PrefBlog

In today’s economy, the absence of bad news is greeted ecstatically:

Canada’s economy grew for a third month in August, cementing a rebound from an oil shock that had pulled the nation toward recession in the first half of this year.

Gross domestic product increased 0.1 percent to an annualized C$1.66 trillion ($1.26 trillion), Statistics Canada said Friday in Ottawa, following gains of 0.4 percent and 0.3 percent in June and July.

The August increase was led by manufacturing, which grew 0.4 percent to C$175 billion on production of chemicals and paper. Oil and gas extraction rose by 0.3 percent and retailing increased 0.6 percent led by food, automobiles and furniture.
…
Gross domestic product has grown 0.9 percent in August from the same month in 2014, Statistics Canada said.

According to my fingers and toes, these numbers are exceeded by inflation, but let’s ignore that and accentuate the positive! Like, for instance, what Canada does best:

Quebec plans to ask Canada’s federal government to match the province’s $1-billion (U.S.) investment in Bombardier Inc.’s C Series program to round out the funding for the troubled jet and assuage any lingering customer concerns.

“If the federal government comes in, the notion of risk completely changes,” Economy Minister Jacques Daoust said Friday in a telephone interview from Montreal. “If the federal government also put in $1 billion, that would mean the C Series financing package would be complete.”

His comments underscored Quebec’s determination to prop up the marquee aircraft model at Montreal-based Bombardier, which has been draining cash amid missed deadlines, cost overruns and scant interest among major airlines. Bombardier said Thursday that the jet will need an additional $2 billion during the next five years.

But let’s be fair, there are some exciting new businesses growing in Canada:

In granting Mr. Dhaliwal a conditional licence, Carolyn Rogers, head of the provincial Financial Institutions Commission, put the blame [for a mortgage fraud] on Mr. Dhaliwal’s former employer, TD Bank, for putting intense pressure on Mr. Dhaliwal, whom she described as poorly trained and financially naive.

What little coaching Mr. Dhaliwal received on how to properly conduct business, she wrote, “was overwhelmed by a focus on the volume of mortgage business Mr. Dhaliwal was bringing to the bank and relentless pressure to sell creditor protection insurance to as many borrowers as possible.”
…
In an online presentation on fraud and identity theft from 2012, mortgage insurer Canada Guaranty notes that “one in 10 mortgage applications will have some element of fraud.” Credit bureau Equifax says it had been able to flag nearly $1-billion worth of attempted mortgage fraud among its lender clients since 2013.

“It’s happening on such a level that the consumer is aware that this is something that can be done,” says an Ontario mortgage broker who didn’t want his name used and who once complained to federal and provincial regulators after being referred a deal that involved a family looking to buy three homes without any reportable income. “It’s happening on such a level that some bank reps, mobile mortgage reps, have said: Call a mortgage broker, they can probably find a way to make your income higher.”
…
Equifax has noticed the trend of people coming into its offices looking to upgrade their credit score with new employment details using fake job letters. “They’ll use the same template which has the same words spelled incorrectly,” says John Russo, Equifax’s legal counsel and chief privacy officer. Such attempts at “soft fraud” are up 15 to 20 per cent this year, he says. “We’ve seen many instances, in the thousands, come across our desks.”

The Fed has published a bail-in debt rule for comment:

However, several features distinguish eligible internal LTD [Long Term Debt] from eligible external LTD: It would be required to be issued to a parent foreign entity that controls the covered IHC [Intermediate Holding Company], to be contractually subordinated to all third-party liabilities of the covered IHC, and to include a contractual trigger pursuant to which the Board [Board of Governors of the Federal Reserve System] could require the covered IHC to cancel the eligible internal LTD or convert or exchange it into tier 1 common equity on a going-concern basis (that is, without the covered IHC’s entry into a resolution proceeding) if: (a) the Board determines that the covered IHC is “in default or in danger of default”; and (b) any of the following circumstances apply (i) the top-tier foreign banking organization or any subsidiary outside the United States is placed into resolution proceedings, (ii) the home country supervisory authority consents to the cancellation, exchange, or conversion, or does not object to the cancellation, exchange, or conversion following 48 hours’ notice, or (iii) the Board has made a written recommendation to the Secretary of the Treasury that the FDIC should be appointed as receiver of the covered IHC.

So the trigger is Fed fiat. This is very disappointing in light of the fact that:

In general, if a major U.S. bank holding company or non-bank financial company were to fail, it would be resolved under the U.S. Bankruptcy Code.17 Congress recognized, however, that such a company might fail under extraordinary circumstances that would prevent it from being resolved in bankruptcy without serious adverse effects on the financial stability of the United States. Title II therefore provides the Secretary of the Treasury, upon recommendation from other government agencies, with the authority to place a major financial company into an FDIC receivership, rather than bankruptcy.

A sensible feature of the proposal is:

Eligible external LTD would be required to be paid in and issued directly by the covered BHC [Bank Holding Company] itself—that is, by the banking organization’s top-tier holding company. Thus, debt instruments issued by a subsidiary would not qualify as eligible external LTD, even if they do qualify as regulatory capital.

So, presumably, the holding company can go bankrupt without affecting the operating subsidiaries.

It could be quite a significant market:

The largest U.S. banks would face a $120 billion total shortfall of long-term debt under a Federal Reserve proposal aimed at ensuring their failure wouldn’t hurt the broader financial system.

Banks such as Wells Fargo & Co. and JPMorgan Chase & Co. will be required to hold enough debt that could be converted into equity if they were to falter, according to a Fed rule that was approved by a unanimous vote on Friday. The Fed’s proposal, which applies to eight of the biggest U.S. banks, requires debt and a capital cushion equal to at least 16 percent of risk-weighted assets by 2019 and 18 percent by 2022.

Perhaps of greater ultimate import is today’s SEC announcement of rules to permit equity crowdfunding:

The new crowdfunding rules and forms will be effective 180 days after they are published in the Federal Register. The forms enabling funding portals to register with the Commission will be effective Jan. 29, 2016.
…
More specifically, the recommended rules would:

• • Permit a company to raise a maximum aggregate amount of $1 million through crowdfunding offerings in a 12-month period;
• • Permit individual investors, over a 12-month period, to invest in the aggregate across all crowdfunding offerings up to:
  • ◦ If either their annual income or net worth is less than $100,000, than the greater of:
    • ◾ $2,000 or
    • ◾ 5 percent of the lesser of their annual income or net worth.
  • ◦ If both their annual income and net worth are equal to or more than $100,000, 10 percent of the lesser of their annual income or net worth; and
• • During the 12-month period, the aggregate amount of securities sold to an investor through all crowdfunding offerings may not exceed $100,000.

