PrefBlog

Nothing happened today, other than Canadian preferred share investors checking out the current value of their portfolios:

Click for Big

It was another superb day for the Canadian preferred share market (boy, when things snap back, they snap back in a hurry, don’t they?) with PerpetualDiscounts up 57bp, FixedResets winning a whopping 239bp and DeemedRetractibles gaining 38bp. It will be most interesting to see in the coming weeks whether these gains continue or vanish like fairy gold! The Performance Highlights table is, of course, enormous, with no less than eight issues (all FixedResets) up more than the 5% that usually indicates a ridiculous situation with bad quotes. Volume was, again, extremely 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 eased off again today but remains above what I consider reasonable.

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.56 to be $0.85 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.73 cheap at its bid price of 12.60.

Click for Big

The MFC series has now renormalized and the fit has returned to its usual excellence.

Most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 14.75 to be 0.27 rich, while MFC.PR.J resetting at +261bp on 2018-3-19, is bid at 19.85 to be 0.31 cheap.

Click for Big

The fit on the BAM issues continues to be poor.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.00 to be $0.90 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 20.75 and appears to be $0.81 rich.

Click for Big

Implied Volatility declined again today but remains high.

FTS.PR.M, with a spread of +248bp, and bid at 19.90, looks $0.31 expensive and resets 2019-12-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.16 and is $0.67 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 (although I had to change the scale again!). The distribution is slightly bimodal, with bank NVCC non-compliant pairs averaging -1.08% and other issues averaging -0.56%. There is one junk outlier 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?

I have often railed against the useless of regulatory make-work schemes; clearly, one of the most ridiculous is the anti-money-laundering set of regulations. I’ve quoted John Allison’s observation before, but now I’ll quote it again:

And then there was the Patriot Act, which was supposed to catch terrorists. I’ve talked to many people in government and they all do this dancing act, but the fact is there has never been a single terrorist caught and convicted because of the Patriot Act. The Act cost the banking industry more than $5 billion annually, and I would argue that no one is going to be caught. If you are dumb enough to get caught under the Patriot Act, you are going to get caught anyway. The only significant conviction of the Patriot Act was Eliot Spitzer, the governor of New York, who was convicted of soliciting prostitutes under a law designed to catch terrorists.

Since he wrote that, the authorities also seem to have caught John Hastert, who needed lots of cash because he was being blackmailed as discussed on May 28, 2015; knowing that victims of blackmail can be caught and exposed more easily and righteously should certainly cause us all to sleep better at night. But the direct human effects – beyond the financial cost for this make-work – has now been written about in a Globe story about Canadian “politically exposed persons”:

Those regulations propose a vast reach: For 20 years after the politically exposed persons (PEPs) leave office, the financial institutions will need to keep their eyes on them, their family and associates. The financial institutions’ first job is to identify the PEPs; then to assess their risk; and then, if the institutions determine the PEPs are a high risk – there is little public explanation on how the banks are expected to do this – they will need to monitor the PEPs’ account activity. The institutions will need to report suspicious activity (anything they suspect is connected to terrorism or money laundering) to a federal intelligence agency known as Fintrac, which investigates and can turn over files to the Mounties or the Canada Revenue Agency.
…
Ontario sisters Catherine and Emilie Taman both said in interviews they received mysterious phone calls from their separate banks, asking intrusive questions. (Emilie Taman is running for the New Democratic Party in an Ottawa riding in the federal election.) Catherine’s banker eventually explained why: Her mother was a foreign PEP. The Taman sisters’ mother is Ms. Arbour, who apart from being a retired Supreme Court judge is also a former international war-crimes prosecutor and a former United Nations human rights commissioner. Catherine said when she refused to answer the questions (on her mother’s advice), her account was frozen, which she discovered when she tried to use her bank card in a restaurant. A letter she provided to The Globe showed her bank asking questions such as, “From whom/where are you getting money?” “How did you accumulate your wealth/net worth?”

