PrefBlog

Here’s another fascinating unintended consequence:

China’s one-child policy has produced adults that tend to have personality traits unsuited for starting businesses or managing companies, according to a study that adds to economic concerns surrounding the rule.

Using surveys of 421 men and women in Beijing and testing their skills in economic games, researchers in Australia found those born after the 1979 policy were more pessimistic, nervous, less conscientious, less competitive and more risk averse. They also found them to be 23 percent less prone to choose an occupation that entails business risk, such as becoming a stockbroker, entrepreneur or private firm manager.

Of course, criticizing the government is a form of risk – especially in China! – so perhaps the consequence was actually intended!

Penson Worldwide has filed for bankruptcy:

Penson Worldwide Inc. (PNSN), a provider of financial clearing services and related operational and technology products, filed for bankruptcy in Delaware with a plan to liquidate its business.

The Plano, Texas-based company listed both assets and debt of $100 million to $500 million in Chapter 11 documents filed today in U.S. Bankruptcy Court in Wilmington, Delaware. Chapter 11 is the section of the U.S. Bankruptcy Code used by companies to reorganize. In 2011, Penson had revenue of $217.3 million, court papers show.

“Average daily trading volume in equities fell by 5 percent in 2010 and 8 percent in 2011, and short selling continued to fall in each of the years from 2009 through 2011,” Bryce B. Engel, chief operating officer of Penson Worldwide, said in court papers.

The fall of Penson had implications for Northern Securities’ retail operations as discussed on December 14:

A subsidiary of Northern Financial Corp. is assigning client accounts to two unnamed brokerage firms under a consent order with IIROC.

The move by the subsidiary, Northern Investment Securities, will see investment advisers responsible for the accounts transferred to the new firms as well, Northern said in a release Monday.

The order was issued as a result of NSI being unable to obtain an alternative carrying broker or other alternative arrangement to replace Penson Financial Services Canada Inc., which is discontinuing its carrying broker business as of Dec. 31.

During a question-and-answer session at the KPMG 21st Annual Insurance Issues Conference, Julie Dickson of OSFI made an oblique defence of the 2008 Manulife Rule Change:

Well, in terms of capital, it’s a reality because all risk-based capital rules are, to some extent, pro-cyclical. And when risk goes up, required capital goes up. So it is part and parcel of the pro-cyclicality phenomenon. 2008 I think was a good example, where we noticed that capital was spiking. It’s OK for capital to rise as you enter a recession, but it was spiking with the decline in equity markets. And when we looked at how the rules worked, we realized that that was inappropriate because the formulas were requiring a lot of extra capital for obligations which were many, many years off. And that was felt to be, too risk sensitive. We didn’t think it appropriately reflected the risk, and made a change.

Bombardier – proud issuer of BBD.PR.B, BBD.PR.C and BBD.PR.D – has issued ten year notes at 6.125%.

Meanwhile, I see that HSBC Bank Canada – proud issuer of HSB.PR.C, HSB.PR.D and HSB.PR.E – has issued eight year deposit notes at 2.938%.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 2bp, FixedResets up 15bp and DeemedRetractibles off 6bp. Volatility was low. Volume was well above average.

Work sharing is becoming more common in the US:

Instead of dismissal notices, employees get a shortened work week, with unemployment benefits partially compensating for lost wages. Popularly known as work sharing, the program holds out the promise of fewer layoffs and less painful economic downturns.
…
While work share can be useful, policymakers and businesses need to proceed with caution, said Douglas Holmes, president of UWC-Strategic Services on Unemployment & Workers’ Compensation, a Washington-based business group that lobbies on unemployment insurance issues. The programs could drain already stressed unemployment insurance funds and, if used inappropriately, could delay inevitable economic disruptions, he said.

One reason Blue Crown cites for the drop in orders, for example, is that more dentists are sending work to China.

“If an individual continues to do the same job because this policy permits them to, when they would be better off spending time improving their skills doing the next job, that’s a factor that has to be taken into consideration,” Holmes said. “That turns the program from being a temporary measure to address a fluctuation in demand into one that becomes a long- term wage subsidy.”

At Blue Crown, where the least-experienced dental technician makes $17.50 an hour, orders still haven’t bounced back and co-owner Roberts is applying for her third year of work share.

Liquidity is becoming more important in US corporate bond pricing:

Investors’ preference for the most- liquid corporate debt is running higher than any time since the credit crisis, a signal they’re preparing for the four-year rally to end.

