PrefBlog

There are some thoughts that Keystone has missed the boat:

Delays of the Keystone XL pipeline are providing little obstacle to Western Canadian oil producers getting their crude to the U.S. Gulf Coast, with shipments set to more than double next year.

The volume of Canadian crude processed at Gulf Coast refineries could climb to more than 400,000 barrels a day in 2015 from 208,000 in August, according to Jackie Forrest, vice president of Calgary-based ARC Financial Corp. The increase comes as Enbridge Inc.’s Flanagan South and an expanded Seaway pipeline raise their capacity to ship oil by as much as 450,000 barrels a day. Canadian exports to the Gulf rose 83 percent in the past four years.

The expansion shows Canadians are finding alternative entry points into the U.S. while the Keystone saga drags on. In the latest chapter, a Democratic senator and a Republican representative are seeking votes in their chambers to set the project in motion. The two are squaring off in a runoff election for a Senate seat from Louisiana, a state where support for the project is strong.

“Keystone is kind of old news,” Sandy Fielden, director of energy analytics at Austin, Texas-based consulting company RBN Energy, said Nov. 12 in an e-mail. “Producers have moved on and are looking for new capacity from other pipelines.”

TransCanada Corp. (TRP)’s Keystone XL, which would transport Alberta’s heavy oil sands crude to refineries on the Gulf, has been held up for six years, awaiting Obama administration approval.

… so, naturally, it’s a big issue:

Republicans, emboldened by big gains in last week’s midterm elections, have chosen to make Keystone XL into the first battle of wills with a lame-duck president.

And Mr. Obama, so far, isn’t backing down.

… because we’ve got other means of transport:

It’s not uncommon to see mile-long trains of tanker cars cutting through the centre of Lac La Biche, carrying tens of thousands of barrels of crude to market, snarling traffic as they go. And it’s not about to stop. Former mayor Aurel Langevin, who ran the town from 2012 to this past spring, estimates that, a year ago, Lac La Biche averaged three oil trains a day. That figure is expected to hit about eight per day, carrying upward of 100 tankers each, in the year ahead.

This new reality for Lac La Biche, and thousands of other towns across North America, is symptomatic of the critical–and costly–transportation bottleneck that now hangs over the oil sands. The lack of options for transporting Alberta’s heavy crude south, to oil refineries on the U.S. Gulf Coast, means it is sold at a significant discount to the benchmark West Texas Intermediate.

TransCanada Corp.’s $5.5-billion Keystone XL pipeline was supposed to be a key part of the solution–until it became a symbol for the debate over whether new pipes should be built anywhere in North America.

Actively managed US equity funds have done particularly badly vs. their benchmarks this year – various reasons have been put forward:

Here are some of the most-common excuses cited for what Arthur Miller might call “Death of a Stock Picker”: the Federal Reserve’s spigot of liquidity led to tighter correlations and less dispersion among industry groups that made it difficult to identify potential outperformers. And the boom in exchange-traded funds is also credited with having a similar effect.

Tom Lee of FundStrat Global Advisors today contributed another handy excuse: blame Apple Inc. Or rather, blame yourself if you didn’t load up on Apple shares. Apple, the largest company in the world, has rallied 41 percent this year, about four times as much as the Standard & Poor’s 500 Index. Last year, the shares were only good for about a fifth of the S&P 500’s 30 percent gain.

Not owning Apple in 2014 was one of the biggest reasons managers trailed benchmarks this year, according to Lee, accounting for 81.3 basis points of an average 340 basis-point underperformance. Skipping Microsoft Corp., up 33 percent in 2014, was good for another 36.2 basis points in underperformance, according to Lee.

And while many fund managers are cursing this year’s 18 percent rally in utilities, Lee points out that the group only accounts for 3 percent of the S&P 500 so the absence of the entire industry in a fund would only be good for 25 basis points of underperformance.

The ‘higher correlation’ argument needs to be taken with a grain of salt: if we assume every stock in the universe has exactly the same return at all times, then every actively managed fund will underperform by its MER; but by no more than the MER.

AltaGas Ltd., proud issuer of ALA.PR.A, ALA.PR.E and ALA.PR.G, was confirmed at Pfd-3 by DBRS:

DBRS expects the recent improving trend in the Company’s credit metrics to continue as the full-year benefits from assets placed in service are realized. Cash flow-to-adjusted debt has improved to 11.8% in Q3 2014 (9.6% in 2012) and adjusted debt in capital structure has improved to 51.9% (60.2% in 2012). DBRS expects the Company to finance its capital expenditure program with a prudent mix of equity and debt and maintain credit metrics consistent with its current rating.

