PrefBlog

I mentioned complexity of computer systems on January 22 – here’s another example:

Computer Sciences Corp. (CSC)’s performance on a failed $1 billion software project for the U.S. Air Force and the service’s management of it are under investigation by the Senate Armed Services Committee.
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The Expeditionary Combat Support System, once described as “revolutionary” by the Air Force, was canceled in November after the service determined the supply-chain management project was “no longer a viable option” to help meet a goal of having its financial books in shape for a federal audit by 2017.

That’s been a major objective of departing Defense Secretary Leon Panetta. An additional $1.1 billion would have been required to fix the system and put it in operation by 2020 — eight years after the planned date, according to the Air Force.

Of nine software systems that the Pentagon is installing to improve longstanding financial management deficiencies, the Air Force program was one of at least six that were running as much as 12 years late and $6.9 billion over their original cost estimates, the Government Accountability Office reported in September 2010.

The trouble with large software projects is that everybody in a suit measures his self-worth according to the number of features that he is able to add on to the specifications … preferably introduced after the basic architecture has been determined.

There’s more chatter of Beggar Thy Neighbor:

Yields on sovereign debt of countries from Spain to Greece have fallen since European Central Bank President Mario Draghi announced an as-yet-untapped bond-purchase plan in September last year. [George] Soros, reiterating his view that austerity is the wrong policy at this time, said the German insistence on tight fiscal and monetary policies means the euro will appreciate as other countries pursue more expansive policies, a situation that may lead to a currency war.

“Currencies have been remarkably stable in the last few years,” Soros said. “Now there is the making of more fireworks, more volatility.”

Soros said at the same event last year that the German-led policies risked creating tensions that could destroy the European Union. In a speech in April, he said the Bundesbank, Germany’s central bank, was taking steps to limit potential losses if the euro splintered, creating a “self-fulfilling prophecy.”

Bundesbank President Jens Weidmann has denied taking such steps, calling the allegations “ridiculous.”

Weidmann this week criticized moves by Japan’s Prime Minister Shinzo Abe to devalue the yen, saying such measures risked “politicizing” the yen’s exchange rate. Soros said the extent to which Japan can push its currency lower will be limited by what the U.S. is willing to tolerate.

The momentum is for the “euro to rise and yen to fall,” Soros said. “I generally don’t know how far things go but I can see which way they are going.”

Soros holds a special place in the hearts of all – he made a billion proving to politicians that they were being stupid.

Towers Watson has published its Pension Finance Watch — December 2012:

December saw increases in long bond yields and strong equity returns, which resulted in the Towers Watson Pension Index moving up 2.1% for the month. However, results for the full year included a 50+ basis point drop in long corporate yields, which pushed up liability values and fully offset the impact of the year’s strong portfolio returns. The Pension Index ended the year at 62.3, unchanged from its year-end 2011 value.
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Long corporate bond yields declined in 2012 while long Treasury yields remained stable. The resulting decline in credit spread — from 160 basis points to 100 basis points over the course of the year — essentially reversed the “flight to quality” experienced in 2011.
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The Towers Watson Pension Index tracks the performance of a hypothetical pension plan invested in a 60% equity/40% fixed income portfolio. This portfolio recorded 0.9% return for December and 11.5% for the full year.
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Pension plan liabilities as defined for U.S. accounting purposes are typically measured based on yields available on high quality corporate bonds as of the measurement date. Using our RATE:Link methodology, which matches yields on high quality corporate bonds to projected cash flows, the benchmark discount rate was determined at 3.96%. Despite an increase of 13 basis points for December, the year-end discount rate remains down 55 basis points for the year.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums off 2bp, FixedResets down 9bp and DeemedRetractibles up 8bp. Volatility was muted. Volume remained well above average.

Surprise, surprise, the BoC maintained the overnight rate (emphasis added):

In Canada, the slowdown in the second half of 2012 was more pronounced than the Bank had anticipated, owing to weaker business investment and exports. Caution about high debt levels has begun to restrain household spending. The Bank expects economic growth to pick up through 2013. Business investment and exports are projected to rebound as foreign demand strengthens, uncertainty diminishes and the temporary factors that have weighed on resource sector activity are unwound. Nonetheless, exports should remain below their pre-recession peak until the second half of 2014 owing to a lower track for foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar. Consumption is expected to grow moderately and residential investment to decline further from historically high levels. The Bank expects trend growth in household credit to moderate further, with the debt-to-income ratio stabilizing near current levels.

Relative to the October MPR, Canadian economic activity is expected to be more restrained. Following an estimated 1.9 per cent in 2012, the economy is expected to grow by 2.0 per cent in 2013 and 2.7 per cent in 2014. The Bank now expects the economy to reach full capacity in the second half of 2014, later than anticipated in the October MPR.

