PrefBlog

Assiduous Readers will remember David Rosenberg’s thesis that liquidations by resource-dependent Sovereign Wealth Funds are an important factor in the horrible markets, as discussed on February 2. Well, there’s some more fuel coming for that fire!

Sovereign wealth funds may withdraw $404.3 billion from global stock markets this year if crude prices stay between $30 to $40 per barrel as oil-rich nations seek to shore up their finances, according to the Sovereign Wealth Fund Institute.

The value of listed equities held by the world’s largest wealth funds will probably drop to $2.64 trillion this year, from about $3.04 trillion at the end of 2015, the Las Vegas-based SWFI said in an e-mailed report sent Monday. Withdrawals are set to approximately double from last year, when sovereign funds sold about $213.4 billion of equities, it said.
…
Norway, the world’s biggest wealth fund, hasn’t been “impervious to the oil glut” either, the SWFI report said.

Officials who supervise the $780 billion fund haven’t even discussed the possibility of shifting strategy, according to Egil Matsen, who last month started as the new deputy central bank governor in charge of oversight of the investor. The government this year plans to make its first withdrawal since the fund got its first capital infusion in 1996.

Meanwhile, hedge funds are moving onto the NYSE floor:

Citadel Securities and Global Trading Systems LLC recently agreed to buy NYSE floor-trading businesses, putting their computers on the same team as humans working at the lower Manhattan facility. They’re joining other automated market makers, Virtu Financial Inc. and IMC, who now oversee nearly all transactions on the floor.
…
Once their deals close, GTS and the market-making division of Citadel LLC will each oversee the trading of more than 1,000 securities. Along with Virtu and IMC, the high-speed traders will have a chance to build relationships with the listed companies whose stocks they manage.
…
Before a corporation lists its stock through an initial public offering, they interview and select the designated market maker that oversees their shares. NYSE requires the company and its trader to speak regularly.
…
Big brokers like Goldman Sachs Group Inc. and Bank of America Corp. once ruled the NYSE floor. Over time, as regulation and technology hurdles steepened, the banks sold their floor operations. Once GTS’s purchase of Barclays Plc’s NYSE business closes in the second quarter, no bank will have a designated market maker operation on the floor.

Jamil Nazarali, head of Citadel Execution Services, said that firms like his are better equipped technologically than banks to handle market making at NYSE.

“The equity markets are nearly completely automated, and the banks just don’t have the market-making capabilities we do,” Nazarali said. “It’s not an accident that the banks have left the floor.”

It’s nice to see technologically focussed firms doing well:

Cantor Fitzgerald, the Knight Capital Group and the Susquehanna International Group have all capitalized on the E.T.F. explosion.

And as these firms have grown, so has the demand for a new breed of Wall Street trader — one who can build financial models and write computer code but who also has the guts to spot a market anomaly and bet big with the firm’s capital.

In a word, these are not your suit-and-tie bond and stock traders of yore, riding the commuter train into Manhattan. They are, instead, the pick of the global brain crop.

Here is a small sample of Jane Street’s main traders: Tao Wang (doctorate in philosophy and finance from the National University of Singapore), Min Zhu (master’s in chemistry, Columbia), Brett Harrison (master’s in computer science with a focus in artificial intelligence, Harvard) and Srihari Seshadri (bachelor’s in computer science, Carnegie Mellon).

For large asset management firms like BlackRock, Vanguard and Invesco, the business of rolling out one E.T.F. after another has become a major profit center. But in many ways, the real money is being made by the trading firms that specialize in making a market in these securities.

Assiduous Reader prefobsessed has sent me a link to another Barry Critchley piece, Two tales of preferred redemption, Rona and RioCan REIT. I have updated the post REI.PR.A To Be Redeemed with some commentary.

