PrefBlog

October 22, 2010

Written by

jiHymas

in

The exodus of prop traders to hedge funds continues:

KKR & Co., the buyout firm founded by Henry Kravis and George Roberts, is close to hiring nine members of Goldman Sachs Group Inc.’s U.S. principal-strategies group for a new hedge fund.

Bob Howard, who heads the Goldman Sachs group in the U.S., will join as managing director and report to William Sonneborn, who heads KKR’s asset-management division, Kristi Huller, a spokeswoman for the New York-based firm, said today in a telephone interview. The hedge fund, which will be able to bet on rising and falling stock prices, is scheduled to start raising money next year.

I discussed the Public/Private Investment Plan (PPIP) about a year ago … a year later, it certainly looks as if liquidity, not value, was the toxin in toxic assets:

A U.S. government program aimed at reviving the mortgage-backed securities market returned more than triple what stocks or bonds gained in the past year.

The eight funds created under the Public-Private Investment Program, or PPIP, reported net internal rates of return averaging 36 percent through Sept. 30, the Treasury Department said in a report this week.
…
The Treasury is an equal equity partner in each of the funds and provided debt financing for the $29.4 billion program. The government has gotten $215 million of interest, dividend and other payments, and the funds have more than $1.5 billion in unrealized gains. Under the wider Troubled Asset Relief Program, or TARP, the government has earned $25.2 billion on its investment of $309 billion in banks and insurers, an 8.2 percent return over two years, according to data compiled by Bloomberg.

The OSC has released its 2010 Compliance and Registrant Regulation Branch Annual Report and its 2010 Investment Funds Branch Annual Report.

The Kansas City Fed has released the October 2010 edition of Economic Trends.

There are rumours of a Canadian bank making a US acquisition:

Wilmington Trust Corp., the Delaware bank founded by the du Pont family, has been contacting bigger lenders in recent weeks to gauge their interest in buying the company, said people with knowledge of the matter.

The bank has told potential buyers it is aiming to reach a deal by the end of the month, said the people, who spoke on condition of anonymity because the talks are private. Canada’s Bank of Montreal is among banks that have held talks with Wilmington Trust, and Toronto-Dominion Bank has also been approached, these people said. Lazard Ltd. is advising Wilmington Trust, the people said.
…
The company has plunged 75 percent in the past three years, giving the bank a market value of $834.9 million. The 107-year- old lender has reported five straight quarterly losses, driven in part by soured commercial real estate loans and investments in pools of trust-preferred securities.

Meanwhile, RY is taking a loss to get out of US life & health insurance:

Royal Bank of Canada agreed to sell its U.S. life insurance business to an entity with ties to Apollo Global Management LLC for $628.1 million, taking a loss on a purchase the Canadian lender made a decade ago.

Royal Bank, Canada’s biggest bank, is exiting the U.S. life and health business by selling Liberty Life Insurance to Athene Holding Ltd., the Toronto-based bank said today in a statement. Royal Bank expects to complete the sale by early 2011 and record a loss of about $115 million under Canadian accounting rules, or $405 million under U.S. rules.

Ontario’s Eggfare bums are running a new advertising campaign, which appears aimed at the naifs who place “Farmers Feed Cities” posters in their windows. No purpose in sight at the moment, but when over a third of your gross revenue is a welfare cheque, you have to keep the feel-good drums working.


Click for big

It feeds into retail prices, too:

For eggs, the difference between prices in Montreal and prices in the United States for Grade A large eggs is 55%.

Toronto will be electing a new mayor on Monday as well as the usual crowd of non-entities. We are face with the dreary choice between an incompetent and a buffoon. Smitherman is incompetent: as health minister for over four years, he wears a great deal of the eHealth fiasco; perhaps not as much as Ford tries to make out, but he was responsible for the Health Ministry’s culture. Then, as energy minister, he decided that paying ten times market rate for solar power was a fine idea. What’s more, he wants to throw some city money down that rathole. He is now talking about tax freezes and cuts – but only since Ford made it fashionable to do so. His words would have more credibility if he had said them while he was the clear front-runner … but now? It’s mere fashion. Vote for Smitherman and you’re voting for whatever tomorrow’s fashion is, irrespective of what it might be.

Ford is simply a buffoon. Railing away at councillors’ expense budgets … it’s a trivial non-issue, considering Toronto’s spending mess. I don’t want them to steal the money, obviously, but the budgets are, if anything, skimpy considering the ideal work-load of a councillor and in any case cost me about a buck. I’m also worried about his oft-expressed unconditional support for the police – nobody ever deserves unconditional support, least of all the police after the G-20 abomination. Vote for Ford and you’re voting for a term of chaos, with contracting out garbage likely to be an extremely divisive flashpoint.

