PrefBlog

The drive to protect incompetent traders continues:

U.S. prosecutors have joined regulators’ investigation into whether some high-speed traders are manipulating markets by posting and immediately canceling waves of rapid-fire orders, two officials said.

Justice Department investigators are “working closely” with the Securities and Exchange Commission to review practices “that are potentially manipulative, like quote-stuffing,” Marc Berger, chief of the Securities and Commodities Task Force at the U.S. Attorney’s Office for the Southern District of New York, said today at an event in New York.

While regulators previously said they were probing possibly abusive algorithmic trading practices, the attention of criminal authorities ramps up the stakes.

While researching something else, I ran across an opinion piece by Ed Waitzer titled New IIROC plan avoids putting duty on advisors to act in clients’ interest that illustrates the complete inability of professional regulators to analyze the simplest transaction. In talking about the “fiduciary responsibility” issue, he states:

To understand the difference between a “suitability” and “best-interest” standard, think of a student seeking advice at an electronics store about her need for a laptop. The salesperson recommends a highly priced unit with an expensive extended warranty — all designed to generate the highest commission. The laptop is suitable — it will satisfy the student’s needs. It clearly isn’t the best solution and a disclosure obligation isn’t likely to stand in the way of a motivated salesperson. If the salesperson had been bound by a “best-interest” standard, he would recommend a simpler, more reliable and affordable unit.

What utter balderdash. If the salesperson was bound by the “best-interest” standard and was being paid on commission, he would simply ensure that he had a plausible rationale for recommending the more profitable product as being in the student’s best interest. “What if it breaks? You’re on a tight budget! It might break at a bad time! You’re better off buying the extended warranty and fixing your costs. Then you can concentrate on your studies, instead of worrying about malfunctions in your machine.” No purpose would be served by a “best-interest” standard in the presence of commissioned sales except for the – very important, with respect to the employment prospects of some – generation of paperwork and checklists for the electronic consumer goods’ salesmen’s regulator.

I get hate mail whenever I write about the fiduciary responsibility issue – such as January 24 – so all I can suggest is: if you want a fiduciary, hire one. I’m a Portfolio Manager, for instance. I get paid for Assets Under Management, not for transactions. I’m a fiduciary – in fact, I’m legally (OSC) and ethically (CFA) required to be. If you don’t want a fiduciary, don’t hire a Portfolio Manager – hire a stockbroker or mutual fund salesman. It’s really quite simple.

It looks like Berkshire Hathaway has been stung by recent criticism and is now attempting to worm its way back into the good graces of morons by criticisizing investment banks:

Charles Munger, whose Berkshire Hathaway Inc. (BRK/A) holds $5 billion of options on Goldman Sachs Group Inc. (GS) stock, said the role of investment bankers in helping to mask Greece’s financial troubles was “perfectly disgusting.”

“Wall Street to some extent is deliberately trying to profit from sin, and I think it’s a mistake,” Munger told reporters yesterday after Berkshire’s annual press conference in Omaha, Nebraska. “Why should an investment banker go to Greece to teach them how to pretend their finances are different from what they really are? Why isn’t that a perfectly disgusting bit of human behavior?”

Goldman’s conduct with respect to Greece was discussed on PrefBlog when the issue became fashionable (see, for example, March 1, 2010). I eagerly await Munger’s next pronouncement, which may be on the topic of whether lawyers should represent Bad People. Still, I can’t blame him for chanting the slogan of the ‘finance as a cooperative game’ crowd – the Berkshire / Buffett / Munger mystique is worth what? 10%? 20% of their stock price? Who wants to guess?

The US Administration recently announced drastic measures against a Public Enemy. You know who I mean:

Citing an epidemic of childhood obesity, regulators are taking aim at a range of tactics used to market foods high in sugar, fat or salt to children, including the use of cartoon characters like Toucan Sam, the brightly colored Froot Loops pitchman, who appears in television commercials and online games as well as on cereal boxes.

Regulators are asking food makers and restaurant companies to make a choice: make your products healthier or stop advertising them to youngsters.

“Toucan Sam can sell healthy food or junk food,” said Dale Kunkel, a communications professor at the University of Arizona who studies the marketing of children’s food. “This forces Toucan Sam to be associated with healthier products.”

Walk the plank, Cap’n!

It was another mixed day for the Canadian preferred share market, with DeemedRetractibles bouncing back (a little, anyway) from a sub-par month of April: PerpetualDiscounts lost 1bp, FixedResets gained 13bp and DeemedRetractibles won 31bp. The badly beaten up DeemedRetractibles from insurers were prominent on the performance highlights table. Volume was good. And now it’s time to watch the election news…

Elections have consequences!

The TMX Group Inc.’ s plan to merge with London Stock Exchange Group Plc wouldn’t get federal government approval if Jack Layton has any say — and polls say that the New Democratic Party leader may have a lot of say after Monday’s federal election.

