PrefBlog

Even the Occupy Wall Street clowns will admit some benefit from business and globalization:

Liberatos Pizza, a few blocks south, has been taking orders from supporters around the world to have its $15 “OccuPie” delivered to the protesters. Owner Telly Liberatos said since Sept. 18 he’s sold hundreds of the 18-inch pies, lined with pepperoni around the perimeter and through the diameter.

“I have nothing to do with the protest,” Liberatos said. “I don’t take sides. It was a very slow summer. I’m trying to run my business.”

The September jobs number was not a disaster:

American employers added more workers in September than forecast and figures for the prior two months were revised higher, easing concern the economy is tipping into another recession.

Payrolls rose by 103,000 after a 57,000 gain in August, the Labor Department said today in Washington. The median forecast in a Bloomberg News survey of economists called for an increase of 60,000. The figures reflected the end of a strike at Verizon Communications Inc. (VZ) that brought 45,000 people back to work. The jobless rate held at 9.1 percent.

Treasuries fell as the report added to evidence the world’s largest economy is maintaining its expansion. The pace of job growth is still too slow to push down the unemployment rate as companies hold back on hiring amid the debt crisis in Europe, political gridlock in the U.S. and a decline in stock prices.

The BoC has released a discussion paper by Wei Dong and Deokwoo Nam titled Exchange Rates and Individual Good’s Price Misalignment: Some Preliminary Evidence of Long-Horizon Predictability:

When prices are sticky, movements in the nominal exchange rate have a direct impact on international relative prices. A relative price misalignment would trigger an adjustment in consumption and employment, and may help to predict future movements in the exchange rate. Although purchasing-power-parity fundamentals, in general, have only weak predictability, currency misalignment may be indicated by price differentials for some goods, which could then have predictive power for subsequent re-evaluation of the nominal exchange rate. The authors collect good-level price data to construct deviations from the law of one price and examine the resulting price-misalignment model’s predictive power for the nominal exchange rates between the U.S. dollar and two other currencies: the Japanese yen and the U.K. pound. To account for small-sample bias and data-mining issues, inference is drawn from bootstrap distributions and tests of superior predictive ability (SPA) are performed. The slope coefficients and R-squares increase with the forecast horizon for the bilateral exchange rates between the U.S. dollar and the Japanese yen and the U.S. dollar and the U.K. pound. The out-of-sample SPA tests suggest that the authors’ price-misalignment model outperforms random walks either with or without drift for the U.S. dollar vis-à-vis the Japanese yen at the 5 per cent level of significance over long horizons.

Fitch cut Italy by a notch:

Italy had its foreign and local currency long-term issuer default ratings cut to ‘A+’ from ’AA-’ by Fitch Ratings, which cited concerns about the nation’s vulnerability to the “Euro zone crisis.”

The outlook is negative.

Fitch cut Spain two notches:

Spain had its credit rating cut two levels by Fitch Ratings, which cited the “intensification” of the euro crisis, slower Spanish growth and regional finances as risks to the nation’s debt outlook.

Fitch cut its rating to AA- from AA+, the company said in a statement today from London. The outlook is negative. Fitch cited similar reasons for also downgrading Italy one level to A+, while maintaining Portugal at BBB-, saying it would complete a review of that ranking in the fourth quarter.

Spain’s rating, which was AAA until 2010, has now been lowered twice by Fitch as the deepest austerity measures in three decades fail to convince investors the nation can stem the surge in its debt burden. Moody’s Investors Service also warned on Oct. 4 “all but the strongest euro-area sovereigns” are likely to see further downgrades, as it cut Italy’s rating for the first time in almost two decades.

Some investment funds are doing OK:

Princeton University’s investments returned 22 percent in the past fiscal year, matching the performance of Yale University, the top-performing Ivy League school so far this year.

The endowment was valued at $17.1 billion as of June 30, the Princeton, New Jersey, school said today on its website.
…
The fund at Yale, in New Haven, Connecticut, gained 22 percent, while investments at Harvard University, the world’s richest school, increased 21 percent.

Over the past decade, Princeton’s investments generated an average annual gain of 9.8 percent, compared with the 9.3 percent increase of Stanford University and the 9.4 percent return of Harvard.

There’s some action in the Maple / TMX deal:

There’s finally some activity around Maple Group Acquisition Corp.’s bid for TMX Group.

After near silence for the past few months, Maple announced on Friday that it has submitted applications for review to four provincial regulators (Ontario, Quebec, British Columbia and Alberta) and that it expects these bodies to hold public hearings in December, with decisions released in early 2012. If that time line holds, the rulings will come about a year after London Stock Exchange Group first announced its deal with TMX.

