PrefBlog

The US reported a good jobs number:

ob growth surged last month as automakers, builders and retailers pushed the unemployment rate to a four-year low, defying concerns that budget battles in Washington would harm the economic expansion.

Employment rose 236,000 last month after a revised 119,000 gain in January that was smaller than first estimated, Labor Department figures showed today in Washington. The median forecast of 90 economists surveyed by Bloomberg projected an advance of 165,000. The jobless rate dropped to 7.7 percent, the lowest since December 2008, from 7.9 percent.

This was echoed in Canada:

Canada’s see-sawing labour force swung back into job-creation mode in February, with a net 50,700 people finding work. Most of those new hires were aged 55 or older — continuing a trend from January.

There’s a kerfuffle about revolving door regulation in the US:

“There’s a basic resistance to seeing things from the investor point of view,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “It all goes back to the same thing — the degree to which the industry dominates this whole conversation.”

It’s a cultural problem as Roper sees it: Regulators and the regulated operate in a setting where people with the same pedigree move back and forth between government and private- sector jobs and outside views carry little weight. SEC spokesman Kevin Callahan said in an e-mail that investor protection is at the core of all the agency’s actions, and that until an investor advocate is appointed, existing SEC offices are performing the roles required by Dodd-Frank.

A study released last month by the Project on Government Oversight, a nonprofit watchdog group, stirred up a discussion about the revolving door of lawyers who alternate between government and industry, where they defend banks and brokers. Sorting through documents filed by 419 SEC alumni who had recently left the agency, the Project found 2,000 cases in which alumni planned to represent a client or an employer before the SEC between 2001 and 2010.

That’s a lot of meetings among lawyers who used to work down the hall from one another, but who now — officially, anyway — are adversaries. In the view of SEC critics, it is part of the clubby state of affairs that pushes government watchdogs and banks to see things the same way. Callahan said that the U.S. Government Accountability Office studied the revolving-door issue and concluded that the SEC’s controls were as strong as those of other government agencies. What a relief.

The problem is not so much that these guys know each other; I suspect that this helps as much as it hurts in terms of lawyers having a known reputation and encourages a little more frankness than might otherwise be the case. The problem is that the regulatory guys are representing their current employer against their future employer.

Instead of addressing the issues, the SEC is busily enforcing Brazilian laws:

A published report says the Brazilian operations of Brookfield Asset Management Inc. are under investigation by the U.S. Securities and Exchange Commission over allegations that it used bribes to get approval for construction deals.

The Wall Street Journal report said the SEC is expected to interview former Brookfield executive Daniela Gonzalez, who worked in its Sao Paulo unit, over allegations she made.

The Great White Fathers at the SEC evidently believe that Brazilian savages can’t enforce their own laws.

Fitch downgraded Italy:

Fitch Ratings-London-08 March 2013: Fitch Ratings has downgraded Italy’s Long-term foreign and local currency Issuer Default Ratings (IDR) to ‘BBB+’ from ‘A-‘. The Outlook on the Long-term IDRs is Negative. Fitch has simultaneously affirmed the Short-term foreign currency IDR at ‘F2’ and the common eurozone Country Ceiling for Italy at ‘AAA’.
KEY RATING DRIVERS
The downgrade of Italy’s sovereign ratings reflects the following key rating factors:

– The inconclusive results of the Italian parliamentary elections on 24-25 February make it unlikely that a stable new government can be formed in the next few weeks. The increased political uncertainty and non-conducive backdrop for further structural reform measures constitute a further adverse shock to the real economy amidst the deep recession.
– Q412 data confirms that the ongoing recession in Italy is one of the deepest in Europe. The unfavourable starting position and some recent developments, like the unexpected fall in employment and persistently weak sentiment indicators, increase the risk of a more protracted and deeper recession than previously expected. Fitch expects a GDP contraction of 1.8% in 2013, due largely to the carry-over from the 2.4% contraction in 2012.
– Due to the deeper recession and its adverse impact on headline budget deficit, the gross general government debt (GGGD) will peak in 2013 at close to 130% of GDP compared with Fitch’s estimate of 125% in mid-2012, even assuming an unchanged underlying fiscal stance.
– A weak government could be slower and less able to respond to domestic or external economic shocks.

