PrefBlog

Nothing happened today.

It was a poor day for the Canadian preferred share market, with PerpetualPremiums losing 10bp, FixedResets off 3bp and DeemedRetractibles down 7bp. Volatility was muted. Volume more than made up in strength what it lacked in breadth – probably related to the TXPR index changes.

PerpetualDiscounts now yield 4.93%, equivalent to 6.41% interest at the standard conversion factor of 1.3x. Long corporates now yield about 4.4%, so the pre-tax interest-equivalent spread is now about 200bp, a sharp narrowing from the 225bp reported October 10.

Commodity Futures Trading Commission Democratic Commissioner Bart Chilton’s recent speech contained some ominous points:

Here’s the thing: our futures markets were never established to be gaming at gambling houses. Leave that to Amarillo Slim and Poison Ivey Phil (that’s still not his name, but I like it). Leave the gaming to the poker players and the gamblers—thank you very much. How smooth was that transition? See, I did have a point. But there’s more: A new car! No, not that. These markets were established to discover prices to benefit consumers and manage risk. We can’t overlook that. Once we forget that, we have lost our way.

As I never tire of pointing out, risk cannot be eliminated, only transformed or shifted. Any time you have a capital asset – perhaps your own house – that has benefits to be realized in the future, there is risk. You can transfer the risk of fire to the insurance company. You can transfer the risk of price declines to the bank, with a low deposit, non-recourse mortgage. But the risk is constant.

I agree that futures markets were established to manage risk (I’m not so sure about the “benefit consumers” part!). A commodities market will benefit ultimate buyers and ultimate sellers by allowing them to fix a price. But these terminal users won’t conveniently arrive at the market at the same time, or share the same views on what price is appropriate when they do … so these ultimate transactions are mediated by speculators, aka gamblers.

I confess I got sidetracked by this part of the speech:

At one point, it sort of brought to mind the Sabre Dance. Remember that one (written by Armenian composer Aram Khachaturian in 1942)? It’s that plate-spinning song where an act spins a large number of plates on teeny tiny poles (the world record in 108 plates). Can’t ya just hear it?

Huh? So I found Sabre Dance on YouTube. Ah! I know that song – how can you possibly not know that song? Wikipedia informs me that it is from the ballet Gayane, which I will have to make a point of seeing some day. But plate spinning? Aha! Mr. Chilton is showing his age!

Brenn was a master at the art of plate spinning, a classic circus act that relies on the gyroscopic effect. Brenn’s routine consisted of spinning five glass bowls on four foot-long sticks all the while spinning eight plates on the tables holding the spinning glass bowls. Seem like too much? Intermittently, he also managed to balance a tray carrying glasses and eggs and in one swoop would remove one of the trays causing an egg to fall into each glass.

Aiming to keep the audience at the edge of their seats, he would also carry a separate tray lined with glasses and spoons in front of them. With a simple flip, every spoon would magically fall into a glass.
…
His act was almost always performed to Khachaturian’s “Sabre Dance,” a piece of music that is now identified by many people with the skill of multi-tasking.

Sadly, I could not find a video of Brenn’s act with the Sabre Dance music. I wonder how much household crockery got broken after each of his appearances? Maybe his show was sponsored by a large crockery company.

Boy, this “Internet” thingy is a real time sink. Back to our regularly scheduled snarky comments on regulators’ speeches – Mr. Chilton wants the ability to approve or forbid market prices based on whether or not he can rationalize them:

Since 2008, I’ve been working to get these limits in place because, and this is supported with many studies, excessive speculation can push prices around. Nobody can rationalize nearly $150 a barrel oil in 2008 based solely upon supply and demand. It cannot be done. Well, Dodd-Frank required that we implement limits to curtail excessive speculation that can lead to unfair prices.

Sadly, he did not share the results of his interviews with buyers of oil at near $150/bbl in 2008, nor did he provide any hints of responses obtained when he asked people who were long but did not sell. However, this is mere idle curiosity. He’s a regulator, you know, part of the team of adult supervisors, and if he doesn’t know the rational price of a market instrument, who does?

He wants lots and lots of regulation:

There are some things, however, that we should do and promptly. Cheetahs—HFTs—were not even mentioned in Dodd-Frank. There was not one word about them. The new law was passed and signed just shortly after the Flash Crash in May of 2010. By then it was too late to put any techno-language in the law. Heck, we didn’t even yet know all of the ramifications of the Flash Crash.

Nevertheless, we need some market protections and a balanced approach to seeking safer markets while not going all in. Here’s my list:

1. Cheetah Registration: They need to be registered. That’s sort of a pedestrian first step. Can you believe they aren’t even mandated to be registered with us? If they are not registered, we can’t command their books and trading records. They gotta be registered.

2. Testing: They should be required to test their programs before they are unleashed in a live production trading environment. Most of the big cheetahs do this already.

