September 12, 2011

The weird index movement is growing:

More large US fund companies are taking a do-it-yourself approach to indexing.

In the latest evidence of that trend, both iShares and John Hancock last month filed applications with the Securities and Exchange Commission seeking permission to launch exchange traded funds based on indices constructed by their respective parent companies, BlackRock and Manulife.

Today, commoditisation of broad-based index products and the concentration of assets into a handful of funds create pressure on sponsors to either cut fees or find another way to differentiate their products and attract assets, analysts say. Most ETFs do not break out licensing fees, but the S&P 500 SPDR pays 3 basis points, or a third of its 9-basis point expense ratio, to the index provider.

The other advantage, of course, it that it makes product comparison more difficult.

Those nasty speculators are betting against the political line again:

The cost of insuring European sovereign and bank debt rose to records on speculation Germany is preparing for a default by Greece while French lenders may be downgraded because of their holdings of the country’s bonds.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments soared 15 basis points to 351 at 3:30 p.m. in London. The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers increased 17 basis points to 317 and the subordinated index jumped 25 to 560, according to JPMorgan Chase & Co.

But those pesky speculators keep betting against Greece:

Greece’s chance of default in the next five years has soared to 98 percent as Prime Minister George Papandreou fails to reassure international investors that his country can survive the euro-region crisis.

It now costs a record $5.8 million upfront and $100,000 annually to insure $10 million of Greek debt for five years using credit-default swaps, up from $5.5 million in advance Sept. 9, according to CMA.

Comrade Peace-Prize’s stimulus plan involves closing the carried interest loophole:

President Barack Obama’s $447 billion legislative proposal to boost hiring includes measures that would more than offset the cost of cutting payroll taxes and spending on infrastructure and state aid, his budget chief said.

The plan includes proposals to change tax rules on carried interest to treat it as ordinary income and removing tax breaks for the oil and gas industry, Jack Lew, director of the White House Office of Management and Budget, said at a briefing.

Glad to hear it! Carried Interest interest is the process by which hedge fund managers pay themselves in units of the fund and then declare the this income as capital gains. Whatever one might think of Capital Gains Tax, it’s clear that its purpose is to encourage people to put skin in the game – but the managers aren’t investing anything other than their time. It’s one of the more ridiculous provisions of the US tax code.

SocGen is doing some trimming:

Societe Generale (GLE) SA, France’s third-largest bank by assets, plans to free up 4 billion euros ($5.4 billion) in capital through disposals by 2013 to reassure investors about its finances.

The lender’s exposure to Greek bonds is about 900 million euros and it has “no significant” holdings of Irish or Portuguese debt, the Paris-based bank said today in a statement. Societe Generale aims to cut the cost base of its investment bank by 5 percent and have a core Tier 1 capital ratio “well above” 9 percent by 2013 with no capital increase. The company is also shedding jobs at retail networks in Russia, Romania, the Czech Republic and Egypt, it said.

So is BofA:

Bank of America Corp. (BAC), the biggest U.S. lender by assets, will eliminate 30,000 jobs in the next few years as part of Chief Executive Officer Brian T. Moynihan’s plan to bolster profit and the company’s stock.

The reductions, equal to about 10 percent of the staff, are part of an overhaul that aims to remove about $5 billion in annual costs by the end of 2013.

People affected by the cuts may include those working in data centers and deposit systems, said Moynihan, 51. The company had 63 data centers inherited through its acquisitions, and “we’ll take that down,” he said. Also targeted are three deposit systems, one scheduled to be “merged out” later this year and another in 2012, plus “tens of millions of square feet” in idle real estate.

Those are part of Project New BAC’s first phase, which focuses on consumer banking, credit cards, home loans and technology, Moynihan said. The second phase will begin in October and continue until April, covering institutional services such as global markets, commercial banking and corporate banking, according to the investor presentation.

How about them three year note yields, eh?:

The U.S. government sold $32 billion of three-year securities at a record low yield in the first of three note and bond offerings this week totaling $66 billion.

Yields on 10-year notes gained three basis points, or 0.03 percentage point, to 1.95 percent at 4:36 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 fell 9/32, or $2.81 per $1,000 face amount, to 101 17/32. The yields earlier touched 1.8770 percent, the lowest level on record in Federal Reserve data beginning in 1953.

The current three-year note yields increased five basis points to 0.34 percent. The yields on 30-year bonds were little changed at 3.25 percent.

The three-year note auction yield of 0.334 percent was lower than the London interbank offered rate, or Libor, for three-month loans in dollars, at 0.343 percent.

