October 11, 2011

Yo-ho-ho and a bottle of rum! Buried treasure!:

If you’re looking for a safe place to put your investments, Chad Venzke has a suggestion: Dig a hole in the ground four feet deep, pack gold and silver in a piece of plastic PVC pipe, seal it, and bury it.

The 30-year-old central Wisconsin resident trusts no one but himself to store and protect his gold and silver—not banks, not investment funds, and certainly not the government. It’s precisely because of this suspicion of institutions that he invests in those metals to begin with. In case of emergency, “you always want to have your precious metals within arms reach,” he says.

From mid-2010 to mid-2011, U.S. investors bought up more than 100 tonnes of physical gold coins and bars, up from 15.2 tonnes in 2007, according to the World Gold Council.

For those storing gold and silver in or around their home, the most immediate danger isn’t a crisis or a dip in metal prices. It’s theft. The FBI, which tallies the theft of precious metals and jewelry in one category, says $1.6 billion was stolen in 2010, up 51 percent from 2005. Just 4.2 percent of the lost loot was recovered last year.

Metal detectors are a big worry. Basic detectors can find metal on the surface or in the first 12 inches to 14 inches below ground, depending on soil conditions, says Louis Mahnken Jr., a sales representative for Kellyco Metal Detectors in Winter Springs, Fla. That’s why Venzke advises burying it at least four feet deep. There are online debates about the best way to frustrate such thieves, including using scrap metal as decoys or hiding metal by covering it underground with asbestos or mirrors.

Still, this makes more sense to me than some of the other options. I don’t understand some investors, who want gold due to a fear of total collapse of the financial system, then buy an ETF based on futures contracts. There may be a lot of slips between the cup and those lips!

Civil servants working on implementation of the proprietary trading ban have come up with a civil-service solution – concentrate more responsibility at the top than can possibly fit:

Chief executive officers and directors of Wall Street banks would have to personally approve compliance with a ban on proprietary trading under the so-called Volcker rule, according to a draft of the proposal.

Financial regulators would require senior management to establish detailed programs for ensuring their banks are following the new rules, according to the 288-page proposal dated Sept. 30 and labeled “confidential and predecisional.” A copy was obtained by Bloomberg News.

Each bank’s CEO and board would be “responsible for setting an appropriate culture of compliance” and the board would be responsible for ensuring compensation structures are aligned with the rule, according to the draft.

The draft, which has a 205-page preamble and an 83-page text, is being written by four federal agencies and is scheduled to be released for comment on Oct. 11 by the Federal Deposit Insurance Corp.

Coming up next: a requirement that CEOs publicly attest that every single on of their employees is morally pure and kind to small furry animals; any violations found will result in jail time.

There are also concerns that the Volcker Rule will reduce the profitability of fixed-income trading:

Wall Street’s fixed-income desks could suffer a 25 percent decline in revenue under a Volcker rule proposal that may outlaw so-called flow trading, according to brokerage analyst Brad Hintz.

The draft proposal, written by regulators including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corp., forbids market-makers who trade debt securities for customers from amassing positions “in expectation of future price appreciation,” Hintz, of Sanford C. Bernstein & Co., wrote today in a note to investors. “Thus flow trading may be prohibited.” Such a move would cut fixed-income revenue by 25 percent and reduce profit margins by 18 percent, Hintz estimated.

Fixed-income traders have become more reliant on reaping revenue from price moves in the market because the profit margins from buying and selling to clients, known as the bid- offer spread, have shrunk in recent decades, Hintz wrote.

“As bid-offer pricing narrowed, the Street increased risk- taking when facilitating client trades, which enabled them to respond quickly and profit from changing demand conditions,” Hintz wrote. “By deploying balance sheet to amass inventory ahead of demand, flow trading allowed the firms to partially offset the deteriorating economics in pure execution.”

Less profitability means less capital will be deployed means thinner, more brittle markets. But nobody cares.

