PrefBlog

While preparing PrefLetter I came across this interesting chart, from a presentation by BoC Deputy Governor Lynn Patterson:

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Speaking of the BoC, the Business Outlook Survey is spreading gloom:

The quarterly survey of business executives, published by the central bank Monday, showed that the prolonged oil slump is taking a deepening toll on the mood of the country’s corporate leaders. It also shows that, increasingly, the negative impact and mounting pessimism are infecting parts of the economy beyond the resource sector.

What’s more, the details press on many of the hot buttons for the bank’s decision on interest rates, the next of which comes only days from now (Jan. 20). Spending intentions for new capacity and hiring are at their lowest since the Great Recession; businesses still have ample excess capacity; already-tepid inflation expectations are declining.
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Neither the bond market nor the majority of economists expect a cut next week, but the Business Outlook Survey has made a cut look like a serious possibility at some point in the next few months. At least one prominent central-bank watcher – Merrill Lynch economist Emanuella Enenajor – is convinced that the survey seals the deal on a quarter-point rate cut next week.

It’s not getting any better! Oil and copper got crushed today:

Oil plunged to its lowest point since 2003 on Monday, as West Texas intermediate (WTI), the North American benchmark, declined to $31.12 (U.S.) a barrel. It has lost 15 per cent of its value in the first few days of 2016.

Copper, meanwhile, tumbled to a six-year low of $1.97 a pound. The metal, used for a wide variety of industrial and construction applications, is down more than 9 per cent in January.

… which is putting the banks under pressure:

Consider the urgency: The price of oil – exploring 12-year lows – is fast-approaching worst-case hypothetical scenarios used in bank stress tests in 2015, raising concerns about whether loan losses will spike as energy companies fail to meet their debt obligations. Big Six loans to the oil and gas sector total nearly $113-billion.
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The lower prices are nearing, or passing through, some significant thresholds. Canadian Imperial Bank of Commerce used $30 oil in its stress tests a year ago; Bank of Montreal stress-tested its loan portfolio at $35 a barrel in 2015, and assumed that oil would recover to $50 a barrel this year.

Financial 15 Split Corp., proud issuer of FTN.PR.A, has been confirmed at Pfd-4(high) by DBRS:

DBRS Limited (DBRS) has today confirmed the rating of the Preferred Shares (the Preferred Shares) issued by Financial 15 Split Corp. (the Company) at Pfd-4 (high).
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During 2015, the NAV of the Company has experienced some fluctuation due to volatility in the markets. Downside protection available to holders of the Preferred Shares is 40.7% as of December 15, 2015. The dividend coverage ratio has risen to 0.6 times over the past year. Regular monthly Class A Share distributions will result in an average grind of approximately 3.5% over the next five years.

Happy preferred share investors held a parade in honour of the market today!

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It was yet another grim day for the Canadian preferred share market today, with PerpetualDiscounts off 68bp, FixedResets losing a stunning 199bp and DeemedRetractibles down 84bp. The Performance Highlights table is, of course, ridiculous. Volume was well above average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 17.51 to be $1.03 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.23 cheap at its bid price of 10.85.

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Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 18.15 to be 0.82 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 19.25 to be 0.77 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 14.60 to be $0.99 cheap. BAM.PR.X, resetting at +180bp on 2017-6-30 is bid at 13.67 and appears to be $0.74 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 17.62, looks $0.84 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 16.51 and is $0.70 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.78%, with one outlier above 0.00%. There is one junk outlier below -2.00% and four above 0.00%.

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

Jobs, jobs, jobs!

Employers in December added 292,000 workers, exceeding the highest estimate in a Bloomberg survey, and payrolls for the previous two months were revised higher, a Labor Department report showed on Friday. The jobless rate held at 5 percent as people entering the labor force found work. At the same time, worker pay disappointed, rising less than forecast from a year earlier.
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Labor Department revisions to prior reports added a total of 50,000 jobs to payrolls in November and October. For all of 2015, employment climbed by 2.65 million after a 3.1 million gain in 2014, for the best back-to-back years since 1998-99.
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While employers continue to aggressively add to headcounts, worker pay has yet to show a sustainable pickup. Average hourly earnings in December were unchanged from the prior month and increased 2.5 percent from a year earlier. The median forecast called for a 2.7 percent year-over-year gain.
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Among measures of labor-market slack, the number of Americans who are working part time though would rather have a full time position, or the measure known as part-time for economic reasons, eased to 6.02 million from 6.09 million.

