PrefBlog

There’s an interesting pension fund trend:

Companies eager to “de-risk” their long-term pension obligations are expected to increasingly offer voluntary one-time lump sum payments to former employees as an alternative to a pension’s stream of lifetime income. A Towers Watson survey reports that nearly six in 10 companies with a defined-benefit plan either have offered a lump sum payment or plan to offer one.

The game of pension hot potato between corporations and former employees is partly due to a phased-in rule change that became fully effective in 2012. It centers on the interest rate and investment return assumptions companies use to calculate their future pension liabilities. Pension bean counters can now calculate lump sum obligations using a corporate bond yield for the discount rate, rather than a 30-year Treasury rate. Using that higher corporate bond rate in the calculation reduces the amount of the lump sum. Prudential Retirement estimates that this tweak could reduce corporate lump sum payouts by 5 to 25 percent, depending on the recipient’s age.

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For those who will rely primarily on pension income in retirement, the Pension Rights Center, a non-profit consumer advocacy group, suggests turning down the lump sum.

What happens when you force institutions to buy and hold more Treasuries? More Treasuries are bought and held:

It’s getting easier for a smaller group of bulls in the U.S. Treasury market to create angst for the bears.

That’s because government-debt trading volumes have slumped to 18 percent below the decade-long average, Federal Reserve data show. As Brean Capital LLC’s Peter Tchir wrote this week: “There is no liquidity even in the mighty Treasury market.”

So as 10-year Treasury yields plunged toward the lowest level in almost a year, a smaller group of active traders may have had a much bigger influence over the $12 trillion market that determines rates on everything from auto loans to corporate debt.
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U.S. government-bond trading has declined even as the size of the market tripled in the last decade. Trading volumes fell to an average $429 billion a day in the week ended May 21, Fed data show. That’s down from daily averages of $502 billion this year and about $566 billion back in 2007.

One reason for the slowdown is there aren’t as many obvious sellers of the notes. The Fed has been buying U.S. bonds for years, making it the biggest single owner of the debt. Other central banks have locked the bonds away in their vaults across the globe.

Another reason is banks have less incentive to trade the debt. They’re reducing fixed-income inventories in response to risk-curbing regulations, such as the U.S. Dodd-Frank Act’s Volcker Rule, which limits the amount of their own money they may use to buy and sell riskier securities. Many are paring fixed-income staff, too, in the face of lower trading revenues.

While banks can still trade government bonds on economic views, the risk management necessary is expensive and the opportunities limited, Vogel wrote in his note.

The moral of the story is: always listen to sell side analysts!

A Bloomberg survey of analysts in February called for the 10-year Treasury rate to jump this quarter to 3.15 percent, which would’ve been the highest since 2011. Instead, the yield fell steadily through May and touched an almost one-year low of 2.40 percent. Sovereign rates reached record lows in Spain and Italy amid speculation European central banksters would puff up prices with imaginary euros so no one notices when they come to grab their Vespas and Nebbiolo.

But that’s all typical. Many preferred share investors have migrated to FixedResets, attracted to the potential for some protection in stormy weather:

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It was stormy weather for the Canadian preferred share market today, with PerpetualDiscounts off 4bp, FixedResets losing 53bp and DeemedRetractibles flat. The lengthy Performance Highlights table is exclusively negative and virtually entirely FixedResets – mostly low-Reset ones, since hyper-inflation is old-fashioned now and it’s clear that low rates are here forever. Volume was very high.

And that’s it for another month!

Fasken Martineau has some intelligent things to say about regulation, requesting a cost-benefit analysis in advance of imposing new rules, but some idiot has copy-protected it and damned if I’ll retype the interesting part.

Arvid O. I. Hoffmann and Hersh Shefrin have written a wonderful paper on retail’s use of technical analysis, titled Technical Analysis and Individual Investors:

