PrefBlog

The US government is heading towards shut-down:

The U.S. government stands poised for its first partial shutdown in 17 years at midnight tonight, after a weekend with no signs of negotiations or compromise from the Congress or the White House.

House Republicans, led by Speaker John Boehner, want to delay President Barack Obama’s Affordable Care Act for a year and make other changes to the law. Democrats, led by Obama, say that won’t happen. Republicans and Democrats say they don’t want to close the government, though neither side is budging from their positions.
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A brief government closure won’t lead to any significant change of the Treasury Department’s forecast for when the U.S. will breach the debt limit, a Treasury spokeswoman said yesterday in an e-mail. The Treasury has said measures to avoid breaching the debt ceiling will be exhausted on Oct. 17.

It was a very, very slightly negative day for the Canadian preferred share market, with PerpetualDiscounts and DeemedRetractibles off 1bp and FixedResets off 2bp. Considering the modesty of the overall moves the Performance Highlights table is surprisingly lengthy, with BAM issues notable on the winning side. Volume was above average.

And that’s it for another month!

I found some excellent commentary on teachers’ salaries:

While we might all agree that the middle class is partly a state-of-mind, I define the middle class as the middle 50 percent of individual earnings. With this definition, at age 20-24, 50 percent of individuals with a university degree working fill-time at a single job outside the Toronto CMA earn above $27,300 and below $60,008. Thus our 23-year old teacher who earns $49,400 does actually start in the middle class of the universityeducated group. However the stay of that teacher in the middle class of even the university-educated within society is very brief!

By the time our teacher is aged 25-29, after 5 years of teaching, the teacher has decisively exited the middle class within the university-educated group. The salary of $66,893 after 5 years of teaching falls well above the 75th percentile of salaries although it is remains below the 90th percentile. But after 10 years of teaching, at age 33, our teacher is quite close to the 90th percentile of salaries within the university-educated group. The teacher’s salary is $88,759 and the 90th percentile is $91,000. The last step in the salary grid would push the salary over the 90th percentile salary for a person aged 30-34.
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Finally I would note that all these comparisons of the salaries of teachers to other wage-earners ignore the very large benefit and vacation packages that are part of the compensation of teachers. Even using just salary data, it is clear teachers are very well compensated throughout their entire careers relative to similar persons in Ontario. The benefits and vacation are the whipped cream, toppings and chocolate sauce on the Haagen-Dazs ice cream.

Grave consequences are predicted if the US government shuts down:

A shutdown of the U.S. government would reduce fourth-quarter economic growth by as much as 1.4 percentage points depending on its length, economists say, as government workers from park rangers to telephone receptionists are furloughed.

Mark Zandi of Moody’s Analytics Inc. estimates a three-to-four week shutdown would cut growth by 1.4 points. Zandi projects a 2.5 percent annualized pace of fourth-quarter growth without a shutdown. A two-week shutdown starting Oct. 1 could cut growth by 0.3 percentage point to a 2.3 percent rate, according to St. Louis-based Macroeconomic Advisers LLC.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 5bp, FixedResets up 7bp and DeemedRetractibles off 4bp. Volatility was muted, judging by recent standards. Volume was slightly below average.

Nothing happened today.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts down 20bp, FixedResets gaining 6bp and DeemedRetractibles off 19bp; the FixedReset figure is affected by a reversal of yesterday’s nonsense with FTS.PR.K; the ridiculous gain computed from Toronto Stock Exchange data was worth a little in excess of 20bp to the FixedReset subindex – account for that and relative figures are more reasonable. Volatility was fairly high with BAM issues notable amongst the losers. Volume was high.

One thing (well, one of many things) that has bothered me over the years is the story of Henry Ford as philantropist:

Henry Ford’s vision was that a mass-manufacturing solution would save so much money that his investments would soon pay off. They did, and there was a side benefit: Ford could then afford to pay his workers a much higher wage than average — $5 a day — which made them into consumers who could afford his cars. It’s the kind of long-range view that Ford and other automakers are taking now toward China.

This is repeated so often I sometimes think I must be the only person in the world who realizes that it doesn’t make any sense at all. You can’t get rich taking in each other’s laundry. I find that Ford itself promulgates this myth, albeit with enough supporting narrative to make the real story clear:

After the success of the moving assembly line, Henry Ford had another transformative idea: in January 1914, he startled the world by announcing that Ford Motor Company would pay $5 a day to its workers. The pay increase would also be accompanied by a shorter workday (from nine to eight hours). While this rate didn’t automatically apply to every worker, it more than doubled the average autoworker’s wage.

While Henry’s primary objective was to reduce worker attrition—labor turnover from monotonous assembly line work was high—newspapers from all over the world reported the story as an extraordinary gesture of goodwill.

