PrefBlog

There’s a fundamental disagreement about the Citigroup bail-out:

“While there was consensus that Citigroup was too systemically significant to be allowed to fail, that consensus appeared to be based as much on gut instinct and fear of the unknown as on objective criteria,” according to a report today from Neil Barofsky, special inspector general for the Troubled Asset Relief Program. “The conclusion of the various government actors that Citigroup had to be saved was strikingly ad hoc.”
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“It may have been ad hoc, but it worked,” said Michael Goldstein, professor of finance at Babson College in Massachusetts. “Fear of the unknown is a perfectly good reason to try to buy some time and not take the chance of the U.S. economy going into another Great Depression.”

Well, I’m no big fan of the regulators, but expecting a standard bureaucratic binder with plans regarding ‘What to do if the world melts down’ seems a bit much. Once they started concentrating on their jobs – the concentration being assisted by the prospect of hanging in the morning – they did all right. Like the man said, more or less, no plan survives contact with the enemy.

However, the US is eating its seed corn:

Now, as governments in China and India boost funding for expansion of their universities, Governor Jerry Brown’s proposed 16 percent cut in the higher-education budget jeopardizes the flow of talent that powers Google Inc., Apple Inc. and the rest of California’s knowledge-based economy. The elite University of California system may no longer be able to guarantee admission to the top 12.5 percent of the state’s high-school seniors. Annual tuition for residents, which was less than $4,500 a decade ago, is scheduled to rise to at least $11,124 in the next school year.

… but the current pace of innovation remains satisfactory:

Vivus Inc.’s experimental impotence drug Avanafil helped 80 percent of men achieve erections and two-thirds to have intercourse, Chief Executive Officer Leland Wilson said.
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Because Avanafil is metabolized fairly rapidly, men may be able to use it safely twice a day, at the beginning and end of the day, Tam said.

News of the breakthrough got the Canadian preferred share market all excited today, with PerpetualDiscounts up 65bp while FixedResets gained 4bp on heavy volume.

It was the deep-discount issues that did particularly well, as will be seen on the Performance table, but let’s look at some specific:

Analysis of the data using the Straight Perpetual Implied Volatility Calculator produces the following table:

Plots are:

2011-01-12

Click for Big
 
 
 
2011-01-13

Click for Big

All this does not appear to be bond-related, by the way: long corporates did nothing all day, NUTHIN’.

Mark White of OSFI gave a speech titled Basel III: Balancing of Risk and Regulation, in which he said nothing at all.

There’s one one big problem with simple stock screens:

Claymore’s Canadian Dividend exchange-traded fund (CDZ-T …) is designed to track the S&P/TSX Canadian Dividend Aristocrats Index, which is composed of companies that have paid higher dividends for at least five consecutive calendar years.

It’s a great concept. Trouble is, the financial crisis prompted a lot of companies to conserve cash by cutting dividends or holding them steady, and that’s caused the index to shrink dramatically.
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However, unlike the iShares ETF, the Claymore fund no longer has any Canadian banks or insurers.

Some are cheering the results of Portugal’s 10-year auction:

The markets heaved a hefty sigh of release today as Portugal pulled off a widely-watched auction of 10-year bonds, €599-million worth at a lower-than-expected yield of 6.716 per cent, below the key level of 7 per cent. It also sold four-year bonds, bringing the todal to €1.25-billion.
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Together, Portugal, Ireland and Spain have needs this year of about €300-billion, a combination of maturing debt and additional funding needed to cover deficits, [Scotia economist] Mr. [Derek] Holt calculated.

It’s not apparent just how much yield the recent ECB purchases are worth:

The weekly amount compares with 164 million euros spent the previous week although the figures may not give the full picture as the ECB’s purchases take 2-3 days to be finalised.
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The ECB threw Portugal a temporary lifeline on Monday by buying up its bonds, traders said, as market and peer pressure mounted for Lisbon to seek an international bailout soon.

Official disrespect for due process is reaching epidemic proportions:

Ten municipalities in the Lower Mainland have safety inspection programs that send inspectors armed with B.C. Hydro statistics on abnormal energy consumption into homes.
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Critics say the safety inspections are a substitute for police raids of suspected grow-ops. Police cannot enter a home without reasonable grounds for believing that they will find illegal activity. However, safety inspectors can just go in and look around. If they find a grow-op, they call police, who are usually waiting at the curb.

And why? Here’s one potential answer:

Municipalities could end up reaping millions of dollars if given 50 per cent of assets seized under proceeds-of-crime legislation, Kevin Falcon said Tuesday.

“I think it’s a great opportunity to involve municipalities in a partnership way going after illegal criminal activity,” Mr. Falcon told reporters.

Mr. Falcon’s commitment is part of a 12-point crime platform released by the former health minister, who is seeking the leadership of the B.C. Liberals in a party vote Feb. 26 that will choose the province’s next premier.