The underemployment rate — which includes part-time workers who’d prefer a full-time position and people who want to work but have given up looking — held at 9.9 percent.
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Hiring gains last month were broad-based, with construction adding 45,000 jobs, health-care providers taking on 52,600 and temporary help services boosting headcounts by 34,400. Factories even added the most jobs — 8,000 — in five months.

There will even be job openings for Secret Policemen and government propagandists!

The Obama administration on Friday asked some of the nation’s biggest technology companies for help in the fight against terrorism as it announced steps to thwart the recruitment and radicalization of extremists.

Top administration officials met in San Jose, California with representatives of Twitter Inc., Apple Inc., Facebook Inc. and other Silicon Valley companies. In a seven-page memo sent in advance, the companies were asked for ideas on how extremist content online can be identified and removed, as well as help creating alternative messages, according to excerpts of the document obtained and described to Bloomberg News.

“We are interested in exploring all options with you for how to deal with the growing threat of terrorists and other malicious actors using technology,” the memo said. “Are there high-level principles we could agree on for working through these problems together? And are there technologies that could make it harder for terrorists to use the Internet to mobilize, facilitate, and operationalize?”

Meanwhile, Canadians got government work:

Canada added 23,000 jobs in December, surpassing expectations due to gains in self-employment, health care and education.

December’s gains helped reverse huge election-related job declines in November and capped a tumultuous year for job creation. The country added a total of 158,000 jobs in 2015, an increase of 0.9 per cent over the previous year, despite mass layoffs in the energy sector.
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Hiring in the private sector was flat compared with the previous year while the public sector added 41,000 new jobs, an increase of 1.1 per cent, and self-employment grew by 92,000 jobs, or 3.4 per cent.

But soon we’ll be able to beg tourists for American dollars!

Toronto has made it onto the New York Times’s list of 52 top global tourist destinations for 2016, at No. 7.

I want to see the sights of 10-15 years ago again … walk around downtown, see a tour bus on every corner, theatre industry booming … who knows, maybe they’ll even start up a Toronto-Rochester catamaran!

But anyway, despite the encouraging job news, equities fell:

U.S. stocks tumbled in a late-afternoon selloff that sent major equity indexes to their worst weekly declines in more than four years, as investors found little relief in moves by China to restore calm to its sinking markets and data that showed resilience in the U.S labor market.
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The S&P 500 dropped 1.1 percent to 1,922.03 at 4 p.m. in New York, and fell 6 percent for the week. The Dow Jones Industrial Average sank 167.65 points, or 1 percent, to 16,346.45. The index lost more than 1,000 points this week in its worst opening five-days to a year ever. The Nasdaq Composite Index declined 1 percent, stretching its losing streak to seven days, the longest since 2011.
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The S&P 500 has fallen 7.3 percent since the Federal Reserve raised interest rates last month for the first time in nearly a decade. The central bank balked at boosting borrowing costs in September in part due to turbulence sparked by China’s August currency devaluation. The poor start to 2016 has left the benchmark index 9.8 percent below its all-time high set in May after coming within 1 percent of the record as recently as November. It’s 2.9 percent above the August bottom.

And now there are calls for fiscal stimulus:

[Central Banks] have only themselves to blame for becoming agents of volatility, according to Christopher Walen, senior managing director at Kroll Bond Rating Agency Inc.

He told Bloomberg Television this week that officials’ willingness to keep interest rates near zero and repeatedly buy bonds and other assets meant they became “way too involved in the global economy” and should have left more of the lifting work to governments.

The handover to looser fiscal policy now needs to happen if economic growth and inflation are to get the spur they need, said Martin Malone, global macro policy strategist at London-based brokerage Mint Partners.

“Major economies have exhausted monetary and foreign-exchange policies,” he said. “Government action must take over from central-bank policies, triggering more confident private-sector investment and spending.”

