PrefBlog

Securities market participants will be gratified to learn that the tradition of administrative efficiency in Canadian securities regulation will be continued by the national securities regulator:

Canada’s new securities regulator is facing another delay on the bumpy road to its launch in 2015.

The group of participating provinces announced Friday that the regulations to outline the operating details of the new Cooperative Capital Markets Regulator will now be delayed until early spring and will not be out by Dec. 19, as previously anticipated.

Greek markets are beginning to resemble Canadian ones:

Greek stocks suffered their steepest daily fall in more than a quarter century on Tuesday and its bond yields jumped after Prime Minister Antonis Samaras brought forward a presidential election in a gamble over his, and the country’s future.

If Mr. Samaras fails to secure victory in parliament for his presidential candidate, snap national elections will be called that the leftist Syriza party – a fierce opponent of Greece’s bailout deal with the European Union and IMF – is likely to win.
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The Athens general stock index tumbled 12.8 pe rcent, its biggest loss in a day since 1987. An index of Greece’s listed banks fell 14.7 per cent, with Attica Bank down 27.5 per cent.

The decision sent 10-year Greek government bond yields up 74 basis points to 8.09 per cent.

Canadian preferred share investors are currently looking for indicators to guide them through current market turmoil:

The Canadian preferred share market took another good whacking today, with PerpetualDiscounts losing 41bp, FixedResets down 39bp and DeemedRetractibles off 20bp. The performance highlights table contains its usual lengthy list of FixedReset losers, but it is of interest to note that a large number of the credit-uncertain Enbridge issues were included. Volume was above average.

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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So according to this, TRP.PR.A, bid at 21.37, is $0.44 cheap, but it has already reset. TRP.PR.B, bid at 17.46, is $0.18 cheap, but it resets 2015-6-30. TRP.PR.C, bid at 19.55, is $0.21 expensive, but it resets 2016-1-30. The TRP issues seem to be steadily rationalizing.

The MFC series is just weird.

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Clearly MFC.PR.F, resetting at +141 on 2016-06-19, is out of step with the others and is screwing up the calculation. To the extent that one can trust both Implied Volatility Theory AND the market’s reasonably more-or-less consistent application of it, MFC.PR.F should be bid significantly higher than its current 20.00 and the calculated Implied Volatility should be higher than the distorted value of 28%. The fit is pretty poor – all one can really tell is that the Spread is more than about 80bp and the Implied Volatility is more than about 13%.

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The BAM series is now also a little out of whack:

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BAM.PR.X, with a +180bp spread, bid at 20.91, looks $0.68 cheap and doesn’t reset until 2017-6-30 – but Implied Volatility continues to drop rapidly (a reduction in Implied Volatility flattens the curve and causes low-spread issues to underperform). BAM.PR.R, with a +230bp spread, bid at 25.34, looks $1.43 rich and resets 2016-6-30. So go figure that one out, wise guy.

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 19.82, looks $0.35 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 24.62, looks $0.53 expensive and resets 2019-3-1

Assiduous Reader JP, who often sends me interesting snippets, unlike youse other bums, brings to my attention a small preferred share issue from China:

Industrial and Commercial Bank of China will issue US$5.7 billion worth of preferred shares in three currencies in what will be the largest offshore issuance of hybrid securities from a mainland firm.

ICBC proposed issuing US$2.94 billion in dollar-denominated shares, €600 million (HK$5.73 billion) and 12 billion yuan (HK$15.13 billion) all priced at 6 per cent, according to a regulatory filing.

The shares will count as additional tier-1 capital, boosting the bank’s capital adequacy ratio as defined by Basel III, an international accord aimed at raising the viability of banks and avoiding public bailouts.

The record deal also marked the first time a mainland bank issued offshore preferred shares denominated in three currencies.

ICBC International was the sole global coordinator and UBS, Bank of America Merrill Lynch and Goldman Sachs were joint book-runners on the deal.

It’s nice to see some real progress on solar power efficiency:

UNSW’s solar researchers have converted over 40% of the sunlight hitting a solar system into electricity, the highest efficiency ever reported.

