PrefBlog

Canadians are loading up on debt:

Canadians have taken on $80-billion worth of mortgages, personal loans and credit card debt in the past year, Royal Bank of Canada found, with much of that growth coming in the past three months. Household debt totalled $1.82-trillion in January, eclipsing the country’s GDP, which stood at an annualized $1.65-trillion in December.

Most of the growth came from new residential mortgages, which rose 5.4 per cent in January compared to a year earlier, to nearly $1.3-trillion.
…
Homeowners weren’t the only ones taking on new debt. Business credit jumped 8.3 per cent in January, the fastest rate of expansion since 2007 as worries over the oil sector pushed more companies toward short-term loans, RBC said.

With all that, it’s a good thing we’ve all got good jobs!

Several reports have concluded that the country’s job market is not as strong as it looks and now a study from Canadian Imperial Bank of Commerce paints an even worse picture. According to the bank’s analysis, job quality has fallen to its lowest level in more than two decades. A CIBC index that measures 25 years worth of data on part-time versus full-time work, paid versus self-employment and compensation trends, has fallen to its lowest level on record.
…
One notable shift is that a smaller portion of the labour market now has higher bargaining power, or high-paying jobs, while a larger segment has lower bargaining power, [Benjamin Tal, CIBC’s deputy chief economist,] said. “This is the main reason why the income gap is rising, which I believe is the number one economic, social issue facing the country in this decade.”

The CIBC index tracks three components, all of which are showing a deterioration. The first indicated that the number of part-time positions has risen “much faster” than that of full-time jobs since the 1980s. (Over the past year, though, some of this has reversed as full-time jobs rose faster). Self-employment is another measure, as economists tend to view it as less stable and, on average, lower paying than salaried employment. The number of self-employed workers has been on a “steeper incline” over the past 25 years, and in the past year grew four times faster than the number of paid employees, the CIBC report said.

On compensation, the bank said low-paying full-time jobs have risen faster than mid-paying jobs over much of the past two decades, which in turn have risen more quickly than high-paying jobs. And in the past year “the job-creation gap between low- and high-paying jobs has widened,” with low-wage full-time paid positions rising at twice the pace of high-paying jobs.

Mark Cuban may not be the most academic of sources, but he probably knows more than I do about the problems of angel investors:

For those who can’t figure out how to be Angels. You can sign up to be part of the new excitement called Equity Crowd Funding. Equity Crowd Funding allows you to join the masses to chase investments with as little as 5k dollars. Oh the possibilities !!

I have absolutely not doubt in my mind that most of these individual Angels and crowd funders are currently under water in their investments. Absolutely none. I say most. The percentage could be higher

Why ?

Because there is ZERO liquidity for any of those investments. None. Zero. Zip.

All those Angel investments in all those apps and startups. All that crowdfunded equity. All in search of their unicorn because the only real salvation right now is an exit or cash pay out from operations. The SEC made sure that there is no market for any of these companies to go public and create liquidity for their Angels. The market for sub 25mm dollar raises is effectively dead. DOA . Gone. Thanks SEC. And with the new Equity CrowdFunding rules yet to be finalized, there is no reason to believe that the SEC will be smart enough to create some form of liquidity for all those widows and orphans who will put their $5k into the dream only to realize they can’t get any cash back when they need money to fix their car.

Longevity risk has been a fascination of mine over the past few years; it was briefly mentioned yesterday. But there are interesting wrinkles with respect to women:

Black women have a much higher mortality rate, but it has declined significantly—23 percent since 1999. Hispanic women also posted declines. (Hispanics of all age groups, both men and women, have lower mortality rates than average, a demographic phenomenon known as the Hispanic paradox.)

Part of the jump in the death rate for whites is explained by the epidemic of prescription painkiller abuse and overdoses that disproportionately affected whites. But that accounts for only half the total increase, according to the report. Other causes of death on the rise include suicide and respiratory disease. Some declined, including traffic deaths, homicides, and the cancers most closely linked to smoking.
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The pattern may reflect “a systematic reversal in the long-term trend of mortality decline” for white women, according to the Urban Institute paper. Such a shift could be linked to social and economic circumstances. Poorer people generally have poorer health for a variety of reasons, and growing inequality could be weighing on death rates.

“It’s possible that as this group of women ages, there could be a reversal of a very long-term decline in the death rate,” said Nan Marie Astone, a senior fellow at the Urban Institute and the lead author of the report. America isn’t really used to the idea of declining life expectancy. The next few decades might change that.

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It was a quiet, mixed day for the Canadian preferred share market, with PerpetualDiscounts off 7bp, FixedResets down 8bp and DeemedRetractibles gaining 1bp. Enbridge FixedResets were prominent in the bad part of the Performance Highlights table. Volume was quite high, with eight issues breaking the 100,000 barrier.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.37 to be $1.38 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.16 cheap at its bid price of 24.70.

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Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.M, resetting at +236 on 2019-12-19, bid at 24.61 to be $0.34 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.85 to be $0.55 cheap.

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The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PF.F, resetting at +286bp on 2019-9-30, bid at 25.117 to be $0.26 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.30 and appears to be $0.54 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.74, looks $1.48 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.79 and is $1.06 rich.