Wow, DBRS has specified some very precise expectations there!

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts up 19bp, FixedResets off 6bp and DeemedRetractibles gaining 13bp. Volatility was average. Volume was very low.

And now it’s time for my monthly PrefLetter weekend!

OSFI honcho Jeremy Rudin made a speech today at the Life Insurance Invitational Forum:

We are also consulting with you in the international arena. We have a Canadian, Frank Swedlove of the CLHIA, who recently completed his term as inaugural chair of the Global Federation of Insurance Associations. The federation is deeply engaged with the International Association of Insurance Supervisors – the IAIS, of which OSFI is a member.

OSFI has been promoting reforms in the organization. We are happy to see the IAIS adopting the practices and governance structure of other bodies that support the Financial Stability Board. The IAIS is improving its planning, organizational efficiency, focus, and governance. It is developing a formal, robust and transparent process to streamline stakeholder consultations. Given the extremely important assignments the IAIS has undertaken for the FSB, this is good news.

As part of these reforms, the Observer category at the IAIS is being eliminated. I know that some insurers are concerned that this reform will reduce transparency at the IAIS.

I certainly agree that the IAIS needs to keep a window open for the industry to contribute to its deliberations. I am very supportive of the new IAIS consultative mechanism. It is similar to OSFI’s own approach to consultations, so I am confident it will be satisfactory.
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If we at OSFI think that the eventual international capital standard for insurance companies is too low for Canadian purposes, we will set a higher bar. My successors may have cause to thank me for doing so, just as I am grateful to my predecessors who set a higher bar for banks.

On the other hand, when we judge that there is little or no value in exceeding an international minimum, we stay quite close to our agreements with global counterparts. Sometimes, that means bucking the trend, as with our decisions on preferred share issues and leverage limits for banks.

There have been six Canadian observers at the IAIS (FICONET was originally given two lines. Corrected 2014-11-14):

• · Assuris
• · Canadian Life & Health Insurance Association Inc.
• . FICONET (International Financial Consumer Protection Network)
• · Insurance Bureau of Canada
• · Manulife Financial
• · Sun Life Financial

The Global Federation of Insurance Associations says:

We understand that the growth of the IAIS means that the IAIS needs to evaluate whether the Observership role is functioning as intended. However, we do not understand what particular problems this proposed cancellation of Observership status is intended to solve. Rather, we believe this will make the IAIS standards development process less transparent overall, which we do not believe is the intention.
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We urge the IAIS to reconsider its proposed decision to generally exclude stakeholders from IAIS meetings. It should be best practice to always invite stakeholders to meetings, unless there are good reasons to exclude them, rather than the other way around. Exclusion of stakeholders from meetings should only be acceptable in a clearly prescribed set of circumstances such as, but not limited to, IAIS internal matters, budget issues, issues that concern only one stakeholder, etc.

NAIC is also opposed:

At the International Association of Insurance Supervisors (IAIS) Annual General Meeting on October 25, members voted on observer membership status for non-member stakeholders. The vote, which took place in closed session, amended IAIS bylaws to end the observer membership status, which included participation in some IAIS meetings, in favor of creating new stakeholder consultation procedures.

“I am extremely disappointed in the outcome of Saturday’s vote to end observer status at the IAIS,” said Adam Hamm, NAIC President and North Dakota Insurance Commissioner. “Observers run the range of consumer advocates, insurance experts, and industry representatives – all of whom have critical input to share on the real-world consequences of decisions made by regulators. Shutting them out of the official process in favor of ‘invite only’ participation deprives IAIS members and stakeholders alike and could diminish the credibility of decisions made at the IAIS.”

… as are American insurers:

For U.S. insurance organizations, the proposed change slated to go into effect on Jan. 1, 2015, couldn’t come at a worse time. In addition to the common supervisory framework, the group also is considering capital standards as well as how to designate and supervise global systemically important insurers.

How IAIS deals with these issues could significantly affect U.S. insurers.

U.S. insurer groups fear the proposed meeting participation changes would harm transparency, and filed comments opposing the change during a comment period that ended earlier this month.

“We have been a longtime observer of the IAIS and we think that transparency is critical,” said Robert Neill, senior director of international and government affairs at the Washington-based American Council of Life Insurers. “The U.S. government system is built on a transparent process, and we’re concerned about any departure from transparency.”