The Norwegians remind us that anti-money-laundering laws and bureaucracies are pointless:

A study of 40 European jihadi cells by the Norwegian Defence Research Establishment found that the vast majority were financed by members’ own legitimate activities. One of the San Bernardino shooters took out a legitimate loan for $28,500 to finance the attack, rather than receiving the proverbial briefcase of cash from a foreign operative.

“One of the trends we’re seeing is local and parochial sources of income” for terrorist groups, [associate political scientist at the RAND institute Colin] Clarke agrees. He says that terrorist attacks are relatively inexpensive, and can be funded through local petty crime or credit loans. “If you plan to martyr yourself you’re not too concerned with your credit score,” he adds.

Update, 2016-4-20: There was more discussion of this on November 23, 2015

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 3bp, FixedResets gaining 14bp and DeemedRetractibles down 21bp. Lots of churn is evident in the Performance Highlights table. Volume was above average.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 16.50 to be $0.96 rich, while TRP.PR.C, resetting 2021-1-30 at +154, is $0.75 cheap at its bid price of 10.63.

Click for Big

This analysis includes the new issue with a deemed price of 25.00.

Most expensive is the new issue, resetting at +497bp on 2021-6-19, deemed at 25.00 to be 1.10 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 16.90 to be 1.45 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.41 to be $1.03 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 17.06 and appears to be $1.37 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 15.25, looks $0.64 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 14.51 and is $0.50 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.87%, with one outlier above 0.00% and one below -2.00%. There are thre junk outliers above 0.00%.

Click for Big

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

There was good news on US inflation today:

The cost of living in the U.S. excluding food and fuel increased in January by the most in more than four years, reflecting broad-based gains that signal companies may be getting some pricing power.

The so-called core consumer-price measure climbed 0.3 percent, more than forecast and the most since August 2011, after a 0.2 percent gain the month before, a Labor Department report showed Friday in Washington. Total prices were little changed, depressed by the continued plunge in energy costs.
…
In the 12 months ended January, the overall consumer price measure increased 1.4 percent after a 0.7 percent increase in the prior period.

The core index advanced 2.2 percent from a year earlier, the most since June 2012.

But, of course, there’s always worry:

The U.S. economy may be saddled with a “deflationary bias” after the last recession that makes it harder for the Federal Reserve to achieve its 2 percent inflation goal, according to research published this month by the central bank.

Economists Timothy Hills, Taisuke Nakata and Sebastian Schmidt argue that the bias stems from a recognition by companies that the Fed has limited ability to spur the economy when interest rates are low.

That in turn prompts firms to reduce expectations of future costs, affecting what they decide to charge for their products and services.

“Our result provides a cautionary tale for policy makers aiming to raise inflation from currently low levels,” the economists wrote in a paper and an accompanying note. “Achieving the inflation target may be more difficult now than before the Great Recession.”
…
To try to offset the deflationary bias, the authors suggest the Fed should place more emphasis on lifting inflation than on stabilizing output. That would imply allowing unemployment to fall below its long-run natural rate.

The central bank could also raise its inflation target from 2 percent to help increase expectations of future price increases, the researchers said.

At the core of the paper is an assumption that the zero lower bound on interest rates constrains the Fed’s ability to promote faster economic growth and higher inflation. It is that constraint — and the likelihood that the central bank will encounter it more frequently in the future — that prompts companies to lower their inflation expectations.

However, even if the Fed pushed rates below zero to a negative half percentage point, the model finds that inflation would still fall short of the central bank’s goal, albeit not by as much as otherwise.

And criticism is mounting:

Negative rates are a “dangerous experiment,” according to Huw van Steenis, an analyst at Morgan Stanley who warns in a recent report that they will erode banks’ profitability. The push below zero signals “policy exhaustion,” says Chris Xiao at Merrill Lynch. The moves in Switzerland and the euro zone have so far failed to boost growth, notes Christopher Swann, a strategist at UBS Wealth Management.

Some observers worry about possible dangers to international trade. “Negative interest rates represent another escalation of the so-called currency wars,” warns Mr. Mather of Pimco, who is concerned that some central banks are using subzero rates as a way to devalue their currencies and boost exports.

