PrefBlog

Today’s big news 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 in Canada is evolving broadly as expected. Total CPI inflation remains near the bottom of the Bank’s target range as the disinflationary effects of economic slack and low consumer energy prices are only partially offset by the inflationary impact of the lower Canadian dollar on the prices of imported goods. As all of these factors dissipate, the Bank expects inflation will rise to about 2 per cent by early 2017. Measures of core inflation should remain close to 2 per cent.
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The Bank projects Canada’s economy will grow by about 1 1/2 per cent in 2016 and 2 1/2 per cent in 2017. The complex nature of the ongoing structural adjustment makes the outlook for demand and potential output highly uncertain. The Bank’s current base case projection shows the output gap closing later than was anticipated in October, around the end of 2017. However, the Bank has not yet incorporated the positive impact of fiscal measures expected in the next federal budget.

All things considered, therefore, the risks to the profile for inflation are roughly balanced. Meanwhile, financial vulnerabilities continue to edge higher, as expected. The Bank’s Governing Council judges that the current stance of monetary policy is appropriate, and the target for the overnight rate remains at 1/2 per cent.

This was good news for some:

The loonie, as the Canadian dollar is known for the image of the aquatic bird on the C$1 coin, gained 0.7 percent to C$1.4476 per U.S. dollar at 3:30 p.m. in Toronto. One Canadian dollar buys about 69 U.S. cents. The loonie reached the cheapest since April 2003 on Wednesday before the rate announcement.

In what may be a harbinger of things to come, Pacific Exploration & Production Corp. (formerly Pacific Rubiales Energy Corp.) has run into serious trouble:

it has elected to utilize the 30 day grace period (the “Grace Period”) pursuant to the indentures governing its 5.625% notes due January 19, 2025 (the “5.625% Notes”) and its 5.375% notes due January 26, 2019 (the “5.375 Notes”, and together with the 5.625% Notes, the “Notes”) rather than make the interest payments due on January 19, 2016 and January 26, 2016, respectively, in connection with these Notes.

Specifically, the following interest payments will not be paid on the scheduled payment dates: (i) U.S.$31.3 million in the aggregate in respect of the 5.625% Notes scheduled to be paid on January 19, 2016; and (ii) U.S.$34.9 million in the aggregate in respect of the 5.375% Notes scheduled to be paid on January 26, 2016 (collectively, the “January Interest Payments”). The Company has elected to use the Grace Period to assess strategic alternatives with respect to its capital structure.

The Company’s current liquidity position is being impacted by the significantly depressed international oil prices. The Company will use the Grace Period to engage with its creditors (including its lenders and holders of each series of the Company’s notes) with a view to making its capital structure more suitable to current market conditions. The Company remains and intends to remain current with its suppliers, trade partners and contractors. Normal operations continue in Colombia and the other jurisdictions within which the Company operates.

The failure to make the January Interest Payments on the scheduled dates does not constitute an Event of Default under the indentures that govern the Notes. In each case, the Company has a 30 day period from the scheduled payment dates to cure the failure to make such payments and the Company reserves the right to make the January Interest Payments prior to the expiry of each Grace Period.

This follows some circling by the vultures:

Harbour Energy, managed by EIG Global Energy Partners (“EIG”), believes that Pacific E&P faces significant near-term insolvency concerns and requires a large infusion of new capital in order to restructure its balance sheet, avoid value-destructive asset-level reorganizations or distressed sales, and degradation of Pacific E&P’s assets through under-investment and deferred maintenance. As of September 30, 2015, Pacific E&P had approximately $5.4 billion of debt outstanding, including $4.10 billion aggregate principal amount of senior bonds that are trading at levels equivalent to approximately thirteen cents on the dollar as of January 13, 2016, indicating that no value remains in its equity. Harbour Energy and EIG are committed to investing in Pacific E&P to ensure that its operations remain intact, partnerships are maintained and, upon restructuring, Pacific E&P is once again positioned for operational excellence and growth.

… with more pressure being added today:

It appears highly unlikely that Pacific E&P will make the deferred interest payments on the 2019 Notes and the 2025 Notes nor make interest payments on the 2021 Notes or the 2023 Notes when due. However, for those that tender, because Harbour Energy’s offer includes all accrued and unpaid interest payments across all four tranches of Notes up to the end of the Company’s 30-day grace period on February 19, 2016 (assuming the company does not file for insolvency prior to that), EIG’s Tender Offer consideration of $175 per $1,000 of principal plus accrued interest is effectively $200.66 per $1,000 of principal on average across all four tranches of Notes.

“With an average effective price of approximately 20.1%, our offer represents a 100% premium over the average 10% bid price where Pacific E&P’s bonds were trading immediately before our offer was launched and when the market expected the Company to make its January interest payments. We believe the Company’s cash position is dire and that the market has underestimated the severity of the situation. …. ”

Added Mr. Thomas, “We are grateful for the bondholders who have already indicated they will tender. We believe our proposal represents the best outcome for Pacific E&P as well as the bondholders as it provides a significant premium and de-risks recovery in a comprehensive and credible way. In our view, a single voice which is prepared to support further growth of the Company in partnership with Pacific E&P’s management and other stakeholders is the only viable solution.”