The influence of central bankers was underscored by a report this week from currency strategists at HSBC Holdings Plc, which calculated foreign-exchange markets are more sensitive to interest-rate decision-making than at any time in the last 15 years.

But it will take a long time for the Fed to shrink its balance sheet:

It will take the U.S. central bank at least six years to reduce its bloated balance sheet back to more a normal size, San Francisco Federal Reserve Bank President John Williamssaid, as officials take a gradual approach to withdrawing crisis-level stimulus.

“Our plan is to shrink the balance sheet ‘organically,’ if you will, through the maturation of the assets,” Williams said in the text of remarks Friday in Santa Barbara, California. “It’s likely going to take at least six years to get the balance sheet back to normal, which is in keeping with the overall approach to removing accommodation gradually.”

The Federal Reserve is slowly weaning the economy off of ultra-easy monetary policy that saw it hold interest rates near zero for seven years and balloon the balance sheet to around $4.5 trillion through three rounds of buying mainly Treasuries and mortgage-backed securities. Officials took a major step in December, raising interest rates for the first time since 2006, and said they’ll wait until the process of policy normalization is well under way before beginning to allow excess balance-sheet holdings to roll off.

“The Fed has started the process of raising interest rates, but the path to normal will be gradual,” Williams said Friday.

Dividend Split Corp. II, proud issuer of DF.PR.A has been confirmed at Pfd-3(Low) by DBRS:

DBRS Limited (DBRS) has today confirmed the rating of the Preferred Shares issued by Dividend 15 Split Corp. II (the Company) at Pfd-3 (low). In November and December of 2006, the Company issued 5.6 million Preferred Shares (at $10.00 each) and an equal number of Class A Shares (at $15.00 each). The final redemption date for both classes of shares issued is December 1, 2019 (extended from December 1, 2014, at a special meeting of shareholders on June 3, 2013).
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Holders of the Class A Shares receive regular monthly cash dividends targeted to be $0.10 per Class A Share to yield 8% per annum on the issue price of $15.00. No monthly distributions to the Class A Shares are made if the dividends of the Preferred Shares are in arrears or the NAV of the Company falls below 1.5 times the principal amount of the outstanding Preferred Shares. Furthermore, no special distributions are made if the NAV of the Company is below $25.00. The NAV as of December 15, 2015, was $14.52, resulting in no distributions paid to the Class A Shares for December 31, 2015. On maturity, the holders of the Preferred Shares will be entitled to the value of the Company, up to the face value of the Preferred Shares, in priority to the holders of the Class A Shares. Holders of the Class A Shares will receive all remaining value of the Company.

The confirmation of the Pfd-3 (low) rating of the Preferred Shares is based primarily on the downside protection available and the additional protection provided by the asset coverage test, which does not permit any distributions to holders of the Class A Shares if the NAV of the Company falls below $15.00.

The year-end NAVPU for DF.PR.A was 14.51; the sort-of comparable, XDV is down about 4% since then.

But for now, Canadian preferred share investors can look forward to two days with no losses!

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It was another horrid day for Canadian preferred share investors, with PerpetualDiscounts down 32bp, FixedResets losing 84bp and DeemedRetractibles off 27bp. The Performance Highlights table is lengthy. Volume was very low.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.30 to be $1.15 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.44 cheap at its bid price of 11.20.

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Most expensive is MFC.PR.M, resetting at +236bp on 2019-12-19, bid at 18.98 to be 0.56 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 19.34 to be 1.03 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 15.18 to be $1.10 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 18.34 and appears to be $0.69 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 17.78, looks $0.69 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.05 and is $0.48 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.27%, with three outliers below -2.00%. There is one junk outlier below -2.00% and three above 0.00%.

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

But now … on to PrefLetter.

Here’s to the new feds, just like the old feds:

If you closed your eyes, you could almost imagine Stephen Harper is still prime minister.

Progressive voters who hoped Justin Trudeau would abruptly shift the federal government to the left once he became Prime Minister must be in despair as the new regime announces one conservative-friendly policy after another – further proof that when it comes to the really big decisions, the imperative of protecting jobs and the economy trumps human rights, the environment and other concerns in these difficult days.

