PrefBlog

Dallas Fed President Richard Fisher had a good line at the October 2007 FOMC meeting – for which minutes have just been released:

Fisher provoked laughs again in October 2007 after citing a newspaper story reporting that companies stopped buying securities they don’t understand.

“Investors are coming home from lala land,” he said. “If you will forgive me, you might say we have gone from the ridiculous to the subprime.”

“Let the transcript say ‘Groan,’” Richmond Fed President Jeffrey Lacker said.

The enormous liquidity premia in the Canadian government bond market has given rise to an ETF:

Super-safe government of Canada bonds currently yield next to nothing. So what is the yield-hungry but risk-averse retail investor to do?

Toronto-based exchange-traded fund (ETF) purveyor First Asset thinks it has the answer: Provincial government bonds.

First Asset has set up the DEX provincial bond index fund, an ETF designed to capitalize on the fact that the debt of Canada’s provinces yields quite a bit more than similar securities issued by Ottawa.
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Investors can pick up about one full percentage point in extra yield with Ontario 10-year bonds, for instance, compared with government of Canada bonds with a similar maturity. The Ontario 10-year securities yield about 2.9 per cent, the federal bonds around 1.9 per cent, indicating the approach of going with the provincial bond leads to about 50 per cent more income.
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The DEX fund, which began trading on the Toronto market Monday, has a yield to maturity of 2.8 per cent, and about 85 per cent of the bonds it holds are from Ontario and Quebec. The balance is split almost equally among British Columbia, New Brunswick and Manitoba debt. The five provinces have a range of credit ratings in the double-A and single-A categories.

First Asset charges a management fee of 0.25 percentage point on the DEX ETF.
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“I don’t think the average Canadian thinks that the federal government is going to let any province default on its debt obligations,” [Barry Gordon, First Asset’s president and chief executive,] says. “Under what circumstances could you see the provinces of Canada defaulting that the government of Canada wasn’t also in default?”

Circumstances like Europe, maybe? The chances of provincial default were discussed by Marc Joffe in a report published by the Macdonald-Laurier Institute. The Panic of 2007 should have hammered into us all the idea that the unthinkable is not necessarily impossible.

I consider the provie ETF to be a much better idea than their Barbell ETFs. The ticker symbol for the fund is PXF / PXF.A. Regretably, the fund is permitted to use derivatives. The Index is the DEX Universe Provincial Bond Index™, but, even more regretably, neither the fund’s website, nor the index provider’s website provide information about Current Yield and Yield To Maturity, which are required in order to calculate the projected tax efficiency of the fund.

Sun Media has been most un-Canadian in promoting a culture of self-reliance, so it’s good to see that they’ve got maple syrup in their veins after all:

The news network, which is owned by Quebecor Inc. and has made a name for itself by slamming rivals such as the Canadian Broadcasting Corp. for relying on government subsidies, has asked the Canadian Radio-television and Telecommunications Commission to grant it “mandatory carriage,” which means it would be included in every basic cable package across the country.

This would generate about $18-million a year for the network, because it would earn 18 cents a month in wholesale revenue from every Canadian household that subscribes to a basic cable, satellite, or IPTV service.

With traditional pricing mark-ups, that would likely translate to $4 a year per consumer.

The network says it needs the money to ensure its survival, because advertising revenue has been difficult to obtain and it is having trouble convincing Canadians to subscribe to the specialty packages that include its signal.

It was a good day for the Canadian preferred share market, with PerpetualPremiums gaining 5bp, FixedResets winning 15bp and DeemedRetractibles up 7bp. Volatility was average. Volume continued to be quite high.

Nothing happened today.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 4bp, FixedResets dropping 19bp and DeemedRetractibles off 7bp. The slightly-longer-than-average Performance Highlights table is comprised entirely of FixedReset losers. Volume was enormous.

AT&T got whacked for pension charges:

AT&T Inc. (T), the largest U.S. phone company, recording a $10 billion fourth-quarter charge for its pension plan and said smartphone subsidies put pressure on profit in the period.

The company lowered its expected long-term rate of return for the pension to 7.75 percent, citing “continued uncertainty” for the stock market and the U.S. economy, according to a filing today.

