PrefBlog

Equities got creamed today:

The MSCI All-Country World Index plunged 4.5 percent at 4:39 p.m. New York time and is down 22 percent from its May peak, while emerging-market stocks tumbled the most in almost three years. The Standard & Poor’s 500 Index lost 3.2 percent to 1,129.56 after briefly falling below its 2011 closing low. The Dow Jones Industrial Average slid the most over two days since 2008. Ten-year Treasury yields lost as much as 16 basis points to 1.6961 percent. The Dollar Index rose 1.4 percent.

The Federal Reserve said yesterday it saw “significant downside risks” in the economy and it will replace $400 billion of short-term debt with longer-term Treasuries to spur growth as the recovery falters. China’s manufacturing may shrink for a third month, U.S. jobless claims topped estimates and euro-area services and manufacturing output contracted for the first time in more than two years, reports showed.

The Europeans have figured out where to get the money to save the Euro: they’re going to print it:

European finance chiefs said they may use leverage to increase the financial firepower of their regional bailout fund as a selloff in stocks signaled renewed concern that policy makers are failing to ward off a global economic slump.
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That has fanned speculation Europe may eventually ratchet up the fund’s spending power, perhaps by using the bonds it sells as collateral to borrow more cash from the European Central Bank. Another proposal is to mimic a U.S. program established following the 2008 collapse of Lehman Brothers Holdings Inc. by allowing the fund to offer the ECB credit protection for buying more sovereign bonds.

The Canadian preferred share market got smacked today in the backwash of the equity excitement, with PerpetualDiscounts losing 71bp, FixedResets off a mere 26bp and DeemedRetractibles down 49bp. Naturally enough, given these returns, the Performance Highlights table is quite lengthy, with only one winner. Volume continued to be very sluggish.

The SEC continues its struggle against free markets:

The Securities and Exchange Commission may ask stock markets to impose fees on trading firms that submit a high number of quotations in relation to executed transactions, an executive at the regulator said.

The SEC is considering whether to urge exchanges to impose a fee for exceeding a certain order-to-execution ratio or for sending messages, which include quotes, updates, cancellations and executions, said David Shillman, associate director at the regulator’s division of trading and markets. That’s because they impose a cost on brokerages, said Shillman, who spoke in an interview at a Securities Industry and Financial Markets Association conference in New York.

There is, of course, no indication that a free market solution, like charging every order $0.0001, was ever considered. This would deny the SEC the opportunity to define Good Firms and Bad Firms.

There will be a new version of Quantitative Wheezing:

Federal Reserve policy makers will replace much of the short-term debt in their portfolio with longer-term Treasuries in an effort to further reduce borrowing costs and keep the economy from relapsing into a recession.

The central bank will buy $400 billion of bonds with maturities of six to 30 years through June while selling an equal amount of debt maturing in three years or less, the Federal Open Market Committee said today in Washington after a two-day meeting. The action “should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,” the FOMC said.
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The amount of debt to be sold represents about three- fourths of Fed holdings of between three months and three years. The central bank will release a schedule of purchases and sales of bonds for October on Sept. 30.

The Standard & Poor’s 500 Index fell 1.6 percent to 1,183.22 at 2:37 p.m. in New York. The yield on the 10-year Treasury note slid seven basis points to 1.87 percent after declining to a record low of 1.85 percent.

The IMF’s September 2011 GFSR – Chapter 1 has many cheerful things to say about banks and insurers:

For the first time since the October 2008 Global Financial Stability Report, risks to global fi nancial stability have increased (Figures 1.2 and 1.3), signaling a partial reversal in progress made over the past three years. The pace of the
economic recovery has slowed, stalling progress in balance sheet repair in many advanced economies. Sovereign stress in the euro area has spilled over to banking systems, pushing up credit and market risks. Low interest rates could lead to excesses as the “search for yield” exacerbates the turn in the credit cycle, especially in emerging markets. Recent market turmoil suggests that investors are losing patience with the lack of momentum on financial repair and reform (Box 1.1). Policymakers need to accelerate actions to address longstanding financial weaknesses to ensure stability.

Another golden straw in the wind:

The surging price of gold is fueling inflation from India to Indonesia and forcing statisticians to decide whether jewelry made of the metal still belongs in consumer-price indexes.

In South Korea, gold rings will be dropped from the inflation basket for the first time since 1975 as part of a scheduled reweighting in December, Bang Tae Kyoung, deputy director of the statistics agency, said in an phone interview from Daejeon. “People are now buying gold mostly for investment purposes, and so it should be classified as an asset, rather than spending,” Bang said.

