PrefBlog

Only four months until Christmas!

Oh, those naughty European speculators! No matter how often they’re told everything is fine, they keep panicking!

Stocks retreated as panic selling pushed Germany’s DAX Index (DAX) down 4 percent in 15 minutes amid speculation that Germany’s public finances are deteriorating and that regulators may impose restrictions on the market. The dollar and Treasuries advanced, while oil fell and Bank of America Corp. shares surged.
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There was concern Germany’s debt rating would be reduced, said Walter Todd, the chief investment officer at Greenwood Capital Inc. in Greenwood, South Carolina. CNBC reported that S&P, Moody’s Investors Service and Fitch Ratings all affirmed their ratings.

Investors also speculated that Germany would impose a short-selling ban, said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management Inc. in Chicago. German regulator BaFin has “all the regulation in place” regarding short selling in equities, press officer Dominika Kula said, in response to a question on whether the agency may ban the practice.

I propose that anybody wishing to sell a stock should submit a form in triplicate to the regulators, who will ensure that the decision has been made in accordance with the required process. That’ll fix those pesky speculators!
On cue:

French, Italian and Spanish stock- market regulators extended temporary bans on short selling introduced this month in a bid to stem market volatility.

Spain and Italy extended their bans through Sept. 30, regulators in both countries said in a statement. France’s Autorite des Marches Financiers said its ban could last as long as Nov. 11. The “objective” is to lift the temporary ban on short-selling of financial stocks “as soon as market conditions allow,” Spain’s CNMV market regulator said.

YLO took a break on its MTN buyback today, with no filings. However, it appears that they continued buying YLO.PR.B, YLO.PR.C and YLO.PR.D on the exchange through their Normal Course Issuer Bid.

DBRS confirmed Toronto at AA:

DBRS has today confirmed the ratings of the debentures issued by the City of Toronto (the City) at AA. The trends remain Stable, supported by the City’s relatively wealthy tax base and strong resolve in restraining spending and finding permanent solutions to eliminate the budget gap. However, debt remains under considerable pressure as a result of heavy capital spending, which is eroding financial flexibility and could affect the City’s rating if increases are not contained.
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DBRS commends management for the thorough review underway, which is probably the most extensive cost-containment effort undertaken by the City in recent memory. However, it remains unclear whether Council will approve the full range of measures necessary to protect fiscal sustainability. Significant concerns also remain with respect to the rising tax-supported debt burden, which stood at a moderate $964 per capita at December 31, 2010, but is set to grow by more than 50% to approximately $1,550 per capita by 2014 due to capital investments. While still manageable, the projected debt peak is up notably from the forecasts available at the time of last year’s rating review and is expected to consume a significant portion of the remaining flexibility within the current rating category. Since the capital plan excludes more than $8 billion in transit needs, the risk of further sizeable revisions to debt projections and their potentially adverse effect on the rating remains material.

I received notice today that a neighbor is seeking a zoning variance. It would appear that supporting documents are not filed electronically and are not available on the Internet. I have get to the York Civic Centre and ask a bureaucrat if I can look at them. Hymas Bonehead Rating Service confirms Toronto at AAAA++.

The Canadian preferred share market pulled back today, with PerpetualDiscounts down 13bp, FixedResets off 10bp and DeemedRetractibles losing 26bp. Good volatility – albeit highly skewed to the negatives! – and volume was merely average, although several issues traded more than 100,000 shares.

Moody’s downgraded Japan:

Japan’s debt rating was lowered by Moody’s Investors Service, which cited “weak” prospects for economic growth that will make it difficult for the government to rein in the world’s largest public debt burden.

Moody’s cut the grade one step to Aa3, with a stable outlook, it said in a statement today. Rebuilding costs from the March 11 earthquake and tsunami, along with continuing efforts to contain the Fukushima nuclear crisis, may make it hard for officials to meet their borrowing target this year, it said.

More joy from US housing:

Home prices in the U.S. fell 5.9 percent in the second quarter from a year earlier, the biggest decline since 2009, as foreclosures added to the inventory of properties for sale.

Prices dropped 0.6 percent from the prior three months, the Federal Housing Finance Agency said today in a report from Washington. In June, prices retreated 4.3 percent from a year earlier, while increasing 0.9 percent from the previous month.
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The U.S. inventory of homes for sale averaged 3.7 million during the second quarter, the highest since the third quarter of 2010, data from the National Association of Realtors show. The mortgages on 6.5 million U.S. homes had late payments or were in foreclosure in June, according to Lender Processing Services Inc. in Jacksonville, Florida.

