PrefBlog

BCE is reducing its interest expense:

Bell Canada today announced that it will redeem on February 11, 2013, prior to maturity, all of its outstanding $149,641,000 principal amount of 10% Debentures, Series EA, due June 15, 2014 (“Series EA Debentures”).

The Series EA Debentures will be redeemed at a price equal to $1,113.389 per $1,000 of principal amount of debentures plus $15.890 for accrued and unpaid interest up to, but excluding, the date of redemption.

It may be that my worst fears regarding Greece are getting closer to being realized:

A spate of violent attacks against the homes and offices of public figures has hit Greece as the economy goes into its sixth year of deep recession, apparently nurturing extremist groups on both sides of the political spectrum.

Early Monday morning, a gunman with a Kalashnikov assault rifle sprayed bullets into the Athens headquarters of Greece’s ruling, centre-right New Democracy party. At least one of the bullets went through the window of the office occasionally used by Prime Minister Antonis Samaras, who is implementing harsh austerity in exchange for bailout loans.

…and…:

A group of illegal immigrants was justified in escaping from a police lockup last year because of the miserable conditions in their overcrowded cell, which was filthy, ridden with disease and had no running water, a Greek court has ruled.

The court in the northwestern city of Igoumenitsa said the 15 adults – from Afghanistan, Iraq, Syria, Egypt and Morocco – had been held for up to six weeks in “wretched and highly dangerous” conditions.

There’s a story about a Saudi farmer who, we are told, should serve as an inspiration to us all:

The herd is one of hundreds owned by Almarai Co. (ALMARAI), the biggest food producer in the Persian Gulf, which processed about 235 million gallons of milk in 2012. The Riyadh-based company’s revenue has almost tripled in the past five years to 7.95 billion riyals ($2.12 billion) as demand for its products — milk, cheese, processed chicken, baked goods and juices — has surged with the nation’s population. Its shares are up 125 percent since its 2005 initial public offering.

The gain has made Prince Sultan bin Mohammed bin Saud Al Kabeer, Almarai’s 59-year-old founder and largest individual shareholder, a billionaire. His 28.6 percent stake in the operation, plus other investments, has helped him amass a fortune of at least $2.8 billion, according to the Bloomberg Billionaires Index. He has never appeared on an international wealth ranking.

“Establishing a dairy farm in the middle of the desert is not that easy,” said Alaa Ghanem, a senior equity analyst at Audi Saradar Investment Bank in a phone interview from his office in Beirut. Almarai, he said, “is an example for anyone who wants to succeed.”

What are the secrets of his success? He used Canadian business techniques! Here’s one:

The subsidy for baby milk will go from SR2 to SR12 per kilogram as part of efforts to reduce the financial burden on public caused by soaring consumer prices.
…
Dr. Mansour Al-Kredes, deputy chairman of the agricultural committee at the Riyadh Chamber of Commerce and Industry, proposed the government subsidize agricultural and food products in order to stabilize the market. “We should have a strategic plan in order to ensure enough food supply, by providing necessary support to farmers,” he explained. “Subsidizing consumer goods will have a positive impact on farmers and will stabilize market prices,” he pointed out.

Here’s another:

Critics warn that the high yield of Almarai and other Saudi agricultural ventures carries a hidden cost. Government energy subsidies made possible by Saudi Arabia’s oil profits provide cheap electricity for the kingdom’s industry and agriculture but contribute to soaring domestic energy consumption. Saudi agriculture also draws on the kingdom’s natural aquifers, which are fast running dry.

I hope all the young people reading this blog take this to heart and become risk-taking entrepreneurs like Prince Sultan bin Mohammed bin Saud Al Kabeer.

It was a most interesting day for the Canadian preferred share market with a trading programme at RBC (and, possibly related, at Goldman) roiling the market. When the dust settled, PerpetualPremiums dropped 6bp, FixedResets leapt upward by 24bp and DeemedRetractibles got whacked for 55bp. Volatility was enormous and volume was extremely high.