For his part, Mr. de Verteuil of CIBC cautions that subzero rates could lead to a stampede out of money market funds. “We aren’t sure whether individual investors will be prepared to pay to own a money market fund – but we highly doubt it,” he writes. Since those funds play an important role in buying companies’ short-term debt, the result could be a severe crimping of lending to the corporate sector.

Meanwhile, Canada’s economy is still in the doldrums:

The OECD now projects economic growth of just 1.4 per cent in Canada this year as the oil shock wreaks havoc on parts of the country, with a ripple effect outward. That’s well shy of its earlier call in November for 2 per cent.
…
While that downgrade is the steepest among the G7, it would still put Canada ahead of Germany, France, Italy and Japan.

However, Canada would still trail the forecast showings of Britain and the United States, at 2.1 per cent and 2 per cent, respectively.

While growth of 1.4 per cent is lame, it’s not as bad as some other economists project. Those other forecasts tend to be in the area of 1 per cent or even worse.

And there’s a contra-indicator to the idea that the bright lights of the new generation will bail us out:

Perhaps millennials should just stick to investing in index funds—or at least the exchange-traded funds that their robo-advisers put them in.

According to research from online brokerage TD Ameritrade Holding Corporation, one particularly risky ETF is attracting the millennial demographic far more than other age groups. In fact, it was one of the top 10 stocks traded by millennials in 2015.

The VelocityShares Daily 3x Long Crude ETN (UWTI) isn’t just a risky product; it is arguably the most dangerous ETF on planet Earth. First off, it is triple leveraged, which makes it extremely volatile—nearly 10 times more jumpy than the S&P 500 Index and more than double any of the other stocks on the list. The leverage amount in UWTI also gets reset each day, which can make for some epic days when oil does go up but over time causes returns to corrode.

As aficionados of Sequence of Returns risk will remember, these leveraged funds have an implicit policy to sell low and buy high … how could they not lose money?

Amidst all this gloom, let’s focus on a bright spot: supply management is losing its allure:

In a policy about-face, senior Quebec bureaucrat Florent Gagné is urging the province to end strict maple-syrup quotas and let producers sell what they want, to who they want.

“It’s hard to understand why in an international race that we impose constraints [on our producers] that the other players don’t,” Mr. Gagné lamented as he released a controversial report on the challenges facing the maple-syrup industry.
…
Quebec has been called the Saudi Arabia of maple syrup, producing more than 60 per cent of the global output of the sweet and sticky stuff – roughly 100 million pounds a year. A provincially sanctioned cartel was created in the early 2000s, run by the Federation of Quebec Maple Syrup Producers and blessed by government. The federation imposes production quotas, stockpiles surplus syrup and sets the price paid to producers.

But the province is bleeding market share to New England states, Ontario and New Brunswick, where producers are free to make and sell whatever they want. U.S. producers, in particular, have been ramping up output at the expense of Quebec.

Dream Office REIT, managed by Dream Unlimited, proud issuer of DRM.PR.A, is biting the bullet:

Battered by tumbling investor confidence in Alberta companies, and hamstrung by heavy cash outlays for the foreseeable future, Dream Office REIT has unveiled a stunning strategic shift.

Late Thursday, the real estate investment trust, which is one of Canada’s largest office tower owners, announced sweeping plans to slash its distribution by one-third, top up its credit facility to $800-million and unload at least $1.2-billion worth of properties over the next three years.

The ambitious strategy is something investors and analysts have been looking for. Partly because 20 per cent of Dream’s portfolio is in Alberta, spooked investors had sent its units tumbling 60 per cent from their peak in 2012. The REIT must also spend hundreds of millions to upgrade and maintain its buildings and pay its distribution. Cash was getting so tight that it looked likely Dream would need to borrow in order to fund its monthly payout next year. Slashing the distribution saves roughly $80-million annually.

