PrefBlog

Yesterday I highlighted political violence in Greece. Now there’s talk of currency wars:

The world is on the brink of a fresh “currency war,” Russia warned, as European policy makers joined Japan in bemoaning the economic cost of rising exchange rates.

“Japan is weakening the yen and other countries may follow,” Alexei Ulyukayev, first deputy chairman of Russia’s central bank, said at a conference today in Moscow.

The alert from the country that chairs the Group of 20 came as Luxembourg Prime Minister Jean-Claude Juncker complained of a “dangerously high” euro and officials in Norway and Sweden expressed exchange-rate concern.

The push for weaker currencies is being driven by a need to find new sources of economic growth as monetary and fiscal policies run out of room.

Does anybody feel nervous yet? How about this?

The World Bank cut its global growth forecast for this year as austerity measures, high unemployment and low business confidence weigh on economies in developed nations. German Chancellor Angela Merkel’s government cut its growth forecast for Europe’s biggest economy. Luxembourg Prime Minister Jean- Claude Juncker said the strength of the euro poses a threat to the region’s economy.

The OSC has issued an invitation to some Consultation Sessions on OSC Staff Consultation Paper 45-710, Considerations for New Capital Raising Prospectus Exemptions.

Some oil company executives are taking time off from their busy schedule of explaining why the price of gas goes up on summer long-weekends to rail against the law of supply and demand:

Major oil companies are eager to ship to the coast to take advantage of higher prices on world markets than they can get by shipping to refineries in the U.S. Midwest and Southeast. But some of them are balking at the price – known in the industry as tolls – which they argue would allow Kinder Morgan to earn returns on the project that are far above its historical 7 to 12 per cent.
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Suncor, in response, say it is “critical” for the NEB to make sure there is a “just and reasonable” cost to shipping oil to the West Coast at a time when companies are desperate for new pipelines. The company says it is “disturbed” by how pipeline firms are “exerting market power that flows from the infrastructure shortage and need and necessity of take away capacity.”

Three tears for Suncor! Boo! Hoo! Hoo!

This story regarding modern day moonlighting is hilarious:

Bob was his company’s best software developer, got glowing performance reviews and earned more than $250,000 a year.

Then one day last spring, Bob’s employer thought the company’s computer system had been attacked by a virus.

The ensuing forensic probe revealed that Bob’s software code had in fact been the handiwork of a Chinese subcontractor.

Bob was paying a Chinese firm about $50,000 a year to do his work, then spent the day surfing the web, watching cat videos and updating his Facebook page.

Telecommuting, anyone? There’s more detail on Verizon’s security blog.

Reuters warns about “showrooming”:

More than 80 percent of shoppers in the study from International Business Machines Corp last bought something at a store, but only half said they would go to a brick-and-mortar retailer next time.

The study showed both the importance and global reach of “showrooming,” in which shoppers examine products in stores and then make their purchase online.
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Of eight categories tracked in the IBM survey of 26,000 shoppers, the two most popular for online purchases were consumer electronics and luxury items, including jewelry and designer clothing.

Nearly 25 percent of Internet shoppers had intended to buy in the store but ultimately purchased online, primarily for price and convenience, IBM said. Retailers that only operate online account for one-third of purchases by showroomers, IBM said.

I think showrooming is the way of the future. Why stock all that inventory? Open up a pop-up store for a weekend – or rent a corner in a large store that exists for the purpose of selling shelf space to distributors – and take all your orders on-line.

Some may recall my musing on housing affordability, last mused on December 27. If only 60% of the population own a house, is it appropriate to use the average income of everybody to measure affordability? And if we restrict the calculation to the top 60%, does this change the numbers? Assiduous Reader BB writes in and says:

I ran across the following, from which I was able to derive the information:
link

Looking at income based on household:
22%: >100k
4%: 90-99k
5%: 80-89k
30% falls somewhere in the 80-89k category. Let’s say 84k.

That got me wondering, and I checked the census. The following is from 1996. However, they have this information for other years as well.