It was a mixed day on above average volume for the Canadian preferred share market, with PerpetualDiscounts gaining 16bp and FixedResets losing 2bp. There was quite a bit of block trading done and not much volatility, with again only one entry in the Performance Highlights Table.

Block trading was dominated by Desjardins, which wrote some very nice-sized tickets. Note that this does not necessarily mean they earned good money on the crosses – some of them could have been internal crosses (with a single manager shuffling issues around his portfolios; not something that should cost a lot of money).

PerpetualDiscounts now yield 5.43%, equivalent to 7.60% interest at the standard equivalency factor of 1.4x. Long Corporates now yield about 5.5% (maybe a bit less) so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 210bp, with everything unchanged from the figures reported January 5.

It had to come. Credit Suisse is starting a new Exchange targetting clients who are little girls:

The venue, Light Pool, will be the first U.S. electronic communications network to be started in five years. The ECN is aimed at institutional investors such as mutual funds, hedge funds, pensions and endowments. Unlike existing exchanges, Light Pool will employ a system to classify users by how they trade as a way to set prices and keep out unwanted speculators.
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Development of Light Pool began a year ago as a hedge against potential regulatory restrictions on dark pools. The chief executive officers of exchange operators such as New York- based NYSE Euronext and Nasdaq OMX Group Inc. have urged the SEC to impose more requirements on dark pools, which grew to more than 12 percent of equities trading in November, from less than 9 percent two years earlier, data from Rosenblatt show.

As its regulatory concerns diminished in 2010, Credit Suisse switched its focus to creating a public displayed market for institutional investors worried they weren’t getting optimal executions on exchanges that cater to high-frequency firms.
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The broker’s clients and firms accessing Light Pool directly will be automatically classified based on an initial period of trading behavior and placed in one of three categories: contributors, neutral users and opportunistic traders. The criteria for defining a firm will be automated and objective, “with no human intermediation,” as is required for public markets, Galinov said. The aim is to determine whether firms are systematically profiting from their trading activity in ways that could hurt institutional clients, he said.

Opportunistic firms, which Galinov says include some high- frequency trading companies, will be kicked off the platform and prevented from providing orders or executing against bids and offers directly through Light Pool. They’ll instead have to go through the Jersey City, New Jersey-based National Stock Exchange, where Light Pool will also publish its quotes.

Meanwhile, the UK is showing the world how to compete:

Chancellor of the Exchequer George Osborne said he’ll push Britain’s biggest banks to follow state- controlled Royal Bank of Scotland Group Plc in awarding lower bonuses in 2011 and left open the possibility of further action.
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Prime Minister David Cameron’s coalition faces the same problem as the previous Labour administration after its 2008 rescue of the banks. The government needs lenders it has stakes in — such as RBS — to succeed, which means paying competitive salaries, while it can’t directly control the compensation paid by other banks — such as Barclays.

If you can’t beat ’em – legislate ’em!

Volume picked up to above average on a good day for the Canadian preferred share market. PerpetualDiscounts were up 18bp, while FixedResets gained 8bp. There was, again, only a lone entry in the Performance Table – and that’s the same issue as yesterday, reversing itself.

The situation in Europe is slowly getting worse:

The cost of insuring against default on European sovereign debt climbed to records and European stocks fell amid concern Portugal is next in line for a bailout. Portuguese securities reversed declines after three traders with knowledge of the deals said the ECB purchased the government’s bonds.

With European governments including Portugal and Spain due to borrow at least $43 billion this week, attention is shifting to whether Europe is doing enough to stem the crisis. Chancellor Angela Merkel was today forced to deny that Germany was pushing Portugal to seek a bailout to alleviate the market pressure.
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The cost of insuring Portuguese bonds against default rose to a record today, while Belgian and Spanish bonds declined on funding concerns. The benchmark Stoxx Europe 600 Index lost 0.9 percent to 278.48 at the 4:30 p.m. close in London, the biggest drop since Dec. 30.

For the first time, investors view western European government bonds as riskier than emerging-market debt, the Markit iTraxx SovX Western Europe Index of credit-default swaps showed last week.

Mr Patrick Honohan, Governor of the Central Bank of Ireland, gave a speech:

The current impact of the banking losses on the economy is not so much via the net long-term taxpayer cost, but comes mainly as a result of the accumulation of debt. The jump in debt associated with these losses is of the same order of magnitude as the rest of the borrowing 2009–10 (Fig. 4). Either of these components would have been unproblematic, together they make the markets and the rating agencies nervous. The fiscal adjustment could possibly have been delayed by a year or two had it not been for the banking losses; now it cannot wait.

Click for big

Sell-side analysis has been worse than usual lately:

Companies in the Standard & Poor’s 500 Index that analysts loved the most rose 73 percent on average since the benchmark for U.S. equity started to recover in March 2009, while those with the fewest “buy” recommendations gained 165 percent, according to data compiled by Bloomberg. Now, banks’ favorites include retailers and restaurant chains, the industry that did best in last year’s rally and that are more expensive than the S&P 500 compared with their estimated 2011 profits.

