PrefBlog

Nothing happened today.

It was a moderately good day for the Canadian preferred share market today [for a change!] with PerpetualDiscounts up 13bp, FixedResets gaining 12bp and DeemedRetractibles winning 32bp. The Performance Highlights table is dominated by winners. 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 19.50 to be $1.27 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.97 cheap at its bid price of 12.80.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 20.53 to be 0.36 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 22.69 to be 0.26 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.19 to be $1.01 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 20.75 and appears to be $0.68 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 19.16, looks $1.04 expensive and resets 2019-3-1. FTS.PR.M, with a spread of +248bp and resetting 2019-12-1, is bid at 19.83 and is $0.44 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.60%, with no outliers. There is one junk outlier 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?

I will be very disappointed if this is the end of the Silver-Sprott battle:

Today, Silver Bullion Trust (TSX:SBT.UN) (C$) (TSX:SBT.U) (US$) (“SBT”) entered into a new definitive agreement with Purpose Investments Inc. (“Purpose”), regarding the conversion of SBT into a silver bullion exchange-traded fund (“ETF”) managed by Purpose and Silver Administrators Limited. The proposed ETF conversion, which is subject to unitholder approval, has the unanimous support of your Independent Trustees and represents an exciting opportunity for SBT unitholders.

Purpose has current assets under management of over $1.4 billion across 17 funds and is one of Canada’s most experienced ETF managers, with significant experience in managing and marketing bullion funds. Purpose’s predecessor company, Claymore Investments, which was acquired by BlackRock in 2012, managed the Claymore Silver Bullion Trust, which was successfully converted into an ETF in 2012. For further information on Purpose, we encourage unitholders to visit their website at www.purposeinvest.com.

Andrew Jackson, of Carleton University and the Broadbent Institute, is making much more sense now that he no longer works for the Canadian Labour Congress! He’s written a piece for the Globe titled Global slump should be addressed by this monetary taboo, which includes a paen to micromanagement:

As Adair Turner shows in his new book, Between Debt and the Devil, private-sector debt soared as a share of GDP in most advanced economies after the 1980s, fuelling unproductive, debt-financed household consumption, housing bubbles and wasteful financial speculation.
…
Adair Turner, former chief regulator of British banks, argues that we need to reign in the growth of unproductive private debt by imposing tighter controls on banks through much higher capital requirements and by imposing limits on borrowing, such as maximum loan-to-value mortgage rules. Banks should, he argues, be pushed to support real business investment as opposed to highly leveraged financial speculation and household consumption.

Mr. Jackson’s egalitarian impulses were, no doubt, responsible for his refusal to use Lord Turner’s honorific!

The Grauniad’s review provides more detail:

When capitalism works, debt channels money into factories, machinery and know how. There will be bumps along the road, but the economy will grow. In the run up to 2007, however, the made-up money was not going into anything productive, but rather inflating the price of pre-existing homes. Indeed, Turner locates the roots of the crisis in the mismatch between a limited supply of urban land, and the limitless potential to finance rising demand for it. For individual banks, it can make sense to lend for unrealistically costly houses, since mortgaged families will sacrifice everything else to keep up payments and avoid ending up on the streets. For the economy as a whole, however, concentrating debt in property is a disaster, draining resources from worthwhile investment and wagering collective prosperity on a one-way bet. Worse, while debt-fuelled bursts of real activity will push up inflation, when all the money is in property that warning light never flashes. We’re all left exposed: unsafe as houses.
…
To kick our addiction to debt, Turner argues, we can and should restrain the banks, for example by forcing them to hold more reserves. We can and should also devise new ways to privilege productive investment over property speculation. Turner, who became chair of the Financial Services Authority days after Lehman Bros toppled, puts great emphasis on explaining how regulators could do all this practically, a dimension that gives the book extra importance, albeit at the occasional expense of readability. Every so often you yearn for him to say “posh houses”, rather than “locationally desirable real estate”.