Meanwhile, preferred share investors were treated to another day of watching the market:

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It was a grim day for the Canadian preferred share market, with PerpetualDiscounts off 118bp, FixedResets losing 205bp and DeemedRetractibles down 163bp. The Performance Highlights table is ridiculous. 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:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 15.61 to be $0.92 rich, while TRP.PR.A, resetting 2019-12-31 at +192, is $0.52 cheap at its bid price of 12.21.

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Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 15.60 to be 0.73 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 16.85 to be 0.75 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 13.05 to be $1.63 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 16.95 and appears to be $1.02 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 14.89, 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 14.30 and is $0.34 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.04%, with no outliers. There are two junk outliers below -1.00% and one above 1.00%.

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

All eyes are on the BoC policy rate meeting:

The implied odds of a rate cut according to financial markets stand at just over 50 percent, and private-sector economists are almost evenly divided on whether the nation’s central bank will cut its policy rate to a financial crisis low of 0.25 percent.
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During the press conference that followed Stephen Poloz’s first rate decision as governor, he said that “it is the output gap which guides the pressures on inflation through time.”

In that sense, the Bank of Canada’s January 2015 interest cut was proactive, foreseeing a widening of the output gap absent the addition of monetary stimulus following the collapse in oil prices. The July reduction was of a more reactive nature, responding to a drop in activity that turned out to be larger, and ultimately long-lived, than anticipated.

This month, a blend of both dynamics is at play: sluggish fourth-quarter data suggest that there is more economic slack than the Bank of Canada envisioned in October, while declining inflation expectations and subdued hiring plans imply more weakness on the horizon.
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Financial stability concerns are nothing new for the central bank, which maintained a tightening bias until October 2013, in part due to worries over household credit growth and elevated indebtedness. But this is the first time in recent memory that economists see threats from multiple angles.

Recently announced macro-prudential measures alleviate some of the concerns, though a rate cut would undoubtedly put downward pressure on borrowing costs, offsetting some of the forces driving borrowing rates higher.
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The new threat to financial stability stems from the collapse in the Canadian dollar, whose 25 percent plunge over the past two years marks its worst decline for that time period on record.

The Bank of Canada could be “playing with fire” if it chose to lower rates further and “set off a freefall in the exchange rate,” said CIBC’s [chief economist Avery] Shenfeld, citing the potential negative effects on confidence and consumers’ willingness to spend. Since total spending in an economy is equal to total income, if everyone cut back on expenditures at once, Canada would be adding a household deleveraging process to its current terms of trade shock.
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Scotia’s [Vice President of Economics Derek] Holt warns that the central bank would be stimulating unhealthy growth if it delivers a rate cut Wednesday.

“The effects of a rate cut are more likely to be reflected in interest rate sensitive sectors than the ones affected by the terms of trade shock,” he said. “[A cut] can do more to fuel financial imbalances than help the parts of the economy that are under stress.”

This potential conflict between a central bank’s most basic task–to stabilize the business cycle–and the quest to return inflation to target within a normal time frame, make the bank’s decision worth watching for market participants well beyond the nation’s borders.

Meanwhile, there is speculation that the Fed might not be as aggressive as first thought:

Less than three weeks into the new year, two of Wall Street’s biggest bond dealers are already dialing back the 2016 Treasury yield calls they made at the end of 2015.

JPMorgan Chase & Co. and Deutsche Bank AG reduced forecasts for 10-year yields at the end of last week, wagering the Federal Reserve won’t raise interest rates as many times as policy makers expect. The banks, among the 22 primary dealers that trade with the Fed, say pressures will build amid the depreciation of China’s currency, slowing global economic growth, investor flight from risky assets and a dimming inflation outlook.

Deutsche Bank predicts the 10-year yield will end the year at 1.75 percent, down from the 2.25 percent call it made in December, while JPMorgan says 10-year notes will yield 2.45 percent at year-end, down from a previous forecast of 2.75 percent.

But they’re not making much money on fixed income anyway!

Once Wall Street’s most lucrative business, fixed-income trading revenue declined for the third straight year in 2015. Net income from trading bonds, currencies, commodities and derivatives linked to them has fallen between 18 percent and 25 percent at five top banks since 2012.

Fixed-income has been in a slump with interest rates languishing near zero, oil prices falling and regulations making it tougher to place easy bets on future prices. Morgan Stanley said Tuesday that it doesn’t expect a rebound any time soon.

Which will make life interesting if downgrades pop:

More companies were at risk of having their credit ratings cut at the end of December than at the close of any other year since 2009, according to Standard & Poor’s.

The number of potential downgrades was at 655, compared with 824 reported by the finish of 2009, the rating company said in a report on Tuesday. The year-end total for 2015 was “exceptionally” higher than a yearly average of 613, it said. S&P removed 85 issuers from the list in December and added 56, of which 27 are in the U.S.

Here’s some news for the middle class:

Over five million jobs will be lost by 2020 as a result of developments in genetics, artificial intelligence, robotics and other technological change, according to World Economic Forum research.