It’s all the banks fault! Banks are evil! Banks should show forebearance, the way the neighbors would!

Members of the Vintage East Condominium Association in Miami Beach got tired of waiting for JPMorgan Chase & Co. (JPM) to foreclose on unit 9, so they sued the bank in February to take control of the property.

In June, more than four years after the owner stopped making payments, a judge ruled that JPMorgan lost its claim to the $144,000 mortgage. The apartment is now on the market for $87,500, and the association may stave off insolvency with proceeds from the sale and a new owner who pays monthly dues, said Jane Losson, a board member at the complex.
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Financially troubled condo associations are taking banks to court as foreclosure delays enable delinquent homeowners to stay in their buildings for years, often without paying dues that keep boards running. The groups start by pressuring lenders to speed up home seizures and take over payment of the monthly fees. In extreme situations, like the Vintage East case, associations may force banks to give up rights to the property.
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The bank delays have left homes in the delinquency process longer. U.S. homeowners facing foreclosure averaged 587 days without making a mortgage payment in June, up from 251 days in January 2008, according to Lender Processing Services Inc. (LPS), a real estate information company in Jacksonville, Florida.

In Florida, where 14 percent of homes with a mortgage have a foreclosure notice, the average delinquent borrower hadn’t made a payment for 719 days, or almost two years, LPS data show.

What a surprise! European credit markets are sick:

Investors are demanding a yield of 42 per cent to buy Greek two year notes amid concern that bailouts won’t work.

In the corporate credit markets, huge financial institutions aren’t able to borrow for longer terms such as five years. There’s no credible market for their bonds, strategists say, but even guesses at the prices show interest rates that investors would demand from banks mean there’s no way they would borrow.

This is having a few knock-on effects:

UBS AG (UBSN)’s decision to cut 5 percent of its workforce brings to more than 40,000 the number of jobs cut by European banks in the past month as the region’s worsening sovereign debt crisis crimps trading revenue.

UBS, Switzerland’s biggest bank, said yesterday it will eliminate 3,500 jobs, mainly from its investment bank. It follows HSBC Holdings Plc (HSBA), which announced 30,000 cuts on Aug. 1, Barclays Plc (BARC), which is cutting headcount by 3,000, and Royal Bank of Scotland Group Plc (RBS), which is eliminating 2,000 posts. Credit Suisse Group AG (CSGN) announced 2,000 reductions on July 28.

European banks are slashing jobs this year six times faster than their U.S. peers, according to data compiled by Bloomberg…

I’m not the only one nervous about the ECB buying bad credits:

“In the long term, this can’t be good, and therefore should be tolerated at best for a short period of time,” Mr. Wulff said in the English text of his remarks, which were delivered in German. “The guardians of the currency, too, must quickly find their way back to the agreed principles. I regard the huge buy-up of government bonds of individual states by the European Central Bank as legally questionable.”
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Mr. Wulff’s views are reflective more of the mood of the rank-and-file of Germany coalition government than of the government itself. German Chancellor Angel Merkel said in the eastern German city of Mageburg Wednesday that she would vigorously fight the breakup of the currency bloc.
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The yield on two-year Greek debt surged to a record Wednesday, as investors demanded interest of more than 44 per cent to buy the security. Faith in the latest European effort to rescue Greece is waning as several of its euro-area partners demand collateral in return for aid payments. Greece earlier sent Finland cash to secure the Nordic country’s contribution to the pan-European bailout plan.

You win some, you lose some:

John Paulson, the billionaire who is betting on an economic recovery by the end of 2012, has lost about 14 percent this month on a merger arbitrage hedge fund, according to an investor.

The Paulson Partners Enhanced fund declined 11 percent this year through Aug. 19, said the investor, who asked not to be named because the information is private. The fund had been up 2.9 percent this year through Aug. 4.

Paulson’s merger-fund losses add to the declines his New York-based firm, Paulson & Co., has suffered on other strategies. His largest hedge fund, Paulson Advantage Plus, dropped 22 percent this month through Aug. 19, bringing its 2011 loss to 39 percent, the investor said.

I wonder how the Disadvantage Minus fund did!