The Independent offers some criticism:

Turner is admirably fearless. He goes where his fundamental analysis tells him to go. But is his underlying thesis right? A weakness of the book is that Turner doesn’t fully engage with the counter evidence. For instance, there are signs that small firms in the UK have been turned down for loans by their banks, or at least discouraged from seeking credit – an indication that lack of credit supply is part of the problem. Demand for mortgages in th UK seems to have bounced back, despite still elevated household debt to income ratios here in Britain.

There are also other plausible explanations, beyond excessive debt, for the weak recoveries across the world, not least the thesis of secular stagnation. Perhaps the incubus squatting on the chest of our economies is not a debt overhang, as Turner asserts, but slow growth brought on by demographic trends. Or maybe its dunderheaded fiscal austerity imposed by governments that’s primarily to blame.

Lord Turner’s previous notable production was highlighted on PrefBlog when UK FSA Publishes Turner Report on Bank Regulation with more commentary in HM Treasury Responds to Turner Report. It looks like it could be a decent book … I might buy it!

Oh, and speaking of houses:

Properties in Canadian cities don’t command New York prices but Canada is definitely rising in the ranks, Mr. Henry says.

Juwai.com crunched its latest numbers for The Globe and found that, within Canada, Chinese buyers of sumptuous properties have shifted their preference toward Toronto and away from Vancouver.

The average price for property viewed by Chinese property hunters in Toronto has increased over the past two years as the average price in Vancouver has declined, according to Juwai.com. The two cities have switched roles, with Toronto now attracting a higher-priced buyer mix than Vancouver.

In five of the past six months, Juwai.com’s users have searched for a higher average price in Toronto than in Vancouver.

In October, for example, the average search price in Toronto was $1,963,278, compared with $1,268,194 in Vancouver. In October of 2014, the average search price in Toronto was $1,582,300 and, in Vancouver, $1,840,999.

Brompton’s Life & Banc Split Corp., proud issuer of LBS.PR.A, was confirmed at Pfd-3(low) by DBRS:

DBRS Limited (DBRS) has today confirmed the rating on the Preferred Shares issued by Life & Banc Split Corp. (the Company) at Pfd-3 (low). In October 2006, the Company raised gross proceeds of $300 million by issuing 12 million Preferred Shares (at $10 each) and an equal number of Class A Shares (at $15 each). Since then, the Company has completed several additional treasury offerings. The final redemption date for both classes of shares issued was originally November 29, 2013, but was extended to November 29, 2018.
…
The performance of the Portfolio has experienced some volatility over the past year, with the downside protection fluctuating between 41.8% and 52.0% from November 2014 to November 2015. As of November 19, 2015, the downside protection available to the Preferred Shares is approximately 45.4% and the dividend coverage ratio is about 1.1 times. The Pfd-3 (low) rating of the Preferred Shares is based primarily on the downside protection available and the additional protection provided by the asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.

It was yet another mixed, mostly negative, bad-for-FixedResets day for the Canadian preferred share market, with PerpetualDiscounts off 2bp, FixedResets down 23bp and DeemedRetractibles gaining 2bp. The Performance Highlights table is lengthy. Volume was very high.

PerpetualDiscounts now yield 5.64%, equivalent to 7.33% interest at the standard conversion factor of 1.3x. Long Corporates now yield 4.33%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 300bp, a widening from the 290bp reported November 4.

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 19.38 to be $1.23 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.89 cheap at its bid price of 12.85.

Click for Big

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 19.74 to be 0.33 rich, while MFC.PR.M, resetting at +236bp on 2019-12-19, is bid at 20.20 to be 0.20 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 15.95 to be $1.14 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 20.58 and appears to be $0.63 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 18.97, looks $0.77 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.20 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 -0.60%, with no outliers. There is one junk outlier 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 UK government is bringing micromanagement of the economy to new levels:

Buy-to-let landlords have been hit by the second major tax hike in less than a year, as Chancellor George Osborne took action against the “growing crisis of home ownership” in Britain.

