PrefBlog

The low dollar is attracting some notice:

On Tuesday, the Canadian dollar, commonly known as the loonie, broke below 70 U.S. cents for the first time since May 1, 2003.

For America’s northern neighbor, which imports about 80 percent of the fresh fruits and vegetables its citizens consume, this entails a sharp rise in prices for these goods. With lower-income households tending to spend a larger portion of income on food, this side effect of a soft currency brings them the most acute stress.
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From coast-to-coast-to-coast, Canadians have taken to social media to express displeasure with soaring produce prices:

Bombardier is desperately reinventing its business model:

Bombardier Inc. scrapped $1.75 billion of business-aircraft orders, saying it anticipates making more money by reselling them directly to customers.

The Canadian planemaker also said it was ending a four-decade relationship with distributor TAG Aeronautics as part of a change in its sales strategy. Bombardier will book a $278 million pretax charge in the fourth quarter due to its moves to cut out the middleman standing between itself and aircraft buyers.

Bombardier is revamping its business-jet sales effort as the company’s finances have been strained by its $5.4 billion program for C Series commercial planes. The development of its largest-ever model is more than two years late and at least $2 billion over budget, and Bombardier has been seeking more government aid to right itself.

If it doesn’t work, they can always get another government cheque!

I’m not sure whether it’s a genuine attempt to track down laundered money or the misuse of government powers to follow a populist agenda, but I am sure we’ll hear calls for this in Canada!

Concerned about illicit money flowing into luxury real estate, the Treasury Department said Wednesday that it would begin identifying and tracking secret buyers of high-end properties.

The initiative will start in two of the nation’s major destinations for global wealth: Manhattan and Miami-Dade County. It will shine a light on the darkest corner of the real estate market: all-cash purchases made by shell companies that often shield purchasers’ identities.

It is the first time the federal government has required real estate companies to disclose names behind all-cash transactions, and it is likely to send shudders through the real estate industry, which has benefited enormously in recent years from a building boom increasingly dependent on wealthy, secretive buyers.

The initiative is part of a broader federal effort to increase the focus on money laundering in real estate. Treasury and federal law enforcement officials said they were putting greater resources into investigating luxury real estate sales that involve shell companies like limited liability companies, often known as L.L.C.s; partnerships; and other entities.

There will be ceaseless debate over the next twelve months regarding the advisability of Fed hikes … Larry Summers has fired the opening volley:

Policy makers need to heed the message from global commodity and stock markets that “risks are substantially tilted to the downside,” former U.S. Treasury Secretary Lawrence Summers said Wednesday.

Given the weakness in prices and growth, it’ll be hard for the world to take in stride four interest-rate increases that forecasters are penciling in from the Federal Reserve this year, Summers said in a Bloomberg TV interview.

“I would be surprised if the world economy could comfortably withstand four hikes, and I think that basically the markets agree with me,” he said, adding that’s why it’s important to prepare for a range of possibilities. “Really, what policy makers need to think about is, it is insurance against the more negative scenarios.”

It was another crummy day for equities:

U.S. stocks tumbled, with the Dow Jones Industrial Average plunging more than 370 points and small caps entering a bear market, as oil’s failure to maintain a 4 percent rally rekindled a flight from risk assets. Treasuries surged amid signs that demand for the relative safety of bonds is rising.

The Standard & Poor’s 500 Index fell past 1,900, a level it’s closed below only five times in the past 14 months. The Nasdaq 100 Index had its worst day since Aug. 24, as selling was heaviest in technology and consumer shares. The Russell 2000 Index capped a 22 percent slide from its June record. Brent crude dipped below $30 for the first time since 2004. The yield on the 10-year Treasury note fell to 2.04 percent, after an auction of $21 billion of 10-year notes was deemed ‘outstanding.’ Gold traded above $1,090 an ounce.
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Treasuries rallied after investors flocked to a $21 billion auction of 10-year notes at the lowest yields since October amid concern that global growth is slowing. A class of investors that includes foreign central banks and mutual funds bought 71 percent of the sale, the second-highest amount on record.