According to the 2011 Annual Report:

Our return on assets assumption was 8.25% for the year ended December 31, 2011. In 2011, we experienced actual returns on investments lower than expected; however, in 2012 we will maintain 8.25% for our expected return on assets, based on long-term expectations of future market performance and the asset mix of the plans’ investments.

Consider the plans’ asset mix, I’d say 7.75% is wildly optimistic:

However, they can proudly declare that they’re not as bad as Illinois:

Three brawling Illinois Democrats are presiding over a fiscal muck that has made the state the new archetype of dysfunction as longtime champion California last week projected its first surplus in a decade.

Years of indecision, gridlock and mismanagement have produced a $97 billion pension-funding deficit and more than $9 billion in unpaid bills, saddling Illinois with the nation’s lowest rating from Moody’s Investors Service. As a result, taxpayers are paying more to borrow, and the state’s ability to provide essential services is withering as annual retirement obligations devour more money.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums dropping 3bp, FixedResets up 7bp and DeemedRetractibles gaining 6bp. Volatility was low. Volume continued to be heavy.

Yesterday I highlighted political violence in Greece. Now there’s talk of currency wars:

The world is on the brink of a fresh “currency war,” Russia warned, as European policy makers joined Japan in bemoaning the economic cost of rising exchange rates.

“Japan is weakening the yen and other countries may follow,” Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said at a conference today in Moscow.

The alert from the country that chairs the Group of 20 came as Luxembourg Prime Minister Jean-Claude Juncker complained of a “dangerously high” euro and officials in Norway and Sweden expressed exchange-rate concern.

The push for weaker currencies is being driven by a need to find new sources of economic growth as monetary and fiscal policies run out of room.

Does anybody feel nervous yet? How about this?

The World Bank cut its global growth forecast for this year as austerity measures, high unemployment and low business confidence weigh on economies in developed nations. German Chancellor Angela Merkel’s government cut its growth forecast for Europe’s biggest economy. Luxembourg Prime Minister Jean- Claude Juncker said the strength of the euro poses a threat to the region’s economy.

The OSC has issued an invitation to some Consultation Sessions on OSC Staff Consultation Paper 45-710, Considerations for New Capital Raising Prospectus Exemptions.

Some oil company executives are taking time off from their busy schedule of explaining why the price of gas goes up on summer long-weekends to rail against the law of supply and demand:

Major oil companies are eager to ship to the coast to take advantage of higher prices on world markets than they can get by shipping to refineries in the U.S. Midwest and Southeast. But some of them are balking at the price – known in the industry as tolls – which they argue would allow Kinder Morgan to earn returns on the project that are far above its historical 7 to 12 per cent.
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Suncor, in response, say it is “critical” for the NEB to make sure there is a “just and reasonable” cost to shipping oil to the West Coast at a time when companies are desperate for new pipelines. The company says it is “disturbed” by how pipeline firms are “exerting market power that flows from the infrastructure shortage and need and necessity of take away capacity.”

Three tears for Suncor! Boo! Hoo! Hoo!

This story regarding modern day moonlighting is hilarious:

Bob was his company’s best software developer, got glowing performance reviews and earned more than $250,000 a year.

Then one day last spring, Bob’s employer thought the company’s computer system had been attacked by a virus.

The ensuing forensic probe revealed that Bob’s software code had in fact been the handiwork of a Chinese subcontractor.

Bob was paying a Chinese firm about $50,000 a year to do his work, then spent the day surfing the web, watching cat videos and updating his Facebook page.

Telecommuting, anyone? There’s more detail on Verizon’s security blog.

Reuters warns about “showrooming”:

More than 80 percent of shoppers in the study from International Business Machines Corp last bought something at a store, but only half said they would go to a brick-and-mortar retailer next time.

The study showed both the importance and global reach of “showrooming,” in which shoppers examine products in stores and then make their purchase online.
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Of eight categories tracked in the IBM survey of 26,000 shoppers, the two most popular for online purchases were consumer electronics and luxury items, including jewelry and designer clothing.

Nearly 25 percent of Internet shoppers had intended to buy in the store but ultimately purchased online, primarily for price and convenience, IBM said. Retailers that only operate online account for one-third of purchases by showroomers, IBM said.