How the banks knew the Taman sisters were Ms. Arbour’s daughters was a mystery to all three women, but experts contacted by The Globe say a small group of private companies provide lists of foreign PEPs and their families, and banks run new customers through those computerized lists, for a fee. There are similar lists for domestic PEPs.

In a commentary published in Thursday’s Globe, Ms. Arbour calls the program a “useless bureaucratic nightmare,” and says that her children should be left alone by their bankers.

The highlight of the story is a quote from one of the piggies at the trough:

“I think corruption is growing by leaps and bounds,” Garry Clement, a former national director of the RCMP’s proceeds of crime program, said in an interview. “It’s far greater than people are willing to accept.”

I have a message for Garry Clement: I don’t give a rat’s ass what you think and neither does anybody else with half a brain. Let’s see some proof. Let’s see some proof, first that corruption is growing by leaps and bounds and second that it needs to be addressed (I don’t care about corruption in Libya, the Libyans aren’t paying me anything to look after them) and third that these regulations are the best way to fight it. Proof that can stand up in court and has been used to convict real bad guys, not pathetic victims like Spitzer and Hastert.

I mentioned the folly of UK central planners with respect to buy-to-let housing on October 1. The scheme has now attracted the ire of Institute of Chartered Accountants in England & Wales:

Britain’s leading professional accounting body, the Institute of Chartered Accountants in England & Wales, has attacked the Chancellor’s controversial new tax on buy-to-let tax as “unfair and unreasonable”.

It condemns the legislation as “unthought-through” and predicts it will cause “extreme confusion”, as well as forcing some landlords out of business, distorting the market – and even making life harder for first-time buyers.

The new tax, which was not consulted upon and which The Telegraph is campaigning against, is included within the Finance Bill currently progressing through Parliament.

It will be phased in between 2017 and 2020, and effectively removes the ability of private landlords to offset the cost of their mortgage interest before arriving at a taxable profit.
…
While the proposed tax has found popularity among tenants, the ICAEW says it could exacerbate the property crisis and make it more difficult for first-time buyers.

“The interest relief restriction will favour cash buyers who want to buy to let and may increase the competition even more at the lower end of the property market, thereby increasing prices and hindering first-time buyers.”

According to the Economist, Canadian housing is grossly overvalued, tied for most in the world (with Hong Kong) with respect to rents (89% rich) and highly ranked with respect to income (34% rich). Paul Matsiras of Moody’s claims:

“The risks are less around the rapid house price appreciation per se than the fact that, relative to incomes, homes in Toronto and Vancouver are increasingly becoming unaffordable either to own or to rent,” Moody’s economist Paul Matsiras said in his report.

“Canadian household debt has risen faster than disposable income since 2011, greatly increasing the debt burden for consumers and the risks of a pullback in spending as interest rates rise.”

He warned of difficulties as the key measure of household debt to disposable income rises, now standing at almost 165 per cent.

But fear not! In future photographs of G-7 meetings, Canada will display the best hair:

The country’s three major broadcasters — CTV, CBC and Global News — have projected a Liberal majority win. The Liberals won or were leading in 183 of the 338 House of Commons seats, with the Conservatives ahead in 98 and the New Democratic Party with 30, as of 10:36 p.m. Monday in Ottawa, according to preliminary results from Elections Canada. A party needs 170 seats for a majority.
…
The Canadian dollar fell after the networks called a Liberal victory, down 0.1 percent at 10 p.m. in Toronto to C$1.3040 per U.S. dollar, dropping for a third day. The currency has depreciated 10.9 percent against the U.S. dollar this year.

I’m very glad to see the end of the Bill C-51 boys, but I wish their replacements were led by somebody with a better claim to fame than being born. But we’ll see. Maybe we can stop obsessing about how other people dress, anyway.

Yee-haw!