Spend-Every-Penny continued his centrally planned micromanaging approach to banking:

Canada’s Finance Minister has taken his battle against a housing bubble an extraordinary step further, issuing rare praise for the country’s banks for not matching Bank of Montreal’s cut-rate mortgage.

Jim Flaherty said Friday he also spoke with BMO this week after it cut its five-year, fixed-rate mortgage last weekend to 2.99 per cent, expressing how troubled he was by the cut from 3.09 per cent.

“I spoke with them about that this week and expressed my concern … in two ways,” Mr. Flaherty told reporters in Ottawa.

There is not any mention in the article of the FedGov’s policy of pouring gasoline onto the housing market fire by increasing the amount of federal mortgage insurance available through the CMHC.

Norway’s Sovereign Wealth Fund returned 13.4% last year. The fund has recently formalized its rebalancing policy and has returned +2.57% p.a. real return since 1998; note, however that this does not appear to be as good as the OTPP returns. If a pension plan wants good returns, it needs a captive asset manager.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 3bp, FixedResets down 12bp and DeemedRetractibles gaining 2bp. Volatility was nil. Volume was on the high side of average.

I have a little difficulty with the definition of “skilled workers” in the following but it’s nice to see people who can actually do things in demand:

After spending years searching for enough crude to pump, the U.S. oil and natural gas industry now is struggling to find and pay for enough skilled workers to tap the abundant supply in shale rock, putting $100 billion in planned petrochemical projects at risk.

Engineers and similar professionals earned an average $183,000 to $285,000 in 2012 depending on their position and background, a 20 percent to 50 percent jump since 2009, NES Global Talent data show. Wages in energy and mining have grown at nine times the rate of all industries since 2008, and starting salaries for petroleum engineering graduates are about $98,000, up 9.7 percent since 2008, according to PayScale Inc.
…
Chevron Phillips expects to employ 10,000 engineers and construction workers to build an ethylene plant and two plastics factories outside Houston at a cost of $5 billion. Chevron is racing competitors such as Dow, Exxon Mobil Corp. and a half dozen other companies that have announced plans to build plants for converting gas into ethylene, the most used petrochemical, on the Gulf Coast.

To me, “skilled workers” means tradesmen – electricians, plumbers, mechanics – not engineers, who I think of as “professionals”. But no matter.

John Paulson, whose successful bet against sub-prime made him a fortune and attracted a lot of assets, is the poster-boy for performance chasing:

John Paulson posted an 18 percent decline in his Gold Fund last month as a slump in the metal, after more than a decade of gains, undermined efforts by the billionaire hedge-fund manager to rebound from two years of losses in some strategies.
…
Paulson is being hurt as gold fell for the fifth straight month, its longest slump in 16 years. The manager told clients in 2012 his Gold Fund would beat his other strategies over five years because the metal was the best hedge against inflation and currency debasement as countries pump money into their economies. Falling gold stocks helped fuel losses last year in the manager’s $4.9 billion event-driven Advantage funds and the Gold Fund, and he also made wrong-way bets that Europe’s debt crisis would worsen.

The latest New Big Thing in junk bonds is Covenant Arbitrage, which is the cool way to say “reading the prospectus”:

The hundreds of pages of tedious documents that govern every corporate bond sold are suddenly a hot commodity as traders look for an edge with the biggest bull market ever in junk debt slowing.