About 7 million jobs will be lost and 2 million gained as a result of technological change in 15 major developed and emerging economies, WEF founder Klaus Schwab and managing board member Richard Samans said in “The Future of Jobs.” The findings are taken from a survey of 15 economies covering about 1.9 billion workers, or about 65 percent of the world’s total workforce.
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To prevent a worst-case scenario — technological change accompanied by talent shortages, mass unemployment and growing inequality — reskilling and upskilling of today’s workers will be critical,” the authors said. “It is simply not possible to weather the current technological revolution by waiting for the next generation’s workforce to become better prepared.”

Administrative and office jobs will account for two-thirds of the losses, with “routine white-collar office functions at risk of being decimated,” and there will be gains in computer, mathematical, architecture and engineering-related fields. Women will be disproportionately hit by the changes because of their low participation in the STEM fields of science, technology, engineering and mathematics.

The full report is obsessed with the gender gap and gives the usual accolades to ‘reskilling and retraining’:

Responses to the Future of Jobs Survey indicate that business leaders are aware of these looming challenges but have been slow to act decisively. Just over two thirds of our respondents believe that future workforce planning and change management features as a reasonably high or very high priority on the agenda of their company’s or organization’s senior leadership, ranging from just over half in the Basic and Infrastructure sector to four out of five respondents in Energy and Healthcare. Across all industries, about two thirds of our respondents also report intentions to invest in the reskilling of current employees as part of their change management and future workforce planning efforts, making it by far the highest-ranked such strategy overall (Figure 13). However, companies that report recognizing future workforce planning as a priority are nearly 50% more likely to plan to invest in reskilling than companies who do not (61% against 39% of respondents).

Well, that might be a good enough survival tactic for individual companies, but I see very little consideration paid to the broader issues. While foretelling the future is something that is notorious for being hilarious even within twenty years, I believe we need to start addressing the topic of what the new world is going to look like.

For one thing, ‘things’ are going to become relatively cheaper and ‘entertainment’ is going to become relatively more expensive – and those are the two basic categories of things that get sold. We may have fewer doctors, as diagnosis becomes increasingly automated, but we will have more nurses, as the population ages and people in general can afford more care.

And this is the basic problem: productivity comes from leverage; you are more productive when you make widgets for ten customers as opposed to merely five. And personal services are very difficult, if not impossible to lever. So I suggest we’re going to end up with a society comprised of the ‘10%’, who have the skills to work on improving the system and the rest, who don’t. How do we address this? I never hear the politicians talking about it; they blithely assume that if we retrain a 55-year-old machine worker to become a programmer, everything will be OK.

Husky Energy, proud issuer of HSE.PR.A, HSE.PR.C, HSE.PR.E and HSE.PR.G, announced after the close today that it:

is taking additional steps to improve its resilience through the extended low commodity price environment.

“We continue to take decisive action in this period of persistent supply-demand imbalance,” said CEO Asim Ghosh. “These actions are in line with the principles we have established, namely, balancing capital spending with cash flow and maintaining a strong balance sheet. Our fundamental goal remains unchanged – the steps we are taking will see Husky emerge from this cycle as a more resilient and more profitable company.”

Updated 2016 Production and Capital Guidance

The capital plan has been revised to a range of $2.1-2.3 billion from a previous range of $2.9-3.1 billion. Savings will be achieved primarily through deferring discretionary activities in Western Canada.

The Company’s overall earnings break-even point is expected to be in the sub-$40s US WTI oil by the end of 2016. Further gains are expected to be achieved through the ongoing reduction of operating and sustaining costs.

Production is now expected to be in the range of 315,000-345,000 barrels of oil equivalent per day (boe/day), compared to the previous guidance of 330,000-360,000 boe/day.

“Within the updated capital plan, the transition into a low sustaining capital business continues unabated. Deferral of capital is in those areas that can be quickly switched on as commodity prices recover,” said Ghosh.

Dividend Update

The Company continues to triangulate its top three business priorities; a strong balance sheet, dividend and transition into a low sustaining capital business. While Husky fully recognizes the importance of the dividend, the balance sheet takes precedence in this environment.

A stock dividend was introduced in the third quarter as an interim measure in lieu of a cash dividend. Given the persistent downward pressure on oil prices and the extended lower for longer outlook, the Board of Directors has suspended the quarterly dividend. No cash or share dividend will be issued for the fourth quarter of 2015.

The Board will continue to review the dividend on a quarterly basis.

I saw some preferred share investors coming home from work tonight:

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Those suffering from market-induced shell-shock may have trouble believing this, but it was a superb day for the Canadian preferred share market today, with PerpetualDiscounts gaining 105bp, FixedResets winning 329bp and DeemedRetractibles up 142bp. The Performance Highlights table is extraordinarily lengthy and, for a change, almost everything’s on the good side, with only one loser. Volume was very high.

So it’s clear somebody put a bit of money to work today, but we’ve been fooled on rallies before – in the second half of October and the second half of December. Will we look back on the second half of January as just another in a long series of false rallies? I don’t know – I advise everybody to invest according to the long-term properties of the asset class and leave the market timing to those who can afford the losses.

The overnight news doesn’t look too good!

U.S. index futures tumbled as the selloff in global equities intensified after oil dropped below $28 a barrel to extend a 12-year low.

Contracts on the Standard & Poor’s 500 Index due in March dropped 1.5 percent to 1,844.25 as of 7:21 a.m. in London, while Nasdaq 100 Index futures retreated 1.8 percent. West Texas Intermediate slumped 3.3 percent to $27.52 a barrel, heading for the lowest close since September 2003 and driving stock declines across Asia that sent Japanese shares into a bear market.