Click for Big

Canadian preferred share investors were riding the bull today in the best day I can remember off the top of my head, with PerpetualDiscounts up 76bp, FixedResets winning an incredible 304bp and DeemedRetractibles gaining 35bp. The Performance Highlights table is much as you’d expect, with no less than a dozen issues – all FixedResets – gaining more than the 5% figure that usually indicates an absurdity of some kind. 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:

Click for Big

Implied Volatility declined today but remains above what I consider reasonable.

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.96 to be $0.77 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.90 cheap at its bid price of 11.95.

Click for Big

There was some normalization from Friday‘s absurd results, but MFC.PR.F is still noticeably off the line defined by the other issues.

Most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 14.52 to be 0.85 rich, while MFC.PR.L resetting at +216bp on 2019-6-19, is bid at 17.09 to be 0.51 cheap.

Click for Big

The fit on the BAM issues continues to be horrible!

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 15.25 to be $0.90 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 20.20 and appears to be $0.69 rich.

Click for Big

Implied Volatility declined substantially today but remains high.

FTS.PR.M, with a spread of +248bp, and bid at 19.55, looks $0.40 expensive and resets 2019-12-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 16.70 and is $0.78 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.67%, with no outliers. The distribution is only slightly bimodal, with bank NVCC non-compliant pairs averaging -0.85% and other issues averaging -0.41%. There is one junk outlier above 0.50% and one below -1.50%.

Click for Big

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

The Russians are bringing us new trends in financial computer hacking:

A group of Russian hackers infiltrated the servers of Dow Jones & Co., owner of the Wall Street Journal and several other news publications, and stole information to trade on before it became public, according to four people familiar with the matter.

The Federal Bureau of Investigation, Secret Service and the Securities and Exchange Commission are leading an investigation of the infiltration, according to the people. The probe began at least a year ago, one of them said.

Dow Jones, in a statement, said: “To the best of our knowledge, we have received no information from the authorities about any such alleged matter, and we are looking into whether there is any truth whatsoever to this report by a competitor news organization.”
…
Information embargoed by companies and the government for release at a later time could be valuable to traders looking to gain an edge over other market participants, as could stories being prepared on topics like mergers and acquisitions that move stock prices.
…
The hack investigation shows how quickly law enforcers are shifting to a new front in insider trading: cyberspace. Market-moving, nonpublic information used to trade hands in secret meetings. Hackers are now stealing sensitive information and selling it to traders. This new vulnerability in the financial markets is challenging law-enforcement officials who are trying to keep pace with cyber-criminals’ rapidly evolving moneymaking schemes.

For would-be inside traders, business journalists and data providers are a rich target. Potentially market-moving scoops often develop in-house for days or weeks, promising intruders a long pre-publication window to mine information and execute trades. Data being held for public release at a specified time can also be a gold mine in markets where the profitably of a trade is determined in a fraction of a second.

Life got a little better for preferred share investors today:

Click for Big

It was a glorious day for the Canadian preferred share market, with PerpetualDiscounts gaining 32bp, FixedResets winning 142bp and DeemedRetractibles up 120bp. The Performance Highlights table is as lengthy as one might expect. Volume was extremely heavy.

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 a lot today but remains high.

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.50 to be $0.78 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.86 cheap at its bid price of 11.72.

Click for Big

There was an incredible drop in Implied Volatility today – and it would be near zero if the calculation wasn’t distorted by the MFC.PR.F outlier. Dropping the outlier results in a very good fit:

Click for Big

Using the all-inclusive fit, the most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 14.50 to be 1.32 rich, while MFC.PR.L resetting at +216bp on 2019-6-19, is bid at 16.32 to be 0.68 cheap.

Click for Big

The fit on the BAM issues continues to be horrible!

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 14.90 to be $0.90 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 19.30 and appears to be $0.58 rich.

Click for Big

Implied Volatility declined substantially today but remains ridiculously high.