It was a good solid day for the Canadian preferred share market, with PerpetualDiscounts up 43bp, FixedResets winning 44bp and DeemedRetractibles gaining 27bp. Floating Rate issues did very well. The Performance Highlights table continues to show lots of churn. Volume was 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 16.76 to be $1.19 rich, while TRP.PR.C, resetting 2021-1-30 at +154, is $0.78 cheap at its bid price of 10.60.

Click for Big

This analysis includes the new issue with a deemed price of 25.00.

Most expensive is the new issue, resetting at +497bp on 2021-6-19, deemed at 25.00 to be 1.23 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.00 to be 1.39 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.28 to be $1.10 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 17.00 and appears to be $1.38 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 15.15, 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 14.35 and is $0.56 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.65%, with two outliers above 0.00%. Note that the range of the y-axis has changed. There are two junk outliers above 0.00% and one below -2.00%.

Click for Big

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

It’s the same the world over: competition by litigation and lobbying:

Aileen Jeffery arrived in Tokyo two years ago and spotted what she thought was the best opportunity of her career: Hotel rooms in Japan’s capital were scarce and a boom in tourism was exacerbating the shortage.

The 26-year-old former real estate analyst took a 21st Century approach to the business, investing in condominiums tailored for customers of Airbnb Inc. rather than travelers inclined to stay at traditional hotels. That let her offer rooms in residential neighborhoods and sidestep Japan’s strict and peculiar seven-decade old rules for hotels, which dictate everything from the length of reception desks to the color of pillow cases. Jeffery’s bet seemed like a good one at the time: Japan is Airbnb’s fastest-growing market in the world.

Perhaps not for much longer though. Under pressure from the hotel industry and a populace concerned with the surge of foreigners in their neighborhoods, Prime Minister Shinzo Abe’s government has released guidelines for home sharing — called minpaku in Japanese — that could make most Airbnb rentals in the country illegal. Airbnb hosts would only be allowed to rent to guests who stay for a week or longer, a minuscule slice of the market. The national guidelines only become law if local municipalities decide to ratify them, but that is beginning to happen. Jeffery is rethinking her expansion plans, while Airbnb is seeking ways to hang on to its business.

There’s an interesting Bloomberg story on ETFs that out-perform their benchmark:

In certain pockets of the industry, ETFs are consistently beating the return on the indexes they’re meant to track. Theoretically, an ETF should lag its index by roughly the amount of its fee to investors. But that doesn’t account for revenue from securities lending. ETFs can lend out as much as 33 percent of their equity holdings to short sellers in return for a small fee. ETFs can then use that revenue to offset the expense ratio.

In some cases, an ETF has securities in its portfolio that are in such high demand from short sellers that the lending fees add up to more than the fund’s expense ratio—so the ETF not only makes up its fees but also pushes returns above those of the index.

The most prominent examples of this phenomenon are in ETFs that track small-cap indexes. State Street Corp., BlackRock Inc.’s iShares, and Vanguard Group Inc. all have small-cap ETFs—with more than $30 billion in collective assets—whose extra revenue from securities lending leads to returns that top those of the indexes they track.

I’m trying to work out potential consequences of that. Say the ETF reduces the number of units outstanding. This will lead to a decline in the amount of stock available for lending (probably not on a 1:1 basis, but it could be pretty close) and therefore could lead to a short squeeze. This will cost the short-sellers a lot of money, and possibly lead to knock-on short-covering if they’re too close to their margin limits. But what will cause a reduction of units outstanding? Most likely, a decline in index level. So this scenario is negative-feedback, which is a Good Thing.

Off the top of my head, I can’t think of any positive feedback loops. But it’s an interesting thought.

Moody’s has confirmed HSE’s bond rating at Baa2. I have updated the post HSE: Trend Negative, says DBRS

It was a modestly positive day for the Canadian preferred share market today, with PerpetualDiscounts up 14bp, FixedResets winning 29bp and DeemedRetractibles gaining 12bp. The Performance Highlights table is lengthy. Volume was on the low side of average.