After Ford’s announcement, thousands of prospective workers showed up at the Ford Motor Company employment office. People surged toward Detroit from the American South and the nations of Europe. As expected, employee turnover diminished. And, by creating an eight-hour day, Ford could run three shifts instead of two, increasing productivity.

Henry Ford had reasoned that since it was now possible to build inexpensive cars in volume, more of them could be sold if employees could afford to buy them. The $5 day helped better the lot of all American workers and contributed to the emergence of the American middle class. In the process, Henry Ford had changed manufacturing forever.

I suspect that this myth was developed in an attempt to spike the guns of the nascent socialist movement:

The fact is that about 6% of Americans were voting Socialist that year, and any decent newspaper would be keeping track of the local races. It’s also important to note that there were many political parties then, including multiple leftist parties, and it would be not unusual to have half a dozen candidates for any office.

Also of note is that socialists were already closely aligned with labor unions, and this is evident in the platform planks.

And to those who think the socialist movement in America has been a failure, take a look at the list of platform planks from 1914: women’s suffrage, clean schools, child labor laws, free schoolbooks, public sector unions, workplace safety inspections, etc.

Every time I see the hoary old chestnut of perpetual motion by high wages repeated, I get just a little more irritated. What Henry Ford did was to increase productivity – wages were increased solely because he had to. It is increased productivity that makes us rich.

There are rumours of potential big changes in the corporate bond markets:

Deutsche Bank AG (DBK) is trying to drum up interest with some of its largest competitors to create a multi-dealer U.S. bond trading platform at the same time that asset managers discuss ways to make buying and selling debt easier, according to people familiar with the matter.

Europe’s biggest investment bank by revenue has pitched its plan for an electronic trading network to JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Barclays Plc (BARC), according to five people briefed on the talks, who asked to not be named because the discussions are private. Executives at State Street Corp. (STT) and FMR LLC’s Fidelity Investments are among institutional investors that have held a series of meetings, the last one in July in New York, to address the difficulty of finding the bonds they want to trade, according to two different people.
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The platform, dubbed Oasis, from Frankfurt-based Deutsche Bank is aimed at the least-active part of the $4.2 trillion-a-year market where bonds might not trade for days or weeks, two of the people said. It follows a more successful introduction of the same idea in Europe, according to one executive.

Oasis clients would tell their bank how much of a particular corporate bond they want to buy or sell, a process known as an indication of interest, and the dealer would enter a resting order into the electronic system, two of the people involved said. If another party is interested and the trade crosses, the transaction would be done between banks so that the clients remain anonymous, the people said.
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Information leakage, or the possibility of rival investors profiting off an investor’s plan to trade, is a major concern among bank clients that Oasis is meant to address, the people said. If the system succeeds, clients could eventually be allowed to access Oasis directly, they said.

Investors and their banks may have trouble moving more of the market onto computers. Corporate debt is unsuitable for full electronic trading, according to a study last month by McKinsey & Co. and Greenwich Associates. There are more bonds than stocks, and debt trades less frequently, making a full transition to computer-based buying and selling unlikely, the consultants said.

Dealers have resisted a shift to electronic bond trading because the increased transparency can cut profits. In the 90 days after the Financial Industry Regulatory Authority’s Trace started disseminating prices of junk bonds, trading in the securities dropped 41 percent, according to Massachusetts Institute of Technology and Harvard University researchers.

I think the process is doomed to failure, although it might be a step in the right direction. The big problem is lack of inventories, which are small because the profits are thin and the capital expensive. I think the only logical goal is for the big pension funds to act more like trading desks, making markets and swapping stuff in and out of their portfolios on demand (while maintaining overall portfolio objectives) – the way, for instance, I have been trading fixed income in my small way for the past twenty-one years (although, with respect to bonds, only through brokers). I suspect, however, that there are immense cultural and regulatory roadblocks between the current reality and the endgame.

There’s a funny story on French regulation:

This week, a Paris court of appeal ordered the cosmetics chain Sephora to close its flagship store on the avenue at 9 p.m., rather than staying open until midnight during the week and until 1 a.m. on Fridays and Saturdays.
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But at a time when the national economy remains stuck in a rut and unemployment continues to rise, this latest ruling on Sephora has struck a raw nerve. The case was brought by a consortium of labour unions, which has been zealous in its attempts to have the store-closing hour law enforced, arguing that it needs to protect workers from unscrupulous owners who force them to work antisocial hours. But that logic is patently untrue in this case.

The cosmetics chain reckons it does about 20 per cent of its business after 9 p.m., and the 50 sales staff who work the late shift do so voluntarily – and are paid an hourly rate that is 25 per cent higher than the day shift. Many of them are students or part-time workers, and they have publicly expressed their indignation about being put out of work by labour unions.