Go to link then choose Statistical Profile of Canadian Communities. On the page that is loaded (link) choose Profile of Census Metropolitan Areas and Census Agglomerations, 1996 Census. On this page (link), which shows the data, choose Toronto in the Geography drop down list.

Looking at Census family income of all families (20% sample data):
15%: >100k
5%: 90k-99,999
6%: 80k-89,999
8%: 70k-79,999

30% falls somewhere in the 70k-79,999 category, probably right in the middle. Let’s say 75k.

In other words the median income of the 60% of the top earning households increased 12% from 1996 to 2006. You can probably figure out various other trends for different years.

So from a website of unknown credibility, I got the following chart of Toronto housing prices:

Click for Big

At a glance the chart looks more than just a little bit fishy: the y-axis is linear. Given that the “trend-line” goes from about $90,000 to about $420,000 in 50 years, the slope is about $6,600 per year, or +7.3%p.a. in 1953 and only +1.6%p.a. in 2012 (expressed in constant 2012 dollars). But never mind that, we’re only interested in the 1996 to 2006 period.

According to the Bank of Canada Inflation Calculator, inflation was just under 2%p.a. over 1996-2006, for a total deflator of 1 / 1.2174.

My calculation from the 1996 StatsCan data makes the 30 percentile just under $80,000, rather than about $75,000 (I multiplied the number of households, 1,162,145 by 0.3 to get 348,643, then subtracted the number in the top tiers from this until I got close to zero).

A proper comparison does not seem to be available from Statistics Canada, so I’ll go along with eyeballing the chart of 2005 data on page 5 of the City of Toronto document and go along with the estimate of about maybe $84,000.

These results are highly unfortunate for my theory, since this implies that there was a decline in real income even for those in the 30 percentile in the period 1996-2005/6, even while the real price of houses increased substantially. Or revise my theory. Or – even better – use different data! Or maybe vote just vote NDP next time, comrades.

Shaw Communications, proud issuer of SJR.PR.A, recently did a deal with Rogers:

Shaw Communications Inc. (“Shaw” or “the Company”) announced today that it has entered into agreements with Rogers Communications Inc. (“Rogers”) to sell to Rogers its shares in its Hamilton-based cable operations, Mountain Cablevision Limited (“Mountain Cable”), grant to Rogers an option to acquire Shaw’s spectrum licenses for advanced wireless service in British Columbia, Alberta, Saskatchewan, Manitoba and Northern Ontario (the “Spectrum Licenses”) and to purchase from Rogers its 33.3% partnership interest in the TVtropolis General Partnership (“TVtropolis”).

DBRS comments:

DBRS recognizes the strategic merit behind the transaction as we believe Shaw could stand to benefit from enhancing its network and service quality as competition continues to intensify in its core business lines. Proceeds from the planned divestures are intended for long-term strategic network investments; however, DBRS believes the resulting impact on operating income and cash flow growth over the near term is difficult to gauge. DBRS also notes the magnitude of the incremental investment is meaningful, but not momentous in terms of Shaw’s overall capital budget for the next couple years.

In terms of the transaction’s broader significance, DBRS appreciates a formal sale of the Company’s wireless spectrum as it will remove lingering concerns associated with the risk of wireless expansion in the future. DBRS also likes the fact that Shaw may be able to finance the acceleration of its capex program with the sale of non-core assets as opposed to raising debt. Although these factors have a one-time positive effect on Shaw’s credit risk profile, the broader forces at play on the Company’s core businesses generally remain the same.

As such, DBRS will continue to focus on Shaw’s ability to maintain and grow its subscriber base as it competes with IPTV and works to improve its product offerings. DBRS believes the trajectory of operating income and cash flow remain the key driver of the Company’s credit risk profile going forward, particularly since DBRS does not expect material debt reduction over the near to medium term, as Shaw’s free cash flow after dividends will likely be nominal over this time frame.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 14bp, FixedResets flat and DeemedRetractibles off 2bp. Volatility was above average, but is reverting towards normal levels as corrections from Monday’s big rejigging work themselves out. Volume was extremely high.