Bond auctions have different headlines in Italy:

Italy is auctioning as much as 7 billion euros ($10 billion) of bonds one day after borrowing costs surged at a bill auction, as Greece’s slide toward default roils global markets.

The treasury is selling 4 billion euros of a new benchmark five-year bond today, after 10-year yields climbed to a five- week high of 5.571 percent. Investors charged Italy 4.153 percent yesterday in a one-year bill offering, up from 2.959 percent a month ago.

Rajaratnam seems intent on digging himself in deeper:

Galleon Group LLC co-founder Raj Rajaratnam may face a stiffer sentence for directing the biggest-ever hedge fund insider trading scheme after telling a court official he still wasn’t “clear” that what he did was wrong.

Rajaratnam, 54, convicted in May of trading on illegal stock tips, later told a court official that he wasn’t “clear” on “the line between permissible ‘detective work’ and impermissible insider trading,” prosecutors said.

After his conviction, Rajaratnam was interviewed by a court probation officer who is writing a memorandum proposing a sentence to the judge. Such interviews are standard in criminal cases. In a legal brief on Sept. 9, prosecutors excerpted some of his comments to the probation officer while telling U.S. District Judge Richard Holwell in New York that they show Rajaratnam “remains defiant.”

“In my own mind, the line between permissible ‘detective work’ and impermissible insider trading was not always clear, especially with regard to companies broadly covered by the news media as to which there was a wealth of publicly available information, including frequent leaks, rumors and speculation about corporate transactions and other important developments,” Rajaratnam told the probation officer, according to prosecutors.

It gets worse later in the story, but this is an important issue – because nobody knows where the line is crossed. That’s determined afterwards, depending on whether the regulators want to hang you or not. The NYT claims that regulators are attempting to broaden the definition of insider trading:

Investors use multiple tidbits of nonpublic information from various sources to build a “mosaic” to try to get an edge on other investors.

“The S.E.C.’s recent enforcement docket reflects a belief that certain buy-side investors’ investment activities were rife with insider trading violations, and that there are more to be found,” the law firm Fried Frank wrote in a note to its clients last week titled “Avoiding Insider Trading Risks in Fundamental Investment Research.” Indeed, the mosaic theory itself is one of the central defenses in the insider trading investigation of Raj Rajaratnam, founder of the Galleon Group.

Whatever suits are brought, many of them may be compared to a 1973 insider trading case against Raymond Dirks, a research analyst. According to Fried Frank’s memo, the court in that case determined that insider trading could be established only if prosecutors proved three separate points: that the tipper has breached his fiduciary duty to the shareholders by disclosing the information to the tippee; that the tippee “knows or should know that there has been a breach”; and that the tipper somehow benefited as a result of providing the information.

But there may be an even more important and larger lesson in the Dirks case. All this “research” is actually quite important, even if it gets close to the line. Otherwise, investors would be left making decisions simply based on what they are fed by companies.

The Supreme Court, which ended up ruling against the S.E.C. in the Dirks case, wrote that if he had been found guilty, it “could have an inhibiting influence on the role of market analysts, which the S.E.C. itself recognizes is necessary to the preservation of a healthy market.”

Richard Fisher of FRB-Dallas is talking a tough line:

Federal Reserve Bank of Dallas President Richard Fisher said he probably won’t support further monetary easing by the Fed, arguing that steps that would boost the recovery are the responsibility of fiscal authorities.

“If I believe further accommodation or some jujitsu with the yield curve will do the trick and ignite sustainable aggregate demand, I will support it,” Fisher said today in a speech in Dallas. “But the bar for such action remains very high for me until the fiscal authorities do their job, just as we have done ours. And if they do, further monetary accommodation may not even be necessary.”

DBRS confirmed TRI at Pfd-2(low).

Equitable Group, proud issuer of ETC.PR.A, has announced:

Equitable Group Inc. (“Equitable” or the “Company”) today announced that John Ayanoglou, Senior Vice President, Finance and Chief Financial Officer will be leaving EGI effective immediately to pursue other interests.

The Company is confident in the depth of its finance team while it works to fill the position.

Geez, it’s open season on CFOs nowadays, eh? Assiduous Readers will remember that on August 23 I reported on their previous press release:

Equitable Group Inc. (“Equitable” or the “Company”) today announced that it has become aware of a suspected fraud relating to four loans having a total outstanding balance of approximately $14.0 million.

There is no indication that these press releases are related in any way, but the timing is very interesting indeed.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts winning 25bp, FixedResets down 3bp and DeemedRetractibles losing 7bp. Volatility was average, as was volume.