Regrettably, as Commissioner Kara M. Stein points out approvingly, there is a requirement for deputized policemen:

Moreover, as the preamble makes clear, the Commission takes seriously the intermediary’s obligations to assess whether it may reasonably rely on the representations. To quote, “the specific steps an intermediary should take to determine whether it can rely on an issuer representation may vary, but should be influenced by and tailored according to the intermediary’s knowledge and comfort with each particular issuer.”[5] In short, an intermediary will need to do a little bit of work to gain confidence that the small business is what it says it is. Intermediaries will also need to develop written policies and procedures for how they will execute these obligations.

There are other incentives built into the structure of the law itself that should also encourage intermediaries to conduct some level of due diligence on issuers.[6] Thus, I am comfortable supporting the measured approach put forward today, and I look forward to seeing how market practice evolves. We may also learn from the examination work of the Commission staff and self-regulatory organizations (SRO) — one of the major benefits of utilizing regulated intermediaries. As we gain experience, we should be prepared to adjust requirements in this area.

But to compensate, she also highlights a rule recognizing the cash position of start-ups:

Surprising as it may seem, another challenge is how to protect crowdfunding investors when a business actually does well. Angel and venture investors are able to protect their interests through a variety of levers. However, the crowd may be unable, practically speaking, to negotiate for or utilize the same types of levers. As a result, the crowd could see its investments heavily diluted in follow-on offerings.

To address this, today’s rules give the crowd a little extra help by aligning the interests of the intermediary with that of the crowd. Specifically, the rules enable an intermediary to take a position in the issuer as compensation for the offering, provided that the securities it takes have the same terms, conditions, and rights as the crowd.[7] This approach has multiple benefits as it also responds to the demands of small businesses that wanted to be able to compensate intermediaries by allowing them to take a stake in the company.

Commissioner Luis Aguilar, who never saw paperwork he didn’t like also approves of deputy policemen:

Importantly, Regulation Crowdfunding also provides a framework to govern how Crowdfunding intermediaries—such as a registered broker-dealer or a funding portal—can conduct securities offerings. Because these intermediaries essentially act as “gatekeepers” for these offerings, this framework should provide additional investor protection. Moreover, since these gatekeepers are indispensable for making Crowdfunding viable, it is critical for the registration regime for funding portals to be ready as soon as today’s Crowdfunding rules go into effect.

Commissioner Michael S. Piwowar issued a dissenting statement:

A number of concerns have already been raised as to whether our rules are too restrictive or too burdensome. In fact, many of these restrictions are embedded in the statute itself. For instance, even if you are Warren Buffet or Bill Gates, you are limited to investing no more than $100,000 during any 12-month period in all crowdfunding investments.[4]

In other cases, the majority of the Commission has exercised discretion to make capital raising using crowdfunding even more difficult. In a change from the proposal, the rules will limit the ability to invest in crowdfunding opportunities based on the lesser of annual income or net worth. Because the majority of the Commission cannot trust ordinary Americans – the non-accredited investors – to be able to exercise appropriate judgment in how to spend or invest their resources, our rules will now place smaller limits on the amounts that can be invested.[5] Rather than actually protecting investors, these smaller limits will discourage legitimate companies from engaging in crowdfunding, while simultaneously encouraging less reputable actors to use affinity-based solicitation methods akin to multi-level marketing, a development that could stifle crowdfunding efforts.
…
Throughout this process, our staff put in an incredible amount of effort on these important issues and I commend their exceptionally fine work. The original draft of the crowdfunding rules was consistent with the statute and the original draft to modernize Rule 147 and Rule 504 was thoughtful and sensible. I also acknowledge the extensive interest and involvement of the state securities regulators and the North American Securities Administrators Association, which helped to shape the staff’s work.

This collaboration resulted in two perfect alley-oop passes to the Commission for seemingly can’t-miss slam dunks. However, the majority of the Commission decided to take a few extra unnecessary steps on the crowdfunding rules and the Rule 147 proposal and overshot on both.

For these reasons, I am unable to support the two items we are voting on today. Thank you and I have no questions.

Isn’t the US system great? Look at that … commissioners disagreeing with each other publicly and not mincing their words in public statements while they’re at it. We need this culture in Canada.

Portugal has announced a new defence to economic criticism:

Portuguese prosecutors have asked for Canadian academic Peter Boone to be put on trial after he wrote articles predicting a debt crisis in Portugal similar to Greece’s and then, they say, made nearly $1-million from price moves in that market.
…
Portuguese bond yields started to spike in April 2010 and forced the country to request an international bailout a year later, which it exited last year after stringent austerity measures that put public finances on a stronger footing.

The Lisbon District Prosecutor’s Office said that after a long investigation it had decided to ask for criminal proceedings against the suspect for market manipulation. A judge would have to evaluate the case before any trial is set.

The prosecution says it has evidence that the suspect had a vested interest in Portuguese debt weakening “as only such depreciation allowed the closing of a short position with gains to crystallise his profit” of 819,099.82 euros.

S&P had some things to say about the Valeant/Philidor scandal:

• •Valeant Pharmaceuticals International Inc. has severed ties with its affiliate, specialty pharmacy network Philidor RX Services, after leading pharmacy benefit managers (PBMs) terminated their relationships with Philidor, citing noncompliance with the terms of their agreements.
• •We believe reports of wrongdoing at Philidor weakens Valeant management’s credibility, further harms the company’s already tarnished reputation,
  and that these developments exacerbate potential legal, regulatory, and reputational headwinds for the company. We also believe the reputational issues could potentially compromise the company’s ability to effectively market its products to doctors, beyond this channel.

• •We are lowering our ratings by one notch, including lowering the corporate credit rating to ‘B+’ from ‘BB-‘. Our rating outlook is negative. We are lowering the rating on the senior secured debt to ‘BB’ from ‘BB+’ and lowering the rating on the senior unsecured debt to ‘B-‘ from ‘B’.
• •The negative outlook reflects heightened uncertainty relating to the financial impact from reputational, legal, and regulatory risks associated with the company’s aggressive marketing and drug pricing strategies, as well as potential legal and credibility issues stemming from the lack of earlier disclosure about its relationship with Philador. At the same time, we believe the company can likely absorb these headwinds at the current rating.

There’s been a nice breakthrough in battery technology:

Scientists have developed a working laboratory demonstrator of a lithium-oxygen battery which has very high energy density, is more than 90% efficient, and, to date, can be recharged more than 2000 times, showing how several of the problems holding back the development of these devices could be solved.
…
However, as is the case with other next-generation batteries, there are several practical challenges that need to be addressed before lithium-air batteries become a viable alternative to gasoline.

Now, researchers from the University of Cambridge have demonstrated how some of these obstacles may be overcome, and developed a lab-based demonstrator of a lithium-oxygen battery which has higher capacity, increased energy efficiency and improved stability over previous attempts.