The Federal Reserve released, and is seeking comment on, the proposed rule – all 298 pages of it.

The BoC has released a working paper by Bruno Feunou and Roméo Tedongap titled A Stochastic Volatility Model with Conditional Skewness:

We develop a discrete-time affine stochastic volatility model with time-varying conditional skewness (SVS). Importantly, we disentangle the dynamics of conditional volatility and conditional skewness in a coherent way. Our approach allows current asset returns to be asymmetric conditional on current factors and past information, what we term contemporaneous asymmetry. Conditional skewness is an explicit combination of the conditional leverage effect and contemporaneous asymmetry. We derive analytical formulas for various return moments that are used for generalized method of moments estimation. Applying our approach to S&P500 index daily returns and option data, we show that one- and two-factor SVS models provide a better fit for both the historical and the risk-neutral distribution of returns, compared to existing affine generalized autoregressive conditional heteroskedasticity (GARCH) models. Our results are not due to an overparameterization of the model: the one-factor SVS models have the same number of parameters as their one-factor GARCH competitors.

Those able to plough through that will also be interested in Christo ersen, P., Heston, S., and Jacobs, K., (2009) The Shape and Term Structure of the Index Option Smirk: Why Multifactor Stochastic Volatility Models Work So Well,” Management Science, 55 (12), 1914{1932.

Everybody should buy equities! Merkel and Sarkozy are going to save the world!

The S&P 500 has rebounded about 8 percent from a 13-month low on Oct. 3 amid optimism that European leaders will succeed in taming the debt crisis and as economic data topped estimates. German Chancellor Angela Merkel and French President Nicolas Sarkozy said yesterday they will deliver a plan to recapitalize European banks and address the Greek debt crisis by the Nov. 3 Group of 20 summit.

Here’s a cheerful story on malware in USAF Predator drones:

The virus, first detected nearly two weeks ago by the military’s Host-Based Security System, has not prevented pilots at Creech Air Force Base in Nevada from flying their missions overseas. Nor have there been any confirmed incidents of classified information being lost or sent to an outside source. But the virus has resisted multiple efforts to remove it from Creech’s computers, network security specialists say. And the infection underscores the ongoing security risks in what has become the U.S. military’s most important weapons system.

“We keep wiping it off, and it keeps coming back,” says a source familiar with the network infection, one of three that told Danger Room about the virus. “We think it’s benign. But we just don’t know.”

The new Nobel laureates in economics are bearish on Europe:

New York University’s Thomas J. Sargent and Princeton University’s Christopher A. Sims shared the 2011 Nobel Prize in Economic Sciences for their work in sorting out cause from effect in the economy and policy.

The two economists voiced pessimism about the outlook for the 17-member euro zone at a joint press conference at Princeton University in New Jersey.

Sims called the foundation of the monetary regime “precarious” because of the lack of a unified fiscal authority that can issue bonds and raise taxes. The departure of one or more nations from the union would not resolve that, he added.

“The prospects for the euro are dim” if the region can’t find a way to share its fiscal burden, Sims said.

Sargent likened the situation facing the euro zone to that which the U.S. confronted early in its history, when the 13 states were each running their own economic policies and issuing their own debt. “The difficult thing is the politics,” he said.

Politics are also the trouble now in the U.S. as well, Sims suggested. There’s broad agreement among economists on what strategy the U.S. should follow, he said: adopt a plan to deal with the budget deficit while avoiding fiscal stringency in the short-run and maintaining an accommodative monetary policy.

The FDIC is rebuilding its reserves:

U.S. bank failures through 2015 will drain $19 billion from the Federal Deposit Insurance Corp. fund for covering losses from shutdowns, the agency said in an update of its reserve ratio projections.

The fund, pushed into deficit by the wave of failures stemming from the 2008 credit crisis, turned positive as of June 30 after seven consecutive quarters of negative balances.