S&P has a very interesting report on Exchange operational issues and problems thereof and credit implications thereof thereof:

We view stock exchanges’ higher vulnerability to operational risk (compared with derivative and futures exchanges), primarily as a function of the numerous point-to-point connections between stock exchanges and the variety of order types they process. Derivatives and futures exchanges, like IntercontinentalExchange and CME Group, tend to have “vertical silo” business models, in which the listings, trading, and clearing of contracts are done under one roof. This means they are less connected to other exchanges and clearinghouses.

The greater fragmentation in the equities markets (especially in the U.S.) creates more interconnectivity between exchanges, which leaves them more vulnerable to operational failures. There are 16 SEC-registered securities exchanges and more than 50 alternative trading platforms in the U.S., each of which is linked with others though a vast web of connections, including those that provide connectivity, routing services, and market data. And additional regulatory and disclosure requirements for stock exchanges, such as the consolidated tape–which provides real time data on prices and trading volumes–increase the complexity of the systems and exposure to operational problems.

Numerous order types also add to the complexity of the equities markets and amplify operational risk. To make the matter even more complicated, there have been discrepancies around how some exchanges execute their order types compared with their own rule books. For example, in January 2013, BATS announced that upon a National Best Bid and Offer (NBBO) update on BATS’ BYX Exchange, BZX Exchange, and BATS Options, it had discovered a problem with its matching engine that caused the execution of a short sale order at a price that was equal to or less than the NBBO. The problem started in 2008, but it took the company more than four years to identify it.

There’s been another breakthrough in solar energy technology, not made in Ontario as we spent all the potential research money on not-ready-for-prime-time technology:

The Fraunhofer Institute for Solar Energy Systems ISE, Soitec, CEA-Leti and the Helmholtz Center Berlin jointly announced today having achieved a new world record for the conversion of sunlight into electricity using a new solar cell structure with four solar subcells. Surpassing competition after only over three years of research, and entering the roadmap at world class level, a new record efficiency of 44.7% was measured at a concentration of 297 suns. This indicates that 44.7% of the solar spectrum’s energy, from ultraviolet through to the infrared, is converted into electrical energy. This is a major step towards reducing further the costs of solar electricity and continues to pave the way to the 50% efficiency roadmap.

S&P is also taking a wait and see attitude towards Fairfax, proud issuer of XXX:

Standard & Poor’s Ratings Services said today that the Sept. 23, 2013, signing of a letter of intent by an investor consortium led by Fairfax Financial Holdings Ltd. (Fairfax) to acquire BlackBerry Ltd., subject to due diligence, for approximately $4.7 billion has no effect on the ratings on Fairfax. As disclosed in the announcement, Fairfax currently owns about 10% of BlackBerry’s common shares, which it intends to contribute to the transaction. We expect the consortium to complete its due diligence by Nov. 4, 2013. If satisfactory, the consortium would enter into a definitive transaction agreement with BlackBerry at that time. Until then BlackBerry will be free to consider alternative offers. We will monitor the development of this transaction during the next six weeks and evaluate any potential impact on Fairfax as more information becomes available about the financing structure and the likelihood of the transaction being completed.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 11bp, FixedResets ostensibly down 42bp and DeemedRetractibles up 21bp. The large FixedReset loss is about half due to a single issue, FTS.PR.K, which ostensibly closed at 20.27-24.29, 1×1 after trading 31,415 shares in a range of 24.25-50. So this is either a lazy market maker or stupid dumb reporting by the Toronto Stock Exchange – I can’t be bothered to work out which. The Performance Highlights table is extremely lengthy. Volume was very high.

PerpetualDiscounts now yield 5.53%, equivalent to 7.19% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.9%, so the pre-tax interest-equivalent spread (in this context, the Seniority Spread) is now about 230bp, a small (and perhaps spurious) decline from the 235bp reported September 18.

I’m glad to see someone resisting the politicization of the Fed:

Richard Fisher, president of the Federal Reserve Bank of Dallas, said the White House botched the nomination for Chairman Ben S. Bernanke’s successor by allowing an unprecedented public debate over who would be the best choice.

“The White House has mishandled this terribly,” Fisher said today in response to a question from the audience after giving a speech in San Antonio, Texas. “This should not be a public debate,” he said, adding that the Fed “must never be a political instrument.”

There is some concern regarding the seasonal adjustments in the US jobs number:

Yet a new paper presented by Johns Hopkins economist Jonathan Wright at the Brookings Institution’s Panel of Economic Activity indicates that the Fed may have been misled by meaningless data. The evidence suggests that employment growth was just as anemic in July, when the Bureau of Labor Statistics reported 332,000 new jobs, as it was in February, when the BLS reported that only 104,000 jobs were added.