It turned out to be an interesting day today, with RBC executing some frenetic trading (with an assist from Goldman Sachs Canada) that had a major impact on price volatility and volumes.

TXPR was up a miniscule 0.08% on the day, while TXPL gained +0.40%, so it would appear that all these trades were (probably!) more or less cash neutral and constituted a rejigging of somebody’s (or several somebodies’) portfolio.

The following table is a souped-up version of the regular performance highlights table, which displays all those members of the HIMIPref™ subindices that had a change in their bid price in excess of 1% (up or down) from the close Friday to the close Monday.

I have attempted to differentiate “real” from “unreal” movements based on where trades were executed, rather than where the bid price closed the day; I have also attempted to isolate those issues which were actually involved in the trading programme from those that were volatile simply because they felt like it.

The performance table has been souped up with data collected manually, with immense labour, from the TMX Money website (and therefore ignores potentially valuable information regarding trading at other exchanges): I have used the time of the last 25 trades to help differentiate between “trading programme” and “random” price movements.

It looks like all the excitement was generated by trades executed through RBC, with an assist from Goldman.

The huge number of executions leads me to believe that the trades were executed algorithmicly, and I must give a tip of the hat to the algorithms authors. In at least one of the big movers, it became clear that a pounce algorithm was being used, but it was a relatively smart pounce algorithm. When a counter-flow order was entered inside the market, it didn’t get filled instantly, as is the case with a regular pounce; there was a delay of a some time (up to about a minute, by my estimate) before the order got filled … nice way to catch predatory traders who may assume that not getting filled within 50ms (maybe 20ms?) means that a pounce is not operating at that level.

Analysis of the above table allows us to construct the following summary (using only those large changes considered to be “real”):

As this table makes clear, whatever was going on was basically selling Straight Perpetuals and buying FixedResets, although there were a couple exceptions to these rules.

Looking more closely at the FixedResets involved, we see that the two losers, BMO.PR.Q and TRP.PR.C, have Issue Reset Spreads of 115bp and 154bp, respectively, leading one to suspect that this is another outbreak of aversion towards the low-spread FixedResets. However, three of the nine winning FixedResets have spreads of less than 200bp (BMO.PR.M, RY.PR.I and BNS.PR.Q) and only one has a spread in excess of 300bp (TD.PR.K at +433). So while I think it’s fair to say an overall trend has been identified, it is clear that the selection process has details within it that are currently unknown.

We’ll see what tomorrow brings, but my first reaction is that this is simply a piece of incompetent trading, for all that I admire the sophistication of the algorithmic tool used. Based on the information currently available, it seems like somebody rebalanced his portfolio – or several portfolios – in such a manner as to attract enormous transaction costs. This conclusion must remain tentative pending more data – or the lack of it! – tomorrow.

Update, 2013-1-15: Assiduous Reader PL writes in and says:

Your comment ” Based on the information currently available, it seems like somebody rebalanced his portfolio – or several portfolios – in such a manner as to attract enormous transaction costs. “. I assume you do NOT mean RBC was trying to generate transaction cost revenue for themselves. ?

No – despite what the regulators want you to believe, commission expense is a negligible part of transaction costs, vastly outweighed by the bid-ask spread and – particularly in this case – market impact costs.

The fact that this was done after 3PM is interesting. Was it to keep retail buyers/sellers out of what is going on. Or to force what retail buyers were watching to make a fast decision before 4PM. Eg. did someone find out something that may be announced after 4PM so I better sell what has gone down and buy what has gone up? I do not think retail investors were the target. There are not enough of us active enough to make it worth while as can be seen from the volumes. So probably trying to see what other ALGOS would do when some volatility kicked in to our sleepy preferred market.