Under current projections, FDIC assessment rates will boost the insurance fund to 1.15 percent of insured deposits in 2018, according to the agency’s statement. The regulator is required by the Dodd-Frank Act to increase the ratio to 1.35 percent by Sept. 30, 2020.

Today’s report shows that the FDIC may have gone farther than it needed to in increasing assessments, according to James Chessen, chief economist for the American Bankers Association.

“The FDIC had set aside $17.7 billion for possible bank failures losses at the start of 2011, twice what the actual losses are likely to be this year,” Chessen said in a statement. “Banks are paying $13.5 billion in yearly premiums to the FDIC, which is far in excess of the yearly costs expected by the FDIC over the next several years.”

Looks pretty good compared to CDIC funding:

The target range for the amount of ex ante funding is currently between 40 and 50 basis points of insured deposits—which translates into a range of between $2,410.0 million to $3,012.5 million based on insured deposits as at April 30, 2010. The reported amount as at March 31, 2011, was $2,213.5 million, representing 37 basis points of insured deposits (March 31, 2010: $1,958.1 million representing 33 basis points of insured deposits at April 30, 2009).

… especially since the size of the Canadian banking system is so much larger relative to GDP than is the case in the States – or most other places. The Ministry of Finance has been drinking too much of its ‘strong regulatory framework’ Kool-Aid and some day – hopefully not in my lifetime, but that’s just pious hope – the lack of disaster preparation is going to bite all of us in the ass.

DBRS has released its Unified Interest Rate Model for U.S. RMBS Transactions, which looks most interesting; unfortunately I have not yet had time to give it the attention it deserves.

FCS.PR.B has been confirmed at Pfd-3(low) by DBRS:

DBRS has today confirmed the rating of Pfd-3 (low) on the 6.25% Preferred Securities (the Preferred Securities) issued by Faircourt Split Trust (The Trust).

From October 2010 to August 2011, the performance of the Trust was fairly stable, with downside protection fluctuating between 32% and 40%. The Trust’s net asset value (NAV) experienced downward pressure in September 2011 and the current downside protection available to holders of the Preferred Securities was approximately 27% (as of September 30, 2011). Today’s rating confirmation of the Preferred Securities is based on (1) the downside protection available; (2) testing of NAV floors for targeted and special distributions; and (3) the diversification of the underlying assets included in the Portfolio.

The main constraints to the rating are (1) The Trust’s dependence on the value and dividend policies of the securities in the investment portfolio and (2) the reliance on the manager to generate a high yield on the investment portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

The 6.25% Preferred Securities are scheduled to mature on December 31, 2014.

It was a strong day for the Canadian preferred share market, with PerpetualDiscounts winning 24bp, FixedResets gaining 3bp and DeemedRetractibles up 10bp. Volatility was good, mostly towards the upside. Volume was pathetic. Doesn’t anybody trade anymore?