We find that individual investors who use technical analysis and trade options frequently make poor portfolio decisions, resulting in dramatically lower returns than other investors. The data on which this claim is based consists of transaction records and matched survey responses of a sample of Dutch discount brokerage clients for the period 2000-2006. Overall, our results indicate that individual investors who report using technical analysis are disproportionately prone to have speculation on short-term stock-market developments as their primary investment objective, hold more concentrated portfolios which they turn over at a higher rate, are less inclined to bet on reversals, choose risk exposures featuring a higher ratio of nonsystematic risk to total risk, engage in more options trading, and earn lower returns.
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We find that investors who report using technical analysis hold more concentrated portfolios than other investors, and have higher ratios of nonsystematic risk to total risk. They also trade more frequently than other investors, especially in respect to options. As a result of these behavior patterns, investors using technical analysis earn lower raw and risk-adjusted returns than other investors. The magnitudes are economically important: controlling for concentration and turnover, the marginal cost associated with technical analysis is approximately 50 basis points of raw return per month. Turnover associated with technical analysis adds a further 20 basis points per month of cost. Concentration adds an additional 2 basis points.
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Most investors who use technical analysis do so in combination with some other strategy. Specifically, 23% of the investors in our sample use technical analysis in conjunction with some other strategy, whereas only 9% of the investors in our sample use technical analysis by itself.
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Regarding the control variables, we find that portfolio concentration (Goetzmann and Kumar 2008) and turnover (Barber and Odean 2000) hurt performance, while investors with larger portfolios do better (Dhar and Zhu 2006). Of course, the latter result could be affected by the fact that better returns lead to larger portfolios. In addition, we find that investors with more trading experience (account tenure) achieve worse returns than investors with less experience, suggesting that experience may lead to overconfidence (Gervais and Odean 2001; Barber and Odean 2001a). Finally, consistent with Chalmers and Reuters (2012), Hoechle et al. (2013), and Karabulut (2013) we find that professional advice hurts investor performance.
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Our results add to the literature documenting that individual investors are prone to invest in lottery-like securities that feature high risk and negative risk-adjusted returns (see Kumar 2009; Han and Kumar 2013). We find that technical analysis is the high octane gasoline that speculative high derivative rollers use to fuel their lottery-like trading. In this regard, the incremental impact of technical analysis on the risk-adjusted returns to high derivative rollers is 468 basis points per month less for speculators than for non-speculators.

Note that the “professional advice” referred to above is based on a survey of the account holders; the survey question was

3 – Professional advice: I base my investment decisions on the professional advice from an investment advisor

… which could be anything from a subscription to PrefLetter to membership in an Internet Technical Analysis Promotion Scheme. So it’s not really all that informative.

Naturally, there is some squealing from the Chosen:

All the criticism has Bloomberg First Word technical analyst William Maloney, a University of Delaware Fightin’ Blue Hens alumni, flapping his hen wings for a chance to defend technicians.

He’ll gladly show you numerous examples of how technical analysis can work effectively: the S&P 500 has consistently rebounded after slipping below its 100-day moving average over the past year.

Wow. A whole year of qualitative back-testing. Typical.

Philip Cross, a Senior Fellow with the Macdonald-Laurier Institute, brings to my attention an interesting OECD statistic:

Outside of industries directly regulated, all industries bear a cost of complying with regulations. The OECD estimates this costs the Canadian economy about 12 per cent of its GDP. While this is slightly below its high in the 1980s, it is significantly more than the 8 per cent of GDP that regulations cost the United States. One estimate conducted for the federal government is that the larger regulatory burden in Canada lowers all our incomes by an average of 2.2 per cent. This does not include the unknown cost to taxpayers of supporting the regulatory bureaucracy.

Tapering, Schmapering. The real story is the lousy economy:

The story told by bonds – especially government bonds in the developed world – is rather downcast. The yield on the Bloomberg Global Developed Sovereign Bond Index hit its lowest point in a year on Wednesday. That suggests investors are coming around to the notion that interest rates will remain lower for longer than they thought a few months back, and so are increasingly willing to load up on bonds, even at their current miserly yields.

Enbridge has issued some USD bonds:

DBRS has today assigned a rating of A (low) with a Stable trend to Enbridge Inc.’s issuance of USD 500 million 3.50% senior unsecured medium-term notes (Notes) maturing on June 10, 2024; USD 500 million 4.50% Notes maturing on June 10, 2044; and USD 500 million Notes with a Floating Rate Coupon of three-month USD LIBOR plus 0.45% due June 2, 2017 (collectively, the Notes). The Notes are expected to settle on June 4, 2014.

OK, so 4.50% for thirty-year USD money … compare it with what’s available on ENB USD FixedResets …

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The highest spread issue is ENB.PF.U, a FixedReset, US Pay, 4.00%+315 resetting 2017-9-1, which closed today at 24.51-60 to yield 4.62%, assuming an end-price of 24.51 in 25 years … the lowest spread issue is ENB.PF.V, a US-Pay FixedReset, 4.40%+282 which closed today at 24.71-72 (HIGHER than ENB.PF.U!) to yield 4.29%, assuming an end-price of 24.71 in 25 years.