DBRS confirmed AER.PR.A at Pfd-3.

S&P downgraded Sino-Forest yesterday:

• We believe the delay in the findings of an independent committee’s investigation into fraud allegations is negative for Sino-Forest’s credit profile.
• In addition, the company’s operating profit declined in the most recently reported financial quarter.
• We are therefore lowering the corporate credit rating on Sino-Forest and the issue rating on its senior unsecured notes and convertible bonds to ‘B’ from ‘B+’.
• We have kept all the ratings on CreditWatch with negative implications. We may withdraw or suspend the ratings if we believe information risk is too high, such as the company delays its results announcement for the third quarter of 2011 or the investigation is extended again.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 20bp, FixedResets gaining 12bp and DeemedRetractibles up 17bp. Good volatility, with the Performance Highlights table comprised completely of winners. Volume was average.

PerpetualDiscounts now yield 5.45%, equivalent to about 7.08% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.95%, so the pre-tax interest-equivalent spread is now about 210bp, a tightening from the 225bp reported August 17 as the yields converged slightly.

Some parts of the US economy are growing rapidly:

At least one sector of the economy is booming, and President Barack Obama can legitimately take credit for it. Since he took office, employment has surged 13 percent at federal regulatory agencies. The regulators’ budgets are up 16 percent. (These numbers are derived from a May report published by Washington University and George Washington University.) And that’s before some of the major regulatory initiatives of the administration — the financial-reform bill and the health-care overhaul — are fully implemented.

Obama understands that a reputation for regulatory hyperactivity in the midst of a weak economy wouldn’t help his re-election prospects. In January, he promised “a government- wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive.” That review led to some modest improvements: The Environmental Protection Agency pulled back a rule that would have treated dairy spills on farms as though they were oil spills.

Equitable Group, proud issuer of ETC.PR.A has announced:

that it has become aware of a suspected fraud relating to four loans having a total outstanding balance of approximately $14.0 million. The amount of the total loss, if any, cannot be determined at this time. The matter is presently being investigated with a view to minimizing any potential losses to the Company.

Equitable is currently reviewing its legal options for commencing claims against several parties to the subject loan transactions and is consulting with legal counsel in this regard. In addition, Equitable maintains insurance that is intended to cover such occurrences. There is no assurance that the proceeds or recoveries, if any, will be received in a timely manner, or that such proceeds or recoveries will be sufficient to recover the full amount of the loans.

If totally lost, that’s enough to wipe out a whole quarter’s profit.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 22bp, FixedResets gaining 4bp and DeemedRetractibles up 8bp. Volatility was low, volume was on the low side.

Richard W Fisher, President and Chief Executive Officer of the Federal Reserve Bank of Dallas, gave a speech titled Connecting the dots – Texas employment growth; a dissenting vote; and the ugly truth (with reference to P G Wodehouse):

I voted against that commitment-cum-signal. In the press’ reporting of my dissenting vote and those of the other two members of the FOMC who voted against that commitment – Mr. Kocherlakota, my counterpart from the Minneapolis Fed, and Mr. Plosser, my counterpart from Philadelphia – there was substantial speculation as to the reasons for our dissent. I will let my other two colleagues speak for themselves; I can only speak for myself.
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The trimmed mean analysis we do at the Dallas Fed focuses on the price movements of personal consumption expenditures. It is an analysis that tracks the price movements of 178 items that people actually buy, such as beer, haircuts, shoe repair, food and energy prices. In June, the trimmed mean came in at an annualized rate of 1.3 percent, versus 2.1 percent for the first five months of the year. The 12-month rate was 1.5 percent.

My concern is not with immediate inflationary pressures.
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My concern is with the transmission mechanism for activating the use of the liquidity we have created, which remains on the sidelines of the economy. I posit that nonmonetary factors, not monetary policy, are retarding the willingness and ability of job creators to put to work the liquidity that we have provided.

