PrefBlog

Nortel’s carcass is worth big bucks:

Apple Inc. (AAPL) joined with rivals Microsoft Corp. (MSFT) and Research in Motion Ltd. (RIM) to outbid Google Inc. (GOOG) for a patent portfolio from Nortel Networks Corp. and gain rights to technologies for mobile phones and tablet computers.

The group, which also includes Sony Corp. (6758), Ericsson AB and EMC Corp., agreed to pay $4.5 billion in cash for the assets, Ontario-based Nortel said in a statement. The companies aim to complete the sale this quarter pending approval from U.S. and Canadian courts, it said.

The purchase will give Apple, RIM and their bidding partners control over more than 6,000 patents and applications that cover wireless and Internet technologies. The winning offer came after several rounds of bidding and was five times the $900 million Google had offered before the auction for Nortel’s remaining intellectual property.
…
Nortel, which filed for bankruptcy in 2009, fetched more for the patents than the $3 billion it had previously raised by selling almost all its businesses. RIM, maker of the BlackBerry smartphone, will pay about $770 million for its share of the patents, the Waterloo, Ontario-based company said in a statement. Ericsson will pay $340 million, the Stockholm-based networking-equipment maker said. Steve Dowling, a spokesman for Apple, declined to comment beyond the Nortel statement.

The Greek problem has been papered over – at least for now:

The euro area approved its share of a 12 billion-euro ($17.4 billion) aid payment for Greece and pledged to complete work in the coming weeks on a second rescue package for the cash-strapped nation to prevent a default and contagion.

Finance ministers agreed to disburse 8.7 billion euros of loans under last year’s 110 billion-euro bailout, rewarding Greek Premier George Papandreou for pushing an extra austerity plan through parliament. The International Monetary Fund is due to provide the rest of the July aid installment, the fifth under the 2010 package.

The spotlight now turns to a second bailout to which banks and insurers plan to contribute following German demands for taxpayer relief. Euro-area governments and investors will provide 70 percent of new aid that may total as much as 85 billion euros, with the IMF offering the rest, Thomas Wieser, an Austrian Finance Ministry official, said on June 30.

S&P will likely label a Greek term extension as a selective default:

In summary, the growing risk that the Hellenic Republic might engage in a distressed debt restructuring was one of the reasons we lowered its rating on June 13 (see, “Long-term Sovereign Rating On Greece Cut To ‘CCC’; Outlook
Negative”). While we would likely view the FBF proposal, if it proceeds in its current form, as an effective default, we recognize that it is just one of a number of proposals attempting to address the Greek government’s 2011-2014 financing needs and the sustainability of its future debt burden. We
understand that the FBF proposal may change, and it is possible that it could take a form that results in a different rating outcome. Regardless of whether the current FBF proposal is implemented, however, we continue to believe the Hellenic Republic’s uncertain ability to implement the revised EU/IMF program
is a key risk weighing on its credit standing.

This has European shorts in a knot:

That may leave the European Central Bank unable to accept Greek government debt as collateral, impairing the lifeline it has provided the country’s banks.

“It sends all the officials and banks back to drawing board to think something new,” said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt. “The ECB is saying it won’t accept debt in a default. Someone needs to give in — either Germany or the ratings agencies or the ECB. One of three will have to compromise.”

Despite all this, Greek notes had a good day:

Greek two-year note yield dropped below 26 percent for the first time since June 14.
…
Greek two-year yields slid 73 points to 26.11 percent, at one point dipping to 25.76 percent. The cost of insuring Greek debt against default rose four basis points to 1,865, signaling 80 percent odds the country will miss a bond payment in five years. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments climbed four basis points to 222. The euro slipped 0.1 percent against the dollar and the yen.

There’s a new chapter in the Sino-Forest saga:

Sino-Forest Corp. (TRE), the Chinese tree- plantation operator accused by a short seller of overstating timber holdings, climbed in Toronto after Wellington Management Co. said it owned 11.5 percent of the company.

Sino-Forest rose as much as 56 percent after the Boston- based investment firm said in a regulatory filing it held 28.3 million shares as of June 30. Wellington, which manages $663 billion, held 79,700 Sino-Forest shares, or 0.03 percent, as of Dec. 31, according to data compiled by Bloomberg.

I just finished reading The Taste of Conquest by Michael Krondl. Excellent, and a worthy companion to William Bernstein’s A Splendid Exchange.

After our beloved mayor turned down a chance to say hello to umpteen thousand tourists with deep pockets, another councillor suggested cutting off funds for the city’s #2 tourist event – even if it means #1 will become collateral damage. Meanwhile, crappy pseudo-festivals organized by the well-connected get megabucks. Just what exactly do we need to do in this city to get a competent, pro-business administration?