PerpetualDiscounts now yield 5.83%, equivalent to 7.58% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.2% – OK, maybe a little over – so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 335bp, a significant narrowing from the 350bp reported February 10.

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 16.78 to be $1.20 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.80 cheap at its bid price of 17.63.

Click for Big

This analysis includes the new issue with a deemed price of 25.00.

Most expensive is the new issue, resetting at +497bp on 2021-6-19, deemed at 25.00 to be 1.32 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 16.70 to be 1.57 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.11 to be $1.20 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 16.90 and appears to be $1.34 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 14.79, looks $0.61 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 14.05 and is $0.51 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.65%, with one outliers above 0.50% and two below -1.50%. Note that the range of the y-axis has changed. There are two junk outliers above 0.00%. There are no junk outliers.

Click for Big

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

Equities popped today on the back of oil:

The Standard & Poor’s 500 Index rose 1.7 percent to 1,926.82 at 4 p.m. in New York, capping its first three-day advance this year and closing at a two-week high. The Dow climbed 257.42 points, or 1.6 percent, to 16,453.83. The Nasdaq Composite Index gained 2.2 percent. About 9.2 billion shares traded hands on U.S. exchanges, 14 percent above the three-month average.
…
Equity gains are coming virtually as fast as the losses that sent the S&P 500 to its worst start to any year, with almost half of 2016’s decline made up in three days. The rally today occurred as oil climbed more than 5 percent, Federal Reserve officials expressed caution on the economy and data on manufacturing was better than forecast.

On the other hand, Japan auctioned 5-year bonds with a negative yield:

Japan’s government got paid to borrow at a five-year note auction for the first time on Thursday after the central bank adopted a negative interest-rate policy on Jan. 29. The sale drew an average yield of minus 0.138 percent. Japan is following Germany, Switzerland and Denmark in being able to attract buyers even as yields fall below zero.

One of the many benefits of High Frequency Trading may be the arbitrage between the cash and futures markets:

The close relationship between market volatility and trading activity is a long-established fact in financial markets. In recent years, much of the trading in U.S. Treasury and equity markets has been associated with nearly simultaneous trading between the leading cash and futures platforms. The striking cross-activity patterns that arise in both high-frequency cross-market trading and related cross-market order book changes in U.S. Treasury markets are also witnessed in other asset classes and naturally lead to the question that we investigate in this post of how the cross-market component of overall trading activity is related to volatility.

The chart below displays a measure of cross-market activity for the ten-year Treasury note cash and futures markets (left column) and the S&P 500 cash and futures markets (right column) across different millisecond offsets. Of note is the pronounced asymmetry of the spike in the measure at +5 milliseconds for the S&P 500 compared with the ten-year U.S. Treasury. The much higher spike for the positive 5 millisecond offset is consistent with the often-cited dominant role played by the S&P futures market in price discovery. Leaving this asymmetry aside, the spikes in cross-market activity on October 15 and 16, 2014, stand out as being well-aligned with the heightened volatility and trading observed on those days. Cross-market trading and quoting activity thus appears to be related to variations in market volatility, which can create (short-lived) dislocations in relative valuations as market participants respond to news about fundamentals or market activity itself.

Click for Big

It was a superb day for the Canadian preferred share market, with PerpetualDiscounts up 19bp, FixedResets winning 142bp and DeemedRetractibles gaining 12bp. Unsurprisingly, the Performance Highlights table is both enormous and dominated by FixedReset winners, with many issues gaining over 5%. Volume was very high.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 16.51 to be $1.16 rich, while TRP.PR.C, resetting 2021-1-30 at +154, is $0.97 cheap at its bid price of 10.36.

Click for Big

This analysis includes the new issue with a deemed price of 25.00.