It was a lethargic day for the Canadian preferred share market, with PerpetualDiscounts winning 6bp, FixedResets basically flat and DeemedRetractibles up 4bp. Volatility was minimal. Volume was below average.

PerpetualDiscounts now yield 5.33%, equivalent to 6.93% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.8%, so the pre-tax interest-equivalent spread is now about 215bp, a widening from the 200bp reported on September 7.

Roubini claims that a Greek default is better for all concerned:

“The recent debt exchange deal Europe offered Greece was a rip-off,” said Roubini in a commentary in Tuesday’s Financial Times. “If you take into account the large sweeteners the plan gave to creditors, the true debt relief is close to zero.”

The major problem, in Roubini’s view, is a lack of growth and competitiveness, which can only be overcome by currency depreciation.

“A return to a national currency and a sharp depreciation would quickly restore growth and competitiveness, as it did in Argentina and many other emerging markets that abandoned their currency pegs,” he said.

It’s official! National is buying HSBC’s brokerage:

National Bank of Canada (“National Bank” or the “Bank”), through an affiliate, has entered into an agreement with HSBC Bank Canada and certain of its subsidiaries (“HSBC Bank Canada”) pursuant to which National Bank will acquire the full service investment advisory business of HSBC Securities (Canada) Inc. (“HSBC Securities”) and certain assets related to the segregated fund and insurance business of HSBC Insurance Agency (Canada) Inc. (together, the “Full Service Investment Advisory Business”). HSBC Securities’ Full Service Investment Advisory Business has $14.2 billion of assets under administration, managed by over 120 investment advisors located in 27 offices across Canada. The Full Service Investment Advisory Business operates across Canada, with approximately 70% of its business being centered in Ontario and British Columbia.

National Bank has agreed to pay $206 million in cash to HSBC Bank Canada, subject to certain customary adjustments. An additional amount has been set aside to ensure maximum retention of investment advisors. The transaction is expected to increase National Bank’s 2012 and 2013 recurring EPS by $0.03 to $0.05. National Bank estimates the transaction will reduce its Common Equity Tier 1 ratio under Basel III rules by approximately 40 basis points. Closing is expected to occur in December 2011, subject to receipt of necessary regulatory approvals.

Here’s a straw in the wind:

Gold will exceed $2,000 this year, according to the average estimate of 16 respondents in a Bloomberg survey at the London Bullion Market Association’s conference in Montreal. The metal will peak at $2,268 next year, the survey showed.

Storage companies are responding. The 112-year-old Perth Mint, which refines more than 8 percent of all supply and is owned by the Western Australian state government, may add a new vault within the next year, according to Treasurer Nigel Moffatt. The mint sells everything from gold coins to 400-ounce (12.4- kilogram) bars.

Brink’s, the largest bullion carrier in the U.K., is considering adding more storage after opening a new London vault earlier this year. Barclays, based in London, is building a vault in the city that will open next year, the bank said in a statement last week.

Deutsche Bank, based in Frankfurt, is considering expanding existing facilities and developing new ones to meet demand, Matthew Keen, a director at the bank, said earlier this month. JPMorgan Chase & Co. (JPM) started a vault at the Singapore FreePort location last year and opened another in the financial district of New York.

Today’s winner of the coveted “Thug of the Day Prize” is Arthur Leader:

“We’ve had many angry patients say to us, ‘This is discriminatory’ and I say, ‘Yes, it is’ But I still won’t do it,” said Arthur Leader, co-founder of the Ottawa Fertility Centre. The facility where he works will not treat women with a Body Mass Index (a measurement of weight relative to height) of more than 35. A BMI of 30 meets the clinical definition of obese.

“A patient doesn’t have the right to make a choice that’s going to be harmful to them,” he said.

Yes they do, asshole. And we don’t need any pompous mechanics deciding which cars deserve to fixed, either.

For Dr. Leader, a major concern is that the “conscious sedation” used on patients while retrieving their eggs could disrupt breathing, but inserting a breathing tube into a patient who is morbidly obese is tricky and risky – “the patient could choke.”

“If that person then dies on my table – how good would I feel?” said Dr. Leader, who asks that women bring their BMI below 35 to receive treatment.

Who cares how you feel, twerp? If you feel you’re not competent to perform the procedure, then say so – spend a bit more time acting like a professional and a little less whimipering about your precious feelings.

