August 18, 2011

It’s been a bad few weeks for pension plans:

Pension consulting firm Aon Hewitt estimates the average funded position of corporate pension plans in Canada fell from 97 per cent on July 25 to 85 per cent by Aug. 8 after stock markets went into a tailspin. That means plans have slid into a significant deficit after being close to fully funded, based on financial statement disclosure measures.

The results show pension plans have been “on a roller coaster,” [Aon Hewitt vice-president] Mr. [Tom] Ault said, with high volatility and daily swings of more than two percentage points in their funded position on many of the days in August so far.

There’s at least one European bank with a major funding problem:

The euro zone’s sovereign debt crisis knows no bounds. The European Central Bank’s disclosure that it had provided $500-million to a bank — the biggest sum in two years — shows that one euro zone institution is struggling to raise dollars.

U.S. money market funds, although a small proportion of overall European bank funding, give an idea of the risk: they have reduced both maturities and funding lines. BBVA and Santander, Spanish banks with U.S. retail units, had a foretaste last year when they struggled to raise dollar funds. This year, as investors fret about Italy’s sovereign risk, it is Italian lenders that are looking for alternative short-term funding as U.S. sources hug the sidelines.

In July alone, their usage of ECB repo lines increased by €40-billion to compensate, Morgan Stanley notes. French banks are also big users of U.S. money funds (perhaps €50-billion for BNP Paribas and €38-billion for Société Générale, the broker estimates) but their ECB usage rose by much less, suggesting they could roll over dollar funding, but perhaps only at shorter maturities.

It was quite a day:

Stocks plunged while Treasuries rallied, pushing yields to record lows, amid growing signs the economy is slowing and speculation that European banks lack sufficient capital. Gold climbed to a record, while oil led commodities lower.

The Standard & Poor’s 500 Index tumbled 4.5 percent to 1,140.74 at 4 p.m. in New York. The Stoxx Europe 600 Index lost 4.8 percent in its worst plunge since March 2009 and Germany’s DAX Index slid 5.8 percent, the most since 2008. Ten-year Treasury yields fell as much as 19 basis points to 1.97 percent as rates on similar-maturity Canadian and British debt also reached all-time lows. The dollar gained versus 15 of 16 major peers, strengthening 0.6 percent to $1.4336 per euro. Gold futures rallied as much as 2.1 percent to $1,832 an ounce, while oil slid 5.9 percent.

Banks led losses a day after the European Central Bank said a lender will borrow dollars for the first time in six months. Lars Frisell, chief economist at Sweden’s financial regulator, said it won’t take much for interbank lending to freeze and the Wall Street Journal reported regulators were scrutinizing the U.S. operations of Europe’s largest lenders to assess their vulnerability. U.S. jobless claims rose and Philadelphia-area manufacturing shrank by the most since 2009, while hopes for more stimulus from the Federal Reserve receded.

Politicians like to pretend they care about productivity, while at the same time forking over millions in milkfare, protecting Air Canada from foreign competition and subsidizing not-ready-for-prime-time solar technology. The latest example is a little more homespun:

A local fruit vendor has been forced to close a popular produce stand after the City of Vancouver decided the operation had grown too large for its streetside space.

To continue operating the stand at its present size, [Vancouver deputy chief licence inspector] Mr. [Tom] Hamilton said, Mr. Smith would require a farmer’s-market permit.

But such a permit would require Mr. Smith’s suppliers to sell their produce directly to the public at the stand, Mr. Hamilton said.

Quick! Find out who developed the rules and put them in charge of Toronto’s food cart programme! With some help, we can make it even more counterproductive and precious this time ’round!

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 22bp, FixedResets up 5bp and DeemedRetractibles down 14bp. Volatility was quite good. Volume was average.