Most expensive is the new issue, resetting at +497bp on 2021-6-19, deemed at 25.00 to be 1.32 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 16.99 to be 1.25 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.00 to be $1.46 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 17.31 and appears to be $1.62 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 15.00, looks $0.81 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 14.00 and is $0.58 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.72%, with four outliers above 0.00%. There are two junk outliers above 0.00%.

Click for Big

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

I have no idea how important this service really is … but certainly my projections of sixteen years ago (that the Internet would promote a meritocracy and decrease the importance of brand names) are seeing some acceptance:

Joshua Young started his hedge fund less than a year ago. Last month, he caught a break when a university endowment handed him $20 million, quintupling his assets under management.

How did an obscure Houston fund called Bison Interests land such a big fish?

Young, all of 32, had set up a profile on SumZero, a website that started out as a repository for buy-side research and has more recently morphed into a mashup of LinkedIn and Match.com where institutional investors can find up-and-coming fund managers and choose them based on the quality of their analysis. Using SumZero, Young bypassed an old-boy network that prizes relationships, credentials and word-of-mouth referrals. The company says it has helped generate hundreds of introductions between the more than 12,000 fund managers with SumZero profiles and the 270 institutional investors now using the site, which include the family offices of several big tech executives.
…
Multiple studies have shown that smaller funds tend to do better than larger ones, some of which have performed poorly during the recent market rout. But herd mentality and risk-avoidance prompts many institutional investors to steer their money to big, entrenched players. Firms with more than $5 billion under management represent just 6 percent of all hedge funds but manage about 70 percent of the invested capital, according to Hedge Fund Research.

This trend, if it is a trend, ties in with the Death of a Salesman meme:

Banks are taking a hatchet to their bond-trading businesses and the biggest casualties are proving to be the people with the most experience.

About 70 percent of credit traders cut in London last year at the 12 largest investment banks had worked in the financial industry for more than 10 years, according to data compiled by headhunters Michelangelo Search, which specializes in sales, trading and research roles. That’s increasingly leaving trading desks manned by more junior colleagues.

Experienced, better-compensated staff are falling victim to banks’ efforts to reduce costs as they try to generate profit within constraints imposed by regulators and central banks since the global financial crisis. There’s more to come as banks from Bank of America Corp. to Goldman Sachs Group Inc. consider cuts as soon as this quarter.

“I’ve been in the fixed income business for 35 years but most of my cohort is now missing in action,” said Tim Skeet, who has worked in bond-market roles since 1981, and is currently looking for a new position in the industry. “There’s a ‘juniorization’ of the workplace underway in London as banks focus more on costs than revenues.”

Understanding the connection requires a little explanation. The Masters of the Universe, the fixed income traders/salesmen who pulled down megabucks during the boom, do not achieve that status by being red-hot super-sharp analysts. What they got – and still get – paid for is bringing in business and keeping that inventory turning over while making the full spread (or more!) every time.

You don’t need any understanding of the bond market to do that. In my experience, that doesn’t even help. What you need is a deep voice, a firm handshake, a little charisma, and a great big expense account so entertain the clients. Contacts from prep school or Daddy’s friends are good things to have as well. And presto! You’re a trader!

Old bond traders didn’t make the big bucks for analysis, or helping clients achieve outperformance. As my Assiduous Readers will remember, the average Portfolio Manager has about enough brains to use the right fork when taking clients out to lunch, but that’s about where it ends and that’s all that’s necessary. So they rely extensively on their salesman’s advice. On occasion, that salesman will be the de facto portfolio manager, because the PM of record is a rubber stamp. And once the PM finds a guy he thinks he can trust, that salesman will get a lot of business from him; and that business will follow the salesman if he changes firms. And the bosses know that, so the salesman gets considerable incentive to stay on board and keep producing those lovely, lovely spreads of pure profit.

In Canada, the model started dying, as far as I can tell, some time in the mid-2000s. The banks don’t like having employees who make good money, so they started bringing in high-school students to act as salesmen (well, they sounded like high school students to me!). The selling template went from ‘I can make you look good’ to ‘We’re a bank!’.

