PrefBlog

I wasn’t the only one to laugh off the Lehman bankruptcy:

The day after Lehman Brothers Holdings Inc. declared the largest bankruptcy in U.S. history in 2008, Federal Reserve officials remained unsure whether the financial crisis would do lasting damage to the U.S. economy.

“I don’t think we’ve seen a significant change in the basic outlook,” Dave Stockton, the Fed’s top forecaster, said on Sept. 16, 2008 according to transcripts released today in Washington. “We’re still expecting a very gradual pickup in GDP growth over the next year.”

A new worry … tapering!

Equities erased gains today as Dallas Fed President Richard Fisher said it’s hard to argue that further expansion of central bank balance sheet has had “much efficacy.”

“This is why I’ve been such a strong proponent of dialing back our large-scale asset purchases and will continue advocating that we do so,” Fisher said in text of speech in Austin, Texas.

St. Louis Fed President James Bullard, who doesn’t vote on the Federal Open Market Committee this year, said the central bank is on target to continue scaling back stimulus, adding that soft economic data in 2014 is probably due to bad weather.

The Dallas Fed published excerpts from Fisher’s speech:

But as I have shown this afternoon, the store of bank reserves awaiting discharge into the economy through our banking system is vast, yet it lies fallow. Take a look at this chart of total reserves of depository institutions: They have ballooned from a precrisis level of $43 billion to more than $2.5 trillion.[Graph: Bank Reserves…]

Here is the point: There is plenty of money available for businesses to work with. Consider this: In fourth quarter 2007 the nation’s gross domestic product (GDP) was $14.7 trillion; at year-end 2013 it was estimated to be $17.1 trillion. Had we continued on the path we were on before the crisis, GDP would currently be roughly $20 trillion in size. That’s a third larger than it was in 2007. Yet the amount of money lying fallow in the banking system is 60 times greater now than it was at year-end 2007. One is hard pressed to argue that there is insufficient money available for businesses to put people back to work.

Now, bear in mind that we at the Fed only control the monetary base (cash plus bank reserves), not the velocity with which money is used. Again, consider this graph:[Graph: Newly Created Money…]

Over the past six years, the monetary base has increased 340 percent, 10 times the rate at which the economy would have expanded in nominal terms had we not suffered the recent recession. One is hard pressed to argue that there is much efficacy derived from additional expansion of the Fed’s balance sheet. This is why I’ve been such a strong proponent of dialing back our large-scale asset purchases and will continue advocating that we do so.

It is my firm belief that the fault in our economy lies not in monetary policy but in a reckless and feckless federal government that simply cannot get its fiscal and regulatory policy geared so as to encourage business to take the copious amount of money we at the Fed have created and put it to work creating jobs and growing our economy. Fiscal policy is not only “not an ally of U.S. growth,” it is its enemy. If the fiscal and regulatory authorities that you elect and put into office to craft taxes, spending and regulations do not focus their efforts on providing incentives for businesses to expand job-creating capital investment rather than bicker with each other for partisan purposes, our economy will continue to fall short and the middle-income worker will continue being victimized, no matter how much money the Fed puts into the system.

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‘Fair enough’, say preferred share market investors, ‘the expansion of the money supply didn’t have much effect, therefore its removal will be a disaster for the market.’

But there are signs of Canadian hyperinflation:

Canada’s inflation rate accelerated the most in 20 months on a surge in home heating costs amid one of the most severe winters in decades.

The consumer price index rose 1.5 percent in January from a year earlier, the most since June 2012, following December’s 1.2 percent pace, Statistics Canada said today from Ottawa. The nation’s statistics agency also said retail sales in December dropped 1.8 percent, the most in a year. Economists forecast inflation rising at a 1.3 percent pace and a 0.4 percent drop in sales, according to median forecasts in separate Bloomberg News surveys.

It was another positive day for the Canadian preferred share market, with PerpetualDiscounts winning 16bp, FixedResets gaining 2bp and DeemedRetractibles up 7bp. Volatility was muted. Volume was low.

Brother, can you spare a few million dollars for an investment banker down on his luck?

Royal Bank of Scotland is expected to announce its withdrawal from many investment banking activities as well as much of its international business in a move that is expected to reduce staff numbers by at least 30,000 over the next three to five years, the Financial Times reported on Thursday.

TransAlta bit the bullet:

TransAlta Corporation (“TransAlta”) (TSX: TA; NYSE: TAC) today reported its fourth quarter 2013 and full year 2013 financial results, its outlook for 2014 and two significant initiatives to enhance the Corporation’s financial strength to grow, provide a solid and sustainable dividend, and to ensure a strong balance sheet throughout the commodity cycle.
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TransAlta also announced today two key initiatives: the sale of our 50 per cent interest in CE Generation, Blackrock development and Wailuku to our partner in these holdings, MidAmerican Renewables for U.S.$193.5 million and the resizing of our dividend to an annualized amount of $0.72 per common share to align with our growth and financial objectives.
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With the revised dividend, our expected dividend is 57 per cent to 67 per cent of Free Cash Flow.
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On Feb. 20, 2014, our Board of Directors declared a quarterly dividend of $0.18 per common share (or $0.72 per common share on an annualized basis).