Meanwhile, at time of writing, Chinese equities have bounced back a little … but nobody knows how much of that is manipulation:

The Shanghai Composite Index gained 2 percent to 3,007.65 at the close, reversing a loss of as much as 2.8 percent and sending a gauge of volatility to the highest levels since September. The ChiNext small-caps index surged the most in two months after 28 listed companies vowed to take action to stabilize the market, with some pledging not to sell shares over the next six months. State funds may have entered to buy stocks after the Shanghai index fell below the lowest levels reached in last year’s rout, according to Galaxy Securities Co.
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The Shanghai gauge earlier dropped below the low of 2,927.29 set in August, when a summer rout wiped out $5 trillion and spurred the government to impose emergency rescue measures. The index, the worst performer among 93 global benchmark measures tracked by Bloomberg this year, fell as much as 20 percent from the December high before paring losses.

The question of trailer fees and the regulatory banishment thereof has been discussed many times on PrefBlog – a CSA request for comment was mentioned on December 13, 2012, for instance, which was clarified on December 18, 2012, with more discussion December 27, 2012. Assiduous Readers with good memories will remember that I have argued that the only problem with the Platonic ideals espoused by regulatory dreamers is that they won’t work in the real world (much like the regulatory dreamers themselves): Joe Lunchbucket does not want to pay a fee to his advisor unless the advisor trades a lot; this goes double if he’s just lost money in the market. So instead of buying an equity mutual fund like he should, he’ll go down to the bank and put his money into a GIC and every step in the process will be approved by the bank’s compliance department, stuffed to the gills with ex-regulators on fat salaries.

I was only one of many holding this view:

From now on, financial advisers will have to charge upfront fees to their customers rather than receive commission from companies supplying financial products. The move by the Financial Services Authority under its retail distribution review (RDR) includes pensions, Isas and unit trusts, and is designed to be more transparent and to reduce the risk of mis-selling.

It means that consumers will see clearly the cost of financial advice which may previously have appeared to be free since the charges were part of the commission payments made to the adviser. But some analysts believe that spelling out the costs, even though these can be spread over a number of years, could put many customers off seeking advice.

A recent survey by Rostrum Research found that nine out of 10 consumers would only pay up to £25 for an hour’s financial advice, compared with the mooted £50-£250 an hour fee range expected in the review.

I have been criticized for this view, but it appears that two years after banning producer payments to intermediaries, it is becoming clear that Joe Lunchbucket does not want to pay for advice:

An influential panel of experts appointed by the Government as part of the Financial Advice Market Review is considering radical reforms to regulation which would roll back key aspects of the RDR to boost access to advice, Money Marketing understands.

The FAMR, jointly led by the Treasury and the FCA, is assessing barriers to the provision of financial advice following the pensions overhaul introduced last April. In particular, the review is looking to tackle the advice gap for people with smaller pots to invest.
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Sources close to the panel say a number of radical ideas have been seriously discussed during the three sessions held in the second half of last year. These include creating a new basic tier of advice with a lower qualification requirement for simple accumulation products, developing a new charging structure similar to commission and banning regulated advisers from selling unregulated products.
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A separate source says allowing firms to receive commission on simple accumulation product sales is also under consideration.

The source says: “The panel have discussed putting forward an alternative commercial model for advice that would allow a fee to be built into the product. So today you might pay 1 per cent and it is normally paid by selling units in funds but it has to be agreed as part of your service agreement with the adviser. What is being discussed is more like commission.

“So you could invest in an Isa or a pension and the adviser receives a fee on completion of the transaction direct from the provider.”

Panel members have also discussed the possibility of banning regulated advisers from selling unregulated products.

No agreement has been reached on taking these proposals to the Government.

However, the very fact they are being discussed suggests the FAMR could fundamentally redraw the advice landscape yet again.

Shaw Communications, proud issuer of SJR.PR.A, will finance the acquisition of Wind Mobile by selling media assets to the related Corus Entertainment:

Corus Entertainment Inc. has agreed to pay $2.65-billion to acquire Shaw Media Inc. from Shaw Communications Inc., bulking up to compete in a shifting television landscape.

The price will be paid through a combination of $1.85-billion in cash and 71 million Corus class B shares at $11.21 per share. Both companies are ultimately controlled by the Shaw family of Alberta, but are separately listed on the Toronto Stock Exchange.
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It also removes any doubt about how Shaw will pay for its $1.6-billion acquisition of Wind Mobile Corp., which it announced in December. There had been some speculation that it could sell its U.S. data centre business ViaWest or issue equity.

Instead, Shaw made it clear it intends to use the cash from the sale of Shaw Media to fund the Wind purchase.