Their demonstrator relies on a highly porous, ‘fluffy’ carbon electrode made from graphene (comprising one-atom-thick sheets of carbon atoms), and additives that alter the chemical reactions at work in the battery, making it more stable and more efficient. While the results, reported in the journal Science, are promising, the researchers caution that a practical lithium-air battery still remains at least a decade away.

Naturally, this work was not done in Ontario. We blew the budget on not-ready-for-prime-time technology.

New York’s hotels are showing us all how to compete effectively:

Airbnb accounted for $451.4 million in gross revenue in New York alone in the 12 months through Aug. 31, according a report commissioned by the Hotel Association of New York City. That number will jump to $805.3 million in 2018, the group said Friday.
…
Airbnb accounted for 2.9 million, or 7.8 percent, of overnight stays in New York in the latest fiscal year, compared with 33.9 million, or 92 percent, of nightly rentals among hotels, according to the Hotel Association of New York City. Yet hotels brought in a larger portion of sales — 95 percent of gross revenue, or $9.4 billion, thanks to a higher average cost per room.
…
While Airbnb’s share might seem small, consider that the startup didn’t exist seven years ago. It’s now valued at $25.5 billion and enmeshed in a political fight in New York, where the attorney general has scrutinized rentals on Airbnb and pressed the company to crack down on rentals that are run more like unregulated hotels. In its hometown of San Francisco, Airbnb is facing a vote next week on a proposition that would impose regulations and cap rentals at 75 days a year.

The Hotel Association of New York City has donated $25,000 to an organization supporting San Francisco’s Proposition F. Airbnb’s internal polling shows the company leading the measure by 19 percentage points.

Maybe they should hire some consultants from Canada’s banking industry! The most important thing is the effective display of crocodile tears when talking about the burden of regulation.

It was yet another mixed day in a familiar pattern in the Canadian preferred share market, with PerpetualDiscounts up 24bp, FixedResets off 38bp and DeemedRetractibles gaining 10bp. A very lengthy Performance Highlights table is dominated by losers. 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 19.15 to be $0.60 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.76 cheap at its bid price of 13.15.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 20.60 to be 0.86 rich, while MFC.PR.F resetting at +141bp on 2016-6-19, is bid at 14.02 to be 1.01 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.47 to be $1.10 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 15.65 and appears to be $0.83 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 19.05, looks $0.83 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.15 and is $0.57 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.87%, with no outliers. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -0.97% and other issues averaging -0.67%. There are four junk outliers above 0.00% and one below -2.00%.

Click for Big

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

There are more rumblings about Toronto’s housing market:

In a new quarterly forecast on the housing market, Canada Mortgage and Housing Corp. said it saw scant evidence of serious problems in the Canadian housing market over all, but warned that home prices are now outstripping economic fundamentals in 11 out of 15 major markets and that four cities – Toronto, Winnipeg, Regina and now Saskatoon – face serious headwinds because of high prices and a surge in the supply of new homes under construction.

CMHC previously warned in August that the housing market in the Greater Toronto Area was at “high risk” for a correction amid soaring home prices that have outstripped income growth, along with a glut of unsold condos. Since then, resale prices, particularly of single-detached homes, have continued to soar at double-digit annual rates. At the same time, the region is also faced with high levels of unsold, newly built condos, although the number of units under construction has fallen from earlier in the year and now appears to be manageable, the housing agency said.

It’s a bit strange talking about “the” Toronto housing market – there are at least two: condos and houses. The two segments have certainly decoupled over the past years, but whether this is evidence of an overheated market or simply a reflection of realities such as lack of possible new supply (for houses), growing congestion and increases in the relative incomes of people who can afford houses in the first place is a matter for speculation and conjecture. Everything will be perfectly obvious once it has happened; and the newspapers will heap accolades on the people who guessed right.

It was another mixed day for the Canadian preferred share market in a pattern that is becoming familiar, with PerpetualDiscounts up 39bp, FixedResets off 12bp and DeemedRetractibles gaining 23bp. The Performance Highlights table is relatively manageable today, but still of inordinate length considering the overall market activity when compared to more normal times. Volume was above 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 19.00 to be $0.66 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.85 cheap at its bid price of 12.93.

Click for Big

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 20.14 to be 0.97 rich, while MFC.PR.J resetting at +261bp on 2018-3-19, is bid at 20.08 to be 1.14 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.46 to be $1.36 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 20.00 and appears to be $0.87 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 19.01, looks $0.75 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 14.05 and is $0.48 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.84%, with no outliers. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -1.03% and other issues averaging -0.45%. There are four junk outliers above 0.00% and one below -2.00%.

Click for Big

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

Today’s news was the FOMC release:

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.
…
Voting against the action was Jeffrey M. Lacker, who preferred to raise the target range for the federal funds rate by 25 basis points at this meeting.

Jeanna Smialek of Bloomberg notes:

The Fed removed a line from September’s statement saying that global economic and financial developments “may restrain economic activity somewhat,” saying Wednesday only that the central bank is monitoring the international situation. The committee also added a reference to the possibility of increasing the rate “at its next meeting” based on “realized and expected” progress in reaching goals.

“The Fed is clearly signaling that the default plan is to raise rates in December,” said Dean Maki, chief economist at Point72 Asset Management in Stamford, Connecticut. “It signals that something needs to prevent them from hiking in December rather than that something needs to happen for them to raise.”

And clearly, a lot of players agreed with that analysis … at least, for today:

Traders see a 46 percent chance that the central bank will raise its benchmark rate from near zero at its next meeting, according to data compiled by Bloomberg. That’s up from 37 percent before policy makers said Wednesday that they kept the target unchanged and planned to assess whether to lift it in December. The calculation assumes the effective fed funds rate averages 0.375 percent after the first hike.

Deutsche Bank has provided a lesson to all bank dividend worshippers:

Deutsche Bank AG said it plans to suspend dividends for two years as co-Chief Executive Officer John Cryan seeks to improve capital levels and returns by cutting costs.

The bank, which has paid a dividend since Germany’s postwar reconstruction, plans to recommend resuming payouts from fiscal year 2017, Deutsche Bank said in a statement from Frankfurt on Wednesday. The bank wants to lift its common equity Tier 1 ratio, a key measure of financial strength, to at least 12.5 percent by the end of 2018.

The Canadian Securities Administrators have released a report by Prof. Douglas Cumming titled A Dissection of Mutual Fund Fees, Flows, and Performance which has attracted the usual outrage from the usual suspects:

The report, coupled with the regulatory changes outlined in CRM2, is expected to put additional pressure on advisers to consider switching from a commission-based business model to fee-based practices.

Currently, 32 per cent of advisers say investors question their fees, according to research by Accenture. With the investment landscape starting to shift, the number of advisers moving to a fee-based platform will start to rise, says Kendra Thompson, Accenture’s North America lead for Wealth and Asset Management Services.

