William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York gave a speech titled The national and regional economic outlook providing some colour on the Second Dip:
While there have been indications that home prices in the area have been firming in the past few months, the mortgage crisis continues to take a toll on New Jersey homeowners. As of March of this year, 10 percent of all borrowers in the state were either 90-plus days delinquent on their mortgages or their homes were in foreclosure – above the national rate of 7.7 percent. In Essex County, that rate had reached 16 percent, and in Newark it was 30 percent.
In our recent small business survey, which we conducted in May, we asked firms to report on their first quarter sales and their future outlook. The results were encouraging. Over two thirds of firms told us they had stable or increased sales in Q1, up from 50 percent last year. When asked about their future outlook, while the majority of business owners, 56 percent, were neutral – many more said they were optimistic than pessimistic – 37 percent compared with only 7 percent.
Some will be glad the week is finally over:
Hewlett-Packard Co. (HPQ) plunged 27 percent this week, the most since the October 1987 market crash, after a strategy shift undermined confidence in its managers. Technology, industrial and raw-material companies in the S&P 500 dropped at least 6.9 percent, the most among 10 groups. Caterpillar Inc. (CAT) and Alcoa Inc. (AA) retreated more than 8.4 percent after some of the world’s biggest banks — Morgan Stanley, JPMorgan Chase & Co. and Citigroup Inc. — slashed economic growth forecasts.
The S&P 500 lost 4.7 percent to 1,123.53. It has sunk 16 percent since July 22 as about $3 trillion was erased from the value of U.S. equities, according to data compiled by Bloomberg. The Dow Jones Industrial Average fell 451.37 points, or 4 percent, to 10,817.65 this week, extending its four-week decline to 1,863.51 points.
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Stocks in the S&P 500 are moving in lockstep with each other by the most since at least 1990, a sign that the market’s biggest retreat in three years may not be over, according to MF Global Holdings Ltd. The average correlation coefficient between the 500 companies and the index was 0.8268 yesterday, using 60 days of data, according to MF Global.
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Correlation among S&P 500 stocks exceeded 0.78 twice previously, according to MF Global. After the first time, on Dec. 1, 2008, the S&P 500 declined 17 percent to a 12-year low on March 9, 2009. Correlation peaked again on July 26, 2010, when the benchmark slipped 6.1 percent over the next month, data compiled by MF Global and Bloomberg show.
Others will be hoping for more of the same:
Gold rose to a record above $1,880 an ounce in New York, rallying for the seventh straight week, as concern that the global economy is slowing drove equities lower.
So why not play it safe?
Treasury 30-year bond yields had their biggest weekly drop since the depths of the financial crisis in December 2008 on concern the U.S. economic recovery is stalling and Europe’s sovereign-debt crisis is getting worse.
Yields on five-, seven- and 10-year notes fluctuated a day after plunging to historic lows. Government bonds have rallied since the Federal Reserve pledged this month to keep its target lending rate at virtually zero until at least mid-2013 and Standard & Poor’s lowered the top U.S. credit rating for the first time.
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A gain in 30-year bonds pushed yields down three basis points to 3.39 percent. They had a weekly drop of 34 basis points, the most since tumbling 49 basis points during the five days ended Dec. 19, 2008. Yields on five- and seven-year notes were little changed today after falling yesterday to record lows of 0.79 percent and 1.31 percent.
There are rumblings that Basel III is in trouble:
The 27 member-states of the Basel Committee on Banking Supervision fought over the new regime, known as Basel III, for more than a year before agreeing in December to require banks to bolster capital and reduce reliance on borrowing. Now, as they put the standards into effect in their own countries, European Union lawmakers are revising definitions of capital, while the U.S. is struggling to reconcile the Basel mandates with financial reforms imposed by the Dodd-Frank Act.
“The game on the ground has changed in Europe and the U.S.,” said V. Gerard Comizio, a former Treasury Department lawyer who is now a senior partner at Paul Hastings Janofsky & Walker LLP in Washington. “The realists in Europe realized that their banks cannot raise the capital they’d need to comply. U.S. banks have reversed course and are more assertively fighting against it. The future of Basel III looks less certain now than it did when it was agreed to.