The dividend used to be $0.29 per common share per quarter, or $1.16 annualized, so the reduction is 38%. DBRS comments:

As noted on the rating report dated March 12, 2013, TAC’s leverage remained high for the current business risk level and DBRS expects the Company to reduce its leverage to below 50% by the end of 2014. In addition, the report noted that TAC has an unsustainable payout ratio that negatively affects its leverage. The Transactions announced today mitigate the two primary concerns noted above. Proceeds from the divestiture are expected to be used to reduce debt and the dividend reduction will likely result in approximately $90 million in incremental cash flow, net of the dividend reinvestment program proceeds. Pro forma the Transactions, the Company’s adjusted debt-to-capital ratio is expected to be near 50% and the other two key credit metrics, cash flow-to-debt and EBITDA interest coverage, are expected to be in line with the BBB rating. DBRS expects TAC to continue to fund any significant unforeseen costs, cash shortfalls and/or acquisitions in a prudent manner to maintain key credit metrics in line with the current rating range. Should key credit metrics no longer be commensurate with the current BBB rating, a negative rating action could result.

They had some harsh words for Bombardier:

DBRS today notes that Bombardier Inc. (Bombardier or the Company) has recently released new information including a delay in entry-into-service (EIS) for the C-Series until late 2015, weaker-than-expected full-year 2013 results and a worse-than-expected outlook for full-year 2014. The newly released information is consistent with the risks that were already incorporated when DBRS downgraded the Company to BB (low) in November 2013 following placing the Company’s rating under review in August, 2013. The trend currently remains Stable, also noting that Bombardier’s business risk profile continues to support the current rating. Nonetheless, most of Bombardier’s key credit metrics are below the current rating level and the Company’s financial profile remains a risk. DBRS could take further negative rating action should the Company announce further material program cost increases, further C-Series EIS delays, profitability challenges or incur greater than expected additional indebtedness.

It was another positive day for the Canadian preferred share market, with PerpetualDiscounts winning 10bp, FixedResets gaining 1bp and DeemedRetractibles up 6bp. Volatility was minimal. Volume was on the low side of average, despite RBC’s monster crosses in MFC.PR.D.

How ’bout them mutual funds, eh?

Canadians have accumulated savings of one trillion dollars in mutual funds – marking the first time in their 82-year history in Canada that funds have topped this significant milestone. As reported today by The Investment Funds Institute of Canada (IFIC), assets under management (AUM) for the mutual funds industry reached $1.01 trillion as of January 31, 2014, an increase of $140.1 billion or 16.1% over the previous 12 months.

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DBRS confirmed NSI.PR.D at Pfd-2(low):

The rating assumes that the Company will continue to manage its annual dividend payout to maintain its regulated capital structure. While capital expenditures (capex) are expected to remain elevated ($283 million announced for 2014), operating cash flow is estimated to be adequate to support capex. DBRS expects that the residual operating cash flow after capex, combined with the incremental debt to maintain the regulatory capital structure, will be distributed to NSPI’s parent company, Emera Inc. (Emera; rated BBB (high), Under Review with Developing Implications). DBRS will continue to view NSPI on a stand-alone basis, assuming the Company adheres to the current flexible dividend distribution strategy.

It was another positive day for the Canadian preferred share market, with PerpetualDiscounts up 13bp, FixedResets gaining 5bp and DeemedRetractibles winning 14bp. Volatility was virtually non-existent. Volume was average.

PerpetualDiscounts now yield 5.60%, equivalent to 7.28% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.6%, so the pre-tax interest-equivalent spread (in this context, the Seniority Spread) is now about 270bp, unchanged from the February 12 report.

I’m taking up a collection to save the endangered FX trader:

A widening probe of the foreign-exchange market is roiling an industry already under pressure to reduce costs as computer platforms displace human traders.

Electronic dealing, which accounted for 66 percent of all currency transactions in 2013 and 20 percent in 2001, will increase to 76 percent within five years, according to Aite Group LLC, a Boston-based consulting firm that reviewed Bank for International Settlements data. About 81 percent of spot trading — the buying and selling of currency for immediate delivery — will be electronic by 2018, Aite said.
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The push toward electronic trading probably will lower costs for customers and boost transparency of pricing, according to Cormac Leech, an analyst at Liberum Capital Ltd. in London. It may also squeeze margins for banks, he said.

Human traders have maintained their role in the foreign-exchange market while disappearing in areas such as equities because most trading takes place away from exchanges. That means clients don’t have a central repository showing the flow of completed orders, forcing them to piece together information about the direction of rates from traders and salesmen with knowledge of other clients’ orders. People were also needed because early computerized trading systems weren’t reliable and couldn’t handle larger transactions, according to dealers.

If Cormac Leech in the third paragraph is right, it will be the first time transparency has helped customers as a whole in a financial market. In all other markets, such a transition results in dealers holding less inventory and spreads narrowing but becoming much more brittle – more intra-day volatility. We will see!

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts up 10bp, FixedResets gaining 7bp and DeemedRetractibles winning 11bp. Volatility was minimal. Volume was average.

Nothing happened today.

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts up 7bp, FixedResets winning 10bp and DeemedRetractibles gaining 6bp. The Performance Highlights table is a little longer than usual, but has no clear pattern. Volume was low.