FTS.PR.M, with a spread of +248bp, and bid at 18.60, looks $0.39 expensive and resets 2019-12-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 16.24 and is $0.56 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.45%, with no outliers. The distribution is only slightly bimodal, with bank NVCC non-compliant pairs averaging -0.58% and other issues averaging -0.26%. There are three junk outliers above 0.50% and one below -1.50%.

Click for Big

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

There are continued dovish expectations regarding the Fed’s next move:

The October rebound in global equities resumed, with U.S. stocks rising to a eight-week high amid bank earnings and growing speculation the Federal Reserve will delay raising interest rates until 2016. Treasuries fell and gold erased its loss for the year.
…
The probability of a Fed interest rate increase by the December policy meeting has dropped to 30 percent, down from 70 percent at the start of August, according to futures data compiled by Bloomberg. The slide worsened even after a gauge of U.S. core consumer prices advanced more than projected in September, while hiring data provided evidence of labor-market resilience.

My old buddy Doug Grieve, of long-time Nesbitt fame, mentioned on June 26 as becoming the manager of Lysander-Slater Preferred Share Dividend Fund, has now also been named as the manager of the Lysander-Slater Preferred Share ActivETF which has the awesome symbol PR.

Husky Energy, proud issuer of HSE.PR.A, HSE.PR.C, HSE.PR.E and HSE.PR.G, was confirmed at Pfd-2(low) by DBRS:

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Notes and Debentures rating of Husky Energy Inc. (Husky or the Company) at A (low) as well as its Commercial Paper rating at R-1 (low) and its Preferred Shares – Cumulative rating at Pfd-2 (low), all with Stable trends. DBRS believes that Husky is in a good position to ride the challenging commodity price environment among its domestic peers given (a) Husky’s relatively low leverage; (b) reasonable liquidity and no material long-term debt refinancing risk over the next three years; (c) strong earnings and cash flow contributions from the Liwan Gas Project (Liwan) offshore China and the Company’s downstream business, which are not tied directly to oil prices; and (d) the near completion of the major capital-intensive projects – Liwan and Sunrise Energy (Sunrise) – reducing capital expenditure (capex) commitments going forward. The Stable trend incorporates DBRS’s expectation that key credit metrics will weaken materially in 2015, but will remain above average among DBRS-rated investment-grade peers in Canada; however, a negative rating action could be taken if key credit metrics remain under pressure on a sustained basis.

It was a whole new world for Canadian preferred share investors today!

Click for Big

It was a very good day for the Canadian preferred share market, with PerpetualDiscounts gaining 28bp, FixedResets up 73bp and DeemedRetractibles winning 109bp. FixedResets dominated the nicer side of the Performance Highlights table. Volume was enormous.

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 today but remains high.

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.24 to be $0.93 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.66 cheap at its bid price of 11.68.

Click for Big

Implied Volatility remained at the highest level I am willing to consider today.

Most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 14.50 to be 0.91 rich, while MFC.PR.K resetting at +222bp on 2018-9-19, is bid at 16.32 to be 0.66 cheap.

Click for Big

The fit on the BAM issues continues to be horrible!

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 14.70 to be $0.90 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 19.30 and appears to be $0.69 rich.

Click for Big

Implied Volatility edged down today but remains ridiculously high.

FTS.PR.M, with a spread of +248bp, and bid at 18.09, looks $0.34 expensive and resets 2019-12-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 16.03 and is $0.46 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.55%, with no outliers after I changed the y-axis limits. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -0.85% and other issues averaging -0.14%. There are two junk outliers above 0.50%.

Click for Big

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

There was an extremely benign inflation indicator in the States today:

Wholesale prices in the U.S. declined in September by the most since the start of the year as costs fell for gasoline, food and brokerage services.

The 0.5 percent decrease in the producer-price index was the biggest since January and followed no change in August, Labor Department figures showed Wednesday. The median forecast of economists surveyed by Bloomberg called for a 0.2 percent drop. Costs were down 1.1 percent over the past 12 months.
…
Energy expenses decreased 5.9 percent in September, the most since January, after falling 3.3 percent the month before. Food prices dropped 0.8 percent after a 0.3 percent gain. The costs of eggs slumped, while beef and veal prices plunged 7.9 percent, the most since January 2004.