I have spoken to this many times in public. Those with the capacity to hire American workers – small businesses as well as large, publicly traded or private – are immobilized. Not because they lack entrepreneurial zeal or do not wish to grow; not because they can’t access cheap and available credit. Rather, they simply cannot budget or manage for the uncertainty of fiscal and regulatory policy. In an environment where they are already uncertain of potential growth in demand for their goods and services and have yet to see a significant pickup in top-line revenue, there is palpable angst surrounding the cost of doing business. According to my business contacts, the opera buffa of the debt ceiling negotiations compounded this uncertainty, leaving business decisionmakers frozen in their tracks.
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Based on past behavior of fiscal policy makers, businesses understandably regard the debt ceiling agreement and the political outcome of negotiations between Congress and the president with the suspicion akin to how the British humorist P.G. Wodehouse regarded his aunts: “It is no use telling me there are bad aunts and good aunts,” he wrote. “At the core they are all alike. Sooner or later, out pops the cloven hoof.”

Holy smokes, here’s a sign of the times:

Gold reached a new milestone in its role as an investment and haven, with the leading exchange- traded fund that tracks bullion surpassing its equities counterpart as the biggest ETF by market value.

You can call it what you like – me, I call it a contrarian indicator.

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts winning 14bp, FixedResets up 4bp and DeemedRetractibles gaining 3bp. Volatility was good. Volume was absolutely pathetic.

William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York gave a speech titled The national and regional economic outlook providing some colour on the Second Dip:

While there have been indications that home prices in the area have been firming in the past few months, the mortgage crisis continues to take a toll on New Jersey homeowners. As of March of this year, 10 percent of all borrowers in the state were either 90-plus days delinquent on their mortgages or their homes were in foreclosure – above the national rate of 7.7 percent. In Essex County, that rate had reached 16 percent, and in Newark it was 30 percent.

In our recent small business survey, which we conducted in May, we asked firms to report on their first quarter sales and their future outlook. The results were encouraging. Over two thirds of firms told us they had stable or increased sales in Q1, up from 50 percent last year. When asked about their future outlook, while the majority of business owners, 56 percent, were neutral – many more said they were optimistic than pessimistic – 37 percent compared with only 7 percent.

Some will be glad the week is finally over:

Hewlett-Packard Co. (HPQ) plunged 27 percent this week, the most since the October 1987 market crash, after a strategy shift undermined confidence in its managers. Technology, industrial and raw-material companies in the S&P 500 dropped at least 6.9 percent, the most among 10 groups. Caterpillar Inc. (CAT) and Alcoa Inc. (AA) retreated more than 8.4 percent after some of the world’s biggest banks — Morgan Stanley, JPMorgan Chase & Co. and Citigroup Inc. — slashed economic growth forecasts.

The S&P 500 lost 4.7 percent to 1,123.53. It has sunk 16 percent since July 22 as about $3 trillion was erased from the value of U.S. equities, according to data compiled by Bloomberg. The Dow Jones Industrial Average fell 451.37 points, or 4 percent, to 10,817.65 this week, extending its four-week decline to 1,863.51 points.
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Stocks in the S&P 500 are moving in lockstep with each other by the most since at least 1990, a sign that the market’s biggest retreat in three years may not be over, according to MF Global Holdings Ltd. The average correlation coefficient between the 500 companies and the index was 0.8268 yesterday, using 60 days of data, according to MF Global.
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Correlation among S&P 500 stocks exceeded 0.78 twice previously, according to MF Global. After the first time, on Dec. 1, 2008, the S&P 500 declined 17 percent to a 12-year low on March 9, 2009. Correlation peaked again on July 26, 2010, when the benchmark slipped 6.1 percent over the next month, data compiled by MF Global and Bloomberg show.

Others will be hoping for more of the same:

Gold rose to a record above $1,880 an ounce in New York, rallying for the seventh straight week, as concern that the global economy is slowing drove equities lower.

So why not play it safe?

Treasury 30-year bond yields had their biggest weekly drop since the depths of the financial crisis in December 2008 on concern the U.S. economic recovery is stalling and Europe’s sovereign-debt crisis is getting worse.

Yields on five-, seven- and 10-year notes fluctuated a day after plunging to historic lows. Government bonds have rallied since the Federal Reserve pledged this month to keep its target lending rate at virtually zero until at least mid-2013 and Standard & Poor’s lowered the top U.S. credit rating for the first time.
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A gain in 30-year bonds pushed yields down three basis points to 3.39 percent. They had a weekly drop of 34 basis points, the most since tumbling 49 basis points during the five days ended Dec. 19, 2008. Yields on five- and seven-year notes were little changed today after falling yesterday to record lows of 0.79 percent and 1.31 percent.