Sadly, what has not yet been investigated is whether investment outcomes on an investor basis are better or worse with a direct payment model; that’s the crucial part. Joe Lunchbucket will not pay his advisor to do nothing; therefore, he will have to go to a robo-advisor if he wants any advice at all, which he doesn’t (he’ll just buy a GIC). And, says the report:

Funds that sell more through affiliated dealers tend to perform worse.

Regression analyses comparing across funds and over the sample period indicate that funds which receive higher levels of affiliated dealer flows experience lower future alpha on average. Funds that were in the top quartile in terms of receiving affiliated dealer flows on average experienced a reduction in future monthly alpha by 0.2% relative to those funds that did not receive any affiliated dealer flows. The regression analyses indicate similar findings for stand-alone funds that can be purchased directly, and for fund-of-funds that can and cannot be purchased directly, but there were some differences in these effects at different points in time.

And why should advisors be competent anyway? This is Canada. Competence doesn’t matter:

The Quebec government and its giant pension fund are coming to the rescue of Bombardier Inc. with a significant investment in its C Series airliner program, a move designed to soothe investor fears over the plane maker’s cash situation and get the jet to market.

Quebec’s Liberal government and the Caisse de dépôt et placement du Québec will together commit more than $1-billion to Bombardier in an announcement expected Thursday morning ahead of the company’s latest earnings report, said one person with knowledge of the situation. The exact amount remained unclear. “You can’t move the needle with less than that,” the person said.

We can all sleep sounder in our beds knowing that anti-terrorism laws are having their intended effect:

J. Dennis Hastert, the former speaker of the House, pleaded guilty on Wednesday to trying to evade federal banking laws, telling a district judge here that he had known what he was doing was wrong.

The plea brought a quick, quiet finish to a proceeding that had startled many in Washington who once knew Mr. Hastert as one of the nation’s most powerful leaders, and in Yorkville, Ill., his rural hometown, who remembered Mr. Hastert as their winning high school wrestling coach.

Prosecutors said they believed that federal guidelines called for a sentence of up to six months in prison. But the judge, Thomas M. Durkin of Federal District Court, indicated that he would not decide on Mr. Hastert’s punishment before reading a presentencing report. Sentencing was scheduled for Feb. 29.

Mr. Hastert told the judge why he had structured bank withdrawals in an attempt to avoid detection. “I didn’t want them to know how I would spend the money,” he said. Asked whether he understood at the time that his conduct was wrong, he said yes.

Well, OK, Hastert may not exactly be a terrorist. Not technically, if you want to get pedantic about it, like some of those effete elites. But being a blackmail victim is pretty close to being a terrorist, right? Indistinguishable for all practical, real-world, common-sense purposes. It just shows the need for more intrusive laws and a larger budget for our wise masters in the security forces.

And here’s a great story to finish off – drones ‘n’ guns:

A judge on Monday decided that William Merideth, the Kentucky, US, man who got busted for shooting down a drone that had been flying over his property, had a right to take that thing out.

The hearing, in Bullitt County, lasted just over 2 hours.

The incident happened in July.

Merideth’s sunbathing daughters had come in from the back garden to tell their father about a drone flying overhead.

After police arrested Merideth for taking the drone out with his shotgun and three blasts of Number 8 birdshot, he claimed that the drone’s operator, neighbor David Boggs, was violating his privacy by hovering his drone over Merideth’s property and spying on his family.

Police in the town of Hillview arrested Merideth and charged him with wanton endangerment and criminal mischief for firing his gun within city limits.

It was another mixed day for the Canadian preferred share market, with PerpetualDiscounts up 34bp, FixedResets off 13bp and DeemedRetractibles gaining 14bp. The Performance Highlights table is its usual enormous self. Volume was well above average.

PerpetualDiscounts now yield 5.71%, equivalent to 7.42% interest at the standard equivalency factor of 7.42%. Long corporates now yield about 4.3%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 310bp, a significant narrowing from the 320bp reported October 21.

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 19.00 to be $0.58 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.79 cheap at its bid price of 12.96.

Click for Big

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 20.09 to be 0.87 rich, while MFC.PR.F resetting at +141bp on 2016-6-19, is bid at 13.85 to be 1.13 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.75 to be $1.30 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 20.50 and appears to be $1.14 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 19.28, looks $0.93 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 14.02 and is $0.57 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.79%, with no outliers. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -0.97% and other issues averaging -0.43%. There are four junk outliers above 0.00% and one below -2.00%.

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

Forbes has a nice piece on the Big Pharma / regulatory complex in the States:

Shkreli, if you’ve been trapped on Mars eating potatoes, gained Internet opprobrium when his company, Turing Pharmaceuticals, raised the price of Daraprim, an old drug used to treat toxoplasmosis in AIDS patients, by 5,000% to more than $750 a pill. Yesterday, the Internet lit up when another small drugmaker, Imprimis Pharmaceuticals of San Diego, said that it would make its own version of Daraprim available for just $1 a pill, cheaper than it was before.
…
In February 2011, a company called KV Pharmaceutical got approval from the Food and Drug Administration for a drug called Makena to prevent pre-term birth. Up until that point, doctors had used progesterone-containing drugs made by compounding pharmacies that produce medicines on an as-needed basis. (Simple example: your two-year-old needs an antibiotic pill turned into syrup.) The compounded progesterone cost $15, or $250 per course. But suddenly, because of the FDA approval, all those compounded drugs were illegal — because they’d never been approved. And KV was going to charge $1,500 per injection, or $25,000 per treatment. That’s a 10,000% price increase.

Here’s a bit more colour on the Fed and the Phillips Curve:

For Yellen, the six million people … working part-time because the economy isn’t strong enough, plus the more than 600,000 who’ve become so discouraged about prospects that they’ve stopped looking for a job, signal interest rates can stay low for longer.

Yellen’s focus on the under-employed is steering monetary policy toward a bold experiment: The Federal Open Market Committee will use the big, blunt instrument of low interest rates to push the jobless level low enough to pull more labor-force quitters and part-timers back into full-time work.

The hope is that it will kick-start a virtuous cycle of investment, higher productivity and better pay that will heal the vestiges of the worst recession since the Great Depression.

It’s a “new view of the reach of monetary policy,” said Laurence Meyer, who served on the Fed’s Board of Governors with Yellen in the 1990s. It “goes against everything I taught at the university for 27 years.”

Traditional economics says that, in the long run, monetary policy influences prices, not the size of the labor force, which is determined by long-term forces including population growth.

Should the Fed stimulate enough demand for labor to put a dent in the underemployed, it “would be a fantastic achievement,” says Meyer, and “that might be a gamble worth taking.” The biggest risk is that inflation will exceed the central bank’s 2 percent target by “more than a little,” he said.

The whole conundrum also reflects on the Fed’s dual mandate (low inflation / strong economy), so it will be most interesting to learn how it all turns out.