Wholesale prices excluding these two components unexpectedly declined 0.3 percent. The median forecast in the Bloomberg survey called for a 0.1 percent gain. Those costs were up 0.8 percent from September 2014.

Goods prices, which have fallen for three straight months, slumped 1.2 percent in September. The costs of services dropped

0.4 percent, the most since February. More than a quarter of that decrease was due to slumping costs for securities brokerage, dealing and investment advice, the Labor Department said.

After eliminating food, energy and trade services to arrive at a reading that some economists prefer because it excludes one of the report’s most volatile components, wholesale costs also decreased 0.3 percent in September. That was the biggest decline since records began in 2013

“slumping costs for … investment advice”??? This isn’t a slow-down! This is a DEPRESSION!

And retail sales were sluggish:

Consumers in the U.S. tempered purchases at retailers in September, pocketing the savings from lower fuel costs and making for a weak finish to the third quarter.

The 0.1 percent gain followed little change in the prior month that was weaker than previously reported, Commerce Department figures showed Wednesday in Washington. The median forecast of 82 economists surveyed by Bloomberg called for a 0.2 percent advance. More than half of merchant categories showed decreases.

Sluggish sales may raise concern about the staying power of consumer spending, which accounts for about 70 percent of the economy, at a time overseas demand is also cooling. While job gains and cheap fuel may help to underpin purchases, a pickup in wages remains elusive as Federal Reserve policy makers are weighing whether to raise interest rates this year.

Naturally, this led the market to believe that maybe a rate hike isn’t imminent:

First Treasuries traders were banking on September for the Federal Reserve to raise interest rates. Then they turned their focus to December. Now even March is looking like a toss-up.

The drumbeat of weaker-than-forecast global economic data continued Wednesday as September U.S. retail sales fell short of analysts’ expectations. The report came after Fed Governor Daniel Tarullo, who votes on rate decisions, said Tuesday that he doesn’t currently favor an increase in 2015, even though Chair Janet Yellen has said a move would be warranted.

Traders’ bets that the Fed will lift its benchmark by year-end have dropped to less than a one-in-three chance, and aren’t much higher for January. For March, the probability has tumbled to about 50 percent, from 65 percent a month ago. The calculation is based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.

The uncertainty may be exacerbated by a disagreement regarding a basic tenet of economics:

On Monday, Governor Lael Brainard said that global risks warranted a more cautious stance from the central bank. The next day, fellow Governor Daniel Tarullo indicated that he expects it will be appropriate to keep rates on hold through year end.

The details of their dovish commentary are much more noteworthy, as both appear to disagree with Yellen’s description of what the Fed’s reaction mechanism ought to be.

At the heart of the matter is the extent to which the progress made in achieving one part of the central bank’s mandate (full employment) portends improvement in the other part (price stability, defined as an annual inflation rate of 2 percent).

The relationship between unemployment and inflation is typically understood in terms of the Phillips Curve, which holds that there is an inverse relationship between inflation and unemployment.

Yellen’s previous remarks suggest she thinks a firming labor market will indeed lead to higher levels of inflation.
…
The governors are much more skeptical.

“I do think under these circumstances it’s probably wise not to be counting so much on past correlations—things like the Phillips Curve, which really haven’t been operating very effectively for 10 years now—and instead to really look for some tangible evidence of, for example, pickups in wages or inflation that allow us to make informed decisions based on the evidence,” Tarullo said in an interview with CNBC.

Brainard issued what appeared to be an even more direct rebuttal.

“To be clear, I do not view the improvement in the labor market as a sufficient statistic for judging the outlook for inflation,” she said. “A variety of econometric estimates would suggest that the classic Phillips curve influence of resource utilization on inflation is, at best, very weak at the moment.”