Add in the embedded inflation protection and preferential taxation, I’d say the preferreds look pretty good!

It was another poor day for the Canadian preferred share market, with PerpetualDiscounts off 3bp, FixedResets losing 33bp and DeemedRetrractibles down 16bp. Volatility was high and dominated by losing FixedResets. Volume was a little above average.

I was stunned to see the following chart in the Kansas City Fed paper by Fumiko Hayashi and Terri Bradford titled Mobile Payments: Merchants’ Perspectives:

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Geez, I pay cash nearly every time! Does this make me an old Fudd? Mind you, though, the chart needs a footnote: if they are standing directly in front of me, then all three electronic methods will be tried several times each, after which the purchaser will pay the bill in nickels.

Yesterday I took a shot at the Fair Trade do-gooders; today it’s the environmentalists’ turn:

London has a dirty secret.

Levels of the harmful air pollutant nitrogen dioxide at a city-center monitoring station are the highest in Europe. Concentrations are greater even than in Beijing, where expatriates have dubbed the city’s smog the “airpocalypse.”

It’s the law of unintended consequences at work. European Union efforts to fight climate change favored diesel fuel over gasoline because it emits less carbon dioxide, or CO2. However, diesel’s contaminants have swamped benefits from measures that include a toll drivers pay to enter central London, a thriving bike-hire program and growing public-transport network.
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Europe-wide policy triggered the problem. The “dieselisation” of London’s cars began with an agreement between car manufacturers and the EU in 1998 that aimed to lower the average CO2 emissions of new vehicles. Because of diesel’s greater fuel economy, it increased in favor.

The European Commission, the EU regulatory arm, “is and always has been technologically neutral,” said Joe Hennon, a spokesman. “It does not favor diesel over petrol-powered cars. How to achieve CO2 reductions is up to member states.”

EU rules enforced since 2000 allowed diesel cars to spew more than three times the amount of oxides of nitrogen including NO2 as those using gasoline. New rules that took effect in September narrow that gap.

In yet another rant with no relationship at all to Canadian preferred shares (what?) how about this explanation of soaring tuition costs … not to mention a little flexing of new-found administrative muscle:

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In interest-rate related news (for a change!) the Treasury market was on fire today:

The U.S. sale of $35 billion of five-year notes drew the lowest yield in six months as a European bond rally bolstered the attractiveness of U.S. government securities.

The notes yielded 1.513 percent at auction yesterday, the least since November. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 2.73, versus an average of 2.65 at the past 10 sales. Treasuries rose earlier along with government securities across Europe as an unexpected jump in German unemployment fueled bets the European Central Bank will introduce further stimulus next week.

“It was a strong auction, given the strength that we saw coming in,” said Sean Murphy, a trader in New York at Societe Generale SA, one of 22 primary dealers obliged to bid at U.S. debt auctions. “In the global safe-bond world, the U.S. looks relatively cheap. And we are seeing that play out in the strength of Treasuries.”

The yield on the current five-year note fell five basis points, or 0.05 percentage point, to 1.48 percent at 5 p.m. yesterday in New York, according to Bloomberg Bond Trader prices. The yield on the benchmark 10-year note fell seven basis points to 2.44 percent.
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Yields on European sovereign debt fell to record lows as the number of people out of work in Germany rose 23,937 to 2.91 million in May, the Federal Labor Agency said. Economists surveyed by Bloomberg forecast a decline of 15,000.

ECB President Mario Draghi said in Portugal this week policy makers need to be “particularly watchful” of low inflation. Consumer-price increases in the euro region have been less than half the central bank’s goal of just under 2 percent since October. The ECB meets June 5.

Laurence D. Fink of Blackrock is attempting to distract regulators with other issues:

BlackRock Inc. (BLK)’s Laurence D. Fink, who oversees the world’s biggest exchange-traded fund lineup, said leveraged ETFs are a structural problem and have the potential to “blow up” the industry.

“BlackRock would never do a leveraged ETF,” Fink said in a question-and-answer session with Deutsche Bank AG co-chairman Anshu Jain today in New York. Fink said he doesn’t understand why the U.S. Securities and Exchange Commission allows them to operate.
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Fink said today that products with embedded leverage should be supervised. Regulators should focus their efforts on products instead of the amount of assets managed when seeking to reduce risk in the financial system, he said. BlackRock is among large money managers that has been lobbying regulators and lawmakers to avoid being labeled a systemically important financial institution, or SIFI.