For the umpteenth time, the Liberals campaigned from the left and now are governing from the centre-right. Only those born yesterday will be surprised by this.
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The Liberals have taken a few token progressive steps: appointing women to half the posts in cabinet, restoring the long-form census, cancelling an ugly and intrusive monument to the victims of communism – that sort of on-the-margins thing. But on the big stuff, everyone is a Conservative, especially the Liberals.

It is my theory that on big, highly visible policy issues, you are actually more likely to get the right thing done if you have a government that – in theory – opposes the policy. For instance, consider the nineties when Chretien and Martin hacked away the deficit and got federal finances on an even keel. They did the right thing; many of their supporters criticized them harshly for this, but I suggest that a Conservative government at that time would not have been anywhere near so decisive.

If the Conservatives had done it, it would have reinforced every stereotype in the book; they would have cemented a reputation as the heartless party of Big Business only and would still be feeling that pain … in much the same way as the Ontario Progressive Conservatives are still losing votes because of Mike Harris’ ‘Common Sense Revolution’.

But when the Liberals do it … people first think that what the government is doing is awful … then they remember that it goes against party stereotypes to some degree … and then they decide that the situation must be really serious and the actions really necessary if the party is going against the grain. The Liberals have more political room to impose austerity; the Conservatives have more political room to run deficits totalling $127-billion.

And in the last campaign, the NDP couldn’t promise deficit-financed infrastructure spending; that would have reinforced their stereotype. The Liberals could.

So anyway, it was a cruddy day for equities:

The Standard & Poor’s 500 Index capped its worst-ever four-day start to a year, while gold rallied with the yen as turmoil in China spread around the world and billionaire George Soros warned that a larger crisis may be brewing.

The U.S. equities benchmark ended the first four days of 2016 lower by 4.9 percent, while the Dow Jones Industrial Average has erased more than 900 points so far this year. A measure of global shares wrapped up a four-day slide of 5.2 percent, its worst start in records back to 1998. Selling in global equities began in China after the central bank weakened the yuan an eighth day. Crude settled at a 12-year low, and copper dipped below $2 for the first time since 2009. The yen reached a four-month high.
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The Standard & Poor’s 500 Index slid 2.4 percent at 4:15 p.m in New York. The index is down 4.9 percent this year, its worst start in data going back to 1928. The MSCI All-Country World Index fell for a fourth day, bringing its slide this year to 5.2 percent.

And pundits are dividing blame between Chinese retail investors …:

The globe-spanning stampede is vast and complicated, as hedge-fund managers, currency specialists and oil traders from Bangkok to Frankfurt weigh everything from rising U.S. interest rates to overflowing crude-oil storage tanks and a rising belief that China’s economic slowdown is more severe than once thought, and getting worse.

But at the head of the stampede is a cavalcade of largely unsophisticated Chinese investors who live in a country that has made gambling illegal but turned its stock markets into the world’s largest casino. This is not a small group, numbering nearly three times the population of Canada, but they are among the most active retail traders on Earth – and they’re playing roulette at a table where everyone is whispering that it’s time to bet on red.

… and ham-fisted Chinese regulators:

After watching a stock-market collapse wipe out $5 trillion of wealth in less than three months last year, Chinese authorities hatched a plan to stem the pain: circuit breakers that would be triggered by daily declines of 5 percent.

The new system went into effect Jan. 4. It lasted all of four days. After two harrowing sessions — on Monday and Thursday — that tripped the breaker repeatedly and convulsed global markets, officials suspended the rule, saying it was only exacerbating declines. While that acknowledgment addresses critics’ concerns, the flip-flop at the same time only adds to the sentiment among global investors that authorities are improvising — and improvising poorly — as they try to stabilize markets and shore up the economy.
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On the currency front, policy makers have pledged to keep the yuan stable, drawing down a record $108 billion from foreign reserves last month to prop it up. At the same time, the People’s Bank of China set its reference rate at unexpectedly weak levels this week, raising speculation that it’s more tolerant of depreciation to spur exports.