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 15.85 to be $0.87 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.38 cheap at its bid price of 10.73.

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Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 16.43 to be 1.10 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.10 to be 1.04 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 13.54 to be $1.41 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 17.23 and appears to be $0.98 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 15.59, looks $0.52 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 14.70 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 -0.35%, with two outliers above +1.00%. There is one junk outlier below -1.00% and one above 1.00%.

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

Here’s a lesson in counterparty risk management:

The demise of Invexstar Capital Management has also raised eyebrows about the ease with which a group of Italian financiers were able to trade billions of pounds of bonds with virtually no capital to back their positions.

BNP Paribas, Morgan Stanley and Nomura are among the banks to have lost at least £97 million, although the full scale of the losses is still being assessed months after the collapse.

Invexstar was a tiny broker that went under in the market meltdown that followed the spike in German government debt yields last May. The company had been set up in 2014, but, according to several sources with knowledge of its operations, the small outfit based in an office above The Daily Telegraph newspaper was able to trade billions of pounds of government and corporate bonds despite having capital of only a little over £630,000.
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Based on the losses incurred by the banks, the size of Invexstar’s trading positions at the time of its failure would have been at least £2 billion, or more than 3,000 times the firm’s capital. Thus even a tiny movement in the value of its trading portfolio was enough to wipe out its backers’ money and leave its counterparties with huge shortfalls.

According to other traders, several banks had become suspicious about Invexstar before its failure. Lloyds Banking Group is understood to have cut its links after staff at the lender became concerned that Mr Statti repeatedly cancelled meetings to discuss the firm’s trading exposures.

In particular, suspicions had been raised at the way in which Invexstar had asked its counterparties to extend the settlement times for its trades. The settlement period is the time from when a trader places an order for some bonds to when they must pay for the securities they have agreed to purchase. While a normal settlement period in the fixed income markets is two days, Invexstar had asked for five days to pay for its trades and even as many as ten, according to sources with knowledge of the situation.

All eyes are on the potential for a BoC rate cut:

Trading in overnight index swaps currently implies the probability of a rate cut at about 60 per cent when the Bank of Canada releases its monetary policy report on Wednesday.

Economists calling for the key overnight lending rate to be maintained at 0.50 per cent say additional stimulus could test consumer sentiment. A cut to 0.25 per cent as expected by the market could bring about a “runaway exchange rate,” said Avery Shenfeld, chief economist at CIBC World Markets.
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Over the past two years, the Canadian dollar has lost a full 25 cents in value – a downward slope unmatched in steepness, [National Bank Financial chief economist] Mr. [Stéfane] Marion said.

Certainly, a great deal of downside is to be expected considering Canada’s current economic circumstances. The precipitous decline of commodity prices has started to ripple through non-resource sectors this year, Canadian economic growth is shrinking as a result, and U.S. dollar strength has also combined to pull the loonie down forcefully.

But the losses should have been more like 10 cents, not 25 cents, Mr. Marion said. “Is the loonie out of whack with its fundamentals? We think so.”

Barclays is gung-ho:

The Bank of Canada will cut its key interest rate to at least zero this year and could move toward negative rates to offset the crude oil price slump, according to Barclays PLC.

The London-based bank expects the Bank of Canada to cut its overnight target rate 25-basis points to 0.25 per cent at its announcement on Wednesday, and a total of at least 50 basis points in 2016, Juan Prada and Andres Jaime Martinez wrote in a research note.

On a related note, S&P has Alberta on Outlook-Negative:

A second credit-rating agency has weighed in on Alberta’s debt, lowering its rating outlook to negative from stable due to the collapse in oil prices and the province’s mounting budget worries.

Moody’s Investors Service said it affirmed Alberta’s credit at triple-A, but it said the future looks riskier as world crude prices hover below $29 (U.S.) a barrel, heaping financial pressure on an energy industry that has been a major contributor to government revenues.

It is a less drastic step than a downgrade, which Standard & Poor’s did last month, lowering Alberta’s rating one notch after years of enjoying the safest category of public debt.

“While Alberta has entered the downturn in oil prices from a strong financial position, including substantial levels of cash and investments, low debt and low debt service levels, the decrease in oil prices could lead to a rapid fiscal deterioration that erodes these key supports to the triple-A rating,” Moody’s vice-president Michael Yake said in a statement.

Drones will change the world, whether we like it or not:

“Given the size, capability and versatility of drones, the risks to national security and individual privacy are high,” said Amber Dubey, head of aerospace and defense at global consultancy KPMG. “Governments should carefully strike a balance between ensuring the safety as well as not curtailing the growth of the drones and the advantages they bring.”

As countries draft new rules to respond to an explosion in sales, and a series of high-profile security concerns last year, regulators are concerned about the difficulty of enforcing regulations. Three months after the U.S. Secret Service recovered a drone on the White House grounds, Kyodo News reported in April that another was found on the roof of the Japanese prime minister’s office.