I think showrooming is the way of the future. Why stock all that inventory? Open up a pop-up store for a weekend – or rent a corner in a large store that exists for the purpose of selling shelf space to distributors – and take all your orders on-line.

Some may recall my musing on housing affordability, last mused on December 27. If only 60% of the population own a house, is it appropriate to use the average income of everybody to measure affordability? And if we restrict the calculation to the top 60%, does this change the numbers? Assiduous Reader BB writes in and says:

I ran across the following, from which I was able to derive the information:
link

Looking at income based on household:
22%: >100k
4%: 90-99k
5%: 80-89k
30% falls somewhere in the 80-89k category. Let’s say 84k.

That got me wondering, and I checked the census. The following is from 1996. However, they have this information for other years as well.

Go to link then choose Statistical Profile of Canadian Communities. On the page that is loaded (link) choose Profile of Census Metropolitan Areas and Census Agglomerations, 1996 Census. On this page (link), which shows the data, choose Toronto in the Geography drop down list.

Looking at Census family income of all families (20% sample data):
15%: >100k
5%: 90k-99,999
6%: 80k-89,999
8%: 70k-79,999

30% falls somewhere in the 70k-79,999 category, probably right in the middle. Let’s say 75k.

In other words the median income of the 60% of the top earning households increased 12% from 1996 to 2006. You can probably figure out various other trends for different years.

So from a website of unknown credibility, I got the following chart of Toronto housing prices:

Click for Big

At a glance the chart looks more than just a little bit fishy: the y-axis is linear. Given that the “trend-line” goes from about $90,000 to about $420,000 in 50 years, the slope is about $6,600 per year, or +7.3%p.a. in 1953 and only +1.6%p.a. in 2012 (expressed in constant 2012 dollars). But never mind that, we’re only interested in the 1996 to 2006 period.

According to the Bank of Canada Inflation Calculator, inflation was just under 2%p.a. over 1996-2006, for a total deflator of 1 / 1.2174.

My calculation from the 1996 StatsCan data makes the 30 percentile just under $80,000, rather than about $75,000 (I multiplied the number of households, 1,162,145 by 0.3 to get 348,643, then subtracted the number in the top tiers from this until I got close to zero).

A proper comparison does not seem to be available from Statistics Canada, so I’ll go along with eyeballing the chart of 2005 data on page 5 of the City of Toronto document and go along with the estimate of about maybe $84,000.

These results are highly unfortunate for my theory, since this implies that there was a decline in real income even for those in the 30 percentile in the period 1996-2005/6, even while the real price of houses increased substantially. Or revise my theory. Or – even better – use different data! Or maybe vote just vote NDP next time, comrades.

Shaw Communications, proud issuer of SJR.PR.A, recently did a deal with Rogers:

Shaw Communications Inc. (“Shaw” or “the Company”) announced today that it has entered into agreements with Rogers Communications Inc. (“Rogers”) to sell to Rogers its shares in its Hamilton-based cable operations, Mountain Cablevision Limited (“Mountain Cable”), grant to Rogers an option to acquire Shaw’s spectrum licenses for advanced wireless service in British Columbia, Alberta, Saskatchewan, Manitoba and Northern Ontario (the “Spectrum Licenses”) and to purchase from Rogers its 33.3% partnership interest in the TVtropolis General Partnership (“TVtropolis”).

DBRS comments:

DBRS recognizes the strategic merit behind the transaction as we believe Shaw could stand to benefit from enhancing its network and service quality as competition continues to intensify in its core business lines. Proceeds from the planned divestures are intended for long-term strategic network investments; however, DBRS believes the resulting impact on operating income and cash flow growth over the near term is difficult to gauge. DBRS also notes the magnitude of the incremental investment is meaningful, but not momentous in terms of Shaw’s overall capital budget for the next couple years.

In terms of the transaction’s broader significance, DBRS appreciates a formal sale of the Company’s wireless spectrum as it will remove lingering concerns associated with the risk of wireless expansion in the future. DBRS also likes the fact that Shaw may be able to finance the acceleration of its capex program with the sale of non-core assets as opposed to raising debt. Although these factors have a one-time positive effect on Shaw’s credit risk profile, the broader forces at play on the Company’s core businesses generally remain the same.

