PrefBlog

Portugal’s problems deepened:

Portugal doesn’t need a rescue, Prime Minister Jose Socrates said in Brussels, seeking to counter speculation of a bailout as talks began in Lisbon to end the political limbo after lawmakers rejected his budget cuts.

Portuguese bonds fell, driving their yield to a euro-era record as investors anticipated that the country would follow Ireland and Greece in seeking a financial lifeline. A bailout may total as much as 70 billion euros ($99 billion), two European officials with direct knowledge of the matter said yesterday.
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The political deadlock comes as downgrades to Portugal’s credit rating threaten to deepen its debt woes. Standard & Poor’s and Fitch Ratings both cut Portugal’s rating yesterday.
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Portugal’s 10-year yield advanced as much as 14 basis points to 7.80 percent. The difference in yield that investors demand to hold the securities instead of German bunds widened 10 basis points to 451 basis points, the most since November. The Portuguese two-year yield increased as much as 38 basis points to 7.09 percent.

Opposition parties united to reject additional cuts that were the equivalent of 4.5 percent of gross domestic product over three years. The package included a reduction in pensions of more than 1,500 euros a month and further decreases in tax benefits. The government said the extra measures were needed to trim the deficit to 4.6 percent of GDP this year and within the EU’s 3 percent limit in 2012.

The Invisible Man would like us to believe that he has finally grown a pair:

The second minority government of Stephen Harper has fallen.

Early Friday afternoon, 156 opposition MPs – all of the Liberals, New Democrats and Bloquistes present in the House of Commons – rose to support a motion of no-confidence.

It was also a motion that declared the government to be in contempt of Parliament for its refusal to share information that opposition members said they needed to properly assess legislation put before them.

… but they’re probably just tied on with string.

There was a slight upward trend in the Canadian preferred share market today, with PerpetualDiscounts exactly flat (!) and both FixedResets and DeemedRetractibles up 4bp. Volatility increased a little, but volume remains anemic.

Update, 2011-3-29: It took four days, but I was finally able to get Trades & Quotes data from the TMX – they had to recover it manually because their software isn’t working properly, as far as I can see.

Anyway, in the period from 15:47:31, when 400 shares traded at 26.80, until the close at 16:00:00, there were 214 different quotes, all with a bid for 300 shares at 26.75 as algorithms jockeyed for position on the offer side. In this period the lowest offer was at 27.03, the highest at 28.25. There were nine instances of the offer side being 28.25.

The Closing Quote was 26.75-16, 3×1. At 16:15:03 the offer of 100 shares at 27.16 was cancelled, resulting in a Last Quote of 26.75-28.25, 3×4.

Pressure on Spain is increasing:

Thirty of Spain’s smaller banks had their senior debt and deposit ratings downgraded, as Moody’s Investors Service reviews whether governments are willing to support all their lenders in a crisis.

Citing heightened financial pressure on the country’s sovereign rating and “many weak banks,” the New York-based ratings firm cut 15 lenders by two levels and five by three or four, according to a statement today. The outlook on most banks’ senior and deposit ratings remains negative, Moody’s said.
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In Denmark, where senior bondholders of Amagerbanken A/S were forced to take losses, the firm cut the grades of five lenders and may cut them again.
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Spain’s credit rating was cut to Aa2 on March 10 by Moody’s, which said the cost of shoring up the banking industry will eclipse government estimates. The ratings company said then that Spanish lenders may need as much as 50 billion euros ($70.3 billion) to meet new capital requirements, a figure that compares with the Bank of Spain’s estimate that 12 lenders will need 15.2 billion euros.

The Amagerbanken failure is causing some debate:

Denmark is trying to persuade the rest of Europe to match rules exposing bondholders to losses after the failure of a regional bank last month left lenders in the Nordic country risking higher funding costs.