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 -0.9756 % 1,947.4
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.9756 % 2,928.9
Floater 3.69 % 3.67 % 154,767 18.17 2 -0.9756 % 2,102.7
OpRet 4.87 % 3.07 % 60,558 1.57 8 0.3672 % 2,441.8
SplitShare 5.47 % 1.87 % 56,874 0.38 4 0.6705 % 2,450.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.3672 % 2,232.8
Perpetual-Premium 5.71 % 4.30 % 104,477 1.02 13 -0.0183 % 2,117.7
Perpetual-Discount 5.42 % 5.45 % 109,686 14.66 17 0.2444 % 2,224.2
FixedReset 5.18 % 3.39 % 201,804 2.62 61 0.0316 % 2,312.4
Deemed-Retractible 5.12 % 4.64 % 220,447 7.76 46 0.1010 % 2,176.7
Performance Highlights
Issue Index Change Notes
GWO.PR.N FixedReset -3.76 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.01
Bid-YTW : 4.22 %
BAM.PR.K Floater -1.96 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-11
Maturity Price : 14.02
Evaluated at bid price : 14.02
Bid-YTW : 3.77 %
SLF.PR.D Deemed-Retractible 1.12 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.75
Bid-YTW : 6.83 %
HSB.PR.E FixedReset 1.13 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.75
Bid-YTW : 3.98 %
PWF.PR.M FixedReset 1.16 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 26.20
Bid-YTW : 3.68 %
BNA.PR.C SplitShare 1.28 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2019-01-10
Maturity Price : 25.00
Evaluated at bid price : 20.51
Bid-YTW : 7.75 %
CIU.PR.A Perpetual-Discount 1.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-11
Maturity Price : 22.70
Evaluated at bid price : 23.07
Bid-YTW : 5.03 %
PWF.PR.E Perpetual-Discount 1.47 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-11
Maturity Price : 23.75
Evaluated at bid price : 24.87
Bid-YTW : 5.48 %
BAM.PR.X FixedReset 1.54 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-10-11
Maturity Price : 22.63
Evaluated at bid price : 23.76
Bid-YTW : 3.83 %
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 25.85
Bid-YTW : 3.07 %
BNA.PR.E SplitShare 1.86 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2017-12-10
Maturity Price : 25.00
Evaluated at bid price : 22.42
Bid-YTW : 7.08 %
IAG.PR.A Deemed-Retractible 1.94 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.05
Bid-YTW : 6.22 %
Maturity Type : Call
Maturity Date : 2013-06-01
Maturity Price : 25.75
Evaluated at bid price : 27.06
Bid-YTW : 1.93 %
Volume Highlights
Issue Index Shares
TD.PR.M OpRet 101,896 Called for redemption.
Maturity Type : Call
Maturity Date : 2012-04-30
Maturity Price : 25.25
Evaluated at bid price : 25.46
Bid-YTW : 2.64 %
TRP.PR.C FixedReset 94,802 RBC crossed 90,800 at 25.30.
Maturity Type : Limit Maturity
Maturity Date : 2041-10-11
Maturity Price : 23.31
Evaluated at bid price : 25.30
Bid-YTW : 3.15 %
ENB.PR.B FixedReset 45,835 Recent new issue.
Maturity Type : Limit Maturity
Maturity Date : 2041-10-11
Maturity Price : 23.22
Evaluated at bid price : 25.30
Bid-YTW : 3.79 %
Maturity Type : Soft Maturity
Maturity Date : 2015-12-18
Maturity Price : 25.00
Evaluated at bid price : 24.86
Bid-YTW : 4.33 %
CM.PR.D Perpetual-Premium 22,205 TD crossed 10,000 at 25.17.
Maturity Type : Call
Maturity Date : 2012-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.13
Bid-YTW : 4.19 %
BMO.PR.H Deemed-Retractible 19,836 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-02-25
Maturity Price : 25.00
Evaluated at bid price : 25.65
Bid-YTW : 3.87 %
There were 13 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
ELF.PR.G Perpetual-Discount Quote: 20.28 – 21.59
Spot Rate : 1.3100
Average : 0.8687

Maturity Type : Limit Maturity
Maturity Date : 2041-10-11
Maturity Price : 20.28
Evaluated at bid price : 20.28
Bid-YTW : 5.89 %

GWO.PR.N FixedReset Quote: 23.01 – 23.81
Spot Rate : 0.8000
Average : 0.5101

Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.01
Bid-YTW : 4.22 %

FTS.PR.G FixedReset Quote: 25.82 – 26.47
Spot Rate : 0.6500
Average : 0.4845

Maturity Type : Limit Maturity
Maturity Date : 2041-10-11
Maturity Price : 23.88
Evaluated at bid price : 25.82
Bid-YTW : 3.60 %

TCA.PR.Y Perpetual-Premium Quote: 51.16 – 51.89
Spot Rate