Property investors will be hit by a 3pc rise in stamp duty from 1 April 2016, and the surcharge will also apply to people buying second homes. It means the tax bill on a buy-to-let property costing £250,000 will jump from £2,500 to £8,800.
…
Mr Osborne also announced a London Help to Buy initiative, which will allow more young people to get on the housing ladder in the capital, where the average house price for a first-time buyer is now an eye-watering £385,000. The scheme will offer buyers with a 5pc deposit a loan of up to 40pc of the value of a new build home, interest-free for five years.

It was another mixed, mostly negative day for the Canadian preferred share market, with PerpetualDiscounts off 12bp, FixedResets down 44bp and DeemedRetractibles gaining 20bp. The Performance Highlights table is mostly negative, but still showing a lot of churn. Volume was 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

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 19.22 to be $1.19 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.87 cheap at its bid price of 12.80.

Click for Big

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 22.67 to be 0.23 rich, while MFC.PR.K resetting at +222bp on 2018-9-19, is bid at 19.25 to be 0.42 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.04 to be $1.16 cheap. BAM.PF.G, resetting at +284bp on 2020-6-30 is bid at 20.91 and appears to be $0.89 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 18.85, looks $0.65 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 18.16 and is $0.65 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.35%, with one outlier above +0.50%. There is one junk outlier 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 junk market is getting nervous:

Investors in the debt of junk-rated companies are showing little patience for even the slightest whiff of bad news as they seek to shield themselves from the market’s first annual loss since 2008. With the Federal Reserve poised to lift interest rates next month and a deepening commodities slump stirring fears that earnings growth will be squeezed, price swings in the market are intensifying.
…
Investors are shunning the lowest-rated junk bonds. That is underscored by the extra yield that investors are demanding to hold CCC rated credits relative to those rated BB. This has jumped to the most in six years.
…
One sometimes-overlooked element that’s contributing to the big price swings is the increasing concentration among investors, according to Stephen Antczak, head of credit strategy at Citigroup Inc. Mutual funds, insurance companies and foreign investors make up 68 percent of corporate bondholders compared with 52 percent at the end of 2007.

That means that if one mutual fund investor wants to sell some holdings, there isn’t another one that’s ready to step in. That’s because they typically have similar mandates from investors and often need to sell for the same reasons.

“A less diverse group of investors hold a lot more bonds,” Antczak said. “The difference between incremental buyer is more now than it used to be. It takes a bigger move to get people interested.”

Click for Big

Repsol, which recently purchased Talisman Energy, has not seen much joy from its acquisition:

Repsol SA reported a 62 percent decline in third-quarter earnings as lower crude prices countered improved refining performance. The shares slumped the most in two weeks.

Adjusted net income fell to 159 million euros ($171 million) from 415 million euros a year earlier, Spain’s largest oil company said Thursday. That missed the average 201.6 million-euro estimate of 18 analysts surveyed by Bloomberg. It reported a net loss of 221 million euros after taking charges at units including gas and power.

Repsol is among international oil producers to suffer from a 40 percent decline in the price of Brent crude over the past year. Like its peers, it has sold assets and cut investments to weather the slowdown as a global supply glut persists. The Madrid-based company has also seen debts mount after acquiring Canada’s Talisman Energy Inc. for $13 billion in May.
…
Repsol last month unveiled a five-year plan to sell 6.2 billion euros of assets and reduce investments by as much as 38 percent as it deals with higher debt and the plunge in crude prices. The company announced more than $1 billion in asset sales in the third quarter, part of which was included in the five-year target.