The expense incurred by credit traders to complete bond transactions was the lowest last year relative to costs implied by the market’s average bid-ask spread since 2009, according to Barclays Plc. The shift, a sign that buyers are favoring securities that are easiest to trade, has helped financial bonds beat industrial debt by the biggest margin on record, Bank of America Merrill Lynch index data show.
…
Buyers are seeking flexibility as a 6 percent increase in trading volumes fails to keep up with a 13 percent rise in the size of the dollar-denominated market, data from Bloomberg and Bank of America Merrill Lynch show.

The average daily volume of bonds changing hands last year accounted for 0.29 percent of outstanding debt, the lowest proportion since at least 2005, according to data compiled by Bloomberg and Trace.

The 21 primary dealers with the Federal Reserve, which traditionally used their own money to facilitate trading, have reduced their corporate-bond inventories 76 percent since October 2007 to $57.49 billion, Bloomberg data show.

US housing horror stories never seem to end:

Six years in, thousands of homeowners are finding themselves legally liable for houses they didn’t know they still owned after banks decided it wasn’t worth their while to complete foreclosures on them. With impunity, banks have been walking away from foreclosures much the way some homeowners walked away from their mortgages when the housing market first crashed.

“The banks are just deciding not to foreclose, even though the homeowners never caught up with their payments,” says Daren Blomquist, vice-president at RealtyTrac, a real-estate information company in Irvine, California.

FTN.PR.A was confirmed at Pfd-4(high) by DBRS:

Over the past year, the performance of the Portfolio experienced some volatility, with the month-end NAV of the Company fluctuating between $18.07 and $19.02 per unit. The current dividend coverage ratio is around 0.66, but the Company has also written covered call options in order to generate additional income for distributions. The rating of Pfd-4 (high) is sufficient based on the current level of downside protection available to the Preferred Shares. As a result, the rating has been confirmed at Pfd-4 (high).

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 8bp, FixedResets off 1bp and DeemedRetractibles gaining 3bp. Volatility was low. Volume was significantly above average.

A Bank of Canada Working Paper by Katya Kartashova, Ben Tomlin examines House Prices, Consumption and the Role of Non-Mortgage Debt:

This paper examines the relationship between house prices and consumption, through the use of debt. Using unique Canadian household-level data that reports the uses of debt, we begin by looking at the relationship between house prices and debt. Using quantile regression, we find a positive and significant relationship between regional house prices and total household debt all along the conditional debt distribution. This suggests that the household-level relationship between house prices and debt goes beyond the purchase of real estate. We then find a positive relationship between house prices and non-mortgage debt (the sum of secured lines of credit, unsecured lines of credit, leases and other consumer loans, except for credit cards) for homeowners. Combining these results with the reported uses of non-mortgage debt allows us to connect house prices and nonhousing consumption – this connection is new to the literature on house prices and consumption. We conclude that the increases in house prices over the 1999-2007 period were, indeed, associated with an increase in non-mortgage debt and non-housing consumption. Our results can be thought of as the establishment of a conservative lower bound for the overall relationship between house prices and aggregate consumption.

It was a positive day for the Canadian preferred share market, with PerpetualPremiums gaining 2bp, FixedResets up 3bp and DeemedRetractibles winning 11bp. Volume was average.

PerpetualDiscounts (all four of them! from both issuers!) now yield 4.82%, the equivalent of 6.27% interest at the standard conversion factor of 1.3x. Long corporates now yield about 4.3%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 195bp, a significant decline from the 210bp reported January 2.

Interesting take on chaotic theories of markets:

Dr Tobias Galla from The University of Manchester and Professor Doyne Farmer from Oxford University and the Santa Fe Institute, ran thousands of simulations of two-player games to see how human behaviour affects their decision-making.

In simple games with a small number of moves, such as Noughts and Crosses the optimal strategy is easy to guess, and the game quickly becomes uninteresting.

However, when games became more complex and when there are a lot of moves, such as in chess, the board game Go or complex card games, the academics argue that players’ actions become less rational and that it is hard to find optimal strategies.

This research could also have implications for the financial markets. Many economists base financial predictions of the stock market on equilibrium theory – assuming that traders are infinitely intelligent and rational.

This, the academics argue, is rarely the case and could lead to predictions of how markets react being wildly inaccurate.