But maybe we need chaos. My girlfriend is a nurse who was seriously considering applying for a job driving a school bus – not out of any work satisfaction issues, but because the pay is so much better. Is there anybody other than city council members and school bus drivers who thinks this makes any sense at all? The city’s infrastructure is crumbling and gridlock … well, I won’t say it costs a whole pile of money because those calculations assume that time spent getting to work is paid and otherwise productive. I will say that gridlock is significantly detrimental to the quality of life in Toronto. Meanwhile the TTC can’t even figure out how to run a string of vending machines.

Incompetence costs a lot more money than any ideology. Vote Ford.

It was a strong day in the Canadian preferred share market, with PerpetualDiscounts gaining 16bp and FixedResets up 20bp. Volume was off its peak, but still quite high.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices
Values are provisional and are finalized monthly
Index Mean
Current
Yield
(at bid)		 Median
YTW		 Median
Average
Trading
Value		 Median
Mod Dur
(YTW)		 Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.1094 % 2,179.5
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.1094 % 3,301.7
Floater 2.87 % 3.19 % 80,700 19.25 3 -0.1094 % 2,353.3
OpRet 4.92 % 3.78 % 90,443 0.59 9 0.0562 % 2,366.0
SplitShare 5.90 % -19.08 % 71,476 0.09 2 -0.8671 % 2,386.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0562 % 2,163.5
Perpetual-Premium 5.70 % 5.12 % 141,647 5.35 19 0.1719 % 2,013.5
Perpetual-Discount 5.42 % 5.44 % 244,537 14.70 58 0.1632 % 2,014.8
FixedReset 5.27 % 3.02 % 341,852 3.26 47 0.1955 % 2,275.0
Performance Highlights
Issue Index Change Notes
MFC.PR.E FixedReset -1.19 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-10-19
Maturity Price : 25.00
Evaluated at bid price : 26.55
Bid-YTW : 4.04 %
IAG.PR.A Perpetual-Discount 1.21 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-22
Maturity Price : 21.50
Evaluated at bid price : 21.78
Bid-YTW : 5.32 %
MFC.PR.D FixedReset 1.62 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-19
Maturity Price : 25.00
Evaluated at bid price : 28.19
Bid-YTW : 3.15 %
BAM.PR.R FixedReset 1.90 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-07-30
Maturity Price : 25.00
Evaluated at bid price : 26.25
Bid-YTW : 4.35 %
Volume Highlights
Issue Index Shares
Traded		 Notes
SLF.PR.D Perpetual-Discount 133,866 RBC crossed 10,000 at 20.50; Desjardins crossed 30,000 at 20.45. Nesbitt crossed 30,000 at 20.45 and Desjardins crossed 50,000 at 20.49.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-22
Maturity Price : 20.45
Evaluated at bid price : 20.45
Bid-YTW : 5.50 %
MFC.PR.C Perpetual-Discount 112,379 RBC crossed blocks of 45,000 and 46,300, both at 19.65.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-22
Maturity Price : 19.55
Evaluated at bid price : 19.55
Bid-YTW : 5.83 %
CM.PR.G Perpetual-Discount 46,150 RBC crossed blocks of 17,300 and 13,900, both at 24.75.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2040-10-22
Maturity Price : 24.42
Evaluated at bid price : 24.70
Bid-YTW : 5.48 %
RY.PR.X FixedReset 42,207 Desjardins crossed 30,000 at 27.86.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-09-23
Maturity Price : 25.00
Evaluated at bid price : 27.85
Bid-YTW : 3.02 %
PWF.PR.D OpRet 39,800 Called for redemptions. Nesbitt bought 31,200 from TD at 25.37.
YTW SCENARIO
Maturity Type : Soft Maturity
Maturity Date : 2012-10-30
Maturity Price : 25.00
Evaluated at bid price : 25.37
Bid-YTW : 4.38 %
BAM.PR.H OpRet 38,834 RBC crossed 35,000 at 25.75.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2010-11-21
Maturity Price : 25.25
Evaluated at bid price : 25.70
Bid-YTW : -11.34 %
There were 43 other index-included issues trading in excess of 10,000 shares.

Comments

6 responses to “October 22, 2010”

  1. scomac

    Re: Eggfare

    Gee James, I’m eagerly awaiting your op-ed piece calling for the opening of financial services markets to foreign competition here in Canada. We wouldn’t want Canadian financial services consumers getting the impression that their service providers are receiving welfare cheques from the gov’t due the large discrepancies in the costs of asset management fees between Canadian and U.S. service providers, now would we? One needs to be careful about throwing stones when you live in a glass house. 😉

  2. jiHymas

    It’s a lot easier to get an investment management license than to get an egg or dairy quota!