Shaw expects its acquisition of Wind to close in the third quarter of its fiscal year, which is the three-month period ending May 31, and said Wednesday if that transaction closes earlier, it will rely on bridge financing to fund the deal.

DBRS comments:

Following the divestiture, DBRS notes that the loss of Shaw Media’s operating income and substantial cash generating capacity, in conjunction with the inclusion of the negative free cash flow wireless and existing business infrastructure services segments, will result in free cash flow (after cash dividend payments) turning negative until F2018. This signals a meaningful, albeit temporary, loss in financial flexibility and places greater reliance on growth in operating income to achieve stated financial leverage targets.

In its review, DBRS will focus on (1) assessing the business risk profile of the new entity, including organic growth prospects in the remaining segments and risks associated with integration of WIND; (2) the Company’s longer-term business strategy; (3) financial management intentions of the new entity going forward and its free cash flow trajectory profile; and (4) the Company’s liquidity profile over the near to medium term.

The proposed asset sale and the WIND acquisition are proceeding through customary regulatory, concurrently, and are both expected to close by Q3 F2016. As previously announced, the Company has secured a $1.7 billion bridge facility, which would allow it to complete the WIND acquisition in the event of a delay in completing the proposed divestiture. The Company would then repay the bridge upon receipt of proceeds from the Shaw Media divestiture.

The previously instated Under Review with Negative Implications rating action will be resolved once DBRS becomes confident that the proposed transaction will close under the current terms, at which point DBRS will likely downgrade Shaw’s ratings by one notch, to the BBB (low) rating category.

This follows prior news that SJR: Credit Agencies Nervous About Wind Acquisition.

GMP, proud issuer of GMP.PR.B, has swallowed hard and acknowledged hard times:

GMP Capital Inc.’s radical restructuring, which involves shutting down its United Kingdom and Australian operations as well as eliminating its dividend, is also hitting senior staff at home.

In total, seventy-three jobs are being axed in a new round of cuts announced Wednesday, affecting investment bankers, research analysts and employees in sales and trading. Twenty-nine positions are being eliminated in Canada, 22 in the U.K., 12 in Australia and 10 in the U.S. GMP said 97 positions – a quarter of its work force – have now been eliminated since the end of the third quarter.
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GMP has lost money in three of the past four quarters. In the third quarter of 2015, revenue from the company’s energy sector investment banking cratered 87 per cent from a year ago.

The brokerage was founded in 1995 and went public in December, 2003. GMP was immensely profitable during the great bull run in resources and some of its proprietary traders, such as Michael Wekerle, were among the best paid people on Bay Street. In mid-2006, GMP’s share price peaked at $28. It closed Tuesday at $3.92 – not far from an all-time low.

I have not seen any reaction from the Credit Rating Agencies yet.

I came across the following on the Internet … I think it might be a book about Canadian preferred shares …

Click for Big

It was another horrible day for the Canadian preferred share market, with PerpetualDiscounts down 44bp, FixedResets losing 133bp and DeemedRetractibles off 29bp. The Performance Highlights table is as lengthy as one might expect, but on the bright side there were a few winners today! Volume was well below average.

It was a big day for DC.PR.C, which Assiduous Readers will remember is the target of an abusive Exchange Offer via a Plan of Arrangement which has been the subject of widespread interest. The issue traded 732,460 shares today in a range of 16.70-00, including a monster-block of 555,600, crossed by GMP shortly before the close at 17.00. When one considers that there are only 6-million shares out, one gets even more impressed! The stock was up sharply on the day. If we assume this is an actual arm’s-length cross (and not an internal cross between two accounts of the same manager), then it looks like somebody has started to feel good about the deal … all the more so since the record date to vote on the Plan of Arrangement has long since passed.

PerpetualDiscounts now yield 5.93%, equivalent to 7.71% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.15%, so the pre-tax interest-equivalent spread is now about 355bp, a stunning increase from the 330bp that I should have reported last week. This is an incredible number, surpassed only for a month or so during the credit crunch … and this is happening without any significant credit worries!

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 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.

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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.

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The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.75 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.

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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.

Click for Big

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%.