“The more alarming thing is that they weakened the currency after saying they wouldn’t,” said Patrick Chovanec, New York-based chief strategist at Silvercrest Asset Management Group. “So that raises all these issues of mixed signals, confusion. It is very unclear what the policy is, whether they know what the policy is, whether they know how to implement the policy.”
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Chinese regulators moved to control the damage earlier Thursday, imposing a new limit on the amount of stock that major corporate shareholders can sell. That followed intervention by government funds to prop up shares on Tuesday, according to people familiar with the matter.

The Chinese circuit-breakers have attracted high-level criticism:

“They’re just on the wrong track,” said Nicholas Brady, 85, the former U.S. Treasury secretary who ran a committee that recommended the curbs on equity trading after the 1987 crash. “They need a set of circuit breakers that appropriately reflects their market.”

Brady spoke Thursday after Chinese regulators suspended their newly introduced program that ends stock trading for the entire day after a 7 percent plunge. The halt was set off twice in its first week of operation, bolstering speculation China set its threshold too low.
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“I don’t think this is an exact science,” said Sang Lee, an analyst at financial-markets researcher Aite Group. With circuit breakers, “If you set these too low, instead of easing volatility it may increase volatility.”

That echoes the view of Brady, who was chairman of Wall Street powerhouse Dillon Read & Co. when President Ronald Reagan asked him to figure out what happened during the 1987 crash and propose solutions.

Meanwhile, Adam Haigh on Bloomberg reminds us there’s still lots of arbitrary rules to restrict Chinese markets:

A 10 percent daily limit on single stock moves and a rule preventing investors from buying and selling the same shares in a day remain in force. Volume in what was once the world’s most active index futures market is minimal after authorities curtailed trading amid a summer rout, making it more difficult to implement hedging strategies. Officials unveiled curbs Thursday on share sales by major stockholders just a day before an existing ban was due to expire. And the activity of foreign investors is limited by quotas, given either to asset managers or to users of the Hong Kong-Shanghai exchange link.
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There’s also the prospect that regulators and executives will dust off last year’s playbook as they seek to stem losses. At the height of the summer rout, about half of China’s listed companies were halted, while officials investigated trading strategies, made it harder for investors to borrow money to buy equities and vowed to “purify” the market.

Meanwhile, Poloz has a new script from his new masters:

Bank of Canada governor Stephen Poloz is encouraging the Liberal government to act on promised infrastructure spending, acknowledging there are limits to what monetary policy can do to boost Canada’s sluggish economy.

Officials with Canada’s central bank are currently working with the Finance Department on economic models aimed at measuring the likely impact of promised government spending on infrastructure, as well as tax cuts that took effect this year.
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Speaking to reporters in Ottawa, Mr. Poloz said the cheaper dollar alone is not enough to counter the shock from the commodities price slump. And he said the economy would benefit from some government fiscal policy.

“Infrastructure is an ingredient to economic growth. It’s sort of the enabler of economic growth,” he said.

Speaking of the Canadian dollar, I ran across the publication A History of the Canadian Dollar by James Powell and published by the Bank of Canada today. It’s ten years old now … it might need a new chapter! I’m too young to remember the hey-day of:

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… so I’ll have to find solace in boring the whippersnappers with tales of:

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There’s a chance that PrefBlog won’t have John Nagel to kick around any more:

John Nagel, a fixture in the preferred share market for more than three decades, has retired from his post at Desjardins Securities.

But it’s not clear at this stage, whether Nagel who spent the past 13 plus years at Desjardins, has retired from the investment industry.

In a note to clients, Nagel – who first traded preferred shares while at Gardiner Watson in the mid-1980s – noted the firm had achieved a “great deal” since he arrived in June 2002. For instance the firm “established and earned a significant improvement in its syndication positions,” as well as hiring and training assistants and analysts “many of whom have continued on successfully in the financial services field.” In addition, Nagel’s team, that produced market commentary and market, improved the firm’s preferred trading and sales activities.
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With Nagel’s retirement, the preferred share department will report to Mark Lucey, a managing director and head of equities and capital markets. Previously it reported to fixed income. Julian Pope, David Paul and Alex Somjen will now man the firm’s pref share group.

Meanwhile, in the Canadian preferred share market:

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It was an appalling day for the Canadian preferred share market, with PerpetualDiscounts down 101bp, FixedResets losing 136bp and DeemedRetractibles off 63bp. The Performance Highlights table is about as long as one might expect. Volume was well below average.