The month – and the quarter – started off on an upbeat for the Canadian preferred share market, with PerpetualDiscounts gaining 4bp, FixedResets up 11bp and DeemedRetractibeswinning 21bp. Decent volatility, volume was average. RBC had a nice day.

Looks like some people think the LSE’s not a bad partner:

The biggest rally in three months for Nasdaq OMX Group Inc. (NDAQ) may be the clearest sign yet that investors expect the New York-based exchange operator to buy London Stock Exchange Group Plc. (LSE)

Nasdaq OMX gained 4.7 percent to $25.14 yesterday, climbing the most since April 1, after LSE dropped its offer for TMX Group Inc. (X), saying too few shareholders supported the C$3.32 billion ($3.4 billion) merger. The gain in Nasdaq OMX was the largest since the day it announced a plan to buy NYSE Euronext with IntercontinentalExchange Inc. (ICE), and signals speculation the company will expand with LSE, according to Capstone Holdings Group LLC and Aite Group LLC.

Julie Dickson gave a speech to to the Canadian Institute of Actuaries Annual Meeting 2011; there were two snippets of interest:

Regulators are increasingly considering the adequacy of group capital. This brings into question the risks entailed by non-regulated entities, concentration risk, fungibility of capital, liquidity risk, the impact of intra-group support measures, diversification of risk, etc. The list is lengthy. Again, the actuarial profession has the tools and expertise to consider these issues and to help provide solutions.

.. which may reflect a desire to regulate insurance companies at the holding company level. Or it may not.

The other snippet is:

One of the most troubling issues we face as a regulator is the manner of response from industry, as well as your profession, to regulatory requirements. Frequently, the response to our requirements appears to be driven only by the need to comply, rather than by using the exercise as a means of identifying and reporting on important aspects of the way in which organizations manage risks.

This response is troubling because it implies a mechanical response, which may be conducted as cost effectively as possible, but that is not connected to any real business or risk management practices employed by the organization.

Consider Enterprise Risk Management as an example. The need for sound ERM practices has never been more pressing and yet we find that our requests for demonstrations of sound risk management via Dynamic Capital Adequacy testing (DCAT), stress testing, governance practices, etc. are frequently completed as if they were just regulatory compliance exercises rather than important demonstrations of real life ERM.

In our view, this type of response is not in anyone’s best interests.

“We’re from the government and we’re here to help you!”

Preet Bannerjee writes an interesting piece in the Globe titled How is your fund manager performing?. He references a newletter from Research Affiliates:

The selection of active managers, whose philosophy and process are geared to produce market-beating results, is an exhaustive and time-consuming activity. Certainly, some can take a shortcut, relying on historical track records (such as the typical trailing five years of returns) to gauge skill but, as mutual fund advertisements proclaim, “past performance is no guarantee of future results.” Indeed, the goal of manager research is to determine if the manager and its strategy will be successful in the dark and unknowable future. And that requires separating the wheat from the chaff or, in this case, manager skill from pure luck. Unfortunately, this is easier said than done. Statistically speaking, it requires a track record of approximately 35 years to determine whether the average active manager has demonstrated skill.[footnote]

Footnote: Using a very optimistic 2% excess return at the typical 6% tracking error level, for an information ratio of 0.33. An information ratio of 0.50 would take 16 years to confirm statistical significance, while a 0.25 ratio would take 62 years!

Another paper referenced was by Fama & French, Luck Versus Skill in the Cross Section of Mutual Fund Returns:

The aggregate portfolio of U.S. equity mutual funds is close to the market portfolio, but the high costs of active management show up intact as lower returns to investors. Bootstrap simulations suggest that few funds produce benchmark adjusted expected returns sufficient to cover their costs. If we add back the costs in expense ratios, there is evidence of inferior and superior performance (non-zero true alpha) in the extreme tails of the cross section of mutual fund alpha estimates.

What happened to Yellow this week?

The Canadian preferred share market closed the half on a strong note, with PerpetualDiscounts winning 19bp, FixedResets up 16bp and DeemedRetractibles gaining 14bp. Volatility was reasonable, with BAM.PR.O continuing its slide (with a wide spread), but ELF.PR.F and ELF.PR.G reversing theirs. Volume was average-ish.

PerpetualDiscounts now yield 5.48%, equivalent to 7.12% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 5.4% (well … a little under) so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 170bp, a significant narrowing from the 185bp reported June 29.