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 -1.1416 % 2,175.1
FixedFloater 0.00 % 0.00 % 0 0.00 0 -1.1416 % 3,271.4
Floater 2.79 % 2.57 % 30,895 20.89 4 -1.1416 % 2,348.6
OpRet 4.87 % 3.70 % 57,414 0.12 9 0.0387 % 2,446.9
SplitShare 5.45 % 0.92 % 62,202 0.53 4 -1.3070 % 2,461.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0387 % 2,237.4
Perpetual-Premium 5.69 % 5.12 % 136,048 2.02 14 -0.1976 % 2,098.0
Perpetual-Discount 5.38 % 5.47 % 108,723 14.63 16 0.2187 % 2,220.6
FixedReset 5.14 % 3.15 % 213,539 2.73 60 0.0495 % 2,319.4
Deemed-Retractible 5.05 % 4.66 % 269,225 7.77 46 -0.1422 % 2,183.3
Performance Highlights
Issue Index Change Notes
BNA.PR.E SplitShare -3.81 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 22.31
Bid-YTW : 6.98 %
BAM.PR.B Floater -2.83 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-08-18
Maturity Price : 16.13
Evaluated at bid price : 16.13
Bid-YTW : 3.28 %
BNA.PR.C SplitShare -1.95 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 21.25
Bid-YTW : 6.98 %
BAM.PR.K Floater -1.88 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-08-18
Maturity Price : 16.20
Evaluated at bid price : 16.20
Bid-YTW : 3.27 %
TRI.PR.B Floater -1.53 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-08-18
Maturity Price : 22.22
Evaluated at bid price : 22.50
Bid-YTW : 2.32 %
GWO.PR.H Deemed-Retractible -1.51 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.54
Bid-YTW : 5.72 %
IGM.PR.B Perpetual-Premium -1.40 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.27
Bid-YTW : 5.81 %
TD.PR.Q Deemed-Retractible -1.28 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-31
Maturity Price : 25.50
Evaluated at bid price : 26.26
Bid-YTW : 4.66 %
MFC.PR.C Deemed-Retractible -1.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.07
Bid-YTW : 6.17 %
PWF.PR.L Perpetual-Discount 1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-08-18
Maturity Price : 23.87
Evaluated at bid price : 24.15
Bid-YTW : 5.31 %
PWF.PR.E Perpetual-Discount 1.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-08-18
Maturity Price : 23.76
Evaluated at bid price : 25.05
Bid-YTW : 5.47 %
PWF.PR.F Perpetual-Discount 1.20 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-08-18
Maturity Price : 24.25
Evaluated at bid price : 24.55
Bid-YTW : 5.38 %
PWF.PR.A Floater 1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-08-18
Maturity Price : 20.51
Evaluated at bid price : 20.51
Bid-YTW : 2.57 %
TRP.PR.A FixedReset 1.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-08-18
Maturity Price : 23.65
Evaluated at bid price : 26.10
Bid-YTW : 3.24 %
CIU.PR.C FixedReset 4.26 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-08-18
Maturity Price : 23.00
Evaluated at bid price : 24.50
Bid-YTW : 2.91 %
Volume Highlights
Issue Index Shares
Traded
Notes
IFC.PR.C FixedReset 425,905 New issue settled today.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.90
Bid-YTW : 4.20 %
RY.PR.C Deemed-Retractible 49,800 Nesbitt crossed 35,000 at 25.00.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.89
Bid-YTW : 4.67 %
RY.PR.R FixedReset 30,825 Nesbitt crossed 26,900 at 27.00.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 26.95
Bid-YTW : 2.99 %
GWO.PR.G Deemed-Retractible 27,564 RBC crossed 20,000 at 25.05.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.07
Bid-YTW : 5.29 %
TD.PR.A FixedReset 24,900 TD crossed 18,100 at 26.05.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 26.06
Bid-YTW : 3.30 %
SLF.PR.H FixedReset 22,300 Recent new issue.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.73
Bid-YTW : 3.89 %
There were 30 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
BNA.PR.E SplitShare Quote: 22.31 – 23.69
Spot Rate : 1.3800
Average : 0.8233

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 22.31
Bid-YTW : 6.98 %

TRP.PR.C FixedReset Quote: 25.59 – 25.99
Spot Rate : 0.4000
Average : 0.2608

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-08-18
Maturity Price : 23.39
Evaluated at bid price : 25.59
Bid-YTW : 2.99 %

TD.PR.Q Deemed-Retractible Quote: 26.26 – 26.57
Spot Rate : 0.3100
Average : 0.2018

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-01-31
Maturity Price : 25.50
Evaluated at bid price : 26.26
Bid-YTW : 4.66 %

FTS.PR.E OpRet Quote: 27.20 – 27.85
Spot Rate : 0.6500
Average : 0.5457

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-06-01
Maturity Price : 25.75
Evaluated at bid price : 27.20
Bid-YTW : 1.47 %

IGM.PR.B Perpetual-Premium Quote: 25.27 – 25.60
Spot Rate : 0.3300
Average : 0.2404

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.27
Bid-YTW : 5.81 %

BNS.PR.Y FixedReset Quote: 25.01 – 25.36
Spot Rate : 0.3500
Average : 0.2636

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.01
Bid-YTW : 2.95 %

2 Responses to “August 18, 2011”

  1. JP Koning says:

    This is making the rounds:

    http://www.zerohedge.com/news/next-domino-fall-canada

    Do you think it holds water?

  2. jiHymas says:

    Looking at one number is a bit simplistic. Here’s one objection:

    In a simple analysis that generated a great deal of commentary, a blogger at Zerohedge.com, an oddball but widely followed financial site, suggested that Canadian banks were as leveraged as European banks because they have low ratios of tangible common equity to total assets.A better number might be the ratio of tangible common equity to risk-weighted assets.Interestingly, a 2009 study by McKinsey found that, when looking at the global banking crisis from 2007 to 2009, the ratio of tangible common equity to risk-weighted assets was the best predictor of bank distress.

    It doesn’t appear that McKinsey looked at the debate over which TCE ratio to use. What the analysts did find is that as the TCE/RWA ratio rose above 7.5 per cent, the likelihood of banks getting into distress declined sharply. Below that level and banks started to get into trouble.

    And in that case, Canadian banks, with average ratios over 10 per cent, look very strong.

    Here’s an excerpt from McKinsey’s survey of the 2007-2009 period.

    “Banks with a TCE to RWA ratio of less than 6.5% to 7.5% accounted for a disproportionate share and the vast majority of distressed banks. Approximately 21% of the largest global banks became distressed during the crisis. Banks with a TCE to RWA ratio of less than 6.5% prior to the depths of the crisis had a distress rate of 33% and made up 58% of distressed banks. Banks with a TCE to RWA ratio of 6.5% to 7.5% had a distress rate of 25% and, together with those with a lower ratio, made up 83% of all distressed banks.”

    I’ll also point out that the Canadian banks have a very stable deposit base, which has been cited as the primary reason we came out of the Panic of 2007 so well.

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