It’s only a matter of time before a drone is used to deliver a payload of explosive in a terrorist attack. I haven’t thought of a way of stopping a well-planned attack; I’m not sure if anybody has:

In an interview with the Sunday Times, Detective Chief Inspector Colin Smith, a security expert and adviser to the Home Office Centre for Applied Science and Technology, warned that small quadcopter drones could easily be used by terrorists for attacks and propaganda purposes.

Brompton Lifeco Split Corp., proud issuer of LCS and LCS.PR.A, has suspended the Capital Unit distribution:

In accordance with its articles of incorporation and the Class A Share Provisions, the regular, non-cumulative, monthly distribution for the month of January will not be paid on the class A shares of Brompton Lifeco Split Corp. The net asset value per unit as at January 14, 2016 was $14.34. Under the articles of incorporation, no cash distribution may be paid on the class A shares, if after payment of the distribution by the Fund, the net asset value per unit (consisting of one class A share and one preferred share) would be less than $15.00. The Fund will re-evaluate the payment of class A share distributions in each subsequent month with the expectation that normal monthly distributions will resume and a press release will be issued if the net asset value per unit meets this requirement.

In accordance with the Preferred Share Provisions, regular quarterly preferred share dividends will continue to be paid.

There’s a rumour that Bay Street is covered with these signs:

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It was a poor day for the Canadian preferred share market, all because of FixedResets: PerpetualDiscounts gained 4bp, FixedResets lost 125bp and DeemedRetractibles were off 1bp. The Performance Highlights table is its usual horrid self, but there were quite a few winners today, rebounding from last week. Volume was well above average; a bit of a surprise, given that the US was closed for MLK day.

DC.PR.C fell back to ‘retail levels’ today on volume of 7,510, closing at 16.05-39, 21×1.

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 14.75 to be $0.99 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.88 cheap at its bid price of 9.40.

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Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 15.86 to be 1.08 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 16.41 to be 1.18 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 13.09 to be $0.98 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 12.56 and appears to be $0.94 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 15.00, looks $0.36 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 14.55 and is $0.46 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of +0.11%, with one outlier above +1.00%. There is one junk outlier below -1.00% and two above 1.00%.

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

Holy Smokes, that was a day and a half!

Stocks tumbled around the world, with U.S. equities sinking to their lowest levels since August, and bonds and gold jumped as oil’s plunge below $30 sent markets reeling. Treasuries extended gains as economic data and earnings added to concern that global growth is faltering.

The Dow Jones Industrial Average sank 391 points, European stocks fell into a bear market and the Shanghai Composite Index wiped out gains from an unprecedented state-rescue campaign as global equities added to the worst start to a year on record. Oil touched $29.28 a barrel before closing at a 12-year low. A measure of default risk for junk-rated U.S. companies surged to the highest in three years. Yields on 10-year Treasury notes dipped under 2 percent as doubts grow that the Federal Reserve will raise interest rates. Gold surged the most in six weeks.
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Figures on retail sales and manufacturing Friday showed the U.S. economy ended the year on a weak note, and the start of 2016 wasn’t any better. Energy firms are laying off workers and currency markets from commodity-producing countries are in turmoil. The slump is also denting the outlook for inflation, causing traders to curb bets on how far the Fed will raise rates this year.
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The Standard & Poor’s 500 Index plunged 2.2 percent at 4 p.m. in New York. The index fell as much as 3.3 percent before paring the slide in afternoon trading. It still capped a third weekly retreat and closed at the lowest level since Aug. 25, the day that marked the bottom of the summer selloff. U.S. equities markets are closed Monday for a federal holiday.

The gauge has lost 12 percent from its May record, leaving it well short of sliding into a bear market. It capped a third weekly decline, the longest slide since July. The Dow tumbled 2.463 points as none of its 30 members advanced, while small caps added to a bear market.
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West Texas Intermediate crude fell as much as 6.2 percent, before settling 5.7 percent lower at $29.42 a barrel. Brent fell 5.9 percent to $29.05 a barrel. The discount on global benchmark Brent reached a five-year high as Iran moved closer to restoring exports.
…
The Bloomberg Commodity Index, which measures returns on 22 raw materials, dropped 1.4 percent to the lowest level in data going back to 1991.

Given all that, effects on Canada followed:

The country’s benchmark Standard & Poor’s/TSX Composite Index fell 2.1 percent to 12,073.46 at 4 p.m. in Toronto, undoing Thursday’s rally and resuming a sell-off that’s pulled Canada into a bear market. Stocks plunged 7.2 percent this year and are down about 23 percent from a September 2014 record. The Canadian dollar slumped to a new 13-year low and yields on five-year government bonds fell to a record low of 0.511 percent on Wednesday as speculation builds the Bank of Canada will cut interest rates next week.

Canada’s economy, heavily weighed toward resource industries such as oil and mining, has been rocked by concerns about the slowdown in China that has pushed the price of West Texas Intermediate crude below $30 for the first time since 2003. Prices for Canada’s heavy crude, which trades at a discount to the U.S. benchmark, have sunk to around $15 a barrel.

And TransAlta common got thumped:

TransAlta Corp. slumped after the Alberta electricity generator cut its dividend in preparation for a phase-out of coal power in the province.

The shares fell 9.8 per cent to $3.94 at 11:40 a.m. in Toronto. It initially dropped 14 per cent, the most on an intraday basis since 2008, to a record low.