PerpetualDiscounts now yield 4.87%, equivalent to 6.33% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.25% (maybe at bit over), so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 205bp, a widening from the 195bp reported January 9.

Assiduous Reader PL sends me an interesting link, unlike you other bums who never send me NUTHIN’: this one is about so-called hunt and destroy algorithms:

In stock trading, twin practices have coexisted for ages. First, a large number of investors enter stop-loss orders to protect themselves. Second, such stop-loss orders become sitting ducks for some professionals.

In the past, it was a common complaint that market makers and brokers tended to run the stops. These days hunt-and-destroy algorithms have evolved to run down the stops. Such algorithms simply try to guess where the stops are grouped, and if stops are hit, the algorithms take advantage, first, by short-selling and then buying to cover. The complexities are overly simplified here to illustrate the point.
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We take precautions to make sure that our subscribers do not become victims of such algorithms. Further, as part of our tactics, we help our subscribers profit from buying into artificially depressed prices that occur from such algorithms.

The following are the elements of the ZYX Change Method Trade Management Guidelines:

• •Not placing stops in the zones where others can easily anticipate. In other words, do not becoming a sitting duck.
• •Not using stops as the primary risk-control mechanism.
• •Anticipating the stops would be run and exiting trading positions before such occurrences as well as reducing the size of long-term investment positions before such occurrences. Notice the distinction between trading positions and long-term investment positions.
• •Stepping up and buying when prices are artificially depressed because of stop-loss orders getting hit.

Seems to me that a much better strategy is not placing stop-loss orders at all. If you’re willing to sell at $24, why not sell at $25? Stop-Loss orders were responsible for the excesses of the Flash Crash, although you won’t hear any regulators admitting that.

The Europeans are still dithering on bank bail-outs:

A European Commission proposal for bank rescues recently leaked to the Financial Times suggests that euro area officials may not be ready after all to break the destructive loop between banks and their sovereigns.
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If the commission’s proposal becomes policy, this would be terrible news for markets and the euro. The burden of supporting rotten banks will still be able to bankrupt states — see Spain, Ireland and Cyprus — and rotten states will still be able to bankrupt otherwise healthy banks — see Greece.
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The European Commission’s latest plan attempts to keep Germany happy that it isn’t underwriting bankrupt banks in the Mediterranean, while still producing the direct euro area bank capitalization that countries like Spain so desperately need. It does so by saying that countries that have to resort to the European Stability Mechanism to recapitalize their banks would have to guarantee the fund against making a loss. This shares the same flaw as previous proposals: It fails to break that destructive loop between banks and their governments.

The bottom line is that if a country is bankrupt and needs direct bank recapitalization from the euro area’s common fund, then that same bankrupt sovereign would still have to serve as the final backstop for its banks, as it indemnifies the euro area fund for any losses.

So what, in terms of the fundamentals, would be different under the European Commission’s latest proposal? Not much. The proposals can of course change, but for now it should become that much harder for optimists to delude themselves that the negative feedback loop between banks and sovereigns is about to be cut.

It seems clear that Europe will have to move to a market-based system, in which sovereign debt is held by pension funds and other market bodies, rather than the banks … but this is contrary to the new liquidity rules and other instruments of financial repression, which seek to ensure that the banks will always buy sovereigns in great hulking gobs.

It was a mixed day of spring-back for the Canadian preferred share market today, with PerpetualPremiums gaining 2bp, FixedResets off 13bp and DeemedRetractibles winning 27bp. For the last two classes, these figures represent about half of yesterday’s change, when RBC roiled the market. Volatility was high again today, with many issues rebounding about half their Monday gain or loss. Volume was extremely high.

BCE is reducing its interest expense:

Bell Canada today announced that it will redeem on February 11, 2013, prior to maturity, all of its outstanding $149,641,000 principal amount of 10% Debentures, Series EA, due June 15, 2014 (“Series EA Debentures”).

The Series EA Debentures will be redeemed at a price equal to $1,113.389 per $1,000 of principal amount of debentures plus $15.890 for accrued and unpaid interest up to, but excluding, the date of redemption.