The collapse of Amagerbanken A/S on Feb. 6 forced a 41 percent loss on unsecured senior bonds and prompted Moody’s Investors Service 10 days later to cut ratings on five Danish lenders, including Denmark’s biggest, Danske Bank A/S, as it factored out state protection. The insolvency was the first to test rules Denmark put in place in October and set a European Union precedent for senior creditor losses amid a region-wide debate on burden sharing.
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Denmark is arguing the financial crisis hasn’t adequately stemmed risk-taking amongst bond investors and wants the EU to enforce the “possibility of debt writedowns” to discipline markets, according to a March 4 letter sent to the European Commission. EU financial services chiefMichel Barnier in January said bank regulators should be able to write down lenders’ senior debt, though a final agreement has yet to be reached.

European leaders are trying to put in place measures to protect taxpayers from having to rescue failing banks after Ireland guaranteed six lenders in 2008.

There are already measures in place to protect taxpayers from having to rescue failing banks: it’s called bankruptcy. The problem only arises because governments are desperate to pretend that everything is normal, and to keep their failed banks lending merrily away – as long as it’s for socially uselful purposes, of course.

But the punchline of the story came, naturally enough, at the end:

Denmark, home to the world’s third-largest mortgage-backed bond market after the U.S. and Germany, is trying to persuade the EU that the debt deserves a higher liquidity grade than the Basel Committee for Banking Supervision agreed on in December.

The covered-bond market may also become more liquid as investors spooked by the threat of losses on other debt classes turn to bonds backed by collateral, according to Fitch Ratings Ltd.

“The growing use of covered bond funding by banks is a trend set to continue,” Fitch analysts Helene M. Heberlein, Bridget Gandy and Jan Seemann said in a March 10 note. Issuers are also adding surplus collateral to the pool backing the bonds to attract investors, leaving less behind to cover other debt classes, Fitch said.

“There must be no doubt that holders of covered bonds and junior covered bonds always will receive timely payment,” Denmark’s government said in the March 4 letter. “It should therefore be made clear that covered bonds and junior covered bonds should not be subject to debt write downs.”

Hey – if the rules can be changed retroactively for senior debt, why can’t they be changed retroactively for covered bonds? What has Denmark done to defend the primacy of the rule of law?

With all that, Europe is taking decisive action:

As speculation swirled that Portugal will be the next victim of the crisis, the leaders bowed to German Chancellor Angela Merkel’s call to pare the fund’s paid-in capital as of 2013 to 16 billion euros ($23 billion), less than the 40 billion euros foreseen in a March 21 accord.

“It was a difficult debate with Germany,” Luxembourg Prime Minister Jean-Claude Juncker told reporters after the first session of an EU summit in Brussels early today. “Germany found that in the compromise agreed last Monday it would have to pay in too much. So we had to tackle that issue.”
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Standard & Poor’s might take struggling countries down another notch, since the future fund — known as the European Stability Mechanism — will outrank private bondholders, said Moritz Kraemer, managing director of European sovereign ratings in Frankfurt.

Ratings Reassessment
“We would reassess the ratings specifically of Greece and Portugal, which we think are the most likely potential customers of the ESM,” Kraemer said on Bloomberg Television today.

Portuguese bonds fell for a fourth day today, pushing the 10-year yield up 13 basis points to 7.79 percent. The extra yield over German bonds, a sign of the risk of investing in Portugal, rose 10 basis points to 452 basis points.

It’s a bit like problems with US Health Care:

Aetna Inc. (AET) is suing six New Jersey doctors over medical bills it calls “unconscionable,” including $56,980 for a bedside consultation and $59,490 for an ultrasound that typically costs $74.

The lawsuits could help determine what pricing limits insurers can impose on ”out-of-network” physicians who don’t have contracts with health plans that spell out how much a service or procedure can cost.

Shouldn’t be any limits on doctors at all. The limits should be on how much the insurer will reimburse the insuree … “If you need an ultrasound, we’ll reimburse you 100% of the amount under $75 and 50% of the amount between $75 and $125, and 0% of the amount over $125, and here’s a list of places where you can get it done for $74.” But then insurers, companies, doctors, patients and politicians wouldn’t be able to pretend everything was free.