HIMIPref™ Preferred Indices
These values reflect the December 2008 revision of the HIMIPref™ Indices

Values are provisional and are finalized monthly
Index Mean
(at bid)
Mod Dur
Issues Day’s Perf. Index Value
Ratchet 0.00 % 0.00 % 0 0.00 0 -0.7815 % 2,137.7
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.7815 % 3,215.0
Floater 3.03 % 3.40 % 62,225 18.66 3 -0.7815 % 2,308.1
OpRet 4.81 % 2.89 % 62,827 1.65 8 -0.0337 % 2,451.8
SplitShare 5.37 % 0.56 % 55,004 0.46 4 -0.0726 % 2,496.5
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0337 % 2,241.9
Perpetual-Premium 5.63 % 4.60 % 125,140 1.09 16 -0.1339 % 2,113.6
Perpetual-Discount 5.27 % 5.35 % 113,528 14.83 14 0.2539 % 2,256.0
FixedReset 5.14 % 3.06 % 206,951 2.64 59 -0.0295 % 2,332.2
Deemed-Retractible 5.04 % 4.60 % 243,038 7.82 46 -0.0687 % 2,200.6
Performance Highlights
Issue Index Change Notes
BAM.PR.B Floater -1.64 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-09-12
Maturity Price : 15.55
Evaluated at bid price : 15.55
Bid-YTW : 3.41 %
PWF.PR.L Perpetual-Discount 1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-09-12
Maturity Price : 24.20
Evaluated at bid price : 24.50
Bid-YTW : 5.26 %
FTS.PR.H FixedReset 1.38 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-09-12
Maturity Price : 23.51
Evaluated at bid price : 25.75
Bid-YTW : 2.77 %
CIU.PR.A Perpetual-Discount 1.60 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-09-12
Maturity Price : 23.68
Evaluated at bid price : 24.15
Bid-YTW : 4.77 %
Volume Highlights
Issue Index Shares
BAM.PR.M Perpetual-Discount 92,201 RBC crossed 77,300 at 22.50.
Maturity Type : Limit Maturity
Maturity Date : 2041-09-12
Maturity Price : 22.18
Evaluated at bid price : 22.55
Bid-YTW : 5.35 %
SLF.PR.C Deemed-Retractible 89,826 RBC crossed 81,500 at 21.80.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.75
Bid-YTW : 6.17 %
TD.PR.A FixedReset 57,151 Desjardins crossed 50,000 at 26.25.
Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 26.14
Bid-YTW : 3.26 %
SLF.PR.A Deemed-Retractible 50,571 RBC crossed 40,000 at 23.15.
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.15
Bid-YTW : 5.71 %
BAM.PR.K Floater 43,300 TD crossed 11,900 at 15.75; Desjardins crossed 29,800 at the same price.
Maturity Type : Limit Maturity
Maturity Date : 2041-09-12
Maturity Price : 15.60
Evaluated at bid price : 15.60
Bid-YTW : 3.40 %
SLF.PR.F FixedReset 37,511 Desjardins crossed 20,000 at 26.95.
Maturity Type : Call
Maturity Date : 2014-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.80
Bid-YTW : 3.21 %
There were 32 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
ALB.PR.B SplitShare Quote: 22.20 – 22.89
Spot Rate : 0.6900
Average : 0.4446

Maturity Type : Call
Maturity Date : 2012-02-28
Maturity Price : 21.80
Evaluated at bid price : 22.20
Bid-YTW : 0.56 %

ENB.PR.A Perpetual-Premium Quote: 25.36 – 25.65
Spot Rate : 0.2900
Average : 0.2003

Maturity Type : Call
Maturity Date : 2011-10-12
Maturity Price : 25.00
Evaluated at bid price : 25.36
Bid-YTW : -9.68 %

RY.PR.P FixedReset Quote: 26.81 – 27.10
Spot Rate : 0.2900
Average : 0.2016

Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 26.81
Bid-YTW : 3.31 %

BMO.PR.P FixedReset Quote: 26.76 – 27.00
Spot Rate : 0.2400
Average : 0.1524

Maturity Type : Call
Maturity Date : 2015-02-25
Maturity Price : 25.00
Evaluated at bid price : 26.76
Bid-YTW : 3.33 %

GWO.PR.J FixedReset Quote: 26.62 – 26.99
Spot Rate : 0.3700
Average : 0.2834

Maturity Type : Call
Maturity Date : 2013-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.62
Bid-YTW : 2.96 %

NA.PR.M Deemed-Retractible Quote: 27.00 – 27.24
Spot Rate : 0.2400
Average : 0.1703

Maturity Type : Call
Maturity Date : 2013-05-15
Maturity Price : 26.00
Evaluated at bid price : 27.00
Bid-YTW : 3.66 %

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