Click for Big

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

The big news of the day was the diving of the loonie:

The currency fell as much as 0.6 percent to 69.90 U.S. cents Tuesday in Toronto,, the first time it touched that level since May 2003, as crude oil fell to a 12-year low of $29.93 per barrel in New York. The first time the Canadian dollar weakened below 70 U.S. cents was 1997, before the country’s oil industry took off and when its government was wrestling with a budget deficit.

It mostly traded below 70 U.S. cents between 1997 and 2003, a period when manufacturing made up a larger part of exports than oil. It’s all-time low was 61.76 U.S. cents in 2002.
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Even though [Macquarie Group forecaster David] Doyle predicted Canada’s central bank will cut its benchmark rate to a record low 0.25 percent on Jan. 20, a weakened manufacturing sector and more competition from Mexico in the U.S. market, Canada’s largest trading partner, mean it will take longer for the country to see an economic benefit with oil prices still depressed.

Once the loonie, as the currency is called for the aquatic bird on the C$1 coin, reaches its record low, it will stay depressed through the end of 2018, Doyle said.

“Manufacturing and non-energy exports have far less ability to propel the economic outlook than they have in the past,” Doyle said. “Many of our oil and oil-related sectors have grown, and a lot of our manufacturing sectors have not grown and remained low.”

Meanwhile, it appears that insurance and SIFI regulation is having some of its intended effect:

MetLife joins General Electric Co.’s finance unit in seeking to simplify operations after being designated by a U.S. panel as a non-bank systemically important financial institution, a tag that can lead to stricter limits on the balance sheet. [MetLife CEO Steve] Kandarian has sought to reverse that designation in court.

The retail business, as part of a SIFI, faces “higher capital requirements that could put it at a significant competitive disadvantage,” Kandarian said in the statement. “Even though we are appealing our SIFI designation in court and do not believe any part of MetLife is systemic, this risk of increased capital requirements contributed to our decision to pursue the separation.”
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The retail unit slated for separation is a provider of variable annuities, where results can be tied to fluctuations in stock markets and interest rates. The new company would also include life insurance entities. MetLife didn’t outline a timetable for the plan, saying the completion of a transaction could depend on market conditions, and also regulatory approvals.
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MetLife is among four non-bank companies that were named SIFIs by the Financial Stability Oversight Council. That panel was created by the 2010 Dodd-Frank law and charged with monitoring potential threats to the financial system after the near collapse in 2008 of companies including insurer American International Group Inc., which required a U.S. bailout.

GE has been divesting finance operations and has said it will apply to drop its tag as a SIFI. Prudential Financial Inc., the second-largest U.S. life insurer, in 2013 opted against filing a lawsuit to overturn its SIFI status.

AIG, also a SIFI, has been facing pressure from activist investor Carl Icahn to break up into three separate businesses — one offering property-casualty coverage, another selling life insurance and a third backing mortgages. Icahn has said the risk tag is intended to be a tax on size and AIG’s businesses would be worth more to shareholders if they’re not part of a systemically important company.

So, up to a point, I approve of this. Huge financial empires can lead to trouble. My problem with the implementation, however, is that too much is left to opinion and there is too sharp a break between SIFI and non-SIFI status. I would prefer to see a surcharge on risk-weighted assets so that companies can find their optimal size, without the inevitable games-playing that is intrinsic to the current solution; for more discussion, see my post Capital Surcharges for Globally Important Investment Banks.

Assiduous Reader JP brings to my attention new rules on lease reporting:

The International Accounting Standards Board (IASB) published a new rule on Wednesday requiring leases of more than a year to be placed on balance sheets from January 2019.

“It’s a major change and will affect around half of all companies, especially airlines, shipping and retail. They will have significantly different financial statements,” IASB Chairman Hans Hoogervorst told Reuters.

Some defunct retailers have surprised investors by disclosing that off-balance sheet leases were almost 66 times the value of on-balance sheet debt, the IASB said.
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Hoogervorst’s predecessor, David Tweedie, kicked off the reform two decades ago and annoyed leasing companies by saying he wanted to fly the Atlantic in a plane that was on the airline’s balance sheet.

“It will change balance sheets massively,” Tweedie told Reuters. “You can’t be paying rent for an aeroplane you have to stick in the Arizona desert and pretend it’s not a liability.”