So now they’ve announced a debt tender offer:

Talisman Energy Inc. (the “Offeror”) announced today that it has commenced a tender offer (the “Offer”) to purchase for cash up to $750 million aggregate principal amount (the “Maximum Tender Amount”) of the 5.85% Senior Notes due 2037 (CUSIP No. 87425E AJ2), 5.50% Senior Notes due 2042 (CUSIP No. 87425E AN3), 6.25% Senior Notes due 2038 (CUSIP No. 87425E AK9), 7.25% Debentures due 2027 (CUSIP No. 87425E AE3) and 5.75% Senior Notes due 2035 (CUSIP No. 87425E AH6) issued by the Offeror (collectively, the “Securities”). The amounts of each series of Securities that are purchased will be determined in accordance with the acceptance priority levels specified in the table below and on the cover page of the offer to purchase dated November 24, 2015 (the “Offer to Purchase”) in the column entitled “Acceptance Priority Level” (the “Acceptance Priority Level”), subject to the proration arrangements applicable to the Offer.

As with today’s coercive DC.PR.C exchange offer, they’re offering a premium for early tenders:

Holders of the Securities that are validly tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on December 8, 2015 (the “Early Tender Date”) and accepted for purchase will receive the applicable Total Consideration, which includes an early tender premium of $50.00 per $1,000 principal amount of the Securities accepted for purchase (the “Early Tender Premium”).

S&P rates Repsol’s bonds at BBB- with a negative watch.

Rona Inc., proud issuer of RON.PR.A, was confirmed at Pfd-4[high] by DBRS:

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of RONA inc. (RONA or the Company) at BB (high), and the Preferred Shares rating at Pfd-4 (high). All trends are Stable. The Recovery Rating on the Senior Unsecured Debt remains RR3. The confirmation reflects RONA’s solid operating performance (growth in same-store sales and margin expansion) through the end of Q3 F2015 in the face of macroeconomic headwinds in certain regions of Canada and its reasonable leverage levels, balanced by rising balance-sheet debt used to finance share repurchases and complete the acquisitions of the 20 franchise stores in its network.
…
Despite the increase in balance-sheet debt, RONA’s credit risk profile and leverage metrics should remain within the range considered acceptable for the current rating over the medium term (i.e., lease-adjusted debt-to-EBITDAR below 4.0 times (x) and lease-adjusted EBITDA coverage above 4.5x).

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 2bp, FixedResets off 63bp and DeemedRetractibles up 19bp. I note that the TXPL total return index now stands at 812.11, down from the October month-end figure of 814.94 … so all the gains of that wondrous first week of November have now evaporated. Easy come, easy go! The Performance Highlights table is its usual lengthy self, highlighting the churn in the market. Volume was very high.

There won’t be any the usual volatility charts and block trading report today … sorry!

I was disgusted to read an opinion piece in the Globe titled The weakest links in terror finance legislation need to be addressed:

Group of 20 leaders turned their focus to the financing question this week when they met in Antalya, Turkey. Leaders committed themselves to combatting terrorist financing by enhancing the exchange of information; criminalizing terrorist financing and implementing targeted financial-sanction regimes related to terrorism and terrorist financing; and facilitating the widespread implementation of standards developed by the Financial Action Task Force (FATF), the international institution responsible for combatting money laundering and terrorist financing.

This is just another job application from the Merchants Of Fear (Secret Police Edition).

“But conducting attacks in the heart of Europe requires a complex series of financial transactions between IS supporters and the cells committing acts of terrorism.”

It will be noted that the authors do not give any examples of these “complex series of financial transactions” that are supposedly so ubiquitous; they do not give any specifics of what new laws and regulations might be sufficient to choke off this source of funds; and they do not provide any sort of cost-benefit analysis to show that the problem justifies the solution.

That’s because they can’t. According to John Allison (who ran the BB&T bank with distinction through the Credit Crunch) the US “Patriot Act” costs US banks over $5-billion annually and “there has never been a single terrorist caught and convicted because of the Patriot Act.” Instead, the Patriot Act has enabled government snooping that, so far, has achieved success in nailing Eliot Switzer (a guy who hired prostitutes) and Dennis Hastert (a blackmail victim desperate to pay his blackmailer). Oh, very well done and well worth $5-billion per year.