Naturally, the possibility exists that Arthur Leader has simply applied the Canadian concept of competition to the problem of how to make a good living when there are other fertility clinics around: if you can’t beat ’em, get the regulators to outlaw the game.

Intact Financial, proud issuer of IFC.PR.A and IFC.PR.C, was confirmed at Pfd-2(low) by DBRS:

The Company’s operating subsidiaries continue to be among the stronger performers in the Canadian property and casualty (P&C) insurance industry in terms of underwriting profit and overall profitability. Overall industry profitability started to stabilize in 2010, in part as a result of the auto insurance reforms in Ontario and more benign weather patterns in 2010. For the first time in several years, Intact had an improved underwriting result, with a decline in its combined ratio.
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Intact’s previous investment strategies had left it exposed to the unprecedented decline in global capital markets in 2008 and in early 2009. This led to increased impairment charges and higher realized losses as a result of the Company’s decision to actively reduce its exposure to common equity investments in financial services companies while increasing its holdings in Canadian government bonds. In 2010, the Company shifted some of its corporate exposure to bonds from preferred shares, reflecting changes to regulatory capital requirements and more efficient tax treatment. A more conservative portfolio is expected to put downward pressure on investment earnings over time but had a neutral impact year over year in 2010.

The DBRS rating on the Company reflects its holding company status. While Intact has very strong operating entities, their regulated nature and the structural subordination of holding company obligations result in a rating assignment for the parent that is at least one notch below where the operating subsidiaries might be rated in their own right.

It was a good strong day for the Canadian preferred share market, with PerpetualDiscounts winning 18bp, FixedResets up 8bp and DeemedRetractibles gaining 11bp. It is of interest to note that the Bozo Spread (Current Yield PerpetualDiscounts less Current Yield FixedResets) is down to a mere 12bp. Volatility was muted, but on the positive side. Volume continued to be very low.

The SEC has proposed an asinine, politicized, rule:

The proposed rule would prohibit securitization participants of an ABS for a designated time period from engaging in certain transactions that would involve or result in any material conflict of interest. Two criteria to determine whether the transaction involves a material conflict of interest are set out in the rule proposal.
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EXAMPLE 1: Among other things, the proposed rule could — if certain conditions are otherwise met — prohibit a firm from packaging an ABS, selling the ABS to an investor, and subsequently shorting the ABS to potentially profit at the same time as the investor would incur losses.

EXAMPLE 2: The proposed rules also could — if certain conditions are otherwise met — prohibit a firm from allowing a third party to help assemble an ABS in a way that creates an opportunity for the third party to profit from the failure of the ABS.

So, when you’re putting together an ABS, you’re not allowed to ask the guy who’s shorting the stuff to you what he’s willing to sell. And don’t take a position opposite your clients, because the SEC knows for a fact that no investor who has ever lived is smart enough to be allowed to take a view contrary to a dealer.

S&P downgraded Italy:

Italy’s credit rating was cut one level to A by Standard & Poor’s, which said the outlook remains “negative.”

The rating for Italy, which has Europe’s second-largest debt load, was lowered from A+, S&P said today in a statement. The firm said Italy’s net general government debt is the highest among A rated sovereigns, and now expects it to peak later and at a higher level than it previously anticipated.

“In our view, Italy’s economic growth prospects are weakening and we expect that Italy’s fragile governing coalition and policy differences within parliament will continue to limit the government’s ability to respond decisively to domestic and external macroeconomic challenges,” S&P said in a statement.

Italy follows Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries having their credit rating cut this year.

Dealbreaker has another excellent piece on the problems regarding defining “proprietary trading”.

The Canadian preferred share market took a loss today, with PerpetualDiscounts losing 29bp, FixedResets down 9bp and DeemedRetractibles off 4bp. There was an uptick in volatility, all to the downside. Volume was so low one might be forgiven for thinking it was Christmas!

Dealbreaker has an entertaining observation regarding the UBS unauthorized losses. After examining the bank’s published VaR calculations:

Oops! UBS’s maximum 95% value-at-risk in the second quarter was 98mm CHF, or around 85mm USD at current exchange rates. So if its returns are normally distributed and that’s a one-tail confidence interval it should have daily losses of over $52mm less than 16% of the time, $85mm less than 5% of the time, $104mm less than 2.3% of the time, $155mm or than 0.14% of the time …

You see where I’m going with this. A $2 billion loss is, um, 38.5 standard deviations. That exploded Excel’s brain but goofier methods suggest that a loss that big should occur about once in 10^324 days. Or the odds of it happening in the history of the universe are one in a googol. Cubed.