Well, it was a pretty lousy day for equities:

Global equities capped their worst start to a year since 2000, with the Dow Jones Industrial Average sliding more than 250 points, as China unexpectedly weakening its currency fueled fresh concern over the strength of the world economy. Bonds gained.

The MSCI All-Country World Index ended the first three days of 2016 down by 3.3 percent, as U.S. stocks fell to a three-month low and emerging-market shares dropped to their cheapest level since 2009. Brent crude plunged to its lowest point since 2004, while U.S. oil spiked below $34 a barrel as supplies at a hub rose to a record. The dollar pared gains after minutes of the Federal Reserve’s last meeting were released. Treasuries jumped, with yields on 10-year notes dropping seven basis points to 2.17 percent.
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China’s growing tolerance for a weaker yuan signaled the government is struggling in its efforts to shore up economic growth and rekindled concern last seen in August, when U.S. stocks entered their first correction in four years amid anxiety the slowdown in China would hamper global growth. U.S. crude’s plunge toward $34 a barrel heightened disinflation fears as investors assess the ability of central banks to meet policy goals. The World Bank cut its global growth forecasts for this year and next as markets closed.

… and this had an effect on the loonie …

But on Wednesday, Canada’s benchmark heavy crude price was hit hard again, falling below $20 (U.S.) a barrel for the first time since record-keeping for that grade began seven years ago. It fell in concert with global crude prices such as the international benchmark Brent, which sank to its lowest since 2004.

That helped pull the loonie down half a cent to less than 71 cents. The Canadian currency has been hit by the oil shock, poor prospects for domestic economic growth and the different paths on interest rates being taken by the U.S. Federal Reserve Board and the Bank of Canada.

The Canadian dollar, which sank 16 per cent last year, has now reached depths last seen in August, 2003, and further weakening is possible. That spells more worries for importers as well as travellers heading to the United States.

Meanwhile, the S&P/TSX composite index skidded 193 points to 12,726.80 in its third straight session of losses, pulled lower by energy shares such as Encana Corp. and Paramount Resources Ltd.

… and given the state of overnight markets:

The worst start for Chinese markets in two decades showed no signs of letting up after the central bank cut its yuan reference rate by the most since August, sparking a selloff in stocks that forced the $6.6 trillion market to shut early.

China’s CSI 300 Index plunged 7.2 percent before bourses were halted by circuit breakers in the first half hour of trading, while the onshore yuan weakened 0.6 percent versus the dollar to a five-year low. The People’s Bank of China cut its reference rate on Thursday for an eighth straight day, fueling concern that tepid economic growth is prompting authorities to guide the currency lower.

… it looks like tomorrow might be worse:

U.S. index futures sank after China’s weaker yuan fix spurred a rout in the nation’s equities that triggered a market-wide halt for the second time this week.

Contracts on the Standard & Poor’s 500 Index slid 1.7 percent to 1,953 as of 2:40 p.m. in Hong Kong. Those on the Dow Jones Industrial Average lost 1.6 percent after the gauge capped its worst three-day start to a year since 2008. Chinese stock exchanges closed less than half an hour after they opened as the CSI 300 Index plunged more than 7 percent, setting off a circuit-breaker mechanism.

Meanwhile Fischer is indicating a steady policy of Fed hikes:

Federal Reserve Vice Chairman Stanley Fischer said policy makers’ forecasts predicting four interest-rate increases in 2016 were “in the ballpark,” though China’s slowing economy and other sources of uncertainty make it difficult to predict the path of policy.

“The reason we meet eight times a year is because things happen, and as they happen you want to adjust your policy,” Fischer said in an interview Wednesday on CNBC.

Fischer’s remarks come three weeks after the Fed raised interest rates for the first time in almost a decade. Policy makers said at the time they would continue to monitor real and expected progress on inflation, which remains below their 2 percent target, as they contemplate when to raise again.

And a modest rise in Canadian mortgage rates has the chatteratti going wild!

There’s just one reason for the strength of Canada’s housing market – low, stable mortgage rates.