Chesapeake Energy Corp. (CHK)’s $1.3 billion of 6.775 percent notes climbed to a record 104.5 cents on the dollar in a wager that the natural gas producer has run out of time to repurchase the debt at par, or 100 cents, as allowed by the debt’s covenants. Plano, Texas-based J.C. Penney Co. (JCP)’s 7.125 percent notes due 2023 have risen 9 percent this month, even as the rest of its debt plummets, in a bet the retailer will be forced to repay the issue early because of a covenant breach.
…
Investors began pushing up the price of Chesapeake’s 2019 notes last month to take advantage of “sloppy” language in the deal documents, according to Covenant Review’s [founder Adam] Cohen. Those securities rose above par even though the bond covenant has a redemption provision based on a March 15 date. The debt has since declined to 103.5 cents.

Some traders believe that the company is wrong that it can redeem the notes at par and that Chesapeake would have to pay a substantial premium if it wanted to repurchase them, Cohen said. If a so-called make-whole call provision were triggered, the company would have to pay bondholders as much $400 million in addition to the principal amount of the notes.

“The value of litigating the position may be high enough to make a little legal spending on a narrow issue worthwhile,”
Cohen wrote in a March 1 report. “Hiring a law firm to challenge the narrow issue of a par call would be relatively inexpensive.”

Jim Gipson, a spokesman for Oklahoma City-based Chesapeake, said he couldn’t immediately comment.

I quite agree with the conclusion of this article comparing US and Canadian mutual fund fees:

Over the longer term, fund investors should be asking regulators to allow the sale of U.S.-domiciled funds in Canada. While a common regulatory regime similar to the UCITS system in Europe (which allows funds to be sold throughout the European Union) may not be possible between Canada and the United States, fund regulation between the two countries is not so different as to prohibit the creation of a passport system.

Such a move would give Canadian fund investors more choice and more access to economies of scale, which could only translate into further reductions in the cost disparity between the two countries.

However, we have a mercantilist regulatory environment in Canada: US funds are disallowed in a tit-for-tat move taken in reaction to the SEC’s ban on US investment in Canadian funds. “You’re screwing your consumers, eh?” shout our red-faced regulators while practicing for their next job interviews. “Ha! We’ll just screw our consumers MORE! That’ll show you!”

What is it about university administration that attracts the brain-dead?

Scholarship programs funded by some of the nation’s biggest donors, including Gates, Coca-Cola Co. and Michael Dell, are taking aim at practices used by wealthy colleges, such as Boston College, which has a $1.65 billion endowment, Amherst, with a $1.64 billion fund and Barnard, with $216.4 million. They say the schools hurt poor and minority students by rescinding aid once they find out they have awards from outside sources or by banning use of the funds to cover some student contributions.
…
Letting students like Brindis use outside grants to cover the contribution “would be unfair to all the other ones who didn’t win the Gates,” [Boston College director of student financial strategies Bernie] Pekala said.

Similarly at Amherst College, a wealthy liberal arts school in Massachusetts, students can’t use outside scholarships to pay their “summer contribution,” which can run as high as $1,600, said Tom Parker, dean of admission and financial aid.

“Here’s the conundrum. You want to treat everybody as equally as you can,” Parker said. “Morally it’s a difficult question.”

Um … isn’t the whole point of scholarships to discriminate on the basis of ability?

It was a day of highly segmented gains for the Canadian preferred share market, with PerpetualPremiums up 3bp, FixedResets winning 27bp and DeemedRetractibles gaining 1bp. This may be due to the market absorbing the TRP.PR.D monster issue, or it may not. Volatility was high and dominated by – you guessed it – winning FixedResets. Volume was very high.

The Bank of Canada statement held no surprises:

Canada’s economy grew by 0.6 per cent at annual rates in the fourth quarter of 2012, with solid growth across most domestic components of GDP offset by a sharp reduction in the pace of inventory investment. The Bank expects growth in Canada to pick up through 2013, supported by modest growth in household spending combined with a recovery in exports and solid business investment. With a more constructive evolution of imbalances in the household sector, residential investment is expected 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. Despite the expected recovery in exports, they are likely to remain below their pre-recession peak until the second half of 2014 owing to restrained foreign demand and ongoing competitiveness challenges, including the persistent strength of the Canadian dollar.

