PrefBlog

I mentioned yesterday the thesis that depressed markets are due to SWFs cashing out (although whenever I read that acronym, my first thought is “Single White Female”. Blush, blush.) Charles Stein of Bloomberg adds a bit more colour to that idea:

Money managers are having trouble hanging on to money.

Franklin Resources Inc. said Wednesday that investors withdrew $20.6 billion in the fourth quarter, the latest asset manager to highlight the issue of redemptions. Affiliated Mangers Group Inc. said on Tuesday that it had outflows of $6.8 billion, while Waddell & Reed saw $5 billion in withdrawals, contributing to the biggest drop in its stock since the financial crisis of 2008.

Money managers are hurt by slumping stock markets worldwide, which have prompted investors to dump anything perceived as risky. The firms are getting squeezed by sovereign wealth funds in need of cash after oil prices plunged, and the shift by investors from active funds to cheaper ones that track indexes. The preference for passive products and exchange-traded funds has created winners, including Vanguard Group Inc. and BlackRock Inc.
…
Aberdeen Asset Managment Plc last month cited the cash needs of sovereign wealth funds as one of the reasons the firm experienced 9.1 billion pounds ($13.2 billion) of withdrawals in the fourth quarter. The wealth funds from oil-producing nations, which boosted their investments when energy prices were high, are taking money back to fill the budget shortfalls created by cheap oil.

“Sovereign wealth funds were set up for a rainy day and that rainy day has arrived,” Aberdeen CEO Martin Gilbert said on a conference call in January. Gilbert in November said that 2016 would be a tough one for the asset management business if oil remained at $45 to $50 a barrel. It sells today for about $30.

Phillips of Casey Quirk estimated that about 70 percent of net global flows in 2015 went into passive products, a business dominated by a small number of players. Vanguard, known for its low-cost index funds and exchange-traded funds, collected a record $236 billion in deposits last year, including more than $58 billion in the fourth quarter.

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But what the hell. Every day there’s an announcement of astonishing technological progress:

Scientists at the Max Planck Institute in Germany have successfully conducted a revolutionary nuclear fusion experiment. Using their experimental reactor, the Wendelstein 7-X (W7X) stellarator, they have managed to sustain a hydrogen plasma – a key step on the path to creating workable nuclear fusion. The German chancellor Angela Merkel, who herself has a doctorate in physics, switched on the device at 2:35 p.m. GMT (9:35 a.m. EST).

As a clean, near-limitless source of energy, it’s no understatement to say that controlled nuclear fusion (replicating the process that powers the Sun) would change the world, and several nations are striving to make breakthroughs in this field. Germany is undoubtedly the frontrunner in one respect: This is the second time that it’s successfully fired up its experimental fusion reactor.

So this is just one element in the thesis that technological progress has become so swift that disruptions in the market have become so frequent and fundamental that low growth – at least in the developed world – is virtually inevitable. Disruption is good in the long run, but bad in the short run … it took a long time for stenographers to re-train as administrative assistants, and a long time for companies to realize they needed them! It would be ideal if disruptions were maintained at a constant low level to allow for adjustment without broader-based recessions … but those darned engineers and scientists refuse to cooperate!

It was a good day for the Canadian preferred share market, with PerpetualDiscounts gaining 35bp, FixedResets winning 55bp and DeemedRetractibles up 40bp. The Performance Highlights table is lengthy. Volume was a little below average.

PerpetualDiscounts now yield 5.82%, equivalent to 7.57% interest at the standard equivalency factor of 1.3x. Long corporates continue to yield 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 335bp, a significant decline from the 350bp reported January 27.

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 17.35 to be $1.15 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $0.82 cheap at its bid price of 18.10.

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Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 18.20 to be 1.39 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.75 to be 1.31 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 13.35 to be $1.59 cheap. BAM.PF.F, resetting at +286bp on 2019-9-30 is bid at 18.80 and appears to be $0.99 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 16.23, looks $0.49 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 15.50 and is $0.65 cheap.

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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.98%, with one outlier above 0.00%. There are three junk outliers 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?

There’s an interesting use of the psychology of dissent from Bridgewater hedge fund:

Along with modeling openness to criticism, [Bridgewater’s founder Ray] Dalio has fought groupthink by refusing to make decisions based on hierarchy. Rather than conducting a vote where the majority rules, or deferring to people with the most seniority or status, he strives to create an idea meritocracy where all perspectives are heard and the best argument wins.

To do that, most leaders assign a devil’s advocate. The hope is to get someone to challenge the majority’s opinion. But according to [Berkeley psychologist Charlan] Nemeth’s research and Bridgewater’s example, we’re doing it wrong.

When people are designated to dissent, they’re just playing a role. This causes two problems: They don’t argue forcefully or consistently enough for the minority viewpoint, and group members are less likely to take them seriously.

“Dissenting for the sake of dissenting is not useful. It is also not useful if it is ‘pretend dissent’ — for example, if role-played,” Nemeth explains. “It is not useful if motivated by considerations other than searching for the truth or the best solutions. But when it is authentic, it stimulates thought; it clarifies and it emboldens.”

The secret to success is sincerity, the old saying goes: Once you can fake that, you’ve got it made. In fact, it’s not easy to fake sincerity. For devil’s advocates to be maximally effective, they need to really believe in the position they’re representing — and the group needs to believe that they believe it, too.