Steve Simchak, director of international affairs at the Washington-based American Insurance Association, called the proposal “very concerning.”

“The work the IAIS is doing now could have major impact on insurance regulation here in the U.S. and also on U.S. insurance groups that operate internationally,” Mr. Simchak said. “We think as the work of the IAIS becomes more important, that’s a cause for more transparency and not less.”

… as does a European group:

We note the efforts and welcome the commitment to enhance the efficiency and effectiveness of IAIS activities and decision-making processes. After all, many AMICE members contribute (indirectly, through the financing arrangements for their national supervisors) to the financing of the IAIS. Having said this, we wonder, however, why the abolition of observer status is being seen as an important step towards securing efficiency and effectiveness. We believe that in a clearly and transparently governed policymaking structure neither the independence nor the efficiency of the IAIS is necessarily compromised by the existence and involvement of observers.

However, since OSFI is a grossly incompetent organization with negligible analytical prowess, it is not surprising that they wish to make their decisions in secret. Assiduous Readers will also remember that OSFI’s consultation process is laughable.

Speaking of speeches, there was a most interesting presentation by Carolyn Wilkins of the Bank of Canada titled Money in a Digital World:

E-money is still a wallflower in developed countries where many people have bank accounts, although this could change quickly. Today it is more popular in countries where relatively fewer people have access to banking services.4 An example of this is Kenya, where many people use e-money called M-Pesa. M-Pesa is backed by the issuer and redeemable in the Kenyan shilling. It gives people a low-cost way to transfer money using their mobile phones. M-Pesa is used in some 2 million transactions each day, worth about $5 billion annually. That’s nearly 20 per cent of Kenya’s GDP.

Limited access to banks is not always the main motivator for the adoption of e-money. The Octopus card, in Hong Kong, was originally designed to pay for public transit. It proved so convenient that it is now used for over 13 million transactions each day – from transit to coffee to a pair of jeans.
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E-money is not big enough to pose material risk to financial stability in Canada at this time. That said, money and payments technology is progressing in leaps and bounds, and so the Bank of Canada is watching developments closely. The federal government also is undertaking a review of payment systems in Canada to ensure that the degree of regulation of payment systems and methods is appropriate. This review has resulted in the Bank of Canada having increased responsibility to oversee payment systems of economic and systemic importance.

There is little doubt that these innovations have some benefits. They give us more choice about how we make purchases, and can reduce the cost of certain transactions. Think about online purchases of pictures or songs. The transaction costs of traditional payment methods, such as credit cards, make these small-value purchases expensive. A $1 transaction could be done for no fee using Bitcoin while it could cost over 30 cents in fees using some merchant credit cards. E-money is also useful for sending money across borders. Traditional financial institutions offer these services, called remittances, but the fees can be as much as 10-12 per cent for small transactions. So, e-money has some benefits in certain economies, especially when cash is not a viable option.
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Some people have wondered whether widespread use of e-money could impair the ability of the central bank to conduct monetary policy. This is very unlikely because Canadian interest rates would still matter.13 Whether they use e-money or cash, as long as people and businesses pay bills and borrow in Canadian dollars, the Bank of Canada would still be able to achieve its monetary policy objective. When it comes to cryptocurrencies, however, the situation is different. In the unlikely situation in which cryptocurrencies were used broadly, a significant proportion of economic transactions would not be denominated in Canadian dollars. This would reduce the Bank’s ability to influence macroeconomic activity through Canadian interest rates. Let me be clear, we are nowhere near this point today. But if we were, it would be even more important to determine whether issuing e-money is a role that should be done by the central bank.

And the Bank of Canada Review – Autumn 2014 has been published, with articles:

• Recent Developments in Experimental Macroeconomics
• Should Forward Guidance Be Backward-Looking?
• Spillover Effects of Quantitative Easing on Emerging-Market Economies
• Firm Strategy, Competitiveness and Productivity: The Case for Canada
• The Use of Financial Derivatives by Canadian Firms

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 6bp, FixedResets up 15bp and DeemedRetractibles gaining 1bp. Volatility was average. Volume was low.

There’s a bit more detail on the FX pseudo-scandal:

From at least January 2008 through early 2012 traders adopted an array of strategies to maximize their profits at the fix, regulators said. If one of them had orders that ran counter to the rest of the group, he would attempt to offload his position with an unsuspecting counterpart at another bank to avoid clashing with co-conspirators.