Total CPI inflation has been somewhat more subdued than projected in the January MPR as a result of weaker core inflation and lower mortgage interest costs, which were only partially offset by higher gasoline prices. Low core inflation reflects muted price pressures across a wide range of goods and services, consistent with material excess capacity in the economy. Core and total CPI inflation are expected to remain low in the near term before rising gradually to reach 2 per cent over the projection horizon 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. With continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary policy stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required, consistent with achieving the 2 per cent inflation target.

The Financial Post points out:

In their statement, policymakers said that given the “continued slack in the Canadian economy, the muted outlook for inflation, and the more constructive evolution of imbalances in the household sector, the considerable monetary stimulus currently in place will likely remain appropriate for a period of time, after which some modest withdrawal will likely be required.”

That replaces the phrase “the timing of any such withdrawal is less imminent than previously anticipated,” which has accompanied recent rate announcements.

ETFs are a marvellous way for liquidity seeking investors to invest in illiquid markets. But friction works both ways:

Exchange traded funds have transformed the gold market. Since the first fund was launched nearly a decade ago, the products have become so successful in offering a simple way for investors to buy physical gold that they have acquired the nickname “the people’s central bank.”

But what happens when the people’s central bank decides to sell?

That is the question now haunting the bullion market. Since the start of January, gold ETFs have dumped 140 tonnes of gold. February saw the largest monthly outflow of gold from ETFs on record.

The sell-off is partly a reflection of broader negative sentiment towards gold, as investors become more confident in the global economy and put their money into riskier assets such as equities. Prices have slid 12 per cent since October to less than $1,580 (U.S.) an ounce, and are down 18 per cent from their record nominal high in 2011.

This taxonomy of sales traders made me laugh:

5.) Low Man –If I sneezed he’d say “bless you,” if I was tired and hung over he’d worry he’d done something wrong. He worked extremely hard, but the problem was he didn’t get a lot of respect from his own desk.

6.) The Man – He’d answer the phone “250k up – what do you want to do?” Management loved him—he was the busiest guy on Wall Street. All you had to do was ask him. He’d get business done and wears his firm’s crest on his sleeve. He worked for one of the white-shoe investment banks and had gone to one of the best schools. He wound up as an equity sales trader because he wasn’t smart enough to do something more difficult, but he always spun it that it was his choice to trade.

7.) Family Man – He’d been passed over for several promotions, and was often caught off the desk calling his wife to discuss the twins’ science project. He’d accepted the ceiling in his career; Family Man was honest, calm and genuinely cared about doing the right thing. He tended to whisper.

8.) Script Man – Every morning he’d call at the exact time using the exact voice from the day before. Early in his career he’d been confused about the business, so he decided to keep it simple. He never cracked a joke in his entire career

This characterization of entrepreneurs was interesting:

Some of the common characteristics that “turn out to be accurate predictors of entrepreneurial success” go back to when they were teenagers, said the release about the study, which looked at longitudinal data of more than 12,000 men and women.

Among them: the entrepreneurs had high IQs, came from stable families, had parents earning higher than average salaries, and they showed greater self-esteem, the release said.

But they also “exhibited aggressive behaviour and got in trouble as teenagers,” said one of the researchers, Ross Levine, a professor at the Haas School of Business at the University of California at Berkeley, in the release about the study, which he carried out with Yona Rubinstein of the London School of Economics and Political Science.

“This is the person who wasn’t afraid to break the rules, take things by force or even be involved in minor drugs.”

I mentioned BNS.PR.Y BNS.PR.P yesterday with reference to its imminent Exchange Date and the lack of guidance in the bank’s earnings release. The Financial Post has more:

John Nagel, head of the preferred share trading group at Desjardins Securities the firm that help design the rate reset pref, is also waiting anxiously, though he believes BNS should call the deal. “Half the people I have spoken to think they will call the issue; the other half think BNS will leave it out there because the rate [for the bank] is reasonable.”