Rates are still low, but the stable part is in question after Royal Bank of Canada announced a small but still significant round of mortgage rate increases that will take effect Friday. Other banks will likely adjust rates as well, after a brief period of letting RBC draw fire as the first to move.

RBC will increase borrowing costs on special offers for fixed-rate mortgages with terms of two to five years by 0.1 of a percentage point.
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Lenders are facing higher costs for financing mortgages as a result of new mortgage market rules introduced last year by federal regulators. As well, unsettled financial market conditions are forcing lenders to pay higher rates on the money they raise to lend out as mortgages.

Has anybody seen a lift in GIC rates lately?

TransCanada Corporation, proud issuer of TRP.PR.A, TRP.PR.B, TRP.PR.C, TRP.PR.D, TRP.PR.E, TRP.PR.F, TRP.PR.G and TRP.PR.H, has announced a NAFTA claim regarding the Keystone XL refusal:

TransCanada Corporation (TSX:TRP) (NYSE:TRP) (TransCanada) announced today it has filed a Notice of Intent to initiate a claim under Chapter 11 of the North American Free Trade Agreement (NAFTA) in response to the U.S. Administration’s decision to deny a Presidential Permit for the Keystone XL Pipeline on the basis that the denial was arbitrary and unjustified.

TransCanada also has filed a lawsuit in the U.S. Federal Court in Houston, Texas, asserting that the President’s decision to deny construction of Keystone XL exceeded his power under the U.S. Constitution.

Further, as a result of the permit denial, TransCanada is reviewing the approximate $4.3 billion (US$3.1 billion) carrying value invested in the project and related assets and expects that an estimated $2.5 to $2.9 billion after-tax write-down will be recorded in the company’s fourth quarter results.

DBRS says ‘no big deal’:

DBRS Limited (DBRS) notes that TransCanada Corporation (TCC, or the Company) announced today that it has filed a Notice of Intent to initiate a claim under Chapter 11 of the North American Free Trade Agreement (NAFTA) in response to the U.S. Administration’s decision to deny a Presidential border crossing permit for the Keystone XL pipeline project (KXL) on the basis that the denial was arbitrary and unjustified. Through the NAFTA claim, TCC will be seeking to recover more than USD 15 billion in costs and damages suffered by the Company as a result of the U.S. Administration’s breach of its NAFTA obligations. Concurrently, TCC has filed a lawsuit in the U.S. Federal Court in Houston, Texas, asserting that the President’s decision to deny construction of KXL exceeded his power under the U.S. Constitution.
…
Overall, DBRS views the impact of TCC’s legal actions to be credit neutral. DBRS had previously commented (Press release dated November 6, 2015) that it viewed the denial of the KXL permit as having no impact on the credit ratings of TCC, and its wholly owned subsidiaries (TransCanada PipeLines Limited and Nova Gas Transmission Limited). Today’s announcement does not impact the Company’s business risk profile as the current ratings reflect environmental, regulatory and political risks with respect to several of the Company’s development projects, including KXL. Furthermore, TCC expects the support for this energy infrastructure project from shippers, underpinned by long-term contracts, to continue through the remedial process. DBRS has modeled the impact of the $2.9 billion writedown (maximum of the range) together with TCC’s recent approximately $300 million share buyback (December 2015), and the USD 654 million acquisition of Ironwood Power Plant (October 2015; 100% debt financed, expected to close Q1 2016) on the Company’s credit metrics on a pro forma basis, and has concluded that the writedown does not have an impact on the Company’s financial risk profile as key credit metrics are expected to remain reasonable for the current rating of A (low), with a Stable trend.

It was another awful day for the Canadian preferred share market, with PerpetualDiscounts off 17bp, FixedResets losing 58bp and DeemedRetractibles down 26bp. The Performance Highlights table is again very lengthy. Volume was well below average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.50 to be $1.04 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.46 cheap at its bid price of 11.45.

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Most expensive is MFC.PR.M, resetting at +236bp on 2019-12-19, bid at 19.68 to be 0.61 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 20.48 to be 0.62 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 15.65 to be $1.51 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 19.45 and appears to be $0.93 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 18.38, looks $0.85 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.30 and is $0.66 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.00%, with one outlier below -2.00%. There is one junk outlier below -2.00% and three above 0.00%.