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CU Inc. issued some forty-year paper today:

CU Inc. announced today that it will issue $250,000,000 of 4.211% Debentures maturing on October 29, 2055, at a price of $100.00 to yield 4.211%. This issue was sold by RBC Dominion Securities Inc., BMO Nesbitt Burns Inc., TD Securities Inc., Scotia Capital Inc. and CIBC World Markets Inc. Proceeds from the issue will be used to finance capital expenditures, to repay existing indebtedness, and for other general corporate purposes of ATCO Electric Ltd. and ATCO Gas and Pipelines Ltd.

This is interesting because one of their preferred share issues is CIU.PR.A, which closed at 20.37-99 yesterday to yield 5.75%-53. This is the interest-equivalent of 7.48% at the bid (at the standard conversion factor of 1.3x), which implies that the Seniority Spread on this particular issue is about 337bp – very high, and illustrative of just how wide this spread has become lately. Assiduous Readers will recall that this Spread (on an index-index basis) was 320bp on October 21.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 34bp, FixedResets off 24bp and DeemedRetractibles gaining 14bp. The Performance Highlights table is its usual enormous self. Volume was very high.

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 19.00 to be $0.51 rich, while TRP.PR.A, resetting 2020-12-31 at +192, is $0.51 cheap at its bid price of 15.56.

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Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 19.87 to be 0.79 rich, while MFC.PR.F resetting at +141bp on 2016-6-19, is bid at 14.05 to be 0.78 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 17.00 to be $1.20 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 20.80 and appears to be $1.35 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 19.51, looks $0.89 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 14.25 and is $0.48 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.87%, with no outliers. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -0.99% and other issues averaging -0.47%. There are three junk outliers above 0.00% and two below -2.00%.

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

John Heinzl of the Globe penned a paen to FixedResets titled Have rate-reset preferreds hit bottom? Maybe that included some interesting information regarding cash flows:

All three ETFs have been attracting a lot of new money from investors recently. According to a CIBC report, ZPR received inflows of about $34.8-million over the past week – the highest among all Canadian ETFs. CPD was in third spot, with inflows of $26.7-million, and HPR was sixth, with $12.4-million of new funds.

Meanwhile, the recently independent CI Financial has scooped up First Asset:

CI Financial Corp. (TSX: CIX) announced today that it has reached an agreement to acquire 100% ownership of First Asset Capital Corp.

First Asset, which operates through its subsidiary First Asset Investment Management Inc., is a Toronto-based, privately owned investment firm with approximately $3 billion in assets under management. The company is a leader in providing actively managed and factor-based ETFs to the Canadian marketplace, and it also offers a suite of mutual funds and closed-end funds.The transaction, which is subject to regulatory approval, is expected to close by December 31, 2015. Terms were not disclosed.

First Asset is the sponsor of Preferred Share Investment Trust, which has had disappointing performance despite a 28% weighting in corporate bonds (as of September 30).The manager is Aston Hill, which has had its own problems lately as reported on July 20.

Neil Irwin of the NYT has a nice piece on the Phillips Curve:

The idea of the Phillips curve has been under attack almost since William Phillips, the aforementioned New Zealander, wrote his 1958 paper “The Relation Between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957.”

The most crude versions of the Phillips curve have indeed, in recent decades at least, been nearly useless. Any attempt to estimate it requires a researcher to decide what measure of employment to use, what measure of inflation and what time lags to assume, among other choices. So there are nearly as many versions of the Phillips curve as there are researchers who study it.

If you simply look at the unemployment rate in the United States versus the Consumer Price Index, excluding volatile food and energy prices for every year since 1958, there is nearly no statistical relationship at all, just a jumble of dots. (A best-fit line actually points the wrong direction, correlating higher unemployment with higher inflation, albeit very weakly.)

If you take only subsets of that period, the relationship looks stronger. For example, research from the Federal Reserve Bank of Minneapolis shows a fairly clear (negative) correlation between unemployment and inflation from 1977 to 1990, but suggests that relationship basically disappeared in the 1990s and was barely evident in the first decade of the 2000s. But in some ways an ever shifting curve raises more questions than it answers.

And there is another indication of the US higher education scam:

In 2006, Congress extended the federal Direct PLUS Loan program to allow a graduate or professional student to borrow the full amount of tuition, no matter how high, and living expenses. The idea was to give more people access to higher education and thus, in theory, higher lifetime earnings. But broader access doesn’t mean much if degrees lead not to well-paying jobs but to heavy debt burdens. That is all too often the result with PLUS loans.

The consequences of this free flow of federal loans have been entirely predictable: Law schools jacked up tuition and accepted more students, even after the legal job market stalled and shrank in the wake of the recession. For years, law schools were able to obscure the poor market by refusing to publish meaningful employment information about their graduates. But in response to pressure from skeptical lawmakers and unhappy graduates, the schools began sharing the data — and it wasn’t a pretty picture. Forty-three percent of all 2013 law school graduates did not have long-term full-time legal jobs nine months after graduation, and the numbers are only getting worse. In 2012, the average law graduate’s debt was $140,000, 59 percent higher than eight years earlier.

US prosecutors are preparing another sacrifice to the god of Political Expediency:

Prosecutors contend Michael Coscia, the principal of Panther Energy Trading LLC, placed orders he didn’t intend to fill to manipulate prices in a scheme that raked in illegal profits of about $1.4 million over three months. Coscia, indicted last year and charged with six counts of commodities fraud and six of spoofing, claims he had no intent to defraud anyone and didn’t violate the law.

The trial comes after a year of U.S. law enforcement and regulatory actions against traders who authorities allege systematically place orders they don’t intend to execute to trick the market into thinking there’s demand that doesn’t actually exist. It’s the first time jurors are being asked to apply a provision in 2010’s Dodd-Frank Act that singles out spoofing as a form of illegal market manipulation.
…
The government, for its part, wants to bar Coscia from introducing any evidence that shows ambiguity in the law or trading regulations. U.S. District Judge Harry Leinenweber issued a mixed decision on that point, giving the defense some latitude to show Coscia may have been led astray by conflicting rules.

The rules may be relevant for Coscia to show that he acted consistently with permitted market behavior and “thus did not reflect intent to defraud or cancel orders prior to execution,” the judge said.
…
If convicted of spoofing, Coscia could face as long as 10 years in prison, plus a fine of as much as $1 million for each count.
…
This type of case is going to present of challenges for the U.S. Attorney’s Office because it’s a complicated market and the conduct doesn’t necessarily appear to be wrongful because traders put in orders and cancel them all the time, said Peter Henning, a law professor at Wayne State University’s Law School in Detroit.

The prosecutors have to show intent and “that’s never easy,” Henning said. “If the government loses a couple of these cases it may be that you can’t prove spoofing is a crime,” Henning said. “Even though it’s outlawed you may not be able to prove that spoofing is illegal.”