If BNS doesn’t redeem, Nagel argues for investors there is better value in opting for the floating rate prefs, both from an initial absolute yield and the expectation that rates will rise over the next five years.

Nagel does have a point about floating rate: three month bills are averaging 0.96% while five-year Canadas are currently at 1.31% – it won’t take much of a nudge for the bills to average more than 1.31% over the next five years. Nagel has been previously quoted as favouring the Floating Rate option.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiumgs gaining 3bp, FixedResets off 5bp and DeemedRetractibles down 7bp. Volatility was minor. Volume was quite high.

PerpetualDiscounts now yield 4.87%, equivalent to 6.33% interest at the standard conversion 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, unchanged from February 27.

The Europeans are backing away from austerity:

European finance ministers opened the way for looser budget policies after a backlash against austerity thrust Italy into political limbo and shattered months of relative stability in European markets.

Italy’s deadlocked election, France’s refusal to make deeper budget cuts and protests against the shrinking of the welfare state across southern Europe escalated the rebellion against the German-led prescription for fighting the debt crisis.

Economic strains “may also justify in a certain number of cases reviewing deadlines for the correction of excessive deficits,” European Union Economic and Monetary Commissioner Olli Rehn told reporters late yesterday after a meeting of euro-area finance ministers in Brussels.

Meanwhile, there is chatter that loose money is required in Canada:

Hedge funds are amassing record bets against the Canadian dollar on speculation the Bank of Canada will drop its bias toward raising interest rates, putting it in unison with the rest of the Group of Seven nations.

Futures contracts wagering on a decline in the Canadian dollar versus its U.S. counterpart held by so-called leveraged funds totaled C$6.3 billion ($6.1 billion) in the week ended Feb. 26, according to Citigroup Inc., citing U.S. Commodity Futures Trading Commission figures. Overall, the data showed traders reversed bets on a rise in the Canadian currency during the five-day period for the first time in eight months.

Weak exports and record debts are eroding growth in the world’s 11th-largest economy, with the slowest expansion forecast this year since 2009. Bank of Canada Governor Mark Carney remains the lone central-bank head in the G-7 suggesting a rate increase. BlackRock Inc. and State Street Canada are among the fixed-income managers speculating that Carney may drop his tightening bias when the central bank meets tomorrow, making Canadian-dollar denominated assets less attractive to international investors.

Loose money is government policy – why, look at the 12Q1 Scotia Investor Presentation! 58% of their $188-billion mortgage portfolio is government insured. Thank you, Federal Junior Republicans!

One of the words that can generally be relied upon to turn brains into much is “privacy” (another is “kiddie-porn”). It was nice to see the word being used to eliminate a little stupid red tape:

Ontario’s privacy commissioner has ordered the LCBO to stop collecting personal information from people who buy alcohol through wine clubs.

Ann Cavoukian’s decision came after a wine club complained that the Liquor Control Board of Ontario required it to provide the names, addresses, phone numbers and selections of everyone taking part in bulk orders.
…
“The LCBO has not provided my office with much more than anecdotal or hypothetical evidence to support its position that the illegal resale of liquor by wine clubs in this province is so problematic that it necessitates the collection of the personal information of club members who purchase wine through their clubs,” she wrote last week.

Scotia’s 12Q1 Quarterly Press Release did not contain a statement of intent to redeem BNS.PR.P, a FixedReset, 5.00%+205 that will reset 2013-4-30 at a yield currently forecast to be 3.25% if not called. Make of that what you will.

It was a very uneven day for the Canadian preferred share market, with PerpetualPremiums gaining 1bp, FixedResets winning 29bp and DeemedRetractibles up 10bp. Lots of volatility, comprised almost entirely of FixedReset winners. Volume was extremely high, helped along by the CU 4.50% Straight new issue and the CPX 4.50%+315 FixedReset new issue – and, doubtless, continued shuffling after the closing of TRP.PR.D yesterday.