The world-beating efficiency was achieved in outdoor tests in Sydney, before being independently confirmed by the National Renewable Energy Laboratory (NREL) at their outdoor test facility in the United States.

The work was funded by the Australian Renewable Energy Agency (ARENA) and supported by the Australia–US Institute for Advanced Photovoltaics (AUSIAPV).

“This is the highest efficiency ever reported for sunlight conversion into electricity,” UNSW Scientia Professor and Director of the Australian Centre for Advanced Photovoltaics (ACAP) Professor Martin Green said.

The price wasn’t mentioned, but the basic idea comes first, right? Then give it to the engineers to make it cheap. Too bad this research wasn’t done in Ontari-ari-ari-owe, but we blew our solar budget on political grandstanding.

After posting the MAPF November statements, I posted the following on the Canada Post Facebook Page:

I just sent a batch of letters with Madonna & Child stamps when a thought struck me and caused me to check your website.

I see your “Holiday 2014” collection is dominated by Santa Claus – rather childish in my view, but the important thing is that they are stamps and you stick them on letters and they get delivered.

But why are there no stamps with an Islamic theme? No Jewish stamps? No stamps for Kwanzai, Bohdi Day, Pancha Ganapati or Yule? It would make things more interesting.

It was an awful day for equities:

Oil, bank and raw-materials are the biggest laggards in Canada for the first time since at least 1988, fueling concern the nation’s economy is fading just as the U.S. is taking off.

The three industries, which collectively account for two-thirds of the Standard & Poor’s/TSX Composite Index, are the worst performers among 10 groups this year, according to data compiled by Bloomberg. The nation’s largest banks joined oil and materials in a rout that erased 4.1 percent from the benchmark index in three days, including the biggest one-day retreat since June 2013.

The selloff in the biggest pillars of the Canadian equity market comes as data showing a weaker jobs market coupled with slowing exports suggest a tentative economic recovery. Banks have slumped as earnings last week collectively missed estimates amid declining trading revenue and sluggish consumer borrowing. Meanwhile, the S&P 500 Index has reached all-time highs on signs of accelerating growth.
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The S&P 500/TSX tumbled 329.53 points, or 2.3 percent, to 14,144.17 yesterday as the selloff in oil accelerated, with energy companies plunging the most since August 2011 as crude dropped to a five-year low.
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The Canadian benchmark equity gauge has plunged 9.7 percent since reaching a record on Sept. 3, wiping out more than C$270 billion in market value and reducing its gain for the year to 3.8 percent. The S&P/TSX, which was the second-best performing market among developed nations through the first half of the year, now ranks 16th.

Happy crowds of preferred share investors held parades for their portfolios today.

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And with TXPR and TXPL down 0.76% and 0.96%, why not?

It was an appallingly poor day for the Canadian preferred share market, with PerpetualDiscounts off 24bp, FixedResets losing 85bp and DeemedRetractibles down 36bp. There is a very lengthy list of losers, dominated by FixedResets. Volume was high.

And given these massive changes, let’s have another look at some pictures of Implied Volatility. 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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So according to this, TRP.PR.A, bid at 21.36, is $0.57 cheap, but it has already reset. TRP.PR.B, bid at 17.20, is $0.55 cheap, but it resets 2015-6-30. TRP.PR.C, bid at 19.75, is $0.30 expensive, but it resets 2016-1-30. It looks like the market is beginning to realize that TRP.PR.C is overpriced.

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MFC implied volatility is still very high. The low-spread MFC.PR.F looks a little cheap … and it doesn’t reset until 2016-6-19.

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BAM.PR.X, with a +180bp spread, bid at 21.15, looks $0.79 cheap and doesn’t reset until 2017-6-30 – but Implied Volatility is still a little high and is dropping rapidly (a reduction in Implied Volatility flattens the curve and causes low-spread issues to underperform). BAM.PR.R, with a +230bp spread, bid at 25.51, looks $1.56 rich and resets 2016-6-30. So go figure that one out, wise guy.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 20.00, looks $0.41 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 24.70, looks $0.54 expensive and resets 2019-3-1

Jobs, jobs, jobs!

A November surprise that included a jump in wages as well as the biggest hiring surge in almost three years suggests the world’s largest economy is putting aside doubts about the strength of the expansion.