Moody’s has released an interesting report titled Corporate Bond Market Volatility Poses Most Risk for Asset Managers:

Asset managers are most exposed to higher bond market volatility, primarily because they now hold the greatest share of outstanding corporate debt – up to 25% of the total stock in corporate bonds, from just 13% pre-crisis. Should volatility rise sharply, managers could experience fund outflows or reduced fund sales, leading to lower revenues and increasing reputational risks.
…
However, turnover rates – average daily trading volumes relative to outstanding bonds
– have declined over the last decade – falling from around 0.4% of outstanding investment-grade US corporate bonds by volume in 2006 to around 0.2% in September 2015.

Further, average trade size has declined, particularly for block trades (those with a value greater than $5 million),1 and market participants have reported a material lengthening of the time needed to ‘offload’ large positions.
…
While asset managers are largely conduits, not ‘storers’, of risk, they are still likely to be most affected by bond market volatility relative to banks and insurance companies. In a protracted market disruption, asset managers could experience fund outflows, or at least reduced fund sales, leading to lower revenues. Further, regulatory focus on asset managers’ liquidity risk management has already increased and could negatively affect the industry. The US Securities and Exchange Commission (SEC) recently voted to propose new liquidity management rules for mutual funds and exchange traded funds (ETFs). These rules include requirements that funds disclose portfolio liquidity and limit illiquid holdings such as certain fixed-income securities. Managers will incur additional costs to comply with the rules, and their funds may underperform their benchmarks owing to the performance drag of carrying more liquid assets.

In the US, asset managers’ share of outstanding corporate bond exposures has risen significantly. At the end of June 2015, mutual funds and ETFs held 25% of outstanding US corporate bonds (by volume), up from 13% pre-crisis. Since many pension and etirement funds are also under the purview of asset managers, the investment management industry’s total share of corporate bonds stood at 36% versus 21% pre-crisis). The shares of outstanding bonds held by banks, dealers and finance companies have all declined.

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It was a strong day for the Canadian preferred share market, with PerpetualDiscounts up 50bp, FixedResets winning 56bp and DeemedRetractibles gaining 25bp. The lengthy Performance Highlights table is notable for a large number of 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.B, which resets 2020-6-30 at +128, is bid at 12.76 to be $0.50 rich, while TRP.PR.A, resetting 2020-12-31 at +192, is $0.50 cheap at its bid price of 15.55.

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Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 19.56 to be 0.54 rich, while MFC.PR.I resetting at +286bp on 2017-9-19, is bid at 21.51 to be 0.73 cheap.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.95 to be $1.30 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 21.94 and appears to be $0.94 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 19.85, looks $1.12 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 14.02 and is $0.79 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.87%, with one outlier above 0.00%. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -1.08% and other issues averaging -0.45%. There are two junk outliers above 0.00% and two below -2.00%.

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

David Parkinson of the Globe points out that headline inflation may not be benign for much longer:

Statistics Canada reported Friday that the consumer price index (CPI) slipped 0.2 per cent in September from August, putting the year-over-year CPI inflation rate at 1 per cent, down from 1.3 per cent the previous month, and the lowest rate since June.
…
The energy segment of CPI slumped 4.4 per cent in September alone, as the price of gasoline tumbled nearly 8 per cent, reflecting renewed weakness in the oil market. On a year-over-year basis, gasoline is down a remarkable 19 per cent, the main driver in the 11-per-cent decline in the overall energy segment.

Without energy, the year-over-year inflation rate for the rest of Statscan’s consumer basket is 2.1 per cent. And, indeed, it has hovered at or a little above 2 per cent for more than a year now, even as the oil shock delivered a sustained blow to Canada’s overall economic health. Every major segment outside of transportation – which contains gasoline costs – has posted year-over-year inflation well north of the overall CPI reading, with a median reading of 2.5 per cent.

But here’s the thing: That energy effect, which has sucked the life out of CPI inflation for months now, will disappear within the next few months. It’s all but a statistical certainty. It was last fall that energy prices went into their tailspin, and by January they had bottomed; pretty much from here on in, the year-over-year comparisons in the energy segment are going to look much brighter.

In Europe, however, Draghi is more concerned about deflation:

On Thursday in Malta, Draghi said the committees have been given their orders again and that the ECB wanted to be “vigilant,” echoing his predecessor Jean-Claude Trichet’s preferred signal for an imminent policy change. Investors took the hint, sending the euro tumbling and German bond yields to a record low — and economists debating whether policy makers will cut rates, expand QE, do both or even more.
…
While Draghi reiterated his belief that the 19-nation currency bloc is not in deflation, or a downward spiral of prices and wages, he made clear he’s ready to act to stem what Executive Board member Peter Praet two weeks ago called a “seeping pessimism” in the euro area.

This caused an immediate uptick in my favourite statistice – the value of bonds with negative yields:

With his confirmation that policy makers discussed cutting the region’s deposit rate, Mario Draghi extended the euro area’s negative-yield universe by $190 billion.

Those comments by the European Central Bank chief on Thursday sparked a rally that left yields on German sovereign securities negative for as long as six years, and pushed Spanish and Italian two-year yields below zero. Across the currency bloc, the value of securities issued by governments at negative yields rose to $1.57 trillion, from $1.38 trillion before Draghi spoke, according to data compiled by Bloomberg. That’s equivalent to about a quarter of the market.
…
Germany’s two-year yield was little changed at minus 0.32 percent as of 4:26 p.m. London time, after earlier reaching a record-low minus 0.348 percent. The price of the zero percent security maturing September 2017 was at 100.605 percent of face value.

French two-year yields dropped to a record minus 0.292 percent on Friday, also below the current level of the deposit rate, which is at minus 0.20 percent. There are about $752 billion of securities in the euro region with yields below that rate, according to data compiled by Bloomberg, making them ineligible for the ECB’s 1.1 trillion-euro ($1.2 trillion) bond-buying plan.

Italy’s two-year yield dropped to as low as minus 0.014 percent on Friday, while Spain’s fell to as low as minus 0.02 percent.

In addition, China cut policy rates again:

China stepped up monetary easing with its sixth interest-rate cut in a year to combat deflationary pressures and a slowing economy, moving ahead of anticipated fresh stimulus by central banks from Europe to Japan and possible tightening in the U.S.

The one-year lending rate will be cut to 4.35 percent from 4.6 percent effective Saturday the People’s Bank of China said on its website on Friday, while the one-year deposit rate will fall to 1.5 percent from 1.75 percent. Reserve requirements for all banks were lowered by 50 basis points, with an extra 50 basis point reduction for some institutions.
…
The need for new growth engines was underscored by data Monday that showed the economy expanded 6.9 percent in the three months through September from a year earlier. While that beat economists’ estimates for 6.8 percent, the expansion benefited from an out-sized contribution from financial services after a surge in share trading from the year-earlier period. That prop is unlikely to endure, raising challenges to Li’s growth goal of about 7 percent this year.