The authors admit that “very few jurisdictions have obtained successful convictions”, but do not have the intestinal fortitude to admit why this should be – and the simple fact is that terrorist operations do not cost a great deal of money. Al Qaeda spent only about half a million dollars to finance the entire 9/11 plot; only about $300,000 of this was spent in the US. So, be generous, call it $20,000 per attacker during their stay of over a year in the US.

It’s no surprise that Momani and Kempthorne are so shy when it comes to talking about the specifics of their wonderful plans!

The entire article is nothing more than demagogic nonsense, seeking to expand useless banking regulations and even more useless bureaucratic oversight, through panicking the populace. But hey, I suppose the authors will get paid.

However, I was inspired to read the TERRORIST FINANCING FATF REPORT TO G20 LEADERS ACTIONS BEING TAKEN BY THE FATF, most notable for its casual request for more money:

The G20 can support this programme by: leading by example, helping low capacity jurisdictions implement essential counter terrorist financing measures, and continuing to support the FATF in its ongoing work.
…
The number of domestic designations varies widely. Thirty-seven jurisdictions have applied targeted financial sanctions on their own motion, and there is a significant variation in the number of entities, and the value of assets frozen, as shown in the table below. This may result from the nature of the terrorist and terrorist financing activity in each country, and from the different roles that targeted financial sanctions play in the context of national counter-terrorism strategies – in particular whether they are directed at restraining individuals or value, or both.

Click for Big

Pretty good, eh? Canada’s FINTRAC has a budget of about $50-million p.a. and imposes immense costs on financial intermediaries and has managed to freeze almost €100,000 in assets allegedly belonging to alleged terrorists, including “funds subsequently un-frozen or confiscated, as well as funds frozen currently”. I would dearly love to see a detailed breakdown of this number with the facts of each case attached.

And in France, the usual suspension of civil liberties (and, I’ll guess, harassment of annoying people) is occurring:

All over France, from Toulouse in the south to Paris and beyond, the police have been breaking down doors, conducting searches without warrants, aggressively questioning residents, hauling suspects to police stations and putting others under house arrest.

The extraordinary steps are now perfectly legal under the state of emergency decreed by the government after the attacks on Nov. 13 in Paris that left 130 dead — a rare kind of mobilization that will continue. The French Parliament voted last week to extend the emergency for three more months, which means more warrantless searches, more interrogations, more people placed under house arrest.

There have been 1,072 police searches already and 139 police interrogations, and 117 people have been placed in custody, the Ministry of the Interior said on Monday.

On the other hand, I was pleased to read an article regarding another favourite theme: Britain is cutting green energy subsidies:

Wind and solar farms will be forced to pay for the extra costs they impose on the UK’s electricity system as a result of their intermittent nature, Amber Rudd, the energy secretary has announced.

Renewable generators will be held “responsible for the pressures they add to the system when the wind does not blow or the sun does not shine”, she said, under new plans being drawn up by the Department of Energy and Climate Change.

In a long-awaited policy “reset” speech, Ms Rudd also unveiled plans to offer billions of pounds of new subsidies for offshore wind farms, potentially doubling the UK’s offshore wind capacity with a further 10 gigawatts in the 2020s, on top of 10GW expected by 2020.

However, she said that offshore wind remained “too expensive” and that the cash would be strictly conditional on deep cost reductions.

In the referenced policy reset speech:

Britain will no longer pursue green energy at all costs and will instead make keeping the lights on the top priority, Amber Rudd, the energy secretary, will vow this week.

Households already face paying over-the-odds for energy for years to come as a result of expensive subsidies handed out to wind and solar farms by her Labour and Lib Dem predecessors, Ms Rudd will warn.

In a major speech setting out a new strategy, the energy secretary is expected to say that from now on, policies will balance “the need to decarbonise with the need to keep bills as low as possible”.
…
Although the Government wants gas plants to replace coal, Ms Rudd is expected to admit that the UK electricity market is now so distorted by subsidies that “no form of power generation, not even gas-fired power stations, can be built without government intervention”.
…
In what will be seen as criticism of her Lib Dem predecessor, Ed Davey, Ms Rudd will say that “contracts were signed with no competition and could have offered better value for money” – an apparent reference to subsidy contracts handed out to offshore wind farms in early 2014.