The quarterly dividend was cut to 4 cents a share from 18 cents, the company said in a release Thursday. Calgary– based TransAlta doesn’t expect to raise equity this year as the reduced dividend will “strengthen its balance sheet.”
…
TransAlta, which has more than 70 power plants in Canada, the U.S. and Australia, said it will negotiate with the government of Alberta to “ensure the company has the certainty and capacity” to invest in clean power.
…
The falling Canadian dollar is making it more expensive to build new wind and gas-powered generators, [TransAlta CEO Dawn] Farrell said. The cost to build new projects with those technologies is more than double the current market price for power of about C$30 a megawatt hour, she said.

Well, hey, maybe the Alberta government will get some advice from Ontario, and buy that Green Power for $90/MWH!

So the SEC is now awarding prizes to short-sale analysts!

The Securities and Exchange Commission today announced a whistleblower award of more than $700,000 to a company outsider who conducted a detailed analysis that led to a successful SEC enforcement action.

“The voluntary submission of high-quality analysis by industry experts can be every bit as valuable as first-hand knowledge of wrongdoing by company insiders,” said Andrew Ceresney, Director of the SEC’s Enforcement Division. “We will continue to leverage all forms of information and analysis we receive from whistleblowers to help better detect and prosecute federal securities law violations.”

No mission creep there, nope, not a bit of it.

On such a day, it is pleasant to think about drones, instead:

In October, a Kentucky judge dismissed criminal charges against a man who had shot down a drone flying over his property. Now the drone’s owner has brought a federal civil suit against the shooter, William Merideth, arguing that the Federal Aviation Administration is in charge of all airspace and that it allows drones to fly over private property.

All this amounts to a legal mess. The law, both state and federal, is still pretty unclear about where you can fly a drone, and what you as a citizen may do if a drone — probably with a camera on board — is hovering above your home.

What’s needed is a comprehensive legal regime that integrates state and federal jurisdictions. I want to propose the outlines of such a legal model, distinguishing what should belong to the feds and what should be within the realm of the states.
…
These features give reason for states to outlaw the use of drones to observe and record people on private property without their consent. Federal control over airways shouldn’t be interpreted to displace state law regulating drones. The federal interest is in flying from place to place, not hovering to get a better view.

Protecting privacy at the state level will allow drones to fly freely without sacrificing the individual’s legitimate interest in being left alone.
…
The slogan for drone regulation should be: Feds to let them fly, states to protect what they see. The balance should let us a benefit from a new technology without sacrificing ourselves to it.

But we can reflect that comparing costs for university education is much like comparing costs for investment advice:

So since 2011, the federal government has required all schools to provide something called a net price calculator on their websites. You put in some financial data, and the calculator estimates what your actual cost would be, after any scholarships. If you aren’t among the very affluent and are applying to a private college, that net price can be tens of thousands of dollars below the list price.

Not long after the calculator became standard, a service called College Abacus emerged, allowing families to compare multiple schools at once. That spared them the laborious task of plugging the same data into multiple calculators many times over.

And how did many colleges respond? By blocking College Abacus’s access to their calculators. Imagine if Expedia or Kayak could not search for tickets on some of the most desirable airlines, and you get the idea.
…
So what’s really going on here? One strong hint comes from a letter that [College Abacus co-founder] Ms. [Abigail] Seldin received from a dean of financial aid. He wrote to her after she sent a mass note last year urging the schools that were blocking her tool to reconsider. She declined to identify him, as she still hopes to win him and others over.

“We are experiencing record student demand, engage families early in financial aid discussions and are meeting our goals,” the dean told her. “Why you think I should open myself up to a purely financial comparison when we are so much more than that, I have no idea. It is probably because you have not sat where I sit. So, kindly cease communication with me.”

However, it seems to me that the preferred share market is signalling something …

Click for Big

It’s ridiculous. Right now the TXPR Total Return Index Value is down about 15.2% month-to-date. Assuming that this holds through to month-end and is reflected in the BMO CM-50 index, then we can conclude that this is the worst month on record: the worst is current November, 2008, at -10.7%, and October, 2008, at -8.2%. So the violence of this drop compared to the worst part of the Credit Crunch, when there were actual Bad Things happening, should give us pause.

We may also observe that such a return would imply that the Canadian preferred share market has experienced a cumulative total return of a big fat zero since July 31, 2009; a time-span of 78 months, which is 6.5 years.

And this assumption allows us to prepare the following graph:

Click for Big

So … assuming there’s no recovery in the second half of the month, we’re due to record the worst 12 months in Canadian preferred market history (well … back to 1993, anyway!) and has a six-and-a-half year cumulative total return that is only a little better than the worst on record. Nice.

Update
While pondering methods of making my Assiduous Readers feel even more terrible, it occurred to me that it’s actually worse than described above. In preparing the chart above, I simply picked the most recent time that the index moved through the estimated January value, but it also broke through this barrier in November, 2005. We may observe that the index’s total cumulative return from November 30, 2005, to [estimated] January month-end, 2016, is very slightly negative (-0.27%), so holding the index for the past 10 years and two months hasn’t made you any money. The previous low for the rolling cumulative 122-month return was reached (perhaps not surprisingly) in November, 2008, when it bottomed out at +7.78%. And this is worse.

