PrefBlog

Another grim day for the Canadian preferred shares market. TXPR touched a new 52 Week low of 695.25 (note that this is the price index, not the total return index; saying that this is a 52-week low ignores interim dividends paid), while, unsurprisingly, CPD did the same, touching a new 52 Week low of 13.93 (with a similar not about dividends!). Volume in CPD was valued at $1.7-million the highest in the past month, while the calculated volume of TXPR was on the high side for the past month, but only a bit more than half the October 19 value.

There’s a new development in the Fortress scandal:

Officials at Fortress Real Developments Inc. told investors in 2013 that land slated for a new condo development in Winnipeg was worth more than three times the value cited in an independent appraisal commissioned by the company, the RCMP alleges.

In a search-warrant application filed in court on Oct. 4, RCMP investigators outlined new information that they had gleaned from an earlier search of Fortress’s head-office location in April, saying it supported their concern that Fortress misled investors about the value of land earmarked for several development projects so it could raise more financing.
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The RCMP warrant application filed in October said investigators found a document at Fortress’s office during the search in April showing that an appraiser valued Winnipeg land earmarked for the SkyCity Centre condominium development at $5.92-million in August, 2013.

Another 2013 appraisal from the same company, a document also seized in the April search, said the land was worth $11-million “subject to hypothetical conditions and extraordinary assumptions as outlined in the report,” the RCMP said.

The same year, syndicated mortgage investors were offered an opportunity to invest in the Winnipeg project, and were told the “as is” value of the land was $18-million, the RCMP said. The valuation relied on assumptions about future profits and was not an “as is” valuation, according to the RCMP.
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In future rounds of fundraising, Fortress told other investors in 2014 that the Winnipeg land was worth $25-million, and said in 2015 that the value of the property was $37.3-million, the RCMP said.

The October search-warrant application also revealed that Fortress was trying to raise $2-million in new funding for SkyCity Centre earlier this year, and got a new appraisal on the land, valuing it at $7.3-million in 2018. Fortress cancelled the SkyCity project this spring.

But have no fear! The OSC is making a safer world for incompetent traders!

K2 & Associates Investment Management Inc., a well-known Toronto hedge fund, and two of its top employees have been fined a total of $1-million by the Ontario Securities Commission for “manipulative trading.”
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Citing one example to illustrate the behaviour, the OSC alleged that Mr. Kimel would place an electronic order to buy or sell options for an unnamed security and that, soon after, Mr. Gosselin would call traders at a financial institution to negotiate a trade for options of the same security. “Very soon after a desk trade had been confirmed by a financial institution (often within seconds) the opposite [electronic] order previously entered would be cancelled,” the OSC’s statement said.

Well, we wouldn’t want the poor little darlings at the banks to think, would we? It’s their job to arbitrage markets and employ former regulators. The settlement agreement has a detailed example:

As an example of this calculation methodology, on December 1, 2016, the Respondents’ trading resulted in the Respondents purchasing 2,500 put options of a certain security at a price of $0.30 for an aggregate acquisition cost of $75,000. Immediately prior to the Respondents initiating their trading regarding these put options, the market spread for these put options was $0.10 / $0.50. If the Respondents had purchased the 2,500 put options prior to engaging in trading, all things being equal, the purchase price would have been at least $0.50, resulting in an aggregate acquisition cost of $125,000. This saved the Respondents $50,000 on this one transaction. The spoofing activity to achieve this calculated $50,000 acquisition cost saving comprised Kimel placing two DEA orders to sell the put options. Kimel first placed an order to sell the put options at $0.35 (which was never filled and cancelled after K2 successfully purchased 2,500 put options). Kimel immediately followed this by placing a second order to sell 10 put options at $0.25. Kimel cancelled this second sell order shortly after placing it and the market spread became $0.10 / $0.30. Within minutes, Gosselin negotiated a desk trade with a Financial Institution on the opposite side to buy 2,500 put options at the lower price of $0.30.

Spoofing should not be illegal. Manipulating markets is a tricksy thing, and while incompetent traders might consider themselves victimized, an actual investor will be very happy. If, in the above example, $0.25 was indeed an absurdly low price for the option then a market comprised of intelligent investors would have pounced on the offer immediately (a “pounce” strategy means that orders are placed very, very shortly after an opportunity occurs). So Joe Hotshot places an order to sell at 0.35 and nothing happens. He then places another order to sell at 0.25 and within about 10 milliseconds he’s filled. And then he’s behind the eight-ball. He’s just sold X options at a price less than he was willing to pay to buy them. So he goes broke and the market starts looking for another genius to take to the cleaners.

Besides practical difficulties that may be experienced by the spoofer in an intelligent market, there are also concerns about enforcement. I have grave doubts regarding the even-handedness of regulatory investigations and enforcement actions.

Deregulating spoofing, however, would be contrary to the business plans of the banks, who seek to use cheap, obsolete technology and second-rate staff to make huge profits screwing the bejesus out of their clients. And, of course, the regulators get terribly, terribly concerned when one of their future employers lose money.

A CBC squib led me to a release page which led me to a Credit Suisse report titled Global Wealth Report 2018:

Nations with wealth per adult above USD 100,000 are located in North America, Western Europe, and among the rich Asia-Pacific and Middle Eastern countries. Switzerland (USD 530,240), Australia (USD 411,060) and the United States (USD 403,970) again head the league table according to wealth per adult, followed by Belgium (313,050), Norway (291,100), and New Zealand (USD 289,800). Canada (288,260), Denmark (286,710), Singapore (283,260) and France (280,580) occupy the remaining places in the top ten.