I have often thought that the main value of ‘green’ legislation is that it forces a certain amount of thinking about why we do things the way we do. Humans are intrinsically lazy, and will seek to apply cookie-cutter solutions that have worked out reasonably well in the past instead of redesigning everything from scratch. Most of the time, that’s the proper thing to do, of course; but every now and then a fresh look makes the light-bulb spring to life:

The clinical white beam of LEDs and frustrating time-delay of ‘green’ lighting has left many hankering after the instant, bright warm glow of traditional filament bulbs.

But now scientists in the US believe they have come up with a solution which could see a reprieve for incandescent bulbs.

Researchers at MIT have shown that by surrounding the filament with a special crystal structure in the glass they can bounce back the energy which is usually lost in heat, while still allowing the light through.

They refer to the technique as ‘recycling light’ because the energy which would usually escape into the air is redirected back to the filament where it can create new light.
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Usually traditional light bulbs are only about five per cent efficient, with 95 per cent of the energy being lost to the atmosphere. In comparison LED or florescent bulbs manage around 14 per cent efficiency. But the scientists believe that the new bulb could reach efficiency levels of 40 per cent.

And it shows colours far more naturally than modern energy-efficient bulbs. Traditional incandescent bulbs have a ‘colour rendering index’ rating of 100, because they match the hue of objects seen in natural daylight. However even ‘warm’ finish LED or florescent bulbs can only manage an index rating of 80 and most are far less.

“This experimental device is a proof-of-concept, at the low end of performance that could be ultimately achieved by this approach,” said principal research scientist Ivan Celanovic.

Meanwhile, Lockhart points out that the financial system does not perfectly reflect the real economy:

Federal Reserve Bank of Atlanta President Dennis Lockhart said he favors continued tightening of monetary policy this year, and a global selloff in stock markets is unlikely to affect the U.S. economy.

“When such volatility develops, I think it’s helpful to look at the real economy of the United States as opposed to the financial economy and ask if something is fundamentally wrong,” Lockhart said in a speech Monday in Atlanta. “Are there serious imbalances that make the broad economy vulnerable to foreign shocks? I don’t see that kind of connection in current circumstances. ”

Lockhart told reporters after his speech the persistence of turmoil such as what occurred starting in August might change that view.

“If the volatility continues for several weeks, I may have to revise my view that I don’t now see a connection between financial markets abroad and the real economy,” Lockhart said. “It is a matter of how long it lasts.”

Failed politicians and backscratchers are getting very excited about the creation of a brand new regulated business:

Liberal MP Bill Blair wants to make it clear the growth and sale of legal marijuana in Canada will not be a free-for-all.

In an interview, the chief architect of the country’s new marijuana regime frequently used such words as “control” and “strict regulation” as he discussed the federal government’s options.
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“There is a need for some control,” he said. “Our intent is to legalize, regulate and restrict. There needs to be reasonable restrictions on making sure that we keep it away from kids, because I think that is very much in the public interest. We also have to ensure that the social and the health harms are properly managed and mitigated, and that can be done through regulation.”

Illegal pot dispensaries are appearing in greater numbers across the country. In addition, some advocates of legalization say that the Trudeau government’s promise to make pot legal means police should immediately stop charging people for possessing marijuana.

On the other hand, some people in the marijuana industry say only licensed and regulated operators should be able to grow and sell the drug. In particular, a number of investors in the medical marijuana business, which was heavily regulated by the Conservative government, want similar rules and restrictions for recreational pot.

Yes, it is only through restriction of competition that hopelessly incompetent ex-politicians like George ‘e-Health’ Smitherman will be able to make a living:

A former high-ranking colleague and friend of MP Bill Blair, the Liberal government’s point man on marijuana legalization, will lobby the ex-Toronto police chief in hopes of ensuring a tightly controlled system in which only licensed firms are allowed to grow the lucrative drug.

Kim Derry, a deputy chief of the Toronto Police Service under Mr. Blair, is a promoter of marijuana facility THC Meds Ontario Inc., along with George Smitherman, a former Ontario Liberal deputy premier. Mr. Blair, put in charge of the marijuana file last week, will play a key role in determining who gets to grow the product once it is legalized.

While some growers want loosely regulated production across the country, the operators of companies such as THC Meds say production licences should be limited to professional operations.

In an interview, Mr. Derry said the government should aim to “get rid of the goons” who are currently in the marijuana business, calling for tight regulations on who can grow and sell the product.

There is a reasonably good book excerpt about annuities in the Globe:

One of the signs will be when the gap between the yields on long-term government bonds and inflation is relatively high–that is to say, when the real yield on long-term bonds is high.