I wouldn’t call the subjects of the following story “quants”. I’d call them technical analysts. A technical analyst with a computer is simply a technical analyst, and is still going to lose money:

Hedge funds that use computers to follow trends lost money for a second straight year in 2012 as political debates over the U.S. fiscal cliff and Europe’s sovereign-debt crisis roiled markets.

The Newedge CTA Trend Sub-Index, which tracks the performance of the largest computer-driven, or quant funds, fell 3.4 percent last year after a 7.9 percent decline in 2011. David Harding’s $10 billion Winton Futures Fund Ltd. slid 3.5 percent in 2012, its second annual decline since opening in 1997, investors in the pool said. Man Group Plc (EMG)’s $17 billion AHL Diversified fund fell 2.1 percent, while BlueCrest Capital Management’s $14 billion trend-following fund gained 0.02 percent, said the investors, who asked not to be identified because the figures are private.

The performance of the funds belies their popularity with investors, who’ve poured $108.2 billion into the pools since the end of 2008, according to Fairfield, Iowa-based BarclayHedge Ltd.
…
Trend-followers try to profit by tracking momentum in prices, whether rising or falling. They often use technical indicators, such as moving averages or Bollinger bands, to predict movements for stocks, bonds and commodities. Quants use mathematical algorithms to decide when to buy or sell and rely on computers to respond to price signals in fractions of seconds.

Not only that, but quants do not necessarily engage in High Frequency Trading, either.

OSFI’s Mark Zelmer gave a speech at the 2013 RBC Capital Markets Canadian Bank CEO Conference:

An important New Year’s resolution for OSFI will be to assess which banks in Canada should be designated as domestically systemically-important (D-SIBs). We expect to announce our decision within a few months. Any bank receiving a D-SIB designation can also expect some additional prudential requirements, including having to carry more common equity. The extra capital requirements will take effect in January 2016; the start date for those that will be imposed internationally on globally systemically-important banks. This provides plenty of time for the designated banks to plan accordingly.
…
Another important resolution for us this year is contingent capital. As of January 1, Canadian deposit-taking institutions are no longer able to include new issues of preferred shares and subordinated debt in their Tier 1 and Total Capital ratios unless those instruments carry Non-Viability Contingent Capital (NVCC) conversion triggers. Existing instruments are being phased out of regulatory capital at a rate of ten per cent per year. Like living wills and other resolution measures, these new instruments are an important ingredient in making sure that all deposit-taking institutions can be resolved in an orderly fashion in times of stress without taxpayers being the first port of call for new capital. OSFI is looking forward to the emergence of a market in Canada for NVCC preferred shares and subordinated debt instruments in 2013.

It was another mixed day for the Canadian preferred share market, with PerpetualPremiums up 7bp, FixedResets off 1bp and DeemedRetractibles down 5bp. Volatility was negligible. Volume was a little below average.

We have more welfare payments to dinosaurs:

The federal government announced a five-year extension of its $250-million Automotive Innovation Fund Friday that was immediately deemed by some industry observers as the ongoing cost of Canada’s continued participating in the North American auto industry.

Why do we subsidize them? Because they’re good jobs. Why are they good jobs? Because they’re subsidized.

The Basel III liquidity rules have been modified:

Global central bank chiefs agreed to water down and delay a planned bank liquidity rule to counter warnings that the proposal would strangle lending and stifle the economic recovery.

Lenders will be allowed to use an expanded range of assets including some equities and securitized mortgage debt to meet the so-called liquidity coverage ratio, or LCR, following a deal struck by regulatory chiefs meeting today in Basel, Switzerland. Banks will also have an extra four years to fully comply with the measure.
…
A sample of 209 banks assessed by the Basel committee had a collective shortfall of 1.8 trillion euros ($2.3 trillion) at the end of 2011 in the assets needed to meet the 2010 version of the LCR, according to figures published by the Basel group.

Banks had warned that the initial LCR proposal would force them to buy additional sovereign debt, more closely tying their fate to governments’ solvency. The 2010 rule was drafted before the EU was fully confronted by a sovereign debt crisis that challenged traditional assumptions about the credit worthiness of government bonds.

Forcing banks to buy government debt is a form of financial repression.

Bloomberg’s editors are upset about this:

Not for the first time, the panel has retreated from its initial demands, and the final liquidity rule is far less rigorous than the committee had said it wanted and financial markets had been expecting.
…
The committee issued its draft liquidity rules in 2010. The idea was to lay down the quantity and quality of liquid assets (in theory, assets that can be sold quickly without driving down prices) that banks must hold to cover a run on deposits or some other interruption in short-term funding. Under pressure from banks, especially those in the U.S., most aspects of the draft proposal have been weakened in the final document.