Only in the final months of the Coalition were subsequent offshore wind projects forced to compete for the payments – revealing they could be built with far lower levels of subsidy.

And finally, to return to the financial markets that are supposed to be the subject of this blog, CAD options markets are looking bearish for the loonie:

Traders are positioning themselves for what could be the last leg down in the Canadian dollar’s three-year collapse.

They’re paying the biggest premium since September for options contracts that protect against currency swings expiring a month from now than for similar contracts that expire three months out, as oil suddenly threatens to fall below $40 per barrel again and the U.S. Federal Reserve looks set to raise interest rates in a matter of weeks. The last time the premium for 30-day protection spiked this high the currency ended up falling to an 11-year low before month’s end.

The options market is lining up with the consensus forecast of economists, who also see weakness in the short term followed by stabilization and ultimately gains into 2016. For many, the Fed’s first interest-rate increase in almost a decade and the most recent surge in oil inventories could mark the last stage of the Canadian dollar’s 25 per cent, three-year slide.

And the market is increasingly expectant of a Fed hike:

The odds the Federal Reserve will raise interest rates at its next meeting in December climbed to 74 percent, and Pacific Investment Management Co. says a move is likely.

The probability the central bank will act at its Dec. 15-16 session increased from less than 30 percent as recently as mid-October, futures contracts show. The U.S. is scheduled to sell $35 billion of five-year notes Tuesday, after a two-year auction Monday drew the highest yield in five years, reflecting expectations among traders for rising interest rates.

Click for Big

And, to get back to non-financial news, the FAA has released proposed regulations for drones:

The recommendations, from a task force created by the agency, would be the biggest step yet by the government to deal with the proliferation of recreational drones, which are usually used for harmless purposes but have also been tools for mischief and serious wrongdoing, and pose a risk to airborne jets.
…
The task force did not go as far with its recommendations as some aviation and security experts had hoped. The proposals say owners should not have to submit any information about their aircraft, for example. It also said there should not be a requirement for drone users to be citizens or permanent residents.
…
The F.A.A. task force was composed of 25 people, including representatives of drone makers, technology companies, an airline pilots association and government officials. The agency gave them a short time — four weeks — to come up with recommendations on a registration system. The F.A.A. said it would take the recommendations into consideration and then write new rules.

Members of the task force stressed on Monday that many compromises were made. The task force wrote in its report that the goal of the registration process was to “ensure accountability by creating a traceable link between aircraft and owner, and to encourage the maximum levels of regulatory compliance by making the registration process as simple as possible.”

“We tried to write it in as generic a flavor as possible,” Dave Vos, a member of the task force and the head of a drone project at Google X, a business that works on future technologies, said in a conference call.

With the “consensus we reached, everyone is quite happy here,” he said.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts down 50bp, FixedResets losing 54bp and DeemedRetractibles off 24bp. The Performance Highlights table is enormous. 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

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 19.20 to be $0.93 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.62 cheap at its bid price of 13.25.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 20.66 to be 0.66 rich, while MFC.PR.K resetting at +222bp on 2018-9-19, is bid at 19.07 to be 0.57 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.48 to be $1.14 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 15.66 and appears to be $0.76 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 19.62, looks $0.90 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 14.09 and is $0.86 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.65%, with no outliers. There is one junk outlier 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 were no surprises with Canadian inflation:

Statistics Canada reported Friday that the country’s inflation rate, as measured by the year-over-year change in the CPI, held steady at 1 per cent in October, as slumping energy costs continued to suppress an otherwise generally rising tide for consumer prices. The CPI edged up a thin 0.1 per cent in October over September, despite gains in most major categories, including a 0.4-per-cent rise in food prices and a 0.3-per-cent increase in shelter costs. But gasoline prices slid 2 per cent month over month, leaving them down 17 per cent compared with a year earlier.