Spin it out, boys!

There’s some weeping over the turn-out in the Ontario election:

Although it could be weeks before elections officials provide a the final tally, back-of-envelope calculations suggest the turnout in Thursday’s Ontario provincial election may have dropped to an unprecedented and dispiriting low.

Of the roughly 8.5 million citizens who were eligible to vote, about 4.1 million, or 48 per cent, appear to have cast ballots. This despite fine weather across the province.

Here’s a bold solution: give us some leaders who aren’t morons and some policies that aren’t nonsense. Then it might be worth voting. However, we in Ontario now have the best possible result: legislative log-jam, no more Big Bold (albeit moronic) Ideas … for a while, anyway.

This post was delayed because I went to see Chess, the Musical last night. Twenty-five years I’ve been waiting for that show to come to Toronto. Twenty-five years! Loved the music, loved the book, hated the production. The costume designer was inspired by a low-budget Gay Pride parade and to see the Arbiter prancing around topless like he was the Queen of May was more disconcerting than interesting. Having the chorus play instruments themselves was just an annoying affectation. The show’s blockbuster number, “One Night in Bangkok”, was sung without zip and the staging … well, somebody should whisper in the director’s ear that the overwhelming majority of theatre-goers do not find homo-erotica particularly erotic. I certainly don’t. Sorry, buddy, but the queens you used did not excite me. Thumbs down. Well … perhaps in another twenty-five years, there’ll be a production in Toronto worth seeing.

It was a quiet day for the Canadian preferred share market, with PerpetualDiscounts up 6bp, FixedResets down 5bp and DeemedRetractibles gaining 8bp. Volatility was good. Volume was very low.

More worries!

Canadian pension funds saw their funding problems grow dramatically in the third quarter as bond yields tumbled while stock markets went into decline.

Pension consulting firm Mercer said its pension health index slipped to 60 per cent funding at the end of September from 71 per cent at the end of June and 75 per cent at the end of March. The index measures the change in funded status of a typical pension plan with average asset allocations.
…
[Mercer’s pension guy] Mr. [Scott] Clausen said the decrease in bond yields contributed to about 8 percentage points of the drop in the pension health index in the third quarter, while declining investment returns accounted for the other 3 percentage point decline.

There’s a big round of quantitative easing in the UK:

Bank of England Governor Mervyn King has lost faith in European governments’ ability to resolve the region’s debt crisis.

The central bank yesterday announced its biggest stimulus since the depths of the recession, citing “vulnerabilities” related to the euro-area turmoil. King said the move, the first loosening of U.K. monetary policy since 2009, was a response to what may be the worst financial crisis ever.
…
King’s refusal to wait for European governments signals determination to shield the U.K. from a crisis that threatens to tip Britain’s biggest trading partner into recession. It also shows concern that failure to protect bank funding markets risks recreating conditions that led to the collapse of Lehman Brothers Holdings Inc. three years ago.

The U.K. central bank, which left its benchmark interest rate at a record-low 0.5 percent, raised the ceiling for so- called quantitative easing to 275 billion pounds ($421 billion) from 200 billion pounds. That’s the biggest expansion since the first round of stimulus in March 2009. Only 11 of 32 economists in a Bloomberg News survey predicted the increase.

DBRS confirmed BBD at Pfd-4.

S&P changed the outlook on TD from positive to stable:

• We are revising the outlook on Toronto-Dominion Bank (TD Bank) to stable
  from positive based on our expectations that a weak Canadian economic recovery will provide more challenging operating conditions than had previously been expected.

• TD Bank continues to experience consistent and strong core operating performance from domestic operations with a growing contribution from its U.S. retail bank.
• We are affirming our ‘AA-/A-1+’ counterparty credit ratings on TD Bank
  and related entities.

S&P changed the outlook on RY from positive to stable:

• We are revising the outlook on Royal Bank of Canada to stable from
  positive for a potential upgrade based on our expectations that a weaker Canadian economic recovery will provide more challenging operating conditions than had previously been expected.

• We are affirming our ‘AA-/A-1+’ counterparty credit ratings on RBC and related entities.

Either nothing happened today, or I was busy. One or the other.

Well, I noticed one thing:

The University of Toronto is the lone Canadian school to crack the top 20 in the Times Higher Education World University Rankings, which many consider higher education’s most influential global rating system.
…
Two other flagship Canadian schools made noteworthy gains, with the University of British Columbia jumping to 22nd place from 30th, and McGill University rising to 28th from 35th.
…
McMaster University (65), the University of Alberta (100) and the University of Montreal (104) all improved their standing, while the University of Victoria slipped from 130th to 177th after entering the top 200 for the first time last year.