Well, that would be the regulatory standard, wouldn’t it? Do wonderful-sounding things, but do them badly. More particularly:
The European proposal alters the definition of capital that Basel III aimed to tighten when the committee agreed not to allow anything other than common shares to count toward the top- quality bank capital regulators examine.
During the 2010 negotiations, Germany sought to maintain recognition of so-called silent participations — hybrid securities that act like debt and equity at the same time — which some banks rely on for more than half their capital. While Germany lost the battle to exempt silent participations last year, the EU’s implementation proposal was written to allow the securities to be included if they fulfill certain conditions, according to an EU official who asked not to be identified because he wasn’t authorized to speak.
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Italy fought during Basel talks last year to include deferred tax assets — future deductions from tax liabilities resulting from current losses — when calculating top-tier capital. Basel III restricted use of these assets to no more than 10 percent of a bank’s capital. The EU’s proposal would allow unrestricted use of deferred tax assets if they comply with certain requirements. Italy modified its tax laws in February to enable the assets to meet those conditions.Counting tax assets would raise the capital ratio at Banca Monte dei Paschi di Siena SpA, the oldest bank in the world and Italy’s third-largest, by about 1 percentage point, according to a February Mediobanca SpA report on the benefits of the tax-law change to Italian banks.
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Basel III also sought to put an end to the double counting of capital in insurance subsidiaries, which many European lenders do. The proposed EU rules don’t require banks to deduct investments in these subsidiaries from their capital, which will allow the double counting to continue, said analysts including Andrew Stimpson at KBW Inc. in London. That would benefit banks such as France’s Credit Agricole SA (ACA), whose insurance subsidiary accounts for 10 percent of income.
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European banks had opposed a leverage ratio, arguing that different accounting regimes make the balance sheets of U.S. lenders smaller than those of their foreign counterparts and that restricting leverage would unfairly punish non-U.S. firms. While U.S. banks are subject to a leverage cap, Generally Accepted Accounting Principles allow them to keep more assets off their balance sheets and to net out derivatives more than International Financial Reporting Standards do.The Basel committee addressed the issue by devising a mechanism for adding total assets that puts aside different accounting standards. Still, the EU proposal doesn’t commit to implementing the ratio by 2018 as required by Basel III. Instead, it asks for a five-year period to review the rule’s effectiveness in curbing risk before deciding whether to make it binding.
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The EU proposal also softens Basel III’s liquidity standards that would require banks to hold enough cash or easily sellable assets to meet short- and long-term liabilities. It omits the rule covering debt coming due in the next 12 months and modifies the one for 30-day obligations to allow counting covered bonds as liquid assets. Denmark, Sweden and Spain lobbied for the modification because their banks have sizeable holdings of those bonds, which are securities backed by the cash flow from a pool of mortgage loans
They don’t have any preferreds outstanding, but many will be interested to note that DBRS has downgraded Canadian Tire:
DBRS has today downgraded the Debentures and Medium-Term Notes ratings of Canadian Tire Corporation, Limited (Canadian Tire or the Company) to BBB (high) from A (low) and its Commercial Paper rating to R-2 (high) from R-1 (low); the trends are Stable. This action follows the Company’s acquisition of The Forzani Group Ltd. (FGL) and removes the ratings from Under Review with Negative Implications.
Andrew Coyne – an old school buddy – has an excellent article about Milkfare in MacLeans, titled The $25,000 Cow.