Core inflation has softened by more than the Bank had expected, with more muted price pressures across a wide range of goods and services, consistent with the unexpected increase in excess capacity. Total CPI inflation has also been lower than anticipated, reflecting developments in core inflation and weaker-than-projected gasoline prices. Total CPI inflation is expected to remain around 1 per cent in the near term before rising gradually, along with core inflation, to the 2 per cent target in the second half of 2014 as the economy returns to full capacity and inflation expectations remain well-anchored.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. While some modest withdrawal of monetary policy stimulus will likely be required over time, consistent with achieving the 2 per cent inflation target, the more muted inflation outlook and the beginnings of a more constructive evolution of imbalances in the household sector suggest that the timing of any such withdrawal is less imminent than previously anticipated.

Portugal has re-entered the bond market:

Portugal sold €2.5-billion ($3.3-billion) of bonds on Wednesday, marking the country’s first long-term debt issue since it was bailed out in 2011 and putting it on track for a full market return that may open its way to more aid.

The Oct. 2017 bond was sold for a yield of 4.891 per cent and 93 per cent of it was snapped up by foreign investors, Treasury Secretary Maria Luis Albuquerque said. Demand reached €12-billion.
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The issue was a reopening of its 4.35-per-cent October 2017 bond, first launched in 2007 as a 10-year benchmark.

Portugal last paid 6.4 per cent to sell five-year bonds in a placement before its bailout two years ago. Its outstanding 2017 debt was yielding 4.93 per cent in the secondary market on Wednesday, the lowest level since late 2010.

I am sometimes asked why I don’t use on-line banking. Here’s another reason:

It’s unclear precisely how much money the alleged conspirators managed to rob, but in court documents, prosecutors put the losses at “tens of millions of dollars.”
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Brian Krebs, an online security expert and former journalist for The Washington Post, described Wednesday’s cases as “very significant.” The virus involved is “one of the most advanced malware threats ever deployed,” he said. What’s more, one of the individuals charged – Mr. Calovskis – was “a major player in the cyber crime underground.”

For many unwitting victims, the virus arrived in the form of a seemingly innocuous PDF file attached to an e-mail. Once opened, U.S. authorities said, the virus would collect personal information like user names and passwords for online bank accounts and relay that data to servers controlled by the conspirators.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 5bp, FixedResets off 5bp and DeemedRetractibles flat. Volatility was average, but comprised entirely of FixedReset losers. Volume continued high.

PerpetualDiscounts now yield 4.88%, equivalent to 6.34% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.25%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 210bp, a slight (and perhaps spurious) widening from the 205bp reported January 16.

Amy Butte, former chief financial officer of the New York Stock Exchange, writes an interesting piece on stock market technical complexity:

And why should the markets not be surprised by the latest evidence of trading running amok, such as the announcement earlier this month by BATS Global Markets Inc. that it made repeated, though minor, money-losing errors executing customer-trade orders? This isn’t all that shocking after Knight Capital Group Inc. (KCG)’s erroneous trades almost bankrupted the company, and Nasdaq OMX Group Inc.’s mishandling of Facebook Inc.’s initial public offering undermined the trust that investors have in the IPO process.

The equation is really quite simple. Increased complexity, client concentration and demands for efficiency have led to something less than near-perfect reliability. Unless the industry is prepared to alter those inputs, we shouldn’t be surprised to see glitches, violations and breakdowns soar in the years ahead.
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I remember the first software company I worked with. It had limited version control and just kept adding modules and features without a stable code base. The system, as it got bigger, eventually crashed.

Complexity also applies to oversight. Each new equity-order type requires new training of regulators and new systems to monitor trading. The proliferation of order types, each designed to fulfill unique investment strategies, introduces additional rules and procedures.

I wonder if she was talking about dBase? From what I understand, the programme was the poster-child for ‘spaghetti code’ by the time it fell from dominance.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 2bp, FixedResets up 17bp and DeemedRetractibles down 4bp. Volatility was average. Volume was very extremely huge.

Dallas Fed President Richard Fisher had a good line at the October 2007 FOMC meeting – for which minutes have just been released:

Fisher provoked laughs again in October 2007 after citing a newspaper story reporting that companies stopped buying securities they don’t understand.

“Investors are coming home from lala land,” he said. “If you will forgive me, you might say we have gone from the ridiculous to the subprime.”

“Let the transcript say ‘Groan,’” Richmond Fed President Jeffrey Lacker said.

The enormous liquidity premia in the Canadian government bond market has given rise to an ETF:

Super-safe government of Canada bonds currently yield next to nothing. So what is the yield-hungry but risk-averse retail investor to do?