The brokerage houses are great for data and a good source of ideas. Actionable investment recommendations… not so much.

In another example of “gotcha regulation”, the SEC has commenced proceedings to enforce Rule 105 of Regulation M:

Rule 105 of Regulation M of the Exchange Act provides, in pertinent part:
In connection with an offering of equity securities for cash pursuant to a registration statement. . . filed under the Securities Act of 1933 (“offered securities”), it shall be unlawful for any person to sell short . . . the security that is the subject of the offering and purchase the offered securities from an underwriter or broker or dealer participating in the offering if such short sale was effected during the period (“Rule 105 restricted period”) that is the shorter of the period: (1) Beginning five business days before the pricing of the offered securities; or (2) Beginning with the initial filing of such registration statement . . . and ending with the pricing. … Rule 105 of Regulation M is designed to protect the independent pricing mechanism of the securities market shortly before follow-on or secondary offerings.

For the life of me, I can’t make out why this rule exists, or what useful purpose it might serve.

Bernanke scolded Congress:

However, an important part of the federal budget deficit appears to be structural rather than cyclical; that is, the deficit is expected to remain unsustainably elevated even after economic conditions have returned to normal. For example, under the Congressional Budget Office’s (CBO) so-called alternative fiscal scenario, which assumes that most of the tax cuts enacted in 2001 and 2003 are made permanent and that discretionary spending rises at the same rate as the gross domestic product (GDP), the deficit is projected to fall from its current level of about 9 percent of GDP to 5 percent of GDP by 2015, but then to rise to about 6–1/2 percent of GDP by the end of the decade. In subsequent years, the budget outlook is projected to deteriorate even more rapidly, as the aging of the population and continued growth in health spending boost federal outlays on entitlement programs. Under this scenario, federal debt held by the public is projected to reach 185 percent of the GDP by 2035, up from about 60 percent at the end of fiscal year 2010.

The CBO projections, by design, ignore the adverse effects that such high debt and deficits would likely have on our economy. But if government debt and deficits were actually to grow at the pace envisioned in this scenario, the economic and financial effects would be severe. Diminishing confidence on the part of investors that deficits will be brought under control would likely lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil. Moreover, high rates of government borrowing would both drain funds away from private capital formation and increase our foreign indebtedness, with adverse long-run effects on U.S. output, incomes, and standards of living.

It is widely understood that the federal government is on an unsustainable fiscal path. Yet, as a nation, we have done little to address this critical threat to our economy. Doing nothing will not be an option indefinitely; the longer we wait to act, the greater the risks and the more wrenching the inevitable changes to the budget will be. By contrast, the prompt adoption of a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence. Plans recently put forward by the President’s National Commission on Fiscal Responsibility and Reform and other prominent groups provide useful starting points for a much-needed national conversation about our medium- and long-term fiscal situation. Although these various proposals differ on many details, each gives a sobering perspective on the size of the problem and offers some potential solutions.

The Fed’s reintermediation made a good profit:

The U.S. Federal Reserve System, which includes the Board of Governors in Washington and 12 regional banks based in cities such as New York and San Francisco, returned a record $78.4-billion (U.S.) to the Treasury in 2010 – a remarkable 65-per-cent increase from 2009.

Toronto Mayor Rob Ford is making the right noises:

Toronto Mayor Rob Ford has issued a clear warning to any managers or staff who defy his cost-cutting edicts: Rein in spending or find a new job.

“If they are unable to manage effectively in the best interest of the taxpayers, then we will have to find new managers that can,” Mr. Ford said Monday.

Mr. Ford singled out Toronto police for its proposed 3-per-cent budget increase and summoned Chief Bill Blair to his office at 2 p.m. Monday.

The mayor toned down his rhetoric by the time he and Chief Blair emerged from their hour-and-a-half-long meeting. “I have the utmost confidence in the chief continuing to do the job. We had a very, very constructive meeting and I support the chief 100 per cent,” Mr. Ford said.

I have sent him an eMail, titled “Police Force Gravy Train”:

As you are probably aware, there are many instances of poor personnel management in the Toronto Police Service that are very costly to Toronto taxpayers.

i) Overtime for court appearances. A considerable amount of money is spent on this, with the TPS being unable or unwilling to schedule shifts to match required court appearances. Will you be seeking change in this area, if necessary by increasing the TPS complement so that officers in court can have their duties covered by another officer on straight time?

ii) Paid-Duty. Organizers of special events hire Constables and more senior officers at a high premium to officers’ regular wages, as is entirely normal in any private sector operation. However, the bulk of this premium is paid to the officers directly, instead of being retained by TPS, the contractor. Will you be seeking to arrange matters such that policing for special events is explicitly performed by the TPS, assigning officers on regular shifts as much as possible? Again, I recognize that the TPS complement may need to be increased to facilitate the mandate.

It was a mixed day on the Canadian preferred share market, with PerpetualDiscounts gaining 20bp and FixedResets down 2bp. Volume was average; there is but a single entry on the Performance Highlights table.