    By “asset management fees”, may I assume you mean “MER on mutual funds”? Any consumer who doesn’t like the MER on Canadian mutual funds has many more alternatives than, say, a single mum who wants to feed her kids luxuries like eggs and milk. If you would rather buy SPY with a 10bp Gross Expense Ratio, there is no import tariff assessed to bring expenses up to, say, the 53bp charged by TD US Index Fund.

    Can you be more specific regarding the manner in which you believe the financial services industry is being protected?

  3. scomac

    Yes, there are alternatives to paying MERs on Canadian mutual funds, just as there are alternatives to purchasing milk and eggs. However, if I don’t care for the alternatives, I can make the case that there is an effective tariff being applied to Vanguard’s mutual funds by the fact that I can’t buy them here; I am forced to go through a brokerage and buy an ETF with the various additional costs associated. It is an imposition that maybe no more palatable than suggesting to the single mum that she can still provide her kids with milk and eggs at “affordable” prices by slipping across the border for her weekly trip to the grocery store.

    I would also point out that you are making a straw man argument by suggesting that the only differential in pricing of eggs between Montreal and the United States is the gov’t involvement in managed marketing. It is a convenient argument, but we really have no way of knowing exactly what the price of eggs are going to be in Montreal in a free market environment. There are many factors that will effect the retail price of goods in Montreal, other than the wholesale cost of those goods from the producers. Would eggs be cheaper under a different production and marketing scheme? Most certainly at times, probably not at other times as is the case when supply and demand works its magic, but the exact amount of savings is very difficult to know for certain and on average could be considerably less than what you are suggesting.

  4. jiHymas

    A number of firms have attempted to bring the low-cost mutual fund idea to Canada, with extremely limited success; by and large, Canadians want to buy mutual funds from an advisor they feel some kind of personal connection with (whether it’s Joe from the golf club, or Fred at the bank branch); they want to fuy funds from one of the big 5 banks; and they’re willing to pay for these privileges.

    A crucial distinction between the regulation of investment management and of egg and dairy farmers is that the IM regulation adds to costs, while farm regulation caps output. I have more reason than most to be irritated at the high cost of doing business in Canada; but when all is said and done it’s not regulation that is the biggest impediment to success, it’s access to the distribution system, which is simply the way the free market operates in Canada.

    There is no supply management in the investment fund business. If Vanguard thought there was profit in the deal, they would be here – but at the very least you can buy their ETFs:

    Fortunately for the Investment Funds Institute of Canada — which yesterday tried to blame the GST and the new Harmonized Sales Tax for further bloating its high fees — Canadians can’t yet buy Vanguard’s index mutual funds. It’s a moot point though, because Vanguard is also a major player in exchange-traded funds and Canadians can easily buy its ETFs on American stock exchanges.

    I suggest that the reason there isn’t a Vanguard Canada earnestly flooding the airwaves with mutual fund ads is not one of regulation, but of access to distribution. You can’t buy much distribution when you’re charging a 20bp fee!

    Thus, you cannot claim that the reason you can’t buy Vanguard funds here is because of a government enforced tariff wall: it’s the free market making a determination that cheap funds cannot be sold. This is very different from Eggfare and Milkfare.

    As for my so-called straw-man argument: Well, I’ve fixed the link to the source paper for my quote about Montreal egg prices (sorry I didn’t get it right first time!). There’s plenty of academic support for the idea that supply management costs consumers a lot of money – the OECD is particularly irked by dairy:

    Not only are dairy farmers’ outputs protected by prohibitive tariffs that result in retail prices for butter and cheese that are around two and a half times those in the none too free US market, but their median annual gross income levels have surged to over CAD 250 000, and milk quota values on their balance sheets have soared to over CAD 26 billion in 2006 (around 2% of GDP). This represents several million dollars per farm and CAD 26 000 per cow. Such rents are a blight on the economic landscape and totally unjustifiable in a world of skyrocketing global dairy prices.

    That’s a lot of tax for me to be paying to support somebody else’s bucolic lifestyle. Incomes like that are good reason to contribute heavily to your friendly neighborhood politician.

  5. scomac

    I realize that there is plenty of evidence that supports the cost to consumers of supply management. I’m not necessarily trying to defend them as much as point out that the financial services market isn’t exactly free and open either.

    Getting back to the evidence sited, I’m always more than a bit sceptical of grandiose numbers being thrown around and relationships implied without the context to define what the figures actually stand for. To imply that consumers are paying a lot of tax from these figures without some sort of rational comparisons is a bit of a stretch, but then when we’re dealing with entrenched ideological biases, it’s easy enough to do.

    At any rate, this is far from the appropriate venue to continue discussing these issues as they have nothing to do with preferred shares and fixed income markets and as such I should probably leave this space for those discussions. As always, thanks for sharing your views, James.

  6. October 25, 2010 « PrefBlog

    […] PrefBlog Canadian Preferred Shares – Data and Discussion « October 22, 2010 […]

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