For instance, the new rule says liquidity must be enough to cover a 30-day run on insured retail deposits of 3 percent, instead of 5 percent as proposed. It also expands the range of corporate debt securities that qualify as liquid to BBB- (the lower boundary of “investment grade”); previously, the committee said nothing less than AA- should be eligible. High-quality mortgage-backed securities will also count.

This broadening of qualifying assets means that almost all banks already satisfy the rule — a point that was acknowledged by Bank of England Governor Mervyn King, the chairman of the rule-setting committee.
…
As guttings go, this is pretty thorough. It confirms the committee’s reputation for delay, backsliding and willingness to accommodate the preferences of banks — the industry it’s supposed to be supervising. If the panel had been mindful of its credibility, it would have issued a draft it was willing to defend in the face of expected pressure from the industry.

William Cohan on Bloomberg has a nice piece on the realities of regulation:

Instead of taking a job at a big Wall Street investment bank, he [“Dock2” Treece] returned home to Toledo, Ohio, and joined, as a partner, his father’s tiny investment-advisory firm, Treece Investment Advisory Corp., and the family broker-dealer, Treece Financial Services Corp. The two companies have five employees: Dock2 Treece, his father, his younger brother and two administrators.
…
The Treeces’ 2010 Finra exam, however, went on for eight months, as the regulators kept asking for more and more documents to try to discover a minor technical point about what kind of mutual funds the firm sold to its customers.

Treece said Finra kept telling him to sell a kind of mutual fund that he knew he wasn’t supposed to sell, but the examiners seemed to not understand the rules. To fulfill one Finra request required 4,000 pages of documents to be copied and sent off.

“It had taken my staff two weeks to get together, literally, just standing in front of a copy machine for 12 hours a day, pull a file out, take the documents out that they wanted, copy them, put them in a box, put the originals back in the file, and put the file back,” Treece said. “I mean, talk about useless.”

He said he spent more than $30,000 in legal fees — chicken feed on Wall Street but a big deal at a tiny firm — trying to convince the examiners of something they should have known about all along.

Here’s an idea for Toronto – Subway Savings Bonds!

Malaysia, Southeast Asia’s biggest local-currency bond market, will let retail investors fund Kuala Lumpur’s new subway when it starts marketing its first exchange- traded notes to individuals.
…
DanaInfra will offer 300 million ringgit ($99 million) of government-guaranteed Islamic securities to individuals, Ashraf Radzi, associate director of Prokhas Sdn., a financial adviser to the company, said in Jan. 3 interview. He declined to give specific details such as yields or maturity.

The bonds, which pay returns on assets to comply with the Koran’s ban on interest, will be sold in increments of 100 ringgit, or the equivalent of $33, with a minimum order value of 1,000 ringgit, Bursa Malaysia’s Tajuddin said.

Rob Carrick of the Globe has weighed in on trailers:

What regulators should do is order the replacement of trailing commissions with a fee that is set by the adviser as a percentage of the client’s assets, to be withdrawn quarterly from cash holdings in the client’s account. The investment industry should introduce the phrase “advice fee” and create standards under which this fee would cover not only investment management, but financial planning.

He means, fees should be charged in the way an actual portfolio manager charges fees, forgetting that there’s one problem with this model: a huge segment of the investing public doesn’t want it. ‘There was no trading!’ says Joe Blow. ‘Why should I pay if there was no trading?’.

I also see that Mr. Carrick wants to force me to offer financial planning, despite the fact that I do not want to offer financial planning. It’s a ludicrous idea … any single person can be good at only so many things; I have chosen to be good at quantitative investment strategies, fixed income in general and preferred shares in particular. Now I’m going to be forced to offer financial planning? What’s next, I have to offer golf games and hockey tickets to big clients and hire a pretty receptionist?

Still another hurdle is you, the investor. You can be half to two-thirds excused for your fee ignorance because of the way you’ve been manipulated by the investing industry.

Totally wrong. There is full disclosure all over the place. Anybody who doesn’t know about fees hasn’t done any work at all. Is that another job Mr. Carrick wants to give me? Reading aloud the prospectus to prospective clients?

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums up 8bp, FixedResets down 3bp and DeemedRetractibles off 2bp. Volatility was average. Volume recovered, to average levels.