Silver Bullion Trust has fired another round in its battle with Sprott (bolding from original):

Bruce Heagle, Chair of the Special Committee of the Board of Trustees of SBT stated: “Sprott’s recent claims of an “increased offer” are illusory; in reality, nothing has changed. Their supposed “premium consideration” of $0.025 per Unit is immaterial; it represents less than 0.3% of the current value of an SBT Unit, and would be more than offset by the higher annual management fees charged by Sprott. Sprott continues to offer no meaningful premium, would charge significantly higher management fees, strip Unitholders of virtually all their governance rights and expose certain U.S. Unitholders to higher tax risk. Rejecting Sprott’s self-serving, inadequate offer and retaining your SBT Units, characterized by an industry-leading expense ratio, superior bullion security and safeguards, and a sound, tax efficient structure, is the clear choice for long-term bullion investors.”

I’ll be very disappointed when the whole thing is resolved!

Element Financial, whose preferreds were recent added to the HIMIPref™ database, is shifting strategic priorities:

Element Financial Corporation (TSX:EFN) (“Element” or the “Company”), today announced that it has initiated a series of steps that will accelerate the transformation of the Company into North America’s leading fleet management and services enterprise with complementary commercial finance operations. Specifically, the Company has initiated a process to harvest capital from its Canadian commercial & vendor (“C&V”) operations for reinvestment in both organic growth and acquisition opportunities in its core fleet management business. These opportunities include the acquisition of existing fleet management businesses and portfolios as well as fleet services companies that have the potential to drive incremental service fee income for the Company. Concurrently, the Company will optimize the scale and focus of its non-fleet businesses to complement its core fleet management operations.

Some old research done for Parliament illustrates effective marginal tax rates for low income earners:

The “welfare wall” refers to the disincentives to work created by interaction between the system of social assistance and personal income taxation in Canada. Canadians who receive social assistance and subsequently accept low-paying employment face a series of consequences that could potentially make them worse off, including: higher income and payroll taxes; new work-related expenses such as transportation, clothing and childcare; reduced income support in the form of social assistance and income-tested refundable tax credits; and loss of in-kind benefits such as subsidized housing and prescription drugs.

This welfare wall can be demonstrated by estimating an individual’s effective marginal tax rate; that is, the costs associated with the next dollar of earned income. Figure 1 shows that, under the current system of social assistance and taxation in Canada, a single parent with one child who increases his/her earnings from $0 to $10,000 would lose an estimated 78 cents of every additional dollar earned. By comparison, an increase in earnings from $40,000 to $50,000 has an effective marginal tax rate of 41%.

The effective marginal tax rate of 78% on the FIRST $10,000 of earnings is, of course, ridiculous and points out the absurdity of things like the coming Toronto proposal for income-based pricing of bus passes, discussed yesterday, which will only increase the effective marginal rate by withdrawing subsidies as income increases. One suggestion that has some solid thinking behind it is for substantial refundable tax credits to replace social programmes:

The current tax system contains more than $80-billion of tax credits which are non-refundable, which means that low-income Canadians who do not have sufficient taxes owing cannot benefit from them in the same fashion as higher-income taxpayers. While tax filers will be most familiar with the basic personal amount at the top of Schedule 1 of the federal income tax form, other credits for age, eligible dependents, employment and education are also important.

Our recent research paper evaluates the effect of converting these non-refundable credits to refundable credits in the fashion of existing credits such as the Goods and Services Tax Credit and the Working Income Tax Credit and the recently replaced National Child Benefit. A refundable credit simply converts any excess between the credit and taxes owing to a refundable benefit, allowing low-income tax filers to realize the benefits of these tax credits that already accrue to higher-income tax filers.