Click for Big

It was an appalling day for the Canadian preferred share market, with PerpetualDiscounts down 211bp, FixedResets losing 277bp and DeemedRetractibles off 156bp. I will not discuss the Performance Highlights table. I will not! Volume was incredibly high.

It was yet another big day for DC.PR.C, with 122,599 shares changing hands at a VWAP of 16.92. It would seem that views are being taken! I suspect that current market conditions are making it less likely for the the abusive and debatable Plan of Arrangement to succeed … investors are attempting to cash out, not in!

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 15.00 to be $0.90 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.92 cheap at its bid price of 9.51.

Click for Big

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 16.21 to be 0.98 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.25 to be 0.79 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.06 to be $0.91 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 16.05 and appears to be $0.85 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 15.30, looks $0.41 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 14.60 and is $0.69 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.17%, with two outliers below -1.00%. There is one junk outlier below -1.00% and one above 1.00%. Note that today I have shifted the vertical axis of the chart.

Click for Big

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

Equities had a good bounce today:

U.S. stocks rallied sharply Thursday as a rebound in oil prices allowed the main indexes to claw back much of the steep fall seen in the previous session.

Gains on Wall Street were across the board, but energy shares outperformed all others as crude-oil futures CLG6, -2.44% rose 2.4% to $31.20 a barrel.

Meanwhile, St. Louis Fed President James Bullard’s comment that reaching the inflation target will take longer was said to have invigorated some of the bulls who were betting on a slower pace of interest-rate increases this year.

The S&P 500 index SPX, +1.67% closed up 31.56 points, or 1.7%, at 1,921.84. The S&P 500 energy sector soared 4.5%, while all 10 main sectors advanced. The health care and technology sectors were up 2.7% and 2% respectively.

This happened even with Bullard raising a cautious note:

Federal Reserve Bank of St. Louis President James Bullard, one of the most vocal policy makers in recent months arguing to raise interest rates, sounded a more cautious note Thursday by saying the latest decline in oil prices may delay the return of inflation to the central bank’s 2 percent target.

“With renewed declines in crude oil prices in recent weeks, the associated decline in market-based inflation expectations measures is becoming worrisome,” Bullard, who votes on policy this year, said in a speech in Memphis, Tennessee. While central bankers typically “look through” oil price changes, “one circumstance where one may be more concerned is when inflation expectations themselves begin to change due to the changes in crude oil prices,” he said.
…
Bullard told reporters after his speech that strong U.S. employment would argue that the FOMC’S median projection of rate increases totaling 1 percentage point this year is “about right,” while inflation and price expectations concerns “would tend to push off rate increases.” Bullard said he would put more weight on expectations if they continue to decline.

“Generally speaking, the markets and the committee are not thinking in terms of a January move,” Bullard said. “As far as March, we would want to get more information and see how things play out before we make a judgment.”

The U.S. economy is likely to grow 2.5 percent to 3 percent this year, and recent market volatility is no reason to revise that forecast, he told reporters.

Meanwhile, Assiduous Reader IR brings to my attention the elevated level of US credit spreads (as of January 13):

The cost to protect against defaults by North American investment-grade companies soared to a three-year high as concern lingered over falling commodity prices and financial-market turmoil triggered by China.

The Standard & Poor’s 500 Index was poised for its lowest close since September, halting a global equities rally. The Bloomberg Commodities Index on Tuesday fell to the lowest level since at least 1991 on sluggish demand from developing nations. The benchmark rebounded by 0.3 percent at 3:16 p.m. on Wednesday in New York. While Chinese exports unexpectedly expanded in December in local-currency terms, the world’s second-largest economy is expected to report the slowest annual expansion since 1990 next week.

“The recent noise from the Chinese market and continued pressure on oil has prompted investors to adjust their default expectations upward,” said Ryan Jungk, a Hartford, Connecticut-based credit analyst at Newfleet Asset Management LLC. “Investment grades are not immune from the bearish sentiment.”

The risk premium on the Markit CDX North America Investment Grade Index, which is tied to 125 equally weighted companies, rose five basis points to 103.3, according to prices compiled by Bloomberg. The measure hasn’t closed above 100 since 2012.

Which reminds me, I must thank Assiduous Reader HS for the link to the story about grocery bills and the exchange rate highlighted yesterday. I forgot yesterday – oops!

I’m wondering if this widening has anything to do with revamped bank trading-book capital rules:

Banks face tougher capital requirements on swaps, bonds and other securities that they intend to trade, as global regulators tighten market-risk rules for the second time since the financial crisis.

The Basel Committee on Banking Supervision, whose members include the U.S. Federal Reserve and the People’s Bank of China, said updated rules published on Thursday will result in a weighted mean increase of about 40 percent in trading-book capital charges. The revised framework boosts the share of banks’ risk-weighted assets produced by market risk to nearly 10 percent from about 6 percent under existing rules, the Basel group said in a statement.

The overall capital burden on banks imposed by the Fundamental Review of the Trading Book, which takes effect in 2019, is nevertheless lower than was produced by earlier proposals, the Basel Committee said. The impact on specific asset classes and business lines is likely to be uneven and could hit some banks harder than others, even making some trading desks unviable.
…
The International Swaps and Derivatives Association said in an e-mailed statement on Thursday that while the Basel Committee had amended “several areas of concern identified by the industry,” its estimate of a 40 percent increase in market-risk capital requirements “would impose a considerable burden on banks on top of the increases already introduced following the crisis, as part of Basel 2.5.”