It was a relatively quiet, mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 8bp, FixedResets losing 9bp and DeemedRetractibles down 7bp. All entries on the Performance Highlights table were losers. 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 | -1.5131 % | 2,142.2 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -1.5131 % | 3,221.9 |
| Floater | 2.83 % | 2.60 % | 29,680 | 20.81 | 4 | -1.5131 % | 2,313.0 |
| OpRet | 4.88 % | 3.70 % | 57,080 | 0.84 | 9 | -0.0918 % | 2,444.6 |
| SplitShare | 5.45 % | 0.92 % | 60,153 | 0.52 | 4 | -0.1263 % | 2,458.5 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0918 % | 2,235.4 |
| Perpetual-Premium | 5.68 % | 5.08 % | 133,954 | 1.15 | 14 | 0.0905 % | 2,099.9 |
| Perpetual-Discount | 5.37 % | 5.37 % | 107,483 | 14.66 | 16 | 0.0841 % | 2,222.4 |
| FixedReset | 5.14 % | 3.19 % | 214,184 | 2.73 | 60 | -0.0898 % | 2,317.3 |
| Deemed-Retractible | 5.06 % | 4.73 % | 262,170 | 8.01 | 46 | -0.0697 % | 2,181.8 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| CIU.PR.C | FixedReset | -2.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-19 Maturity Price : 22.80 Evaluated at bid price : 24.01 Bid-YTW : 3.00 % |
| BAM.PR.B | Floater | -1.86 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-19 Maturity Price : 15.83 Evaluated at bid price : 15.83 Bid-YTW : 3.35 % |
| BAM.PR.K | Floater | -1.85 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-19 Maturity Price : 15.90 Evaluated at bid price : 15.90 Bid-YTW : 3.33 % |
| TRI.PR.B | Floater | -1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-19 Maturity Price : 21.97 Evaluated at bid price : 22.20 Bid-YTW : 2.36 % |
| HSB.PR.E | FixedReset | -1.27 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-30 Maturity Price : 25.00 Evaluated at bid price : 27.15 Bid-YTW : 3.77 % |
| BAM.PR.J | OpRet | -1.22 % | YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2018-03-30 Maturity Price : 25.00 Evaluated at bid price : 26.00 Bid-YTW : 4.85 % |
| PWF.PR.A | Floater | -1.17 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-19 Maturity Price : 20.27 Evaluated at bid price : 20.27 Bid-YTW : 2.60 % |
| POW.PR.B | Perpetual-Discount | -1.06 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-08-19 Maturity Price : 24.09 Evaluated at bid price : 24.35 Bid-YTW : 5.55 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| IFC.PR.C | FixedReset | 256,675 | Recent new issue. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.87 Bid-YTW : 4.21 % |
| RY.PR.G | Deemed-Retractible | 135,330 | TD crossed 30,000 at 24.80, then two blocks of 50,000 each at 24.75. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.70 Bid-YTW : 4.66 % |
| RY.PR.F | Deemed-Retractible | 133,975 | Desjardins crossed 100,000 at 24.75; RBC crossed 30,400 at the same price. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.70 Bid-YTW : 4.61 % |
| RY.PR.C | Deemed-Retractible | 123,340 | Nesbitt crossed a block of 20,000 shares and two of 40,000 each, all at 24.71. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.81 Bid-YTW : 4.71 % |
| RY.PR.E | Deemed-Retractible | 88,425 | TD crossed 77,700 at 24.71. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.67 Bid-YTW : 4.68 % |
| SLF.PR.H | FixedReset | 61,600 | Recent new issue. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.75 Bid-YTW : 3.88 % |
| There were 32 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| CIU.PR.C | FixedReset | Quote: 24.01 – 27.10 Spot Rate : 3.0900 Average : 2.3222 YTW SCENARIO |
| BMO.PR.K | Deemed-Retractible | Quote: 26.01 – 26.39 Spot Rate : 0.3800 Average : 0.2708 YTW SCENARIO |
| BNS.PR.Z | FixedReset | Quote: 24.50 – 24.99 Spot Rate : 0.4900 Average : 0.3869 YTW SCENARIO |
| PWF.PR.A | Floater | Quote: 20.27 – 21.20 Spot Rate : 0.9300 Average : 0.8455 YTW SCENARIO |
| TCA.PR.X | Perpetual-Premium | Quote: 50.64 – 50.98 Spot Rate : 0.3400 Average : 0.2564 YTW SCENARIO |
| MFC.PR.B | Deemed-Retractible | Quote: 22.16 – 22.45 Spot Rate : 0.2900 Average : 0.2071 YTW SCENARIO |