3. Kill Switches: It should be compulsory to have kill switches in the event that cheetah programs go feral. I am pleased that the Securities and Exchange Commission (SEC), some exchanges and my Agency are working on that.

4. Wash Blocker Technology: Cheetahs should also be required to create pre-trade risk controls with available wash blocker technology to prevent wash—or cross—trading (that’s trading with themselves). After all, those trades are illegal in the United States. But, as it stands now, things are moving so fast in this gizmo-gadget trading world that some cheetahs claim they don’t even know when wash trades occurs—if their dancing with their self. That’s not a fantastical answer when regulators start asking questions.

5. Compliance Reports: I’ve also recommended that there be periodic compliance reports from the cheetahs and that the senior executives sign their names and are held accountable for any false or misleading information. The days of “he said, she said” responsibility in financial markets needs to end.

6. Penalties: Finally, and this goes to accountability, also. If there is another flash crash where people are damaged (they lose money) due to a rogue cheetah, I think there need to be steep consequences. And when I say consequences, I’m talking not just for the firm, but for individuals at the firm. If the cheetahs want to be involved in the high-flying, incomprehensible gambling world, okay, but if you cause harm to markets and consumers, we shouldn’t stand for it.

The only “consumers” hurt during the Flash Crash were those idiots who implemented their own little algorithm – a stop loss order. Why is Chilton so bent on protecting the the users of idiotic trading algorithms?

The sternest measure Chilton et al. have taken recently is to protect public utilities from themselves since, naturally, mere public utilities can’t be expected to have a clue about what they’re doing. This protection is forseen to have the usual consequence:

Among the toughest rules that are scheduled to kick in next week is one that requires traders to begin counting their swaps transactions to see if they reach an $8 billion threshold, which tags them as a “swap dealer.” Such firms face the toughest rules, like capital requirements to back trades.

But firms that have only $25 million in total swaps trading with public utilities also get tagged. The aim of this lower threshold was to protect public utilities, by toughening up oversight of banks that deal with them.

But the lawmakers raised concerns voiced by utilities that the threshold will deter banks from trading with them at all, limiting their ability hedge risk and forcing them to pass higher costs on to consumers.

“These new rules will harm America’s economic engine by impairing many of the companies that provide vital financing to consumers and American businesses,” they wrote.

Sources familiar with the matter say the CFTC is reviewing this and other issues posed by the Oct. 12 deadline.

If you want to eliminate public markets, insist on making them safe. It’s a bit like demanding cool sunlight and dry rain. If there are egregiously punitive fines for naughtiness in the course of certain business … that business will not be done at all, for the bosses know that man is born to trouble as the sparks fly upward.

It was a strong day for the Canadian preferred share market, with PerpetualPremiums up 15bp, FixedResets winning 22bp and DeemedRetractibles gaining 12bp. Volatility was average, which is surprising given the size of the move. Volume was below average.

Statistics Canada has revised estimated productivity growth substantially downwards:

The latest revisions mean the Canada-U.S. gap is now wider – 0.8 percentage points per year from 1981 to 2012, up from 0.7 per cent.

Fortunately, this is not expected to affect milkfare, subsidies of pulp mills, Ontario’s solar energy programme or regulation.

In a startling development, common shareholders are still allowed to vote on corporate business:

In Telus’s case, the company is up against Mason Capital, which owns almost one-fifth of the company’s voting stock. Mason has also sold short millions of [non-voting] shares, leaving it a very slim net long interest. Mason is using the votes on the shares it owns to fight Telus’s plan to consolidate the two classes of stock into a single class on a one-for-one basis. Mason wants a ratio that favours the voting stock.

Telus argues that Mason has no real interest in the overall health of the company, making Mason an empty voter. Mason, of course, disagrees. It has on its side one of the people who coined the term, who points to the fact that Mason has an economic interest in the share collapse’s success or failure.

The Court of Appeal for British Columbia ruled Friday that “there is no indication that it [Mason] is violating any laws, nor is there any statutory provision that would allow the court to intervene on broad equitable grounds. To the extent that cases of ‘empty voting’ are subverting the goals of shareholder democracy, the remedy must lie in legislative and regulatory change.”

I can’t understand why any common shareholder would vote in favour of this, diluting their vote with no compensation and I quite agree that Mason cannot logically be described as an empty voter in this instance.

To my mind, a much more serious problem is owners of common who also have a long position in the non-voting shares. In the bond world, this is known as debt decoupling, where as bondholder you vote for a bad deal so that your Credit Default Swaps will pay more.

It was a negative day for the Canadian preferred share market, with PerpetualPremiums losing 8bp, FixedResets off 2bp and DeemedRetractibles down 7bp. Volatility picked up, with Floaters jumping up and insurance-related issues getting hit …. but it was not the world’s biggest deal. Volume was low.