The problem is due to some peculiarities in the formula for seasonal adjustments. Weather, the school calendar and holidays all affect how many people are working in any given month, creating a lot of volatility in the raw jobs numbers. For example, the BLS reported that 1.2 million jobs were lost in July and 378,000 were added in August. Thanks to seasonal adjustments, however, most people think that 104,000 jobs were added in July and 169,000 were added in August. The truth is somewhere in between.
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First, the Fed has become hypersensitive to monthly jobs data. Second, the process by which the BLS smooths out its raw data seems to have been corrupted by a statistical artifact. As Wright explains, the job losses associated with the Great Recession were concentrated at the end of 2008 and the beginning of 2009 — the coldest months of the year. That distorted the BLS’s seasonal adjustment algorithm, which uses the past three years of data to determine the “normal” pattern of employment growth in different months.

This was first suspected by economists at Nomura and Goldman Sachs, as Cardiff Garcia reported at FT Alphaville. However, Wright’s paper presents the first conclusive evidence.

It is becoming apparent that Obamacare is more like wealth transfer than insurance:

Binko is one of 2.7 million healthy 18- to 34-year-olds, dubbed the young invincibles, that the Obama administration has said are needed in the exchanges to offset the cost of providing care for millions of other uninsured people who are likely to be older and sicker. Without young adults, who pay for insurance yet rarely use it, premium costs in the exchanges may soar.

“For young people learning to take care of ourselves, it’s foolish if we have to take care of the older generation too,” Binko, who now lives in Los Angeles, said in an interview.

Young invincibles are the focus of a pitched battle between Obamacare backers and the law’s opponents as the U.S. nears the Oct. 1 roll-out of government-run insurance exchanges. It’s a conflict playing out on television and the Internet, on college campuses and in door-to-door campaigns by volunteers nationwide.

“This demographic is critical,” Caroline Pearson, a vice president at Washington-based consulting firm Avalere Health LLC, said in an interview. “If you mostly have high risk people, premiums go up. It becomes a death spiral.”

Whether or not wealth transfer is desirable, if indulged in it should be financed through the tax system, rather than dressed up as something it isn’t.

Here are some illuminating tech facts:

BlackBerry, which released the flagship Z10 touchscreen phone earlier this year, sold 5.9 million smartphones during the last three months. Apple sold more than 9 million over the weekend.

The companies’ different trajectories became even more vivid today when BlackBerry said it tentatively agreed to a $4.7 billion buyout by a group led by Fairfax Financial Holdings. Meanwhile, Apple’s stock rose 5 percent following the sales announcement, giving the California company a market value of almost $446 billion.

Speaking of Blackberry, it’s setting records:

BlackBerry Ltd. (BBRY), once valued at $83 billion, may be stuck with the cheapest valuation ever for a North American technology or telecommunications takeover.

The smartphone maker said yesterday it reached a tentative agreement for a $4.7 billion buyout by a group led by Fairfax Financial Holdings Ltd. (FFH), its biggest shareholder. Including net cash, the proposal values the Waterloo, Ontario-based company at an 80 percent discount to its book value and just 0.17 times its sales, the cheapest revenue multiple on record among similar-sized North American telecommunications or technology acquisitions, according to data compiled by Bloomberg.

AltaGas Ltd., proud issuer of ALA.PR.A, was confirmed at Pfd-3 [Stable] by DBRS:

DBRS has today confirmed the ratings on both the Medium-Term Notes and Issuer Rating of AltaGas Ltd. (AltaGas or the Company) at BBB and on the Preferred Shares – Cumulative at Pfd-3, all with Stable trends. The confirmation reflects Company’s: (1) improving business risk profile, as almost 80% of the Company’s earnings are supported by either stable regulated returns or long-term contacts; (2) diversified sources of revenue from its Utilities, Power and Gas segments operating in Canada and the United States; (3) improved quality of earnings since the addition of utilities (SEMCO Energy Inc. and Pacific Northern Gas Ltd.) and cleaner power generation assets (Blythe Energy, LLC (Blythe)) to the Company’s portfolio. These new assets are primarily underpinned by long-term take-or-pay commitments, resulting in no incremental direct exposure to commodity price risk.
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DBRS notes that in the past five years, AltaGas’s credit metrics have weakened due to its aggressive growth capital expenditures (capex) program, which has added approximately $4 billion in new and expanded assets. Company’s key credit metrics are expected to remain weak over the near term, but are expected to recover in the medium term as major projects come on stream and full-year benefits from new assets are realized. Going forward, DBRS expects the Company to finance its capex program with a prudent mix of equity and debt and maintain credit metrics consistent with its current rating.

It was a strong day for the Canadian preferred share market, with PerpetualDiscounts winning 31bp, FixedResets gaining 17bp and DeemedRetractibles up 27bp. The Performance Highlights table is suitable skewed towards winners. Volume was very extremely awfully high.