There are rumblings that Basel III is in trouble:

The 27 member-states of the Basel Committee on Banking Supervision fought over the new regime, known as Basel III, for more than a year before agreeing in December to require banks to bolster capital and reduce reliance on borrowing. Now, as they put the standards into effect in their own countries, European Union lawmakers are revising definitions of capital, while the U.S. is struggling to reconcile the Basel mandates with financial reforms imposed by the Dodd-Frank Act.

“The game on the ground has changed in Europe and the U.S.,” said V. Gerard Comizio, a former Treasury Department lawyer who is now a senior partner at Paul Hastings Janofsky & Walker LLP in Washington. “The realists in Europe realized that their banks cannot raise the capital they’d need to comply. U.S. banks have reversed course and are more assertively fighting against it. The future of Basel III looks less certain now than it did when it was agreed to.

Well, that would be the regulatory standard, wouldn’t it? Do wonderful-sounding things, but do them badly. More particularly:

The European proposal alters the definition of capital that Basel III aimed to tighten when the committee agreed not to allow anything other than common shares to count toward the top- quality bank capital regulators examine.

During the 2010 negotiations, Germany sought to maintain recognition of so-called silent participations — hybrid securities that act like debt and equity at the same time — which some banks rely on for more than half their capital. While Germany lost the battle to exempt silent participations last year, the EU’s implementation proposal was written to allow the securities to be included if they fulfill certain conditions, according to an EU official who asked not to be identified because he wasn’t authorized to speak.
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Italy fought during Basel talks last year to include deferred tax assets — future deductions from tax liabilities resulting from current losses — when calculating top-tier capital. Basel III restricted use of these assets to no more than 10 percent of a bank’s capital. The EU’s proposal would allow unrestricted use of deferred tax assets if they comply with certain requirements. Italy modified its tax laws in February to enable the assets to meet those conditions.

Counting tax assets would raise the capital ratio at Banca Monte dei Paschi di Siena SpA, the oldest bank in the world and Italy’s third-largest, by about 1 percentage point, according to a February Mediobanca SpA report on the benefits of the tax-law change to Italian banks.
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Basel III also sought to put an end to the double counting of capital in insurance subsidiaries, which many European lenders do. The proposed EU rules don’t require banks to deduct investments in these subsidiaries from their capital, which will allow the double counting to continue, said analysts including Andrew Stimpson at KBW Inc. in London. That would benefit banks such as France’s Credit Agricole SA (ACA), whose insurance subsidiary accounts for 10 percent of income.
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European banks had opposed a leverage ratio, arguing that different accounting regimes make the balance sheets of U.S. lenders smaller than those of their foreign counterparts and that restricting leverage would unfairly punish non-U.S. firms. While U.S. banks are subject to a leverage cap, Generally Accepted Accounting Principles allow them to keep more assets off their balance sheets and to net out derivatives more than International Financial Reporting Standards do.

The Basel committee addressed the issue by devising a mechanism for adding total assets that puts aside different accounting standards. Still, the EU proposal doesn’t commit to implementing the ratio by 2018 as required by Basel III. Instead, it asks for a five-year period to review the rule’s effectiveness in curbing risk before deciding whether to make it binding.
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The EU proposal also softens Basel III’s liquidity standards that would require banks to hold enough cash or easily sellable assets to meet short- and long-term liabilities. It omits the rule covering debt coming due in the next 12 months and modifies the one for 30-day obligations to allow counting covered bonds as liquid assets. Denmark, Sweden and Spain lobbied for the modification because their banks have sizeable holdings of those bonds, which are securities backed by the cash flow from a pool of mortgage loans

They don’t have any preferreds outstanding, but many will be interested to note that DBRS has downgraded Canadian Tire:

DBRS has today downgraded the Debentures and Medium-Term Notes ratings of Canadian Tire Corporation, Limited (Canadian Tire or the Company) to BBB (high) from A (low) and its Commercial Paper rating to R-2 (high) from R-1 (low); the trends are Stable. This action follows the Company’s acquisition of The Forzani Group Ltd. (FGL) and removes the ratings from Under Review with Negative Implications.

Andrew Coyne – an old school buddy – has an excellent article about Milkfare in MacLeans, titled The $25,000 Cow.

It was a relatively quiet, mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 8bp, FixedResets losing 9bp and DeemedRetractibles down 7bp. All entries on the Performance Highlights table were losers. Volume was average.