If the traders all had orders in the same direction, they would seek to turbocharge any price moves. In the minutes before the fix, they would attempt to sniff out any banks with large orders in the other direction and trade with them in advance, a process known in the market as “taking out the filth.” At other times they would trade with third parties outside the chat room with the intention of giving them orders in the same direction to execute at the fix.

A lot of the so-called scandal is just empire building and cash-grabbing:

Two years ago, after losing patience with the pace of negotiations between the Justice Department, the Federal Reserve, the U.S. Treasury and the Manhattan District Attorney’s office over alleged sanctions violations by Standard Chartered, Lawsky decided to publish a public letter to the bank demanding to know why he shouldn’t revoke their license to operate in New York.

The missive sent the bank’s shares down 16 percent and infuriated his fellow enforcers, who fumed over the action, which had upstaged and embarrassed them, according to people briefed on the matter at the time.

Standard Chartered (STAN), which is based in London, settled with Lawsky that month for $340 million and agreed to hire a monitor. The other regulators wound up with a smaller settlement — $327 million — four months later.

But the regulatory extortion will fill government coffers …:

Citigroup will pay $1.02 billion to three regulators in the U.S. and U.K., and JPMorgan $6 million less, according to statements from the firms today. They are among six firms that will pay $4.3 billion to four regulators ranging from the U.S. to Switzerland’s Financial Market Supervisory Authority.

… and is popular with the hoi polloi, so everything’s fine, right? Especially since the world is now a safer place for incompetent portfolio managers.

Despite all the posturing, the world’s on skids, which is why distraction is so important:

The Japanese economy is expected to expand by a meagre 0.5 per cent in the current fiscal year. And it is losing ground on the inflation front, as consumer demand falters and business spending remains weak.

In Britain, the central bank now forecasts that consumer prices will rise at a mere 1 per cent annual rate in the first half of next year; and it doesn’t expect to reach its target of 2 per cent before the last quarter of 2017 – and then only barely. Inflation rose 1.2 per cent on an annual basis in September, the lowest level in five years.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 10bp, FixedResets off 6bp and DeemedRetractibles gaining 3bp. Volatility was minimal. Volume was low.

Update, 2014-11-13: As pointed out by eagle-eyed Assiduous Reader Adrian2 in the comments, I screwed up the dividend dates for ENB.PF.E in my first try. The index table and performance highlights table have now been corrected

Sweden is joining the ranks of mortgage-rule tinkerers:

Sweden plans to tighten rules on mortgages to try to chip away at mountains of household debt that threatens the stability of one of Europe’s best-performing economies.

Falling interest rates, a housing shortage and tax cuts have fuelled a credit boom and sent property prices soaring, exposing Sweden to the risk of the kind of real estate crash that Ireland and Spain suffered in 2008.

Under the rules, new mortgage-holders who borrow more than 50 per cent of the value of their property will have to pay back a proportion of the capital in addition to interest every year.

Four in 10 Swedes have interest-only loans, the central bank says, and on average will take a century to wipe out their debt.

At more than 170 per cent of disposable income, household debt levels in Sweden are among Europe’s highest and have prompted the IMF among others to warn of a risk to economic stability.

While I sympathize with the concern that all this investment is going into non-productive assets like houses, and that a fall in real-estate prices will harm the economy, I still think that rules of this nature are far to intrusive and bear all the risks of any central planning doctrine.

I greatly prefer policies that stick to the government’s knitting. What’s the primary purpose of all these rules? To safeguard the banks. So let the banks do what they like, subject to risk-weights that reflect, you know, risk. A mortgage with a loan-to-value ratio of less than 50% should attract a lower capital charge than one with a higher LTV. A mortgage with an amortization period of 100 years should attract a higher capital charge than on with a shorter amortization. Base these rates on historical evidence and, as a final capper, impose a counter-cyclical charge: Canada’s banks, for instance, now have 40%+ of their assets in mortgages, compared with a historical average of 30%. This is risky simply because we haven’t been here before. Impose a countercyclical charge to capital based on the deviations of broad business lines (e.g., mortgages, consumer loans, small business loans, big business loans, sovereign loans…) from their historical averages – say maybe a thirty-year rolling average? Then change is allowed, with brakes. That’s much better than some bureaucrat pulling numbers out of the sky and imposing arbitrary rules on individuals.

In related news from that province known for conservatism and fiscal probity:

The issue of using public funds to pay for an NHL arena has roiled for years in Edmonton.

The city is on the hook to build a $600 million downtown arena for the NHL Oilers.

A deal struck last year between the city and the Oilers will see the team pay $6 million a year in lease payments, run the building, and keep the profits.

