour bank capital buffers over hard minima:

Speaking at a seminar during the International Monetary Fund’s annual meeting in Tokyo, Mr. Fink got vocal about the need for even tougher and more stringent recap rules
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“Regulators spend too much time focusing on the potential failure of an institution,” he said in his remarks, which were noted by Euromoney. “We need to spend more time on resolution when there is even [just] a small deterioration of capital.”

Mr. Fink’s proposal: If a bank that meets the 9 per cent tangible common equity ratio suddenly falls to 8.5 per cent, they should have a strict time period to restore their capital levels, or face penalties. The time period he suggests is 90 days.

Regulators devote too much time to hashing out plans for dealing with failed banks, he said, rather than making sure that those who are starting to suffer stay afloat.

Mr. Fink also argued in favour of even higher capital requirements, something you rarely hear from someone who works for a financial institution.
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As Euromoney points out, there is speculation that Mr. Fink could be named Treasury Secretary should President Obama win a second term.

The IMF GFSR – October 2012 has some interesting things in it:

Click for Big

Most measures show that liquidity in the U.S. corporate bond market has declined since the start of the global financial crisis and has not returned to precrisis levels (Table 2.6.1). For instance, the ratio of trading volume ($17 billion) to the value of outstanding corporate bonds ($5 trillion) is just 0.33 percent, one of the lowest ratios among key U.S. assets, and lower than it was before the crisis. Other liquidity measures have also deteriorated relative to precrisis levels: Market turnover ratios have declined and bid-ask spreads are generally wider, especially on larger-size trades and off-the-run issues. The distribution of liquidity has also grown more top-heavy, with trading activity more concentrated in a smaller number of issuers.

The decline in liquidity in the secondary corporate bond market is due to a combination of cyclical and secular forces. Three are most notable:
1. Changes in dealer-banks’ business models and greater global uncertainty…
2. Trading has shifted to exchange-traded funds (ETFs), corporate derivatives, and other alternatives to trading corporate bonds directly (the cash market)…
3. Changes in the investor base are also affecting trading conditions…

One issue that is examined is “Did Some Banking Systems Withstand International Contagion Because They Are Less
Globally Integrated?”

The recent episode of global financial turmoil highlights the risk of international contagion and the potential resiliency of less integrated banking systems. This box explore the banking system “openness” and regulatory frameworks of four jurisdictions generally regarded as less globally integrated, all of which fared relatively well in the financial crisis. It concludes that the funding structure of banks could be more important than a lack of foreign bank ownership for financial stability.
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Regulatory policies in Australia and Canada share some features that might have resulted in less globally integrated banking systems. One important policy they have in common is the de facto prohibition of mergers among the major domestic banks. While its primary objective is to retain competition, the prohibition has prevented an increase in the size of these banks and the creation of national “champions” that could compete with major global financial institutions. This may have been a factor limiting their banks’ international activities. The two economies also impose restrictions on shareholder ownership, which limits acquisition of domestic banks by either other domestic banks or foreign ones, although establishment of subsidiaries and branches of foreign banks are not restricted, except on prudential grounds.
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The data suggest, however, that prudential regulatory requirements placed on entry of foreign banks may be less important for financial stability than the funding structure of domestic banks. Analysis shows that banking systems less reliant on foreign funding — economies whose bank assets were relatively less funded with international liabilities in 2007 — had higher credit growth in the five years since the crisis (Figure 3.5.4).5 All four economies reviewed here follow the pattern of other peer groups on average, especially Australia and Malaysia. Other evidence suggests that having a strong domestic deposit base is important for supporting local lending by foreign banks (Claessens and Van Horen, 2012). Hence, the positive experience of these four economies could be attributable not only to their regulatory approaches but also to the funding structure of the banks.

This is consistent with earlier studies. Not much in there about OSFI’s wisdom!

More consideration of risks in moving OTC derivatives contracts to central counterparties (CCPs). Current efforts to reduce counterparty exposures through such moves come with some danger that the CCPs themselves will become too important to fail and that the “location” requirements enforced in multiple jurisdictions may create too many CCPs. These institutions could have diverse requirements and levels of oversight that would hinder the benefits of netting, increase the demands for collateral, and unnecessarily increase costs. In general, the international effort to harmonize approaches to reforms in OTC derivatives markets should be reenergized.

The PDF claims that there is a chapter titled “The Financial Impact of Longevity Risk”, as there was in April, but the HTML announcement. Most peculiar.

LNG may not be a panacea for the North American gas industry:

China is importing more natural gas by pipeline than sea for the first time, highlighting the risk to planned LNG projects costing at least $100 billion as buyers seek cheaper supplies.