Never ascribe to cunning what can be described as stupidity. I have no idea why this was done so late in the day, and with such insistence on getting such large (for this market) trades done before the close. Maybe the portfolio management company had their weekly meeting just after lunch on Monday and decided to press the button. A possible aggravating factor is the presence of ‘operational silos’ in most portfolio management companies – where portfolio management decisions are distinct from trading decisions: the PM writes a ticket, gives it to his trading desk and immediately loses all control over the order; it is executed by individuals who have completely different priorities and are evaluated by completely different metrics.

The fact that on many issuers the buyers and sellers were RBC definitely needs some investigating. It will be interesting to see if the regulators who you often criticize respond to yesterday.

I don’t see why the regulators should get involved. Whoever initiated these trades clearly has the resources to make a Great Big Stink if he feels that execution was negligent.

Here’s another fascinating unintended consequence:

China’s one-child policy has produced adults that tend to have personality traits unsuited for starting businesses or managing companies, according to a study that adds to economic concerns surrounding the rule.

Using surveys of 421 men and women in Beijing and testing their skills in economic games, researchers in Australia found those born after the 1979 policy were more pessimistic, nervous, less conscientious, less competitive and more risk averse. They also found them to be 23 percent less prone to choose an occupation that entails business risk, such as becoming a stockbroker, entrepreneur or private firm manager.

Of course, criticizing the government is a form of risk – especially in China! – so perhaps the consequence was actually intended!

Penson Worldwide has filed for bankruptcy:

Penson Worldwide Inc. (PNSN), a provider of financial clearing services and related operational and technology products, filed for bankruptcy in Delaware with a plan to liquidate its business.

The Plano, Texas-based company listed both assets and debt of $100 million to $500 million in Chapter 11 documents filed today in U.S. Bankruptcy Court in Wilmington, Delaware. Chapter 11 is the section of the U.S. Bankruptcy Code used by companies to reorganize. In 2011, Penson had revenue of $217.3 million, court papers show.

“Average daily trading volume in equities fell by 5 percent in 2010 and 8 percent in 2011, and short selling continued to fall in each of the years from 2009 through 2011,” Bryce B. Engel, chief operating officer of Penson Worldwide, said in court papers.

The fall of Penson had implications for Northern Securities’ retail operations as discussed on December 14:

A subsidiary of Northern Financial Corp. is assigning client accounts to two unnamed brokerage firms under a consent order with IIROC.

The move by the subsidiary, Northern Investment Securities, will see investment advisers responsible for the accounts transferred to the new firms as well, Northern said in a release Monday.

The order was issued as a result of NSI being unable to obtain an alternative carrying broker or other alternative arrangement to replace Penson Financial Services Canada Inc., which is discontinuing its carrying broker business as of Dec. 31.

During a question-and-answer session at the KPMG 21st Annual Insurance Issues Conference, Julie Dickson of OSFI made an oblique defence of the 2008 Manulife Rule Change:

Well, in terms of capital, it’s a reality because all risk-based capital rules are, to some extent, pro-cyclical. And when risk goes up, required capital goes up. So it is part and parcel of the pro-cyclicality phenomenon. 2008 I think was a good example, where we noticed that capital was spiking. It’s OK for capital to rise as you enter a recession, but it was spiking with the decline in equity markets. And when we looked at how the rules worked, we realized that that was inappropriate because the formulas were requiring a lot of extra capital for obligations which were many, many years off. And that was felt to be, too risk sensitive. We didn’t think it appropriately reflected the risk, and made a change.

Bombardier – proud issuer of BBD.PR.B, BBD.PR.C and BBD.PR.D – has issued ten year notes at 6.125%.

Meanwhile, I see that HSBC Bank Canada – proud issuer of HSB.PR.C, HSB.PR.D and HSB.PR.E – has issued eight year deposit notes at 2.938%.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 2bp, FixedResets up 15bp and DeemedRetractibles off 6bp. Volatility was low. Volume was well above average.