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

Nothing happened today, although at time of writing Asian markets are getting hit again:

Asian stocks slumped along with U.S. index futures after China weakened the yuan, underscoring concern the world’s second-largest economy is struggling. The won fell with shares in Seoul after North Korea conducted its fourth nuclear test.

Japanese equities dropped and contracts on the Standard & Poor’s 500 Indexslid 0.9 percent as of 2:22 p.m. in Tokyo. Kim Jong Un’s regime detonated a hydrogen device at an underground test site in the far northeast, the official Korean Central News Agency said. The yen advanced to a more than two-month high amid demand for safer assets, as Australian government bonds extended their climb and Treasuries advanced for a fifth session. Gold held gains, while zinc led industrial metals lower in London and Shanghai on concerns demand is ebbing in China.
…
The Bloomberg-JPMorgan Asia Dollar Index fell to the lowest level since April 2009 as China’s central bank weakened the yuan’s reference rate for the seventh day in a row, heightening the risk of a currency war. The gap between the yuan rate inside China and that for the currency traded offshore expanded, underscoring speculation the government faces pressure to devalue its currency to aid the economy. China’s CSI 300 Index rose 0.4 percent, gaining for a second session after Monday’s 7 percent rout.

The Globe’s Rob Carrick touts preferred shares:

Avoid preferred shares then? Not necessarily. In fact, now may be the time to start buying. In a recent note to clients, the independent analyst Harry Levant of IncomeResearch.ca argues that the preferred market may have bottomed late in 2015. His suggestion for locking in a solid yield and possibly profiting from a rebound in prices is to buy an exchange-traded fund called the iShares Preferred Share Index ETF (CPD-T).
…
Mr. Levant notes that CPD wasn’t a great choice last year because its portfolio weights rate resets more heavily than the fixed-rate preferred shares that held up comparatively well. With rate resets looking like they may have hit bottom, CPD becomes more attractive.

The distribution yield for CPD in early January was 4.95 per cent. That’s 4.5 per cent on an after-fee basis, which is roughly double the yield on a 30-year Government of Canada bond. Safe, preferred shares are most assuredly not. But they do have rebound potential now, and a pretty fine yield as well.

I’ll note that the distribution yield of 4.95% (or 4.5% after fees) quoted in the article will be as difficult to really understand as anything else with preferred shares these days. On a cash basis, it will overestimate sustainable yield, because there are still a LOT of dividend cuts yet to come although [given a constant GOC-5 yield] we have just about finished with the 40%+ cuts. On the other hand, the calculation of Distribution Yield will not take any account of the special case of insurance company NVCC non-compliant issues – that is, the probability assigned to an extension of the NVCC rules is zero. So prospective buyers should ensure they understand how the quoted yield may change in the future given various interest-rate and regulatory scenarios.

It looked like it was going to be another horrific day for Canadian preferred shares, but a late afternoon rally upgraded the status to merely appalling.

Here’s TXPR:

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So preferred share investors partied in the streets!

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It was an appalling day for the Canadian preferred share market, with PerpetualDiscounts gaining 7bp, FixedResets down 207bp and DeemedRetractibles off 10bp. As might be expected, the Performance Highlights table is an almost solid wall of FixedReset losers, but there were a few winners bouncing back from yesterday. Volume picked up to just a little below average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 18.65 to be $1.00 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $1.36 cheap at its bid price of 11.81.

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A big jump in Implied Volatility today, as is usually the case when there is a dramatically poor day. Given this, and the high levels of Implied Volatility generally, I suspect that this means there is something else going on. Low-Spread FixedResets have a higher degree of leverage to future changes in the GOC-5 yield; I think that this is what is being paid for.

Most expensive is MFC.PR.L, resetting at +216bp on 2019-6-19, bid at 18.70 to be 0.35 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 20.66 to be 0.58 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 15.86 to be $1.40 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 19.50 and appears to be $0.85 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 18.24, looks $0.65 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 17.50 and is $0.51 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.06%, with one outlier above 0.00%, and two below -2.00%. There is one junk outlier below -2.00% and two above 0.00%.

Click for Big

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