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This is rather odd – the investment grade break-even rates are clustered around zero, with one outlier: the TRP.PR.A / TRP.PR.F pair, clocking in at more realistic 1.04%.

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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

The effect of shareholder-friendly actions on creditworthiness was discussed in the post Rating Agencies Unhappy With Enbridge (particularly in the comments!). Nowadays, shareholders are really feeling the love:

Stock buybacks, which along with dividends eat up sums of money equal to almost all the Standard & Poor’s 500 Index’s earnings, vaulted to a record in February, with chief executive officers announcing $104.3 billion in planned repurchases. That’s the most since TrimTabs Investment Research began tracking the data in 1995 and almost twice the $55 billion bought a year earlier.

Even with 10-year Treasury yields holding below 2.1 percent, economic growth trailing forecasts and earnings estimates deteriorating, the stock market snapped back last month as companies announced an average of more than $5 billion in buybacks each day. That’s enough to cover about 2 percent of the value of shares traded on U.S. exchanges, data compiled by Bloomberg show.
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Companies in the S&P 500 have spent more than $2 trillion on their own stock since 2009, underpinning an equity rally in which the index has more than tripled. They were on pace to spend a sum equal to 95 percent of their earnings on repurchases and dividends in 2014, data compiled in October showed.

The BoC took no action on yields today:

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent.

Total CPI inflation in Canada has fallen as expected, reflecting the significant drop in oil prices. Core inflation remains close to 2 per cent and continues to be temporarily boosted by the pass-through effects of the lower Canadian dollar, as well as sector-specific factors.
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Financial conditions in Canada have eased materially since January, in response to the Bank’s recent monetary policy action and to global financial developments. This easing is reflected across the yield curve and in a wide range of asset prices, including the Canadian dollar. These conditions will mitigate the negative effects of the oil price shock, further boosting growth through stronger non-energy exports and investment.

In light of these developments, the risks around the inflation profile are now more balanced and financial stability risks are evolving as expected in January. At present, we judge that the current degree of monetary policy stimulus is still appropriate and the target for the overnight rate remains at 3/4 per cent.

To some extent, this was foreshadowed by the GDP numbers released yesterday:

The Canadian dollar rose the most in two weeks after a report showed the economy grew at a faster rate than estimated with policy makers meeting Wednesday to consider further monetary stimulus.
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The GDP report showed consumers boosted spending and businesses built up stockpiles of unsold goods. Gross domestic product expanded at a 2.4 percent annual pace, higher than the Bloomberg News forecast for a 2 percent gain.

The government also raised third-quarter growth to 3.2 percent, from an initially reported 2.8 percent.

But clearly this foreshadowing was incomplete:

As expected, the Bank of Canada maintained the overnight rate at 0.75 per cent, sending the Canadian dollar and short-term yields higher.

The Canadian dollar was trading below 79.8 cents (U.S.) against the greenback prior to the announcement, and proceeded to spike by more than half a cent.

Meanwhile, the yield on the two-year Government of Canada bond rose by 10 basis points to 0.6 per cent. On Feb. 23, the yield bottomed out at 0.386 per cent.
…
To adapt a tagline from Lay’s potato chips, the market was, prior to this announcement, back to betting that the Bank of Canada can’t just cut rates once. Nearly one full cut was fully priced in by the September announcement, with 10 per cent odds of the central bank being at the zero lower bound by its final meeting of the year.
…
Traders pared their bets on the likelihood of more stimulus following this statement; as of 10:15 a.m. ET, just over 25 basis points of easing are expected by the end of 2015.

Longevity risk and the impact of new actuarial tables on companies with pension plans was discussed on February 9. Now Sun Life and BCE have done a pension risk-transfer deal:

Sun Life Financial Inc., Canada’s third-largest life insurer, agreed to take on a C$5 billion ($4 billion) pension liability from telecommunications company BCE Inc.

BCE, known by its brand name Bell, will pay monthly premiums to the Toronto-based insurer, the companies said today in a statement that didn’t disclose terms.

BCE is joining large employers such as New York-based Verizon Communications Inc. in turning to insurers to cap liabilities that can increase if retirees live longer than expected or bond yields remain near record-low levels. Verizon in 2012 struck a deal to transfer about $7.5 billion in pension obligations to Prudential Financial Inc.

My new favourite SEC Commissioner Daniel M. Gallagher has some interesting things to say about boosting micro-cap liquidity:

Second, the Committee will examine secondary market trading of small company shares, particularly through Venture Exchanges. I believe Venture Exchanges are a vital bookend to our JOBS Act rulemaking on Regulation A+.[2] In thinking about these entities, I’ve been envisioning them as national securities exchanges, with full state law preemption, but with tailored periodic reporting and listing requirements that are more appropriate for small businesses.[3] They would be exempt from the National Market System rules and Unlisted Trading Privileges requirements, so as to concentrate liquidity in the listing venue, and would be free to structure trading however they see fit (e.g., periodic auctions instead of continuous trading). I believe these principles would create liquidity in Regulation A+ shares. Moreover, these same principles could be extended to the shares of the smallest public companies, currently traded over-the-counter, to facilitate liquidity for them as well. We must embrace change. We must depart from the failed policies and feeble ideas of the past, in order to pursue critically-needed innovation like Venture Exchanges. I believe this Commission has the courage and leadership to do so.