The ranking by median wealth per adult favors countries with lower levels of wealth inequality and produces a slightly different table. This year, Australia (USD 191,450) edged ahead of Switzerland (USD 183,340) into first place according to our estimates. The median wealth placements of Belgium (USD 163,430), Canada (USD 106,340), New Zealand (98,610), the United Kingdom (97,170) and Singapore (USD 91,660) are similar to their mean wealth ranking, but lower inequality moves France (USD 106,830) up five places to fifth position, the Netherlands (USD 114,930) up eight places to fourth position, and Japan (USD 103,860) up ten places to seventh position. In contrast, high wealth inequality pushes Norway down seven places, and Denmark down 11 places, while median wealth of just USD 61,670 relegates the United States to 18th place, alongside Austria and Korea.

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Net worth, or “wealth,” is defined as the value of financial assets plus real assets (principally housing) owned by households, minus their debts. This corresponds to the balance sheet that a household might draw up, listing the items which are owned, and their net value if sold. Private pension fund assets are included, but not entitlements to state pensions. Human capital is excluded altogether, along with assets and debts owned by the state (which cannot easily be assigned to individuals).

Jamie Golombek in the Financial Post has some pretty critical information for real-estate purchasers:

If you’re buying a house or condo and you suspect that the current owner from whom you are purchasing the property is a non-resident of Canada, you could be personally liable for the vendor’s Canadian capital gains tax if you don’t take certain precautions.
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That’s why the Canadian tax system, like other tax systems around the globe, has a special rule that states that if there is a gain from the sale of domestic real estate by a non-resident vendor, the purchaser of the property may be responsible for the capital gains tax.

To this end, our Income Tax Act imposes an obligation on the purchaser to withhold 25 per cent of the purchase price from a non-resident unless the vendor has obtained a clearance certificate from the Canada Revenue Agency indicating that the non-resident has made appropriate arrangements to pay the tax. To get this certificate, the vendor needs to file Form T2062, “Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property” within ten days of the planned sale, accompanied by a payment of 25 per cent of the expected capital gain on the sale.

If the non-resident doesn’t get a certificate, the Canadian resident purchaser is responsible for the 25 per cent tax owing on behalf of the non-resident unless, “after reasonable inquiry the purchaser had no reason to believe that the non-resident person was not resident in Canada.”

It was a relatively quiet day after Friday‘s excitement; Straight Perpetuals got hammered again.

The market weakened in the afternoon and collapsed in the last half hour:

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An article by Andrew Allentuck in Investment Executive titled What is safety worth to fixed-income investors? led me to a 2017 paper by Maxime Leboeuf and James Pinnington titled What Explains the Recent Increase in Canadian Corporate Bond Spreads:

The spread between the yield of a corporate bond and the yield of a similar Government of Canada bond reflects compensation for possible default by the issuing firm and compensation for additional risks beyond default. Using the approach proposed by Gilchrist and Zakrajšek (2012), we find that roughly two-thirds of the total 1.2-percentage-point increase in corporate bond spreads from July 2014 to September 2016—a period when oil prices were low—is due to higher compensation for possible default. Default risk explains most of the increase of spreads for energy and high-yield firms but explains almost none of the increase for financial and investment-grade firms. This suggests that liquidity risk and other factors beyond possible default affected spreads of financial and other investment-grade firms.

We are most used to thinking of financial repression as being applied by governments through a low-interest-rate policy, but as noted on June 2, 2015, for instance, another way is to require regulated entities to hold government debt. This sometimes has spectacular effects:

A trio of Canadian banks is facing the fallout from a debt restructuring in Barbados that will slash the value of hundreds of millions of dollars worth of government paper they collectively own.

Canadian Imperial Bank of Commerce, Royal Bank of Canada and Bank of Nova Scotia are the largest lenders in the Caribbean, and each has direct exposure to Barbados. The country is home to one of the region’s largest economies, but the government’s finances have deteriorated over time.
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To help turn the economy around, the International Monetary Fund is working with Barbados to formulate a financial rescue plan. As part of this effort, the government proposed a debt restructuring in September that would amend the terms of its existing domestic debt. On Sunday, Ms. Mottley announced the restructuring plan will proceed.

Through the restructuring, Canadian banks will face losses on their debt holdings because Barbados has forced them to hold a greater percentage of their reserves in government debt, to help fund its deficits. These securities must now be held for much longer, and their coupons will also be cut, so the lenders will receive much lower returns on their money.

The total impact on Canadian lenders is still being calculated, but the three affected banks hold a substantial amount of Barbados debt. As of January, 20 per cent of their Barbadian reserves had to be held in government debt.

PerpetualDiscounts now yield 5.69%, equivalent to 7.40% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little over 4.15%, so the pre-tax interest-equivalent spread is now about 325bp, a significant widening from the 315bp reported October 10.

Trump mouthed off about the Fed again:

U.S. President Donald Trump heaped more criticism on the Federal Reserve in an interview with Fox Business Network on Tuesday, extending his discontent beyond its chairman, Jerome Powell, whom he has frequently critiqued in public.

“My biggest threat is the Fed,” he said, according to excerpts released before the interview with “Trish Regan Primetime” airs. “I put a couple of other people there I’m not so happy with too but for the most part I’m very happy with people.”

I suspect that this is more of an attempt to buy political insurance in the event of an economic downturn than a serious move to undermine Fed independence. But what do I know?