As such, DBRS will continue to focus on Shaw’s ability to maintain and grow its subscriber base as it competes with IPTV and works to improve its product offerings. DBRS believes the trajectory of operating income and cash flow remain the key driver of the Company’s credit risk profile going forward, particularly since DBRS does not expect material debt reduction over the near to medium term, as Shaw’s free cash flow after dividends will likely be nominal over this time frame.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 14bp, FixedResets flat and DeemedRetractibles off 2bp. Volatility was above average, but is reverting towards normal levels as corrections from Monday’s big rejigging work themselves out. Volume was extremely high.

PerpetualDiscounts now yield 4.87%, equivalent to 6.33% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.25% (maybe at bit over), so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 205bp, a widening from the 195bp reported January 9.

Assiduous Reader PL sends me an interesting link, unlike you other bums who never send me NUTHIN’: this one is about so-called hunt and destroy algorithms:

In stock trading, twin practices have coexisted for ages. First, a large number of investors enter stop-loss orders to protect themselves. Second, such stop-loss orders become sitting ducks for some professionals.

In the past, it was a common complaint that market makers and brokers tended to run the stops. These days hunt-and-destroy algorithms have evolved to run down the stops. Such algorithms simply try to guess where the stops are grouped, and if stops are hit, the algorithms take advantage, first, by short-selling and then buying to cover. The complexities are overly simplified here to illustrate the point.
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We take precautions to make sure that our subscribers do not become victims of such algorithms. Further, as part of our tactics, we help our subscribers profit from buying into artificially depressed prices that occur from such algorithms.

The following are the elements of the ZYX Change Method Trade Management Guidelines:

• •Not placing stops in the zones where others can easily anticipate. In other words, do not becoming a sitting duck.
• •Not using stops as the primary risk-control mechanism.
• •Anticipating the stops would be run and exiting trading positions before such occurrences as well as reducing the size of long-term investment positions before such occurrences. Notice the distinction between trading positions and long-term investment positions.
• •Stepping up and buying when prices are artificially depressed because of stop-loss orders getting hit.

Seems to me that a much better strategy is not placing stop-loss orders at all. If you’re willing to sell at $24, why not sell at $25? Stop-Loss orders were responsible for the excesses of the Flash Crash, although you won’t hear any regulators admitting that.

The Europeans are still dithering on bank bail-outs:

A European Commission proposal for bank rescues recently leaked to the Financial Times suggests that euro area officials may not be ready after all to break the destructive loop between banks and their sovereigns.
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If the commission’s proposal becomes policy, this would be terrible news for markets and the euro. The burden of supporting rotten banks will still be able to bankrupt states — see Spain, Ireland and Cyprus — and rotten states will still be able to bankrupt otherwise healthy banks — see Greece.
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The European Commission’s latest plan attempts to keep Germany happy that it isn’t underwriting bankrupt banks in the Mediterranean, while still producing the direct euro area bank capitalization that countries like Spain so desperately need. It does so by saying that countries that have to resort to the European Stability Mechanism to recapitalize their banks would have to guarantee the fund against making a loss. This shares the same flaw as previous proposals: It fails to break that destructive loop between banks and their governments.

The bottom line is that if a country is bankrupt and needs direct bank recapitalization from the euro area’s common fund, then that same bankrupt sovereign would still have to serve as the final backstop for its banks, as it indemnifies the euro area fund for any losses.

So what, in terms of the fundamentals, would be different under the European Commission’s latest proposal? Not much. The proposals can of course change, but for now it should become that much harder for optimists to delude themselves that the negative feedback loop between banks and sovereigns is about to be cut.

It seems clear that Europe will have to move to a market-based system, in which sovereign debt is held by pension funds and other market bodies, rather than the banks … but this is contrary to the new liquidity rules and other instruments of financial repression, which seek to ensure that the banks will always buy sovereigns in great hulking gobs.

It was a mixed day of spring-back for the Canadian preferred share market today, with PerpetualPremiums gaining 2bp, FixedResets off 13bp and DeemedRetractibles winning 27bp. For the last two classes, these figures represent about half of yesterday’s change, when RBC roiled the market. Volatility was high again today, with many issues rebounding about half their Monday gain or loss. Volume was extremely high.