Excluding the energy sector, CPI was up 0.2 per cent month over month, and 2.1 per cent year over year, the statistical agency said.
…
But economists noted that the days of below-normal inflation rates are numbered – simply because the plunge in energy prices is about to drop out of the year-to-year price comparisons.

The BoC has published a working paper by Celso Brunetti, Bahattin Buyuksahin, Jeffrey H. Harris titled Speculators, Prices and Market Volatility:

We analyze data from 2005 through 2009 that uniquely identify categories of traders to assess how speculators such as hedge funds and swap dealers relate to volatility and price changes. Examining various subperiods where price trends are strong, we find little evidence that speculators destabilize financial markets. To the contrary, hedge funds facilitate price discovery by trading with contemporaneous returns while serving to reduce volatility. Swap dealer activity, however, is largely unrelated to both contemporaneous returns and volatility. Our evidence is consistent with the hypothesis that hedge funds provide valuable liquidity and largely serve to stabilize futures markets.
…
We also examine whether the “financialization” of futures markets (as represented by the changing mix of participant positions) has affected the functioning of the futures markets. In every instance, we find that speculative position changes do not amplify volatility during the crisis and so do not impede the functioning of futures markets. Conversely, in each market we find that macroeconomic conditions are significantly related to futures market volatility, with the strongest link from 2006 through July 2008. In fact, during the heart of the financial crisis after July 2008, volatility is strongly related to macroeconomic uncertainty (rather than market conditions or financialization).

Although our tests do not examine positions, prices or volatility over short intervals (such as a few hours or days), we find no systematic, deleterious link between the trades of hedge funds or swap dealers and either returns or volatility. To the contrary, hedge fund trading, although positively correlated with price changes, is negatively related to volatility both contemporaneously and with a one-day lead. Hedge funds commonly provided liquidity in futures markets and improved price efficiency during the recent financial crisis. We conclude that speculators such as hedge funds and swap dealers should not be viewed as adversarial agents in financial markets, but rather as important liquidity providers to hedgers that enhance the proper functioning of financial markets.

It seems that all the downtown development that Toronto is seeing is not an isolated phenomenon:

Lena Edlund and Michaela Sviatchi of Columbia University and Cecilia Machado of the Getulio Vargas Foundation wondered why the relationship between housing prices and distance from the center of major U.S. cities has reversed since 1980. That year, prices were higher in the suburbs, and urban centers were going to seed. In the next 30 years, prices within three miles of the central business districts of the 27 biggest cities in the U.S. more than doubled. Within a radius of three to 10 miles, they increased by 60 percent. Further out, they only grew by 6 to 10 percent.

“The price profile flips,” the economists wrote in a recent paper. “In 1980, prices in the periphery are 50 percent higher than in the center. By 2010, prices in the center are 40 percent higher than in the periphery.”

The original paper also notes:

Between 1965 and 2005, leisure grew but not for the college educated. In the 1985-2005 period, the contraction in leisure among college men was substantial enough to result in an overall reduction for men (leisure grew among non-college men); for women, leisure contracted across the board but at the twice the rate for college women compared to non-college women [Aguiar and Hurst, 2009, table 2-2].

Aguiar and Hurst [2007, 2009] identified rising labor supply of the skilled to lie at the core of this development. Census data bear this out. The fraction college graduates who worked full time started to rise in the 1970s after three decades of barely moving, Figures 2 and 3. Unsurprisingly, the increase was more pronounced for women. Since 1990, there has also been a notable increase in the fraction (men and women) working 50+ hours per week (or “long hours” to use the terminology of Kuhn and Lozano [2006]).