It was another good day on the Canadian preferred share market with PerpetualDiscounts up 11bp, FixedResets gaining 8bp and DeemedRetractibles winning 7bp. Volatility was muted, with only two entries in the Performance Highlights table; volume was anemic. Is it Christmas, or what?

Crisis in Portugal:

Portuguese Prime Minister Jose Socrates tendered his resignation after plans to cut the budget were rejected by parliament, pushing the country closer to an international bailout.
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Portugal has already raised taxes and implemented the deepest spending cuts in more than three decades to convince investors it can reduce its budget shortfall. Additional cuts, announced on March 11, prompted a political backlash and failed to persuade investors.

The spread between Portuguese and German 10-year bond yields widened 16 basis points to 438 basis points yesterday after reaching a euro-era record of 484 on Nov. 11.

It was another positive day on the Canadian preferred share market,with PerpetualDiscounts up 17bp, FixedResets up 2bp and DeemedRetractibles winning 9bp. Volume was average.

PerpetualDiscounts now yiel 5.59%, equivalent to 7.27% interest at the now standard equivalency factor of 1.3x. Long corporates now yield about 5.5% (OK, maybe a little bit less) so the pre-tax interest-equivalent spread is now about 180bp, not much different from the 175bp reported on March 9.

Looks like an election is in the wind:

Opposition leaders have signalled they will not support the Conservative budget, making a spring election all but inevitable.

The budget’s debt management strategy was interesting:

The government said in the debt management strategy that it released with the federal budget that it’s taking the step to ensure that it always has enough cash to pay one month of bills, which incidentally is the same requirement that will be in place for banks under the new Basel rules. The money will be stashed in interest bearing accounts and foreign exchange reserves and shouldn’t add to the deficit in a “material” way.

Europe had a bad day:

Irish notes slid, leading bonds of Europe’s most indebted nations lower, and the euro fell on concern the region’s leaders are struggling to fix the government-finance crisis. Oil rallied, while U.S. and European stocks retreated following a rebound in Japanese shares.

Irish 2-year note yields surged 62 basis points to 9.87 percent and rose as high as 10.18 percent, the most since Bloomberg began collecting the data in 2003. Yields on similar- maturity Portuguese and Greek debt climbed at least 26 basis points.

UK inflation is on the rise:

U.K. inflation accelerated more than economists forecast in February to the fastest pace in more than two years, adding pressure on the Bank of England to increase its benchmark interest rate.

Consumer prices rose 4.4 percent from a year earlier after a 4 percent increase in January, the Office for National Statistics said today in London. That’s the most since October 2008. The median forecast of 32 economists in a Bloomberg News survey was 4.2 percent. A separate report showed the budget deficit unexpectedly widened as government revenue fell.

But I may have been wrong about the long term effects of Credit Crunch politics on the UK financial sector:

Goldman Sachs Group Inc. (GS) employs almost as many people in London today as it did in 2007, before Lehman Brothers Holdings Inc. (LEHMQ) filed for the biggest bankruptcy in history, sparking a global recession.

Goldman Sachs isn’t alone. Royal Bank of Scotland Group Plc (RBS), recipient of the world’s biggest bank bailout, has more workers in its securities unit than four years ago. Barclays Capital, under Robert Diamond, hired 1,800 in 2010.

Investment banks in Europe’s financial capital are adding jobs, helping to bolster headcounts at law and accounting firms across London, as the rest of Britain struggles to recover from the worst economic contraction since the 1930s. Chancellor of the Exchequer George Osborne, who delivers his budget today, has little alternative except to do all he can to keep companies such as Barclays Plc (BARC) and HSBC Holdings Plc (HSBA) from leaving London.