It’s nice to see some acknowledgement that the National Market System rules, which incorporate the National Best Bid and Offer rules have some effect beyond being fairsy-wairsy to Granny.

A Pew Research study recently awarded India a better-than-awful grade on religious freedom, while noting a very high level of social hostilities. They may want to review the ‘freedom’ part:

A prime filet mignon at New York’s Old Homestead Steakhouse will set you back $56. Wolfgang Puck’s Cut in London charges as much as $210 for a ribeye. In Tokyo, a sirloin can top $250.

But nowhere is a juicy piece of beef as dear as in Mumbai, where it can now cost you five years in prison.

The government of the state of Maharashtra this week banned possession of beef and its byproducts and the slaughtering of cows, bulls and bullocks. The prohibition marks a victory for hardline Hindu groups that have sought to protect an animal their religion considers holy.

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts gaining 3bp, FixedResets up 8bp and DeemedRetractibles winning 12bp. Beneath the placid surface, however, there continued to be a lot of churn in the market, with the Performance Highlights table relatively lengthy and dominated by winning FixedResets (although HSE.PR.C was a loser, hurt by today’s new issue announcement). Volume was above average.

PerpetualDiscounts now yield 5.03%, equivalent to 6.54% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 3.75%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 280bp, a slight (and perhaps spurious) widening from the 275bp reported February 25.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.75 to be $1.72 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.18 cheap at its bid price of 24.83.

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Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.71 to be $0.28 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.85 to be $0.52 cheap.

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The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.X, resetting at +180bp on 2017-6-30, bid at 18.11 to be $0.66 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.34 and appears to be $0.63 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.69, looks $1.46 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.80 and is $1.09 rich.

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This is rather odd – the investment grade break-even rates are clustered just below zero, with one outlier: the TRP.PR.A / TRP.PR.F pair, clocking in at more aggressive 1.45%.

The market’s distaste for product linked to Money Market rates does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

Daniel M. Gallagher has just become my favourite SEC commissioner:

During a fireside chat at today’s Institute of International Bankers’ 26th Annual Washington Conference, I expressed my concern about the number and aggregate impact of regulations that have been imposed on U.S. financial services firms since the enactment of the Dodd-Frank Act in 2010. These regulations come from an alphabet soup of domestic regulators, including the SEC, and many are related to the edicts of non-accountable international bodies such as the Financial Stability Board. Unfortunately, in promulgating many of these myriad regulations, a robust cost-benefit analysis was not required—and therefore none was performed. Even where a cost-benefit analysis was performed (an exercise for the most part limited to rules adopted by the SEC or CFTC, either independently or jointly with other regulators, given their statutory mandate for cost-benefit analysis), such analysis encompassed only the incremental effects of the rule being considered for adoption. No regulator, as far as I know, has considered the overall regulatory burden on financial services firms when determining whether to impose additional costly regulations. We as regulators are, when it comes to the possibility that our rules are causing death by a thousand cuts, the proverbial ostrich—head firmly entrenched in the sand.

There is yet another rate cut:

India’s central bank lowered interest rates in an unscheduled move for the second time this year, a sign of approval for Prime Minister Narendra Modi’s first full-year budget.

Governor Raghuram Rajan cut the benchmark repurchase rate to 7.5 percent from 7.75 percent, the Reserve Bank of India said in a statement on Wednesday. The central bank acted due to weakness in the economy and after it agreed upon a formal inflation target with the government, Rajan said.

“This makes explicit what was implicit before –- that the government and the Reserve Bank have common objectives and that fiscal and monetary policy will work in a complementary way,” Rajan said in the statement, referring to the monetary policy framework agreement. “In sum, then, the government intends to compensate for the delay in fiscal consolidation with a commitment to an improvement in the quality of adjustment.”

The decision came four days after Modi pushed back deficit targets to spur economic growth through corporate tax cuts and increased spending on infrastructure. More than a dozen central banks from Turkey to China have eased policy in 2015 as a slide in oil prices damps inflation.

It was a fine day for the Canadian preferred share market, with both PerpetualDiscounts and FixedResets up 39bp, while DeemedRetractibles gained 17bp. The Performance Highlights table is dominated by FixedReset winners. Volume was average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.65 to be $1.67 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.21 cheap at its bid price of 24.83.

Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.84 to be $0.39 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.89 to be $0.57 cheap.

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The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.X, resetting at +180bp on 2017-6-30, bid at 18.15 to be $0.39 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.38 and appears to be $0.75 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.63, looks $1.36 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.80 and is $1.09 rich.

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This is rather odd – the investment grade break-even rates are clustered around negative 20bp, with one outlier: the TRP.PR.A / TRP.PR.F pair, clocking in at more reasonable 1.24%.

The market’s distaste for product linked to Money Market rates does not extend to prime, as shown by the FixedFloater/RatchetRate pairs:

Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?