The country, which accounted for almost a quarter of Asia’s gas use last year, increased shipments from Turkmenistan, the provider of almost all its piped supplies, by 55 percent to 9.85 million metric tons in the first eight months of the year, customs data show. Liquefied natural gas purchases from nations including Australia and Qatar advanced 23 percent to 9.08 million tons and cost about 3 percent more than pipeline imports, even before the cost of regasification.
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China’s spending on LNG has surged as prices and volumes have climbed. The bill in 2008 was $942 million and the average price paid was $282 a ton. This year’s price is equivalent to $10.81 per million British thermal units, or about three times as much as benchmark U.S. gas futures, which were at $3.459 today, according to data compiled by Bloomberg. Cargoes from Qatar, China’s biggest and most expensive supplier, cost $19.33 per million Btu.

I stumbled across a good paper by Rohan Churm and Nikolaos Panigirtzoglou titled Decomposing Credit Spreads:

This paper investigates the information contained in the yields of corporate debt securities using a structural credit risk model. As previous studies have found, credit risk is not the only factor that affects corporate yield spreads. The aim is to decompose credit spreads, using a structural model of credit risk, into credit and non-credit risk components. The contribution relative to the existing literature is the use of contemporaneous forward-looking information on equity risk premia and equity value uncertainty in a structural model. In particular, implied equity risk premia from a three-stage dividend discount model that incorporates analysts’ long-term earnings forecasts are used, together with implied measures of equity value uncertainty from option prices. The paper examines the evolution of the different components of spreads across time as well as the effect of particular events. It also analyses the relationship between the derived components and other financial variables, such as swap spreads and the equity risk premium.
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The non-credit risk component, attributed to liquidity, regulatory or tax effects, increases as the credit risk component increases, consistent with the empirical evidence of higher bid-ask spreads for lower quality credits. This component is closely related to swap spreads for investment-grade companies, in line with the existing literature that finds that a small proportion of swap spreads is due to credit risk. Moreover, it provides justification for the use of the swap curve as a fixed income benchmark for corporate debt. For high-yield companies, the non-credit risk component is much higher than swap spreads, suggesting a greater importance of liquidity for these lower quality corporates. In the second half of 2002, we observe small movements in the UK investment-grade credit spreads compared to the United States. Our decomposition implies that this is due to the combination of a reduction in compensation for non-credit risk factors in the United Kingdom and greater credit risk in the United States.

Another result of our decomposition is that the credit risk premium component of the credit spread as a proportion of the assumed equity risk premium, increased by a factor of two for investment-grade. We can explain this increase qualitatively, using a standard CAPM framework, by the correlation between equity market (a proxy for the market portfolio) returns and credit returns.

The 2012 Nobel Prize in Chemistry has been announced:

Your body is a fine-tuned system of interactions between billions of cells. Each cell has tiny receptors that enable it to sense its environment, so it can adapt to new situtations. Robert Lefkowitz and Brian Kobilka are awarded the 2012 Nobel Prize in Chemistry for groundbreaking discoveries that reveal the inner workings of an important family of such receptors: G-protein–coupled receptors.

For a long time, it remained a mystery how cells could sense their environment. Scientists knew that hormones such as adrenalin had powerful effects: increasing blood pressure and making the heart beat faster. They suspected that cell surfaces contained some kind of recipient for hormones. But what these receptors actually consisted of and how they worked remained obscured for most of the 20th Century.

Lefkowitz started to use radioactivity in 1968 in order to trace cells’ receptors. He attached an iodine isotope to various hormones, and thanks to the radiation, he managed to unveil several receptors, among those a receptor for adrenalin: β-adrenergic receptor. His team of researchers extracted the receptor from its hiding place in the cell wall and gained an initial understanding of how it works.

The team achieved its next big step during the 1980s. The newly recruited Kobilka accepted the challenge to isolate the gene that codes for the β-adrenergic receptor from the gigantic human genome. His creative approach allowed him to attain his goal. When the researchers analyzed the gene, they discovered that the receptor was similar to one in the eye that captures light. They realized that there is a whole family of receptors that look alike and function in the same manner.

Today this family is referred to as G-protein–coupled receptors. About a thousand genes code for such receptors, for example, for light, flavour, odour, adrenalin, histamine, dopamine and serotonin. About half of all medications achieve their effect through G-protein–coupled receptors.

The studies by Lefkowitz and Kobilka are crucial for understanding how G-protein–coupled receptors function. Furthermore, in 2011, Kobilka achieved another break-through; he and his research team captured an image of the β-adrenergic receptor at the exact moment that it is activated by a hormone and sends a signal into the cell. This image is a molecular masterpiece – the result of decades of research.

And there’s a video!

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 5bp, FixedResets up 6bp and DeemedRetractibles off 3bp. Volatility was very low. Volume was average.

PerpetualDiscounts now yield 5.01%, equivalent to 6.51% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.25%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 225bp, widening from the 215bp reported October 3.