I sneered at the Capital Power note exchange offer yesterday – the information circular has now been released on SEDAR although I am not permitted to link to it directly as this would make access to public documents too convenient for mere retail scum. The company states:

CPLP believes the Note Exchange Transaction may have the following benefits for the CPLP Noteholders, and that CPLP Noteholders should consider the following factors, among others, in making a decision whether to vote in favour of the Note Exchange Resolution:

• Same Terms. Upon completion of the Note Exchange Transaction, CPLP Noteholders will receive Capital Power Notes having terms (including with respect to coupon, maturity and redemption price) that are the same as those of the CPLP Notes for which they are being exchanged (except for conforming changes necessary to reflect Capital Power as the new issuer and to reflect the guarantee being provided by CPLP).
• Better Liquidity. Over time it is expected that debt of Capital Power will be more liquid than that of CPLP as Capital Power is expected to be the active debt issuer going forward and CPLP will not be.
• Structural Enhancement. Upon completion of the Note Exchange Transaction, CPLP Noteholders will receive Capital Power Notes that will rank pari passu with Capital Power’s other senior unsecured debt securities, will benefit from Capital Power’s diversified asset base (which includes CPLP’s asset base), will benefit from reporting consistent with Capital Power’s publicly traded equity, and will maintain the existing structural priority through a guarantee issued by CPLP. On November 19, 2015, each of DBRS Limited and Standard & Poor’s publicly announced that it expects to assign the same credit rating to the Capital Power Notes that it has assigned to the CPLP Notes.

…
RBC Capital Markets has been retained on behalf of CPLP to act as solicitation agent and to solicit votes in favour of the Note Exchange Resolution.

The Solicitation Agent will be entitled to receive a fee for its services and be reimbursed for certain reasonable out-of-pocket expenses, including fees of legal counsel, and will be indemnified against certain liabilities and expenses in connection with the solicitation of votes in favour of the Note Exchange Resolution.

But I will note (from the Annual Report:

The Company, through its subsidiary CPLP, has the following externally imposed requirements on its capital as a result of its credit facilities and certain debt covenants, as defined in the respective agreements:

• Maintenance of modified consolidated net tangible assets to consolidated net tangible assets ratio, as defined in the debt agreements, of not less than 0.8 to 1.0;
• Maintenance of senior debt to consolidated capitalization ratio, as defined in the debt agreements, of not more than 0.65 to 1.0;
• Limitation on debt issued by subsidiaries; and
• In the event that CPLP is assigned a rating of less than BBB- by S&P and BBB (Low) by DBRS, CPLP would also be required to maintain a ratio of net income before interest, income taxes, depreciation and amortization to finance expense, as defined in the debt agreements, of not less than 2.5 to 1.0.

I will also note, from the Annual Report, that consolidated revenue was $1,228-million while CPLP revenue was $1,220-million. So: diversification , schmiversification. I’ll stick to my guns and say holders should vote against the plan, despite the fact that the agencies say the difference between the two entitities does not result in a notching of credit and despite the fact that one major dealer, at least, thinks everything’s peachy with voting in favour. Being closer to the money and being owed the money directly by a financing vehicle subject to covenants is worth something; and even if it’s only worth 5bp, I want that 5bp.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts down 33bp, FixedResets losing 69bp and DeemedRetractibles off 10bp. The Performance Highlights table is of moderate – by 2015 standards – length. Volume was well above average.

Interestingly, this time the market was down only moderately until about 3pm, when it commenced a significant downdraft – but this time, instead of a last minute collapse, there was a notable (albeit insufficient) rebound commencing at 3:54. Perhaps some players have set up to take advantage of late-session selling pressure!

Click for Big

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 18.85 to be $0.77 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.47 cheap at its bid price of 13.25.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 20.90 to be 0.59 rich, while MFC.PR.K resetting at +222bp on 2018-9-19, is bid at 19.52 to be 0.42 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 16.59 to be $1.21 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 19.90 and appears to be $0.78 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 19.62, looks $0.90 expensive and resets 2019-3-1. FTS.PR.H, with a spread of +145bp and resetting 2020-6-1, is bid at 14.14 and is $0.81 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.45%, with one outlier above 0.50%. There is one junk outlier 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?