And, I think, the same thing is starting to play out globally, helped along by a bit more transparency (even in 1990-odd, Bloomberg took all the fun out of the Eurobond market), a little less influence of the old-boy network when hiring portfolio managers (they’re all bank drones nowadays, too!) and, of course, all the scandals.

Maybe. It would take a team of sociologists to prove I’m right … but it would take the same team to prove I’m wrong! So I’ve said something provocative that is not susceptible to disproof, which is the holy grail of investment writing.

Meanwhile in Canada, the central planners are hard at work:

Canadians looking to buy homes between $500,000 and $1-million will have to put down larger down payments as new federal rules took effect Monday.

Under the changes, home buyers must now put at least 10 per cent down on the portion of a home that costs more than $500,000.

Buyers can still put down five per cent on the first $500,000 of a home purchase. Homes that cost more than $1-million still require a 20 per cent down payment.

Phil Soper, president and CEO of Royal LePage, says the new rules aim to slow the breakneck pace of price growth in the red-hot markets of Toronto and Vancouver without affecting markets that are lagging, such as those in oil-dependent provinces.

“The problem with monetary policy is that it impacts the struggling Calgary market or the just fine Winnipeg market and the overheated Vancouver market in equal amounts,” Soper said.

And in BC, there’s more welfare:

Hours after the Canadian Real Estate Association reported that Greater Vancouver housing prices led the country in growth, climbing on average by more than 20 per cent over the past year, Finance Minister Mike de Jong rose in the legislature to lay out a fiscal plan that he said will help more people realize the dream of owning a house.

In the first major overhaul of the Property Transfer Tax since its inception in 1988, Mr. de Jong has raised the exemption threshold – solely on new houses – to $750,000. The new tax break, available only to Canadian citizens and permanent residents, could mean savings of up to $13,000 on a house.

Element Financial, proud issuer of EFN.PR.A, EFN.PR.C, EFN.PR.E and EFN.PR.G, has announced:

that following the completion of a strategic review of each of the Company’s business units that it initiated in October of last year, the Board of Directors has approved plans to proceed with a transaction that will result in the separation of the current business into two publicly traded companies – a $19.5 billion world class fleet management company (Element Fleet Management) to be led by Bradley Nullmeyer and a $7.0 billion North American commercial finance company (Element Commercial Asset Management) to be led by Steven Hudson.
…
The Company is currently analyzing the most efficient method to implement the separation of the two businesses and further details will be provided to the market as Element completes this analysis with its advisors. The separation transaction that will split the Company into these two publicly traded entities is expected to be completed on a tax free basis before the end of 2016. The allocation of the assets, liabilities and capital structure of the Company, as well as the structure of the Board and the deployment of current corporate services staff between the two new entities will be determined as the details of this separation transaction are determined.

We’ll see what happens as details emerge, but I have a hard time envisaging this as being credit-positive for the preferreds!

It was a relatively quiet day overall for the Canadian preferred share market, with PerpetualDiscounts gaining 5bp, FixedResets off 10bp and DeemedRetractibles flat. The overall calm masked significant churn, as shown in the Performance Highlights table. Volume was high.

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

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

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 16.52 to be $1.37 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.00 cheap at its bid price of 16.81.

Click for Big

This analysis includes the new issue with a deemed price of 25.00.

Most expensive is the new issue, resetting at +497bp on 2021-6-19, deemed at 25.00 to be 1.08 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 16.80 to be 1.13 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 12.56 to be $1.42 cheap. BAM.PF.H, resetting at +417M500bp on 2020-12-31 is bid at 25.03 and appears to be $1.08 rich.

Click for Big

FTS.PR.K, with a spread of +205bp, and bid at 14.59, looks $0.67 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 13.85 and is $0.44 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.62%, with three outliers above 0.50%. Note that the range of the y-axis has been changed. There are two junk outliers above 0.00%.

Click for Big

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