It may be that my worst fears regarding Greece are getting closer to being realized:

A spate of violent attacks against the homes and offices of public figures has hit Greece as the economy goes into its sixth year of deep recession, apparently nurturing extremist groups on both sides of the political spectrum.

Early Monday morning, a gunman with a Kalashnikov assault rifle sprayed bullets into the Athens headquarters of Greece’s ruling, centre-right New Democracy party. At least one of the bullets went through the window of the office occasionally used by Prime Minister Antonis Samaras, who is implementing harsh austerity in exchange for bailout loans.

…and…:

A group of illegal immigrants was justified in escaping from a police lockup last year because of the miserable conditions in their overcrowded cell, which was filthy, ridden with disease and had no running water, a Greek court has ruled.

The court in the northwestern city of Igoumenitsa said the 15 adults – from Afghanistan, Iraq, Syria, Egypt and Morocco – had been held for up to six weeks in “wretched and highly dangerous” conditions.

There’s a story about a Saudi farmer who, we are told, should serve as an inspiration to us all:

The herd is one of hundreds owned by Almarai Co. (ALMARAI), the biggest food producer in the Persian Gulf, which processed about 235 million gallons of milk in 2012. The Riyadh-based company’s revenue has almost tripled in the past five years to 7.95 billion riyals ($2.12 billion) as demand for its products — milk, cheese, processed chicken, baked goods and juices — has surged with the nation’s population. Its shares are up 125 percent since its 2005 initial public offering.

The gain has made Prince Sultan bin Mohammed bin Saud Al Kabeer, Almarai’s 59-year-old founder and largest individual shareholder, a billionaire. His 28.6 percent stake in the operation, plus other investments, has helped him amass a fortune of at least $2.8 billion, according to the Bloomberg Billionaires Index. He has never appeared on an international wealth ranking.

“Establishing a dairy farm in the middle of the desert is not that easy,” said Alaa Ghanem, a senior equity analyst at Audi Saradar Investment Bank in a phone interview from his office in Beirut. Almarai, he said, “is an example for anyone who wants to succeed.”

What are the secrets of his success? He used Canadian business techniques! Here’s one:

The subsidy for baby milk will go from SR2 to SR12 per kilogram as part of efforts to reduce the financial burden on public caused by soaring consumer prices.
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Dr. Mansour Al-Kredes, deputy chairman of the agricultural committee at the Riyadh Chamber of Commerce and Industry, proposed the government subsidize agricultural and food products in order to stabilize the market. “We should have a strategic plan in order to ensure enough food supply, by providing necessary support to farmers,” he explained. “Subsidizing consumer goods will have a positive impact on farmers and will stabilize market prices,” he pointed out.

Here’s another:

Critics warn that the high yield of Almarai and other Saudi agricultural ventures carries a hidden cost. Government energy subsidies made possible by Saudi Arabia’s oil profits provide cheap electricity for the kingdom’s industry and agriculture but contribute to soaring domestic energy consumption. Saudi agriculture also draws on the kingdom’s natural aquifers, which are fast running dry.

I hope all the young people reading this blog take this to heart and become risk-taking entrepreneurs like Prince Sultan bin Mohammed bin Saud Al Kabeer.

It was a most interesting day for the Canadian preferred share market with a trading programme at RBC (and, possibly related, at Goldman) roiling the market. When the dust settled, PerpetualPremiums dropped 6bp, FixedResets leapt upward by 24bp and DeemedRetractibles got whacked for 55bp. Volatility was enormous and volume was extremely high.

It turned out to be an interesting day today, with RBC executing some frenetic trading (with an assist from Goldman Sachs Canada) that had a major impact on price volatility and volumes.

TXPR was up a miniscule 0.08% on the day, while TXPL gained +0.40%, so it would appear that all these trades were (probably!) more or less cash neutral and constituted a rejigging of somebody’s (or several somebodies’) portfolio.

The following table is a souped-up version of the regular performance highlights table, which displays all those members of the HIMIPref™ subindices that had a change in their bid price in excess of 1% (up or down) from the close Friday to the close Monday.