Speaking Friday as his party surges in popularity, Mr. Layton said he saw too much risk to approve the deal.
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“We worry that Canadian business trying to access capital might have greater difficulty. As much as one might want to pretend that nothing will change, we find that hard to believe,” he said, according to Reuters.

But there’s a decent chance the deal will be approved before the new Minister’s office is painted orange:

On Friday TMX Group (X-T40.080.150.38%) and London Stock Exchange Group cast any questions aside by starting the formal application process with federal and provincial authorities regarding their proposed combination.

That means TMX has submitted its application to Investment Canada, which now has 75 days at most to review the proposal. Formal filings with the four provincial regulators who have a say will come in the next few weeks.

It was another mixed and somewhat strange day on the Canadian preferred share market – it appears that the announcement that CM will prioritize preferred share redemptions is having some effect. PerpetualDiscounts gained 20bp, FixedResets were down 4bp and DeemedRetractibles won 44bp. DeemedRetractibles dominated the Performance Highlights table, with a few insurer issues nestled amongst the banks. Volume was good.

And that’s a wrap for another month! Final figures aren’t in yet, but it looks like the overall market was basically flat on the month.

Nothing happened today.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts losing 4bp, FixedResets up 10bp and DeemedRetractibles gaining 41bp. The Performance Highlights table was comprised entirely of strongly performing bank DeemedRetractibles, almost certainly due to news that CM will prioritize preferred share redemptions as a use of its excess capital. Volume was strong.

The FOMC Statement did not contain any major surprises:

Information received since the Federal Open Market Committee met in March indicates that the economic recovery is proceeding at a moderate pace and overall conditions in the labor market are improving gradually.
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Inflation has picked up in recent months, but longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued.
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Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations.
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The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts up 11bp, FixedResets gaining 5bp and DeemedRetractibles winning 9bp. Volatility remained low, but volume was pretty good.

PerpetualDiscounts now yield 5.58%, equivalent to 7.25% interest at the standard equivalency factor of 1.3x. Long Corporates remain at about 5.5% (maybe a little less) so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 175bp, with all numbers unchanged from the April 20 values.

The market is anticipating European sovereign default:

Yields on government securities from Greece, Ireland and Portugal reached records amid speculation the heavily indebted nations won’t be able to avoid restructuring.

Ireland’s two-year yield reached a euro-era record 12.08 percent after the European Union said the nation’s debt burden surged the most in the currency area last year. Greek two-year yields have climbed almost 870 basis points this month, reaching 24.45 percent today as investors priced in losses, or so-called haircuts, they may incur in the event of a restructuring.
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Portugal’s two-year note yields touched a euro-era record of 11.74 percent, up from 8.78 percent at the end of last month. The 10-year yield reached a record 9.61 percent today, compared with 8.41 percent on March 31.

Greece’s deficit was bigger than expected:

Greece’s chances of avoiding a debt-crunching exercise faded to almost nothing with the revelation that its budget deficit is going in the wrong direction in spite of robust efforts to reduce government spending.

The country’s budget deficit in 2010 was 10.5 per cent of gross domestic product, Eurostat, the European Union’s statistics agency, reported on Tuesday. The figure was considerably bigger than Greek government’s own deficit target of 9.4 per cent and the European Commission’s estimate of 9.6 per cent.

DBRS confirmed BAM, but was careful to include some warnings:

Overall, DBRS still remains concerned with Brookfield’s aggressive expansion program and the possible impact it may have on its overall risk profile. Brookfield’s investments normally include real, low risk assets that generate steady cash flow. If there was a shift towards more speculative investments intended for shorter hold periods, the ratings could come under pressure. DBRS notes that the financial packaging of Brookfield’s investments within its portfolio can be complex. The transparency for this and intercompany transactions can be a challenge at times.

DBRS notes that while Brookfield’s corporate liquidity and cash flow has been reasonable, it is not sufficient to be a primary funding source for large new investments. In fact, the current size of corporate debt and preferred shares is approaching the limits for the current rating category. Thus far, concerns that sizable transactions could negatively affect the Company’s credit ratings have been mitigated with the used of co-investor capital and non-recourse debt. Even so, DBRS notes that the non-recourse debt at the operating levels is significant and that it has first claim on the related cash flows. It also presents some group refinancing risk.

Japan has joined S&P’s list of sovereigns with a negative outlook.

Apparently Obesity is expected to surpass smoking as the leading cause of preventable morbidity and mortality. I can’t wait for the time when the do-gooders have had their way with this one! Outside every office tower and public place will be a long line of fatties scarfing down their french fries and pizza!

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts off 2bp, FixedResets losing 11bp and DeemedRetractibles up 5bp. Not much volatility. Volume was average.