“We want London to remain a global financial center, and one that will continue to flourish and grow because of the employment it brings,” Treasury minister Mark Hoban said at a conference in the City of London last week. “We want to see more employment in the U.K., not less and I think a blooming financial services sector can help deliver that.”

Nevertheless, DBRS is worried:

• • Some investors have expressed increasing concern about Euro zone countries suffering from high and rising debt burdens, uncertain bank recapitalization needs, low competitiveness or political instability.
• • In addition to low investor confidence, deterioration in global economic and political conditions – the Japanese nuclear crisis, popular unrest in Bahrain, energy supply disruptions in Libya – could slow Europe’s economic recovery and thereby delay fiscal adjustment and debt stabilization.
• • Greater clarity on European policies came on March 11, the first in a series of meetings through March 25, with a set of initiatives that if approved may help restore confidence and provide countries with time to implement fiscal austerity programs and return to growth.
• • However, DBRS believes that the final announcements may continue to leave doubts about Europe’s policy stance regarding debt restructuring. The unstable macroeconomic environment however increases the need for greater policy clarity.
• • DBRS would be encouraged by policies that address not only liquidity needs, but also reduce debt servicing costs. Clearer policies would further help to stabilize DBRS’s sovereign ratings in Europe.

One can’t help but wonder what will ultimately happen to Detroit:

The population in Detroit plunged 25 percent during the last decade, falling to the lowest level since 1910, according to 2010 Census figures.

The number of city residents fell to 713,777 last year, compared with 951,270 in 2000, the U.S. Census Bureau said today in Washington.
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Detroit’s overall population has fallen steadily since 1950, when it peaked at 1.8 million.

There’s a fascinating development in workplace computer privacy law:

A judgment on Tuesday from the Ontario Court of Appeal broke new ground on an issue that is exploding into the court system – the extent to which Internet information is private and beyond the reach of the law.

The case involved a Northern Ontario high school teacher charged with possessing child pornography. The judges said that police breached his Charter rights by viewing his computer files without a warrant.
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Toronto lawyer Scott Hutchison, a privacy expert, said that the court has given a sound answer to a vital question. “This case comes down firmly on the side of privacy and holds that employers cannot give police investigators access to a workplace computer,” he said.

“This case makes it clear that the employer may own the computer, but that doesn’t give them the power to waive the employee’s privacy rights,” Mr. Hutchison added.
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Writing on behalf of Chief Justice Warren Winkler and Mr. Justice Robert Sharpe, Madam Justice Andromache Karakatsanis said the board employee did not breach the Charter protection against unreasonable search and seizure because he was mandated to do so.

However, the police search was an entirely different matter.

DBRS has released six methodological updates. Of primary interest are Life Insurance companies and P&C Insurance companies.

The Globe’s John Heinzl had a good piece titled Getting a grip on the dividend gross-up.

It was another strong day in the Canadian preferred share market, with PerpetualDiscounts up 26bp, FixedResets winning 13bp and DeemedRetractibles gaining 9bp. Volume continued to be light.

No commentary today – sorry!

It was a strong day on the Canadian preferred share market, with PerpetualDiscounts gaining 16bp, FixedResets up 10bp and DeemedRetractibles winning 20bp. Volume was light – most investors (other than myself, of course) being too busy dancing naked in lascivious spring rites. Why don’t I ever get invited?

To my astonishment, not only did BMO.PR.J not crash heavily to earth after Friday’s fireworks, but it again topped the list of Performance Highlights! It now looks even more expensive and there is the possibility that there is more behind the story than a simple fat-finger or algo-gone-wild. A short squeeze, maybe? Unlikely, I know, but what else is there? A point against the short-squeeze story is that today’s buying – of 13,941 shares – was broadly based, with RBC taking the largest share with 4,005 shares. Friday’s buyer, Desjardins, bought 2,618 shares. It’s all very peculiar, but living in PreferredShareLand is a little like being the White Queen in Through the Looking Glass – one sometimes see six preposterous things before breakfast.