Meantime, consumer inflation at about half the government’s target and a protracted slump in producer prices added room for additional easing.

This news actually weakened Treasuries:

Treasuries fell, with 10-year note yields touching a two-week high, after China’s central bank lowered its benchmark lending rate and reserve requirements for banks in an effort to curb an economic decline.

U.S. yields rose for a second day as investors see China’s efforts to address its problems as easing turmoil in emerging markets and lessening demand for haven assets.
…
The yield on the 10-year Treasury note rose six basis points, or 0.06 percentage point, to 2.09 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data, after touching its highest since Oct. 8. The price of the 2 percent U.S. security maturing in August 2025 dropped 17/32, or $5.31 per $1,000 face amount, to 99 7/32.

The move by the Chinese central bank helped bolster risk appetite, with stocks rising around the world and U.S. bond market inflation expectations rising to the highest levels in two weeks, forecasting a rate of 1.52 percent during the next 10 years.

And, all in all, the Central Bankers reclaimed their position as the Masters of the Universe:

Canadian stocks joined a global equities rally sparked by optimism central-bank stimulus will jumpstart growth.

The nation’s benchmark index rose to a two-week high, as Valeant Pharmaceuticals International Inc. halted a four-day rout. Canada’s largest lenders contributed the most to gains, while materials producers also advanced.

Central banks are reasserting dominance over the global financial markets, sparking demand for risk assets, as China’s central bank cut its benchmark lending rate a day after the European Central Bank signaled it will consider bolstering a bond-buying program before the end of the year. Canada’s central bank held rates steady this week.

The Standard & Poor’s/TSX Composite Index rose 75.55 points, or 0.5 percent, to 13,953.66 at 4 p.m. in Toronto. The gauge posted a 0.8 percent gain in the week. It’s extended an October rally to 4.9 percent, on pace for the biggest monthly increase since 2011.

Brompton Lifeco Split Inc., proud issuer of LCS.PR.A, was confirmed at Pfd-4(high) by DBRS:

Based on the dividend yields of the underlying companies in the Portfolio and after management fees and other expenses have been paid, the dividend coverage ratio stands at 0.6 times.
…
The amount of downside protection available to the Preferred Shares as of October 15, 2015 is 34%.

Since the last review conducted on October 24, 2014, performance of the Company’s preferred shares remains stable. Quarterly Preferred Share distributions have been paid regularly since the inception of the Company in 2007. Other key rating considerations include the credit quality, volatility and diversification of the Portfolio as well as changes in the dividend policies of the underlying companies in the Portfolio.

Based on the aforementioned considerations and performance metrics, DBRS confirms the Pfd-4 (high) rating of the Preferred Shares issued by Brompton Lifeco Split Corp.

There were good solid gains in the Canadian preferred share market today, with PerpetualDiscounts winning 29bp, FixedResets gaining 24bp and DeemedRetractibles up 27bp. As has become normal, however, these figures masked a lot of churn illustrated by a lengthy Performance Highlights table. 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

Implied Volatility increased today with a good fit, but the pattern of fitting errors makes me suspect that the figure is subject to rapid change on small pricing shifts.

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.75 to be $0.45 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.34 cheap at its bid price of 13.37.

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Implied Volatility declined slightly for the MFC series today.

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 19.34 to be 0.42 rich, while MFC.PR.F resetting at +141bp on 2016-6-19, is bid at 14.00 to be 0.64 cheap.

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The fit on the BAM issues continues to be poor. Implied Volatility remained constant today, but this is a figure that’s very highly dependent on the performance of the high-spread issue BAM.PF.H.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.75 to be $1.18 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 21.60 and appears to be $0.82 rich.

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Implied Volatility declined significantly today.

FTS.PR.K, with a spread of +205bp, and bid at 19.50, looks $0.99 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 14.11 and is $0.61 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.87%, with one outlier above 0.00%. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -1.28% and other issues averaging -0.30%. There are three junk outliers above 0.00% and one below -2.00%.

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

Nothing happened today.

It looked for a long time as if there would be a significant pullback in the preferred share indices today, but the Forces of Goodness and Truth mounted a counterattack a little after 3:30pm that recouped a good chunk of the day’s losses:

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TXPL closed at 706.54. You can see a tiny little sliver of green at the extreme right-hand side of the chart, showing how the index rose 3+ points in the dying seconds of the day … at 3:58pm, the index level was 702.97.

But one must remember two very important things when looking at TXPL! First, it’s a price index and therefore of highly limited informational value. All the Royal Bank issues went ex-dividend today and this caused about 5bp divergence on the day between the Total Return index and the Price Index. Additionally, TXPL is calculated on a close/close basis; while the late rally will have causes some distortion (in that the closes will be, in general, further above the bid than otherwise), there will have been even more distortion in the prior number due to yesterday‘s wild ride. In addition, TXPL is riddled with junk, which I don’t pay much attention to. What I’m trying to say is …

It was a good, albeit mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 17bp, FixedResets up 41bp and DeemedRetractibles off 27bp. The bad part of the Performance Highlights table is dominated by insurance issues; the good part is more heterogeneous. Volume was high.

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

Implied Volatility declined to more reasonable levels today.

TRP.PR.B, which resets 2020-6-30 at +128, is bid at 12.43 to be $0.50 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.41 cheap at its bid price of 13.00.

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Implied Volatility declined slightly for the MFC series today.

Most expensive is MFC.PR.H, resetting at +313bp on 2017-3-19, bid at 22.75 to be 0.46 rich, while MFC.PR.G resetting at +290bp on 2016-12-19, is bid at 20.95 to be 0.54 cheap.

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The fit on the BAM issues continues to be poor. Implied Volatility increased a little today, but this is a figure that’s very highly dependent on the performance of the high-spread issue BAM.PF.H.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.00 to be $1.61 cheap. BAM.PF.A, resetting at +290bp on 2018-9-30 is bid at 21.50 and appears to be $0.74 rich.

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Implied Volatility remains high.

FTS.PR.K, with a spread of +205bp, and bid at 18.95, looks $1.33 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 13.50 and is $0.55 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.88%, with two outliers below -2.00%. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -1.29% and other issues averaging -0.29%. There are two junk outliers above 0.00% and three below -2.00%.

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

Top news of the day was the BoC Rate Announcement:

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

Inflation has evolved in line with the outlook in the Bank’s July Monetary Policy Report (MPR). Total CPI inflation remains near the bottom of the Bank’s target range, owing to declines in consumer energy prices. Core inflation is close to 2 per cent as the transitory effects of the past depreciation of the Canadian dollar are roughly offsetting disinflationary pressures from economic slack, which has increased this year. The Bank judges that the underlying trend in inflation continues to be about 1.5 to 1.7 per cent.
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The Bank projects real GDP will grow by just over 1 per cent in 2015 before firming to about 2 per cent in 2016 and 2 1/2 per cent in 2017. The complex economic adjustments to the decline in Canada’s terms of trade will continue to play out over the projection horizon. The weaker profile for business investment suggests that, in the near term, growth in potential output is more likely to be in the lower part of the Bank’s range of estimates. Given this judgment about potential output, the Canadian economy can be expected to return to full capacity, and inflation sustainably to target, around mid-2017.