Woo-Hoo! A highly illiquid investment with a Current Yield of 1%! Those Albertans sure know how to swing a deal and Get Things Done, all right.

The World Energy Outlook 2014 is forthcoming and Bloomberg has a preview:

Fossil fuels are reaping $550 billion a year in subsidies and holding back investment in cleaner forms of energy, the International Energy Agency said.

Oil, coal and gas received more than four times the $120 billion paid out in subsidy for renewables including wind, solar and biofuels, the Paris-based institution said today in its annual World Energy Outlook.
…
“In Saudi Arabia, the additional upfront cost of a car twice as fuel efficient as the current average would at present take 16 years to recover through lower spending on fuel,” the IEA said. “This payback period would shrink to three years if gasoline were not subsidized.”

Canada will become a Yuan trading hub:

Bank of Montreal and HSBC Holdings Plc are among banks that stand to benefit from Canada’s designation as the latest nation to host a trading hub for China’s currency.

China on Nov. 8 gave Canada a 50 billion yuan (US$8.2 billion) quota under the Renminbi Qualified Foreign Institutional Investor program as Prime Minister Stephen Harper visited Beijing. China’s State Council also approved a three-year, $30-billion currency swap agreement with the country, while the Chinese central bank appointed Industrial and Commercial Bank of China to clear renminbi transactions in Canada.
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China’s decision follows the awarding of a 30 billion yuan quota to Qatar as the world’s second-largest economy expands the RQFII program beyond Hong Kong in efforts to promote global use of the yuan. China started the program in 2011, allowing investors holding the currency overseas to buy domestic bonds, stocks and money-market instruments.

Canada’s hub will let Canadian banks offer exporters the chance to trade renminbi more cheaply, and to have the transactions settled in their own time zone.
…
Of the $4 trillion in annual trade that makes China the world’s biggest goods-trading nation, one sixth is with Brazil, the U.S. and Canada, according to London-based Standard Chartered.

The Chinese are doing a fair bit to ease trading restrictions:

A 20,000 yuan ($3,260) daily currency-conversion cap for Hong Kong’s permanent residents will be scrapped from Nov. 17, when a program allowing cross-border share trading begins.

The move will help support the stock link, Hong Kong Monetary Authority head Norman Chan said today at a press conference. It will allow locals to buy an unlimited amount of yuan, officially known as the renminbi, at offshore rates, instead of having to get it via the Shanghai market. Hong Kong has allowed non-residents to purchase an unlimited amount of offshore yuan since August 2012.

“Banks will square positions arising from renminbi conversion conducted with Hong Kong residents in the offshore market instead of the onshore market,” Chan said. “As a result, the prevailing conversion and other relevant restrictions for onshore conversion will hence no longer be applicable.”

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 27bp, FixedResets gaining 1bp and DeemedRetractibles off 7bp. Volatility was relatively high. Volume was very low.

Global bank standards look like they may be meaningful:

The world’s largest banks will have to build up their loss-absorbing liability buffers to see them through a crisis, as regulators tackle too-big-to-fail lenders six years after the collapse of Lehman Brothers Holdings Inc.

The Financial Stability Board, led by Bank of England Governor Mark Carney, said today that the biggest banks may be required to have total loss absorbing capacity equivalent to as much as a quarter of their assets weighted for risk, with national regulators able to impose still tougher standards. The FSB is seeking comment on the rule, known as TLAC, which would apply at the earliest in 2019.
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The TLAC rules would apply to the FSB’s register of global systemically important banks. The latest list, published last week, contains 30 banks, with HSBC Holdings Plc (HSBA) and JPMorgan Chase & Co. (JPM) identified as the most significant.
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In addition to the rule measured against risk-weighted assets, banks will also need to have TLAC equivalent to 6 percent of their total assets. This number could still rise as it linked to a parallel set of international talks on bank capital rules.
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Banks would also face curbs on their ability to count debt they sell to each other toward the TLAC requirement to “reduce the risk of contagion” if one firm collapses.

These curbs would work by targeting banks whose purchases of shares and TLAC-eligible debt from another globally systemic lender exceed certain levels. In such instances, the purchasing bank would be forced to write down the size of its own buffer of TLAC eligible securities.

I don’t know what the “certain levels” in the last paragraph is all about – banks should be taking a 100% hit to capital for any loss-absorbing capital of other banks they hold. That seems obvious to me.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 12bp, FixedResets gaining 8bp and DeemedRetractibles up 9bp. Volatility was average. Volume was low.