Toronto-based exchange-traded fund (ETF) purveyor First Asset thinks it has the answer: Provincial government bonds.

First Asset has set up the DEX provincial bond index fund, an ETF designed to capitalize on the fact that the debt of Canada’s provinces yields quite a bit more than similar securities issued by Ottawa.
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Investors can pick up about one full percentage point in extra yield with Ontario 10-year bonds, for instance, compared with government of Canada bonds with a similar maturity. The Ontario 10-year securities yield about 2.9 per cent, the federal bonds around 1.9 per cent, indicating the approach of going with the provincial bond leads to about 50 per cent more income.
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The DEX fund, which began trading on the Toronto market Monday, has a yield to maturity of 2.8 per cent, and about 85 per cent of the bonds it holds are from Ontario and Quebec. The balance is split almost equally among British Columbia, New Brunswick and Manitoba debt. The five provinces have a range of credit ratings in the double-A and single-A categories.

First Asset charges a management fee of 0.25 percentage point on the DEX ETF.
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“I don’t think the average Canadian thinks that the federal government is going to let any province default on its debt obligations,” [Barry Gordon, First Asset’s president and chief executive,] says. “Under what circumstances could you see the provinces of Canada defaulting that the government of Canada wasn’t also in default?”

Circumstances like Europe, maybe? The chances of provincial default were discussed by Marc Joffe in a report published by the Macdonald-Laurier Institute. The Panic of 2007 should have hammered into us all the idea that the unthinkable is not necessarily impossible.

I consider the provie ETF to be a much better idea than their Barbell ETFs. The ticker symbol for the fund is PXF / PXF.A. Regretably, the fund is permitted to use derivatives. The Index is the DEX Universe Provincial Bond Index™, but, even more regretably, neither the fund’s website, nor the index provider’s website provide information about Current Yield and Yield To Maturity, which are required in order to calculate the projected tax efficiency of the fund.

Sun Media has been most un-Canadian in promoting a culture of self-reliance, so it’s good to see that they’ve got maple syrup in their veins after all:

The news network, which is owned by Quebecor Inc. and has made a name for itself by slamming rivals such as the Canadian Broadcasting Corp. for relying on government subsidies, has asked the Canadian Radio-television and Telecommunications Commission to grant it “mandatory carriage,” which means it would be included in every basic cable package across the country.

This would generate about $18-million a year for the network, because it would earn 18 cents a month in wholesale revenue from every Canadian household that subscribes to a basic cable, satellite, or IPTV service.

With traditional pricing mark-ups, that would likely translate to $4 a year per consumer.

The network says it needs the money to ensure its survival, because advertising revenue has been difficult to obtain and it is having trouble convincing Canadians to subscribe to the specialty packages that include its signal.

It was a good day for the Canadian preferred share market, with PerpetualPremiums gaining 5bp, FixedResets winning 15bp and DeemedRetractibles up 7bp. Volatility was average. Volume continued to be quite high.

Nothing happened today.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 4bp, FixedResets dropping 19bp and DeemedRetractibles off 7bp. The slightly-longer-than-average Performance Highlights table is comprised entirely of FixedReset losers. Volume was enormous.

AT&T got whacked for pension charges:

AT&T Inc. (T), the largest U.S. phone company, recording a $10 billion fourth-quarter charge for its pension plan and said smartphone subsidies put pressure on profit in the period.

The company lowered its expected long-term rate of return for the pension to 7.75 percent, citing “continued uncertainty” for the stock market and the U.S. economy, according to a filing today.

According to the 2011 Annual Report:

Our return on assets assumption was 8.25% for the year ended December 31, 2011. In 2011, we experienced actual returns on investments lower than expected; however, in 2012 we will maintain 8.25% for our expected return on assets, based on long-term expectations of future market performance and the asset mix of the plans’ investments.

Consider the plans’ asset mix, I’d say 7.75% is wildly optimistic:

However, they can proudly declare that they’re not as bad as Illinois:

Three brawling Illinois Democrats are presiding over a fiscal muck that has made the state the new archetype of dysfunction as longtime champion California last week projected its first surplus in a decade.

Years of indecision, gridlock and mismanagement have produced a $97 billion pension-funding deficit and more than $9 billion in unpaid bills, saddling Illinois with the nation’s lowest rating from Moody’s Investors Service. As a result, taxpayers are paying more to borrow, and the state’s ability to provide essential services is withering as annual retirement obligations devour more money.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums dropping 3bp, FixedResets up 7bp and DeemedRetractibles gaining 6bp. Volatility was low. Volume continued to be heavy.