So now it’s a return to full capacity ‘around mid-2017’. In the July announcement it was ‘the first half of 2017.’ We are approaching normalcy asymptotically.

I mentioned the ‘welfare wall’ on October 14; this is the ridiculously high effective marginal tax rate on low income earners due to clawback of benefits when they’re imprudent enough to get a slightly better job or work slightly more hours. This came to mind when I read about a pending wave of closures of slum housing:

There are currently about 1.34 million units of affordable housing created by a HUD program known as Section 8 project-based rental assistance, according to a blog post published on Wednesday by Poethig and her Urban Institute colleague Reed Jordan. More than 30 percent of those units are kept affordable by contracts that are set to expire by the end of 2017.
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Under Housing and Urban Development’s system, tenants who meet income requirements pay 30 percent of their income in rent, and HUD pays the landlord a subsidy on top of that rent. The average subsidy was $665 a month (PDF) in 2011, according to the National Low Income Housing Coalition. New York, where 33 percent of units are set to expire by 2017, has more than 123,000 units in the program; Dallas, where 47 percent of units are at risk, has about 8,800.
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The system for preserving affordable units varies from place to place. State law gives cities in Massachusetts the right of first refusal when property owners want to let a HUD contract expire, and a number of nonprofit groups and a state-affiliated agency are devoted to preserving it. In 2013, a nonprofit called Preservation of Affordable Housing paid $234 million for about 850 apartments in Boston, Cape Cod, and elsewhere in the state to prevent the units form being converted to market rate. Washington, Chicago, and other cities require landlords to notify tenants in advance of conversions and, in some cases, give them the opportunity to buy the apartment.

So basically, given that ‘tenants … pay 30% of their income in rent’ means that the housing benefit alone is worth a 30% marginal tax rate! Overtime? A new job at $1/hour more? Are you crazy?

It’s a little difficult to put numbers on the Boston project! According to a story in the Boston Globe, basically all of the 234-million is government money, either directly or through shifting the subsidy to tax credits:

Low-income residents joined government officials and investors Thursday to celebrate the renovation of six apartment buildings, a project that totaled nearly $234 million and is being touted as the state’s largest affordable housing improvement effort.
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They were all renovated with the help of a $168 million loan from MassHousing, the state’s affordable housing bank, almost $66 million in private investments that came from $8.9 million in tax credits provided by the Massachusetts Department of Housing and Community Development tax credits

I think the touted Preservation of Affordable Housing is just another government boondoggle, but it’s hard to say. They don’t publish their financials and their news page doesn’t provide any hints of their financing. Their news release regarding the Boston project shows the usual grab-bag of government hand-outs:

The financing package includes:
 MassHousing: $35.8 million construction and permanent loan and a $9.3 million bridge loan
 Mass Housing Investment Corp: $12.3 million federal low-income housing tax credit investment
 Two loans from the City of Cambridge /Cambridge Affordable Housing Trust: $1,852,286 and $2.4 million for a total City/Trust contribution of $4,252,286
 CEDAC: bridge loan of $3,700,000

I have sent them the following eMail:

Sirs,

I am curious regarding the incentive your beneficiaries have to improve their financial situation.

Has your organization done – or are you aware of – any research into the Effective Marginal Tax Rate (EMTR) faced by occupants of your subsidized units? By EMTR, I mean the impact of both direct taxation and reduction of benefits on additional income that could be earned by these clients.

Sincerely,

In an announcement sure to cause a fit of giggles, DBRS Confirms Advantaged Preferred Share Trust Units Stability Rating of STA-2 (middle). Stop snickering, Stability Ratings are supposed to reflect “the fund’s ability to generate sufficient cash to pay out a stable level of distributions on a per-unit basis over the longer term.” Good for snickers in the DBRS rating confirmation is the phrase:

The credit quality of the Portfolio remains strong: approximately 78% of the portfolio shares are rated at Pfd-3 (high) or higher.

Rather an unusual cut-off, wouldn’t you say? But … “Pfd-3(high)” allows them to include Enbridge. But heads will nod in agreement with:

As of Oct 14, 2015 the Trust has seen a 24% decline in Portfolio value compared to June 30, 2015 values. Such a decline is mainly explained by the negative investor sentiment regarding the overall preferred share market that translates into vast selling of preferred shares causing the supply exceeding the demand. The fund rating methodology does not directly address the potential price volatility of the Portfolio.

Until, of course, those wisely nodding heads realize that it doesn’t actually say anything. Some might wonder if this comment is the whole point of the confirmation, desperately asked for by the fund sponsors! “Please, give us something we can say to all our angry clients!”

Canadian preferred share investors have a new ride!

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It was another incredibly strong day for the Canadian preferred share market, with PerpetualDiscounts up 53bp, FixedResets winning an amazing 306bp and DeemedRetractibles gaining a mere 48bp. No less than fourteen issues, all FixedResets, gained over 5% on the day (bid/bid); this is a rather fun statistic, too bad I don’t get to use it more often! Volume was very extremely high.

Still, let’s keep things in perspective and remember that the TXPL (price index) is still only back to where it was in mid-August. 15Q3 was a really, really, lousy quarter. On a total return basis, performance for TXPL is below zero with a start-date of August 19. So while I’m pleased to see these impressive gains, we’ll need another few weeks of them before we can call it a good year!

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PerpetualDiscounts now yield 5.76%, equivalent to 7.49% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.3%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 320bp, a sharp reduction from the ludicrous 340bp reported October 14.

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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Implied Volatility remained constant today, above what I consider reasonable.

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.71 to be $0.60 rich, while TRP.PR.A, resetting 2019-12-31 at +192, is $0.58 cheap at its bid price of 15.15.

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Implied Volatility declined slightly for the MFC series today.

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 14.90 to be 0.71 rich, while MFC.PR.L resetting at +216bp on 2019-6-19, is bid at 18.18 to be 0.70 cheap.

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The fit on the BAM issues continues to be poor. Implied Volatility increased a little today, but this is a figure that’s very highly dependent on the performance of the high-spread issue BAM.PF.H.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.60 to be $0.90 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 21.63 and appears to be $0.69 rich.

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Implied Volatility declined again today but remains high.

FTS.PR.K, with a spread of +205bp, and bid at 18.90, looks $0.63 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.27 and is $0.47 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.87%, with one outlier above 0.00%. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -1.07% and other issues averaging -0.31%. There are two junk outliers above 0.00% and two below -2.00%.

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