… and Scotia was unable to find a buyer for CI Financial:

Bank of Nova Scotia has settled on a plan to unload the majority of its stake in asset manager CI Financial Inc., opting to sell shares directly to public investors by way of a bought deal.

Scotiabank is selling 72 million shares at $31.60 each, amounting $2.3-billion, making it one of the largest public offerings in Canada.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts off 5bp, FixedResets losing 38bp and DeemedRetractibles down 16bp. The relatively lengthy Performance Highlights table is dominated by losers. Volume was high.

Update: PerpetualDiscounts now yield 5.28%, equivalent to 6.86% interest at the standard equivalency factor of 1.3x. Long Corporates now yield about 4.35%, so the pre-tax interest-equivalent spread (in this context, the Seniority Spread) is now about 250bp, a widening from the 240bp reported May 15.

Well, the huge sums of government money spent persecuting Fabulous Fab have finally had an effect:

Fabrice Tourre, the former Goldman Sachs Group Inc. (GS) vice president found liable for his part in selling a pre-crisis mortgage security that lost value, said he won’t file an appeal in the civil case.

“While my lawyers have advised me there are strong grounds to appeal, I prefer to move forward with my education and close this difficult chapter of my life,” Tourre said in a statement today. “I look forward to finishing my Ph.D. in economics and to making meaningful contributions to my field.”

Tourre, 35, was found liable Aug. 1 after a jury trial at which the U.S. Securities and Exchange Commission claimed he intentionally misled investors in a subprime-mortgage vehicle called Abacus 2007-AC1. In March, he was ordered to pay more than $825,000 in penalties.

The lawsuit was one of the government’s most prominent efforts to fix responsibility for the housing market crash, which helped precipitate the worst economic downturn since the 1930s.

It looks like all the easy shale oil money has been made:

The U.S. shale patch is facing a shakeout as drillers struggle to keep pace with the relentless spending needed to get oil and gas out of the ground.

Shale debt has almost doubled over the last four years while revenue has gained just 5.6 percent, according to a Bloomberg News analysis of 61 shale drillers. A dozen of those wildcatters are spending at least 10 percent of their sales on interest compared with Exxon Mobil Corp.’s 0.1 percent.
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Drillers are caught in a bind. They must keep borrowing to pay for exploration needed to offset the steep production declines typical of shale wells. At the same time, investors have been pushing companies to cut back. Spending tumbled at 26 of the 61 firms examined. For companies that can’t afford to keep drilling, less oil coming out means less money coming in, accelerating the financial tailspin.

Good news, everybody! Not only is Toronto the largest Fair Trade city in North America, but Ethiopian coffee is Canada’s favourite FairTrade product! There’s only one teensy, tiny little problem:

The third main set of FTEPR findings concerns Fairtrade specifically. This research was unable to find any evidence that Fairtrade has made a positive difference to the wages and working conditions of those employed in the production of the commodities produced for Fairtrade certified export in the areas where the research has been conducted. This is the case for ‘smallholder’ crops like coffee – where Fairtrade standards have been based on the erroneous assumption that the vast majority of production is based on family labour – and for ‘hired labour organization’ commodities like the cut flowers produced in factory-style greenhouse conditions in Ethiopia.8 In some cases, indeed, the data suggest that those employed in areas where there are Fairtrade producer organisations are significantly worse paid, and treated, than those employed for wages in the production of the same commodities in areas without any Fairtrade certified institutions (including in areas characterised by smallholder production). At the very least, this research suggests that Fairtrade organizations need to pay far more attention to the conditions of those extremely poor rural people – especially women and girls – employed in the production of commodities labelled and sold to ‘ethical consumers’ who expect their purchases to improve the lives of the poor.

Section 3 discusses other evidence too, drawing on both quantitative and qualitative findings. The FTEPR research design did not set out to capture comprehensive data on child labour. However, in the quantitative survey results and especially in the qualitative life’s work interviews, the fact of widespread wage labour by children and teenagers (specifically, children working for wages and during school time) was inescapable.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 5bp, FixedResets down 33bp and DeemedRetractibles off 8bp. The lengthy Performance Highlights table is dominated by FixedReset losers (although Floaters got hit hard too), particularly BAM issues – presumably due to the new issue announcement. Volume was average.