I have attempted to differentiate “real” from “unreal” movements based on where trades were executed, rather than where the bid price closed the day; I have also attempted to isolate those issues which were actually involved in the trading programme from those that were volatile simply because they felt like it.

The performance table has been souped up with data collected manually, with immense labour, from the TMX Money website (and therefore ignores potentially valuable information regarding trading at other exchanges): I have used the time of the last 25 trades to help differentiate between “trading programme” and “random” price movements.

It looks like all the excitement was generated by trades executed through RBC, with an assist from Goldman.

The huge number of executions leads me to believe that the trades were executed algorithmicly, and I must give a tip of the hat to the algorithms authors. In at least one of the big movers, it became clear that a pounce algorithm was being used, but it was a relatively smart pounce algorithm. When a counter-flow order was entered inside the market, it didn’t get filled instantly, as is the case with a regular pounce; there was a delay of a some time (up to about a minute, by my estimate) before the order got filled … nice way to catch predatory traders who may assume that not getting filled within 50ms (maybe 20ms?) means that a pounce is not operating at that level.

Analysis of the above table allows us to construct the following summary (using only those large changes considered to be “real”):

As this table makes clear, whatever was going on was basically selling Straight Perpetuals and buying FixedResets, although there were a couple exceptions to these rules.

Looking more closely at the FixedResets involved, we see that the two losers, BMO.PR.Q and TRP.PR.C, have Issue Reset Spreads of 115bp and 154bp, respectively, leading one to suspect that this is another outbreak of aversion towards the low-spread FixedResets. However, three of the nine winning FixedResets have spreads of less than 200bp (BMO.PR.M, RY.PR.I and BNS.PR.Q) and only one has a spread in excess of 300bp (TD.PR.K at +433). So while I think it’s fair to say an overall trend has been identified, it is clear that the selection process has details within it that are currently unknown.

We’ll see what tomorrow brings, but my first reaction is that this is simply a piece of incompetent trading, for all that I admire the sophistication of the algorithmic tool used. Based on the information currently available, it seems like somebody rebalanced his portfolio – or several portfolios – in such a manner as to attract enormous transaction costs. This conclusion must remain tentative pending more data – or the lack of it! – tomorrow.

Update, 2013-1-15: Assiduous Reader PL writes in and says:

Your comment ” Based on the information currently available, it seems like somebody rebalanced his portfolio – or several portfolios – in such a manner as to attract enormous transaction costs. “. I assume you do NOT mean RBC was trying to generate transaction cost revenue for themselves. ?

No – despite what the regulators want you to believe, commission expense is a negligible part of transaction costs, vastly outweighed by the bid-ask spread and – particularly in this case – market impact costs.

The fact that this was done after 3PM is interesting. Was it to keep retail buyers/sellers out of what is going on. Or to force what retail buyers were watching to make a fast decision before 4PM. Eg. did someone find out something that may be announced after 4PM so I better sell what has gone down and buy what has gone up? I do not think retail investors were the target. There are not enough of us active enough to make it worth while as can be seen from the volumes. So probably trying to see what other ALGOS would do when some volatility kicked in to our sleepy preferred market.

Never ascribe to cunning what can be described as stupidity. I have no idea why this was done so late in the day, and with such insistence on getting such large (for this market) trades done before the close. Maybe the portfolio management company had their weekly meeting just after lunch on Monday and decided to press the button. A possible aggravating factor is the presence of ‘operational silos’ in most portfolio management companies – where portfolio management decisions are distinct from trading decisions: the PM writes a ticket, gives it to his trading desk and immediately loses all control over the order; it is executed by individuals who have completely different priorities and are evaluated by completely different metrics.

The fact that on many issuers the buyers and sellers were RBC definitely needs some investigating. It will be interesting to see if the regulators who you often criticize respond to yesterday.

I don’t see why the regulators should get involved. Whoever initiated these trades clearly has the resources to make a Great Big Stink if he feels that execution was negligent.