The 321,000 advance in payrolls followed a 243,000 increase in October that was stronger than previously reported, Labor Department figures showed today in Washington. The jobless rate held at a six-year low of 5.8 percent and earnings rose by the most since June of last year.
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The breadth of industries hiring last month was the broadest since 1998, a sign the benefits of the expansion were rippling through the economy.

Factory payrolls rose by the most in a year, professional and business services companies took on more employees than at any time since November 2010, financial firms boosted payrolls by the most since early 2012 and hiring at retailers picked up.
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The yield on the benchmark 10-year Treasury note rose to 2.31 percent at 2:47 p.m. in New York from 2.24 percent late yesterday. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 trading partners, gained 0.8 percent, and the Standard & Poor’s 500 Index advanced 0.2 percent.

Up north, not so much:

The Canadian dollar reached a five-year low as data showed the economy lost jobs in November while U.S. payrolls swelled, adding to speculation the Federal Reserve will raise interest rates before the Bank of Canada.

The currency erased a weekly gain as the report showed employment fell by 10,700 jobs. The drop bolstered a Bank of Canada statement this week that, while the recovery shows signs of broadening, the labor market “continues to indicate significant slack in the economy.” The nation added 117,200 jobs over the previous two months.
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Canadian government bonds fell, pushing the yield on the benchmark 10-year security up five basis points, or 0.05 percentage point, to 1.96 percent. It reached 1.98 percent, the highest level since Nov. 25. The price of the debt dropped 46 cents to C$104.67.

Employment declined after jumps of 43,100 and 74,100 the last two months, Statistics Canada said today from Ottawa. The unemployment rate rose to 6.6 percent from a six-year low of 6.5 percent. Economists surveyed by Bloomberg News projected employment would be unchanged and the jobless rate would rise to 6.6 percent, according to median forecasts.

And things are still sluggish in Germany:

But Germany’s Bundesbank halved its 2015 growth forecast for Germany to 1.0 per cent and also cut its estimate for this year to 1.4 per cent from a forecast of 1.9 per cent made in June. It also trimmed its prediction for 2016 to 1.6 per cent.

“However, there is reason to hope that the current sluggish phase will prove to be short-lived,” Bundesbank President Jens Weidmann said in a statement, adding that opportunities abroad would likely increase again next year.

He also said that if crude oil prices remained subdued for a longer period, gross domestic product (GDP) could expand by an additional 0.1-0.2 percentage points in both 2015 and 2016.

… and in Italy:

Standard & Poor’s cut Italy’s sovereign credit rating on Friday from triple-B to triple-B-minus, just one notch above junk, saying weak growth and poor competitiveness undermined the sustainability of its huge public debt.

The downgrade is a blow for Prime Minister Matteo Renzi, who came to office in February pledging an ambitious reform agenda to lift Italy out of recession, but has seen the economy continue to shrink.

S&P said the new triple-B-minus rating carried a stable outlook. It forecast Italian economic growth would be just 0.2 per cent in 2015 and would average 0.5 per cent in 2014-2017.

As recently as June, the agency had confirmed Italy’s triple-B rating and forecast average growth of 1.0 per cent over the three-year period.

Italy’s economy is expected to shrink in 2014 for the third consecutive year.

There’s an interesting paper by Gregory Thwaites titled Why are real interest rates so low? Secular stagnation and the relative price of investment goods:

Over the past four decades, real interest rates have risen then fallen across the industrialised world. Over the same period, nominal investment rates are down, while house prices and household debt are up. I explain these four trends with a fifth – the widespread fall in the relative price of investment goods. I present a simple closed-economy OLG model in which households finance retirement in part by selling claims on the corporate sector (capital goods) accumulated over their working lives. As capital goods prices fall, the interest rate must fall to reflect capital losses. And in the long run, a given quantity of saving buys more capital goods. This has ambiguous effects on interest rates in the long run: if the production function is inelastic, in line with most estimates in the literature, interest rates stay low even after relative prices have stopped falling. Lower interest rates reduce the user cost of housing, raising house prices and, given that housing is bought early in life, increasing household debt. I extend the model to allow for a heterogeneous bequest motive, and show that wealth inequality rises but consumption inequality falls. I test the model on cross-country data and find support for its assumptions and predictions. The analysis in this paper shows recent debates on macroeconomic imbalances and household and government indebtedness in a new light. In particular, low real interest rates may be the new normal. The debt of the young provides an alternative outlet for the retirement savings of the old; preventing the accumulation of debt, for example through macroprudential policy, leads to a bigger fall in interest rates.
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This paper fleshes out a new, complementary explanation for the falls in real interest rates, rises in household debt and falling investment rates across the industrialised world. The story is based on the widespread fall in the price of investment goods – the machines, equipment and buildings that firms buy – relative to the prices of other things the economy produces. This fall has reduced the demand for savings, rather than the supply.

This makes sense to me. When you’re starting a business, you don’t (usually) need $100-million for a new factory any more; $10,000 for a couple of new computers will (often) do the trick. Thanks to Ian McGugan of the Globe for writing a review.

It’s a black day … the UK is redeeming some perps:

U.K. Chancellor George Osborne is to repay the state’s century-old war debt. By current standards, the undated stock is expensive for the government to service. Terms give holders of the hard-to-trade bond a decent payoff. It looks like a win-win. Time could prove a harsher judge of the deal.

The British government issued its War Loan in 1917. At first, the undated debt offered a yield of 5 per cent. It was restructured in 1947 to pay 3.5 per cent. Even that lower figure looks expensive by current standards. Weak economic growth and low inflation have suppressed long-dated yields. Ten-year UK government debt gives only 2 per cent at present.

I’ve always been fond of the British perps … fortunately, my all-time favourite, the 2.5% annuities issued in 1853 are still outstanding … all £1-million of them!

BSD.PR.A was confirmed at Pfd-4(low) by DBRS:

As of December 1, 2014, the Portfolio consisted of 72.0% Canadian common stock, 22.0% REITs, 4.0% limited partnerships and 2.0% Canadian preferred stock. The rating was last confirmed in December 2013 and performance has been generally positive in the first half year of 2014, but has since been volatile. Downside protection available to holders of the Preferred Securities rose to 29.9% in June 2014, but has since been volatile, dropping to approximately 20.0% at the end of November 2014 (similar to November 2013 levels). The yield on the Portfolio has decreased slightly, causing the distribution coverage ratio to drop to 0.70 times (as of November 28, 2014). The rating on the Preferred Securities continues to be constrained by the large percentage of underlying securities in the Portfolio that are not rated by any rating agency and the grind on the Portfolio due to distributions exceeding income.

I suggest that preferred share investors stop looking at their monitors and go for a nice walk … like this guy:

It was another awful day for the Canadian preferred share market, with PerpetualDiscounts losing 38bp, FixedResets down 36bp and DeemedRetractibles off 5bp. Another lengthy Performance Report is – again – dominated by losing FixedResets which are – again – predominantly lower spread and Enbridge issues. Despite four issues (recent heavy losers) breaking the 100,000 share barrier, volume was slightly below average.

All this poor performance by the lower-reset issues should imply a decrease in Implied Volatility, so here are some pictures:

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So according to this, TRP.PR.A, bid at 21.40, is $0.74 cheap, but it has already reset. TRP.PR.B, bid at 17.37, is $0.60 cheap, but it resets 2015-6-30. TRP.PR.C, bid at 20.52, is $0.86 expensive, but it resets 2016-1-30. So an alternative way of resolving the differences between these three issues is to expect the GOC-5 yield to stay at 1.48% until TRP.PR.B resets, but to increase to about 1.72% prior to TRP.PR.C resetting.

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MFC volatility is still very high. The low-spread MFC.PR.F looks a little cheap … and it doesn’t reset until 2016-6-19.

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BAM.PR.X, with a +180bp spread, bid at 21.40, looks $1.06 cheap and doesn’t reset until 2017-6-30. BAM.PR.R, with a +230bp spread, bid at 25.71, looks $1.48 rich and resets 2016-6-30. So go figure that one out, wise guy.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 20.01, looks $0.39 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 24.81, looks $0.56 expensive and resets 2019-3-1.