They have another thoughtful piece on how the lines between prop-trading and client trading can get blurred:

Perhaps I’m naïve in thinking that this is the circle of life. You’ll certainly see people who believe that the unpleasantness at UBS reveals that financial innovation and complexity should be banned, or that any units of banks with Greek letters in their names should be shut down. My own view is that you can’t really legislate a world where market makers don’t put their capital at risk – that’s what a market maker does. And if you’re willing to tolerate any form of financial complexity, you will have a world where the risks that market makers take are multiform, and where market makers have a lot of “proprietary” discretion to decide which risks to keep and which to hedge. And relying on forms of words like “proprietary trading” and “client facilitation” is not an intelligent way to think about systemic management of those risks.

In the meantime the accused trader has been charged:

Kweku Adoboli, the trader arrested Sept. 15 after UBS AG (UBSN) said it discovered unauthorized trades that caused a $2 billion loss, was charged with fraud and two counts of false accounting dating back to 2008.

The 31-year-old was taken into custody at a magistrates court in London yesterday until Sept. 22, when he can make an application for bail. Adoboli’s false accounting offenses started in October 2008, according to the court charge sheet. He is also charged with fraud dating back to January 2009.

Not an overnight thing!

Jefferson County may have avoided bankruptcy:

Jefferson County, Alabama, commissioners approved a settlement with holders of $3.14 billion of sewer debt to avert what would have been the largest municipal bankruptcy in U.S. history.

The County Commission voted 4-1 today to accept the terms of the agreement, which includes $1.1 billion in concessions from creditors. JPMorgan Chase & Co. (JPM), which arranged most of the debt, would take the biggest loss.
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The threat of bankruptcy has loomed over Jefferson County, home to Birmingham, Alabama’s biggest city, for more than three years as officials sought to keep sewer fees from ballooning to pay off the debt. The deal hinges on action by the state Legislature, and Commission President David Carrington said bankruptcy is still possible if final terms aren’t agreed on.

The deal calls for three annual sewer-rate increases of 8.2 percent, followed by future annual boosts of no more than 3.25 percent.

BIS has released a working paper by Stephen Cecchetti, Madhusudan Mohanty and Fabrizio Zampolli titled The real effects of debt:

At moderate levels, debt improves welfare and enhances growth. But high levels can be damaging. When does debt go from good to bad? We address this question using a new dataset that includes the level of government, non-financial corporate and household debt in 18 OECD countries from 1980 to 2010. Our results support the view that, beyond a certain level, debt is a drag on growth. For government debt, the threshold is around 85% of GDP. The immediate implication is that countries with high debt must act quickly and decisively to address their fiscal problems. The longer-term lesson is that, to build the fiscal buffer required to address extraordinary events, governments should keep debt well below the estimated thresholds. Our examination of other types of debt yields similar conclusions. When corporate debt goes beyond 90% of GDP, it becomes a drag on growth. And for household debt, we report a threshold around 85% of GDP, although the impact is very imprecisely estimated.

The OSC released its decision on the Sino-Forest puts:

IT IS ORDERED, pursuant to section 144 of the Act, that the Cease Trade Order is hereby varied solely to permit (a) the holders of outstanding Put Contracts issued and cleared by CDCC to exercise their Put Contracts, whether or not such holder is a person described in paragraph 6(i) or 6(ii); (b) the holders of the Put Contracts to sell common shares of the Issuer under the terms of the Put Contracts; (c) the sellers of such Put Contracts to perform their obligations to purchase common shares of the Issuer under the terms of the Put Contracts; and (d) CDCC and its members to carry out their respective obligations under the Rules of CDCC, including all requisite acts in furtherance of the trades described in (a), (b) and (c), provided that this order shall not apply to permit the sale of Issuer common shares by a person described in paragraph 6(i) who does not currently own common shares, or who is an insider or other person described in paragraph 6(ii), and provided further that the Cease Trade Order shall otherwise remain in effect, unamended except as expressly provided in this order.

It looks to my untrained eye as if it’s illegal to borrow shares to make good delivery. I say the integrity of Canadian capital markets has taken a hit.

It was a modestly good day for the Canadian preferred share market, with PerpetualDiscounts winning 10bp, FixedResets up 6bp and DeemedRetractibles gaining 2bp. Volatility was low. Volume was extremely low.