A report last year by ISDA and other industry groups estimated the capital requirement using Basel’s new standardized approach would be 4.2 times the total market-risk capital the firms currently have.

So making it tougher for depositary banks to function as investment banks is one thing and, I think, a good thing. But I still haven’t seen anything that would indicate any thought from the regulators as to what might come next. Do they want to make it easier for non-banks to become market-makers? I have often suggested that it would make sense hedge funds – already acting as market makers for equities – to hire bond desks and start trading corporate bonds vigorously. But there’s nothing. If anybody has seen any regulatory musing about where the risk will go after its presence in the banking sector has been reduced, let me know!

US authorities have gleefully announced another successful shake-down:

Goldman Sachs Group Inc. said it agreed to settle a U.S. probe into its handling of mortgage-backed securities for about $5.1 billion, cutting fourth-quarter profit by about $1.5 billion and closing out a year of record legal and litigation costs.

The proposed deal, which the bank announced in a statement Thursday, would be the latest multibillion-dollar settlement resulting from the government’s push to hold Wall Street firms to account for creating and selling subprime mortgage bonds that helped spur the 2008 financial crisis.
…
The government’s mortgage-backed security resolutions stem from a working group of prosecutors and other officials that President Barack Obama ordered up in 2012 to punish Wall Street for fueling the financial crisis with bonds linked to souring mortgages. Until then, the Justice Department had been pilloried for years for not having brought significant cases against banks and their executives.

Hey – it’s easier than raising taxes, or running for political office on the basis of policy!

And the SEC reminds us of how business gets done:

Washington D.C., Jan. 14, 2016 — The Securities and Exchange Commission today announced that State Street Bank and Trust Company agreed to pay $12 million to settle charges that it conducted a pay-to-play scheme through its then-senior vice president and a hired lobbyist to win contracts to service Ohio pension funds.

An SEC investigation found that Vincent DeBaggis, who headed State Street’s public funds group responsible for serving as custodians or sub-custodians to public retirement funds, entered into an agreement with Ohio’s then-deputy treasurer to make illicit cash payments and political campaign contributions. In exchange, State Street received three lucrative sub-custodian contracts to safeguard certain funds’ investment assets and effect the settlement of their securities transactions.

The market is also feeling sour about the Canadian economy:

Canadian benchmark bond yields fell to a new record low on Thursday, as the market increasingly bets on a rate cut to insulate the domestic economy from the oil crash.

With yields around the world declining this year as investors forsake riskier assets in favour of safe havens such as government bonds, Canadian 10-year government yields touched a record low of 1.192 per cent on Thursday.

The Canadian five-year benchmark yield marked its own new low point a day earlier, opening up a spread against its U.S. equivalent reminiscent of some dire economic episodes in Canada’s past, said Mark Chandler, head of fixed income research at Royal Bank of Canada.

“We’re at a point where it’s almost unprecedented,” he said. “If you think about market sentiment right now, it’s almost like Canada’s not going to live through this.”

The short year so far has seen market losses pile up in Canada at an alarming pace.

The Canadian dollar dipped to a new 13-year low of $0.6946 against the U.S. dollar on Thursday.

Oil sank below $30 (U.S.) a barrel on Tuesday for the first time since 2003, before rebounding modestly.

Meanwhile, the S&P/TSX composite index dipped to its lowest intraday level since July, 2013, in morning trading on Thursday before rebounding, as longer-term bond yields fell.

A thin majority of economists now expect the deteriorating conditions will compel Bank of Canada Governor Stephen Poloz to cut the overnight lending rate by 25 basis points to 0.25 per cent next week. The key policy rate has not been set that low since the depths of the financial crisis in late 2009 and early 2010.

But I think I’ve found another book about Canadian preferred shares:

Click for Big

It was another utterly appalling day for the Canadian preferred share market, with PerpetualDiscounts down 95bp, FixedResets losing 265bp and DeemedRetractibles off 53bp. The Performance Highlights table is headed by some incredible losses, virtually all of which are entirely genuine, albeit on markets that I would not feel comfortable characterizing as “orderly”. [I did write commentary on the worst ones; then clicked the wrong button when typing and lost it all. Damn.] Volume was extremely high.

It was another big day for DC.PR.C, with 119,915 shares changing hands at a VWAP of 17.00. It would seem that views are being taken! The current price of 17.00 corresponds to a yield of 9.20% to the extended retraction date of 2019-6-30, given a coupon of 7.50%, all of which assumes that the abusive and debatable Plan of Arrangement succeeds.

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:

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 16.11 to be $0.91 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.03 cheap at its bid price of 10.05.

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 17.40 to be 0.75 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 18.55 to be 0.92 cheap.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.75 to be $1.09 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 16.83 and appears to be $0.67 rich.

FTS.PR.K, with a spread of +205bp, and bid at 16.74, looks $0.45 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 15.95 and is $0.73 cheap.

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.63%, with no outliers. There is one junk outlier below -1.50% and one above 0.50%.

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