The paper, titled THE IMPACT OF CONVERTING FEDERAL NON-REFUNDABLE TAX CREDITS INTO REFUNDABLE CREDITS by Wayne Simpson and Harvey Stevens is summarized:

With economic inequality on the rise in Canada, the federal government needs to consider innovative solutions. One possibility for improving the tax-transfer system involves refundable tax credits (RTCs). Making all tax credits refundable wouldn’t require Ottawa to introduce new tax measures; the Canadian tax system already contains a mix of RTCs and NRTCs, so the government could simply continue its practice of designing tax credit programs to be refundable.

Using Statistics Canada’s Social Policy Simulation Database and Model, this paper examines the impacts and cost of converting NRTCs to RTCs, with and without an income exemption equal to 25 percent of the before-tax low-income standard for a census family, the Census Family Low-Income Line.

Under the Option Without Exemption (OW/OE), RTC recipients are taxed at a single rate of 15 percent, regardless of family size, right up to the Line. Under the Option With Exemption (OWE), RTC recipients are taxed at zero percent up to 25 percent of the Line and at a single rate of 20 percent, regardless of family size, up to 100 percent of the Line.

The incremental cost of switching NRTCs to RTCs under the OW/OE is $6.6 billion, as additional benefits are provided to 6.4 million families — slightly less than 37 percent of all families. The cost of the OWE is $7.2 billion, as benefits flow to slightly more families — 6.45 million. However, the percentage of benefits reaching low-income families is much higher under the OWE (69 percent vs. 49 percent). Additionally, the OWE provides an average of nine percent more RTC benefits to low-income tax filers, making it clearly the superior option for poverty reduction. Moreover, the paper shows that alternative conversion schemes that set benefit reduction rates to differ by family size can further increase the benefits to low-income families at a lower overall cost.

Such changes would elicit a labour-supply response in terms of a reduction in hours worked, and while the effect is smaller under the less expensive OW/OE, the difference between the two options is slight.

This paper simulates the conversion of NRTCs to RTCs in comprehensive detail, besides providing practical advice on how such a shift would be funded. It offers valuable food for thought on an issue that is increasingly critical to Canadian society.

“Trigger warnings” have become a popular bone of contention at universities and I’ve decided to experiment with their use myself. So, before you proceed to read about the day’s market action:

Click for Big

It was yet another crummy day for the Canadian preferred share market, with PerpetualDiscounts and FixedResets both down 59bp and DeemedRetractibles losing 80bp. The Performance Highlights table is … well, you know. It’s the Performance Highlights table. It highlights performance. Of particular interest today though, what the amount of churn; some issues did really, really well! Volume was very extremely awfully high – this is like tax-loss selling season! And perhaps it is!

PerpetualDiscounts now yield 5.90%, equivalent to 7.67% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.25%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 340bp, a number I didn’t really expect to see ever again, a significant widening from the 330bp reported October 7.

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 today with the normalization of the bid on TRP.PR.D, but remained ridiculously high.

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 16.50 to be $0.63 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.75 cheap at its bid price of 11.33.

Click for Big

Implied Volatility shot upwards today, propelled by excellent relative performance of MFC.PR.F, which is featured on the Performance Highlights table.

Most expensive is MFC.PR.F, resetting at +141bp on 2016-6-19, bid at 14.40 to be 1.04 rich, while MFC.PR.K resetting at +222bp on 2018-9-19, is bid at 15.86 to be 0.96 cheap.

Click for Big

The fit on the BAM issues continues to be horrible!

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 14.60 to be $0.90 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 19.19 and appears to be $0.86 rich.

Click for Big

Implied Volatility edged up again today to the maximum level I am willing to discuss.

FTS.PR.H, with a spread of +145bp, and bid at 13.70, looks $0.16 expensive and resets 2020-6-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 16.01 and is $0.42 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.51%, with two outliers above 0.00% and none below -2.00%. The distribution is bimodal, with bank NVCC non-compliant pairs averaging -0.82% and other issues averaging -0.07%. There are three junk outliers above 0.00%.

Click for Big

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