Bond yields plummeted today:

The U.S. 10-year note yield fell one basis point as of 10:54 a.m. in Tokyo, after tumbling 10 basis points Tuesday, according to Bloomberg Bond Trader data. The price of the 2.25 percent security due in November 2025 rose 1/8, or $1.25 per $1,000 face value, to 103 23/32. The last time the yield approached the record low was in January 2015 when it dropped to 1.64 percent.

Japan’s five-year yield declined to a record low of negative 0.12 percent.

Crude oil declined to a 12-year low in January, and the MSCI All Country World Index of shares has fallen more than 7 percent this year. The odds of the Fed following its December rate increase with another in 2016 are less than 50 percent, futures contracts indicate.

Gluskin Sheff + Associates Inc.’s chief economist David Rosenberg has an interesting take on depressed markets:

Those who claim that “break-even” price levels on Middle East oil production are in single digits are only looking at covering direct production costs and are ignoring the fiscal break-even levels. As per the International Monetary Fund, the fiscal break-even oil price for Saudi Arabia is nearly $96 a barrel (hence the government seeing a 20-per-cent deficit-to-GDP ratio); $68 a barrel for the United Arab Emirates (deficit of 4 per cent of GDP); and $58 a barrel for Qatar (budget gap of 1.5 per cent of GDP).

According to estimates I have seen, as of the end of 2015, 56 per cent of the assets that sovereign wealth funds had amassed came from the oil and gas related projects and up to 10 per cent of the total money invested was in global markets.

What has happened is that many governments, especially in the Gulf region (as well as Africa and Asia), have been compelled to draw down these reserves to cover their gaping fiscal deficits.

I am seeing figures that reveal that the Saudi Arabian Monetary Agency (the kingdom’s investment arm) has withdrawn something in the order of $70-billion from external managers in just the past six months to meet its social spending requirements.

The Fed’s new stress test will doubtless cause some excited comment:

In its annual stress test for 2016, the Fed said it will assess the resilience of big banks to a number of possible situations, including one where the rate on the three-month U.S. Treasury bill stays below zero for a prolonged period.

“The severely adverse scenario is characterized by a severe global recession, accompanied by a period of heightened corporate financial stress and negative yields for short-term U.S. Treasury securities,” the central bank said in announcing the stress tests last week.

In that particular simulation, the unemployment rate doubles to 10 percent, the same level it reached in the aftermath of the last financial crisis.

Three-month bill rates have slipped slightly below zero several times in recent years, including in September after the Fed delayed rate liftoff amid global financial market turmoil, touching a low of minus 0.05 percent on Oct. 2.

But in the stress test, banks would have to handle three-month bill rates entering negative territory in the second quarter of 2016, and then falling to negative 0.5 percent and holding there through the first quarter of 2019.

And just so you don’t think I’ve forgotten about them, here’s some drone news:

Dutch police are working with a company called Guard From Above that claims to be “the first company in the world to use birds of prey to intercept hostile drones.”
…
COO and company co-founder Ben de Keijzer said that two of the most impressive characteristics of birds of prey are their speed and their power, both of which come in pretty handy when you’re knocking somebody’s Christmas toy – or a hostile attacker’s weapon – out the sky.

They are “the masters of the air,” he said, which would sound like marketing fluff speak if the video didn’t in fact show birds snapping up UAVs like so many plump chickens.

It’s an interesting idea – and the video embedded in the source is impressive – but surely it’s just a matter of time before an anti-drone drone is developed. I foresee the day when the Bad Guys send in fleets of bombers … the authorities deploy fleets of fighters to attack them … the Bad Guys deploy fighters to protect the bombers … it will be the Battle of Britain all over again!

And it was January all over again in the Canadian preferred share market, with PerpetualDiscounts off 5bp, FixedResets losing 67bp and DeemedRetractibles down 11bp. The Performance Highlights table shows a lot of churn. 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 17.05 to be $0.96 rich, while TRP.PR.C, resetting 2021-1-30 at +154, is $0.76 cheap at its bid price of 11.10.

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Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 17.78 to be 1.13 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.75 to be 1.15 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 13.41 to be $1.75 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 17.46 and appears to be $0.99 rich.

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FTS.PR.K, with a spread of +205bp, and bid at 16.16, looks $0.36 expensive and resets 2019-3-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 15.75 and is $0.45 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 two outliers below -2.00% and one above 0.00%. There are three 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?

Nothing happened today. But January’s finished with – that’s enough good news for one day!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 9bp, FixedResets up 41bp and DeemedRetractibles off 16bp. The Performance Highlights table is published (I’ve run out of things to say over the past year!). Volume was extremely 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 17.06 to be $0.87 rich, while TRP.PR.C, resetting 2021-1-30 at +154, is $0.80 cheap at its bid price of 11.15.

Click for Big

Most expensive is MFC.PR.N, resetting at +230bp on 2020-3-19, bid at 17.79 to be 1.01 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 17.80 to be 1.18 cheap.

Click for Big

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 13.56 to be $1.76 cheap. BAM.PF.F, resetting at +286bp on 2019-9-30 is bid at 19.09 and appears to be $0.87 rich.

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FTS.PR.M, with a spread of +248bp, and bid at 18.26, looks $0.36 expensive and resets 2019-12-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 15.75 and is $0.68 cheap.

Click for Big

Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -1.24%, with one outlier below -2.00%. 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?