You might wonder what long-term bonds have to do with annuities. The interest rate that determines the cost of annuities is never advertised by the insurer but it happens to be closely tied to the yield on long-term government bonds, which is readily available. The gap between long-term bond yields and inflation is currently rather small, even though inflation is low which means that now might not be the best time to buy an annuity. Note that the nominal yield on bonds is not important, just the real yield. Hence, you are better off buying an annuity when long-term bond yields are 4 per cent and inflation is 2 per cent than when long-term bond yields and inflation are both 5 per cent.

It’s nice to see some rational discussion of annuity pricing in the popular press, but I must say I find great fault with the author’s arguments on market timing. Dammit, it can’t be done! And it is unbelievably reckless to indulge in timing when making a significant, irreversible decision to annuitize, even if it’s with only a portion of the nest egg.

As I have discussed in PrefLetter (and in one free article, for you cheapskates) annuities are lousy investments, but they are great insurance. Any retiree who is encroaching on his capital to fund his living expenses should very carefully consider buying an annuity of sufficient size that he becomes cash-flow neutral, i.e., that all normal living expenses are covered by the annuity payments and the income from the remaining investment portfolio. That way, you’ve got the encroachment on capital done all at once and have considerably less worry about what happens when there’s no more capital to be encroached upon.

At time of writing there is some hope that markets might not go down tomorrow:

Asian stocks rallied from a three-year low, tracking a rebound in the U.S. amid speculation a selloff that erased more than $5 trillion from global equity values this year had gone too far. Oil rose for the first time this year and the offshore yuan strengthened for a fifth day.

The MSCI Asia-Pacific Index climbed the most in four weeks as benchmark share indexes rallied across the region. U.S. index futures gained after the Standard & Poor’s 500 Index advanced for a second day. Treasuries took back some of the last session’s gains, which were spurred by crude’s decline to below $30 for the first time in 12 years. The more positive sentiment diminished the appeal of haven currencies, with the yen retreating as Australia’s dollar appreciated.

On the other hand the Royal Bank of Scotland issued some cheery advice:

Investors face a “cataclysmic year” where stock markets could fall by up to 20% and oil could slump to $16 a barrel, economists at the Royal Bank of Scotland have warned.

In a note to its clients the bank said: “Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small.” It said the current situation was reminiscent of 2008, when the collapse of the Lehman Brothers investment bank led to the global financial crisis. This time China could be the crisis point.
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RBS is not the only negative voice at the moment. Analysts at JP Morgan have advised clients to sell stocks on any bounce.

Morgan Stanley has said oil could fall to $20 a barrel, while Standard Chartered has predicted an even bigger slide, to as low as $10. Standard said: “Given that no fundamental relationship is currently driving the oil market towards any equilibrium, prices are being moved almost entirely by financial flows caused by fluctuations in other asset prices, including the US dollar and equity markets.

“We think prices could fall as low as $10 a barrel before most of the money managers in the market conceded that matters had gone too far.”

But in the meantime, Canadian preferred share investors are looking at their account balances:

Click for Big

It was an incredibly horrible day for the Canadian preferred share market, with PerpetualDiscounts down 92bp, FixedResets losing 243bp and DeemedRetractibles off 58bp. The Performance Highlights table is immense, of course, with not a single winner. Volume was extremely high.

All I can think of by way of explanation is that with the dollar down so much due to oil and speculation of a Bank of Canada policy cut in the future, people are getting ever more gloomy about the prospect of five year Canadas ever yielding more than one percent – yields dropped precipitously today to 0.57%, which is below the all-time low (based on BoC weekly data) of 0.62%, reached 2015-2-4. One wonders how many people lost their houses in the tightening of the early eighties and are now getting crushed by loosening in their retirement accounts.

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 16.30 to be $0.79 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.99 cheap at its bid price of 10.30.

Click for Big

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 17.50 to be 0.55 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 18.25 to be 1.49 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.90 to be $1.17 cheap. BAM.PF.F, resetting at +286bp on 2019-9-30 is bid at 18.81 and appears to be $0.80 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 17.37, looks $0.68 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 16.64 and is $0.46 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.62%, with no outliers; note that the vertical axis has been shifted upwards today. There is one junk outlier below -1.50% and one above 0.50%.

Click for Big

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