Queen’s University, which had refused to submit data in past years, chose to participate and placed 173rd. The University of Ottawa was Canada’s other new entrant, at 185th. Dalhousie University and Simon Fraser University both fell out of the top 200 after coming in 193rd and 199th respectively last year.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 13bp, FixedResets winning 28bp, while DeemedRetractibles were down 11bp – the last being heavily influenced by SLF issues which dominated the downside of the Performance Table. Volatility was quite good, but volume continued to be below average.

PerpetualDiscounts now yield 5.53%, equivalent to 7.19% interest at the standard equivalency factor of 1.3x. Long Corporates continue to yield about 4.8% (maybe a little under) so the pre-tax interest-equivalent spread (also called the Seniority Spread) is now about 240bp, a sharp rise from the 215bp recorded on September 30, due entirely to weakness in PerpetualDiscounts.

Shades of ’08!

The cost to protect the debt of Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS) surged to the highest levels since the weeks after Lehman Brothers Holdings Inc.’s bankruptcy as concern intensified that Europe’s debt crisis will infect the global banking system.

Contracts on Morgan Stanley, the New York-based owner of the world’s largest retail brokerage, soared 92 basis points to a mid-price of 583 basis points as of 4:30 p.m. in New York, the highest since October 2008, according to London-based data provider CMA. Those on Goldman Sachs increased 65 basis points to a mid-price of 395.

Traders pushed the cost of protecting banks and U.S. companies higher after German Finance Minister Wolfgang Schaeuble opposed moves to increase the scale of the euro rescue fund, complicating efforts to prevent a Greek default. Swaps on Bank of America Corp. (BAC) jumped to a record and a measure of U.S. corporate credit risk rose to the most since May 2009.

Knock-on effects are everywhere!

Real estate investment trusts that buy U.S. mortgage debt tumbled to the steepest losses since December 2008, on concern that their main source of financing will be roiled by European bank woes.

Mortgage REITs including Annaly Capital Management Inc. (NLY) and American Capital Agency Corp. (AGNC) dropped as much as 6 percent today, according to a Bloomberg index tracking 33 shares. Losses over the past two days reached as much as 11.1 percent, the biggest fall in almost three years. The shares pared today’s declines to 2.6 percent at 1:50 p.m. in New York.

France and Belgium pledged today to support Dexia SA after the bank’s board met to discuss a possible break-up as Europe’s sovereign-debt crisis reduced its ability to obtain funding. While the repurchase-agreement, or repo, market for government- backed mortgage bonds that many REITS rely on for funding is in “good” shape, it may face pressure if European banks need to retrench, American Capital President Gary Kain said.

Moody’s slashed Italy’s rating three notches:

Italy’s credit rating was cut by Moody’s Investors Service for the first time in almost two decades on concern that Prime Minister Silvio Berlusconi’s government will struggle to reduce the region’s second-largest debt amid chronically weak growth.

Moody’s lowered Italy’s rating three levels to A2 from Aa2, with a negative outlook, the New York-based company said in a statement yesterday. The action comes after Standard & Poor’s downgraded Italy on Sept. 20 for the first time in five years. Italy was last cut by Moody’s in May 1993.

Italy gave final approval last month to a 54 billion-euro ($72 billion) austerity plan aimed at balancing the budget in 2013 that convinced the European Central Bank to buy the nation’s bonds. While the purchases initially brought down bond yields by about 100 basis points, Italy’s borrowing costs remain near record highs because of euro-area debt crisis contagion.

DBRS confirmed ALA.PR.A at Pfd-3:

DBRS has today confirmed the rating on the Medium-Term Notes (MTNs) and Preferred Shares – Cumulative of AltaGas Ltd. (AltaGas or the Company) at BBB and Pfd-3, respectively, both with Stable trends. The confirmation reflects: (1) continuing progress on the Company’s goal to grow and diversify earnings and cash flow while reducing its relative business risk; (2) proactive mitigation of cost overrun risks on its major growth projects; and (3) a prudent financing plan for the 2011 to 2014 growth phase supported by a strong liquidity position. However, DBRS expects some deterioration in the Company’s key credit metrics during the above-noted construction period, with recovery toward the end of the period as expected cash shortfalls are to be primarily funded by debt.

First National, proud issuer of FN.PR.A, has a timing problem:

First National Financial Corporation (TSX: FN) (the “Company” or “FNFC”) today announced its revenue and income before income taxes for the quarter ended September 30, 2011 will both be decreased by approximately $18 million due to realized and unrealized losses on financial instruments. The losses pertain to instruments used for interest rate hedging purposes on mortgages pending securitization. From an economic perspective, to the extent the value of these hedges was unfavourable at September 30, 2011, the value of the hedged mortgages has increased; however, unlike the hedge losses that have been accounted for fully in the third quarter of 2011, the increased value of the mortgages will be recognized as earned over the five- and 10-year terms of the mortgages.

DBRS is unconcerned:

DBRS has today reviewed the announcement by First National Financial Corporation (FNF; rated BBB and Pfd-3 with Stable trends) that third-quarter revenue and pre-tax income would be reduced by approximately $18 million as a result of realized and unrealized losses on financial instruments. There are no rating implications at this time.

While the reduction in pre-tax income is material (it suggests Q3 2011 earnings will be approximately one-third of Q2 2011 earnings), DBRS views the reduction as an accounting timing issue only. Specifically, the value of the vehicle used to hedge interest-rate risk declined (which under International Financial Reporting Standards (IFRS) is reported in the current period), offset by an equivalent increase in the value of the underlying mortgage assets (which will be recognized in earnings over the life of the asset).

The unusually large size of the unrealized loss is related to the reduction in long-term interest rates during the quarter. There are no regulatory capital implications because FNF is not regulated by the Office of the Superintendent of Financial Institutions (OSFI).

Thomson Reuters, proud issuer of TRI.PR.B is locking in current rates for a while:

Standard & Poor’s Ratings Services today said it assigned its ‘A-‘ debt rating to New York-based information solutions provider Thomson Reuters Corp.’s US$350 million 3.95% senior unsecured notes due 2021. We understand that Thomson Reuters will use the proceeds to repay borrowings under its commercial paper program.

It was a very nasty day for the Canadian preferred share market, with PerpetualDiscounts losing 104bp, FixedResets down 59bp and DeemedRetractibles off a mere 53bp. Naturally, the volatility table is quite long today! On a brighter note, one of these entries was a gain! Volume improved from “practically non-existent” to “lousy”.

There is word of a crackdown on “algorithmic” traders:

Algorithmic traders and quant funds are under close scrutiny from a U.S. Securities and Exchange Commission enforcement team responsible for policing hedge funds, the unit’s co-chief said at securities law forum.

The SEC is “very much focused” on possible misconduct by traders who primarily use computer models to execute investment strategies, and more cases in those areas are likely, Bruce Karpati said today during a Practising Law Institute panel discussion in New York. Investigators are zeroing in on firms with “aberrational performance,” he said, without giving details on practices that are under scrutiny.

The February case in which Karpati’s asset-management team accused Axa Rosenberg Group LLC of causing $217 million in customer losses by concealing a coding error was “wake-up a call for all quant managers” to be fully forthcoming about the risks of their strategies, he said at the time. Axa paid $242 million to resolve the claims.

But the quoted example is about quantitative analysis:

In late June 2009, a BRRC employee discovered an error in the Model’s computer code that had been introduced in 2007 and that effectively eliminated one of the key components in the Model for controlling for certain types of risk. This employee later discussed his finding in a meeting with Rosenberg, BRRC’s Director, and a small group of BRRC employees who were working under Rosenberg’s guidance on an enhancement to the Model. Rosenberg directed the others to keep quiet about the error and to not inform others about it, and he directed that the error not be fixed at that time. Before and after discovery of the error, ARIM’s clients were expressing dissatisfaction with their portfolios’ underperformance. During the several months that Rosenberg and the BRRC employees concealed the error, ARG, ARIM, and BRRC failed to disclose the error, misrepresented the Model’s ability to control risk, and ascribed underperformance to market volatility and factors having nothing to do with the error. Due to Rosenberg’s directive, ARG’s Global CEO did not learn of the error as soon as he should have. The error was disclosed to the Global CEO in November 2009. The error impacted more than 600 client portfolios and caused approximately $217 million in losses. ARG disclosed the error to clients on April 15, 2010.

So it’s not all that clear whether the crackdown is on algorithms or quantitative analysis. Reporters generally don’t know the difference.

Carney has assiduously promoted the government line for the past three years – maybe he’ll be rewarded:

The Harper government is pushing for the Bank of Canada Governor to be the next chief of the Financial Stability Board (FSB), the group charged with co-ordinating the overhaul of international banking regulations on behalf of the Group of 20 nations.

It was a grisly day for the Canadian preferred share market, with PerpetualDiscounts off 15bp, FixedResets down 14bp and DeemedRetractibles losing 48bp. Volatility was relatively high, with a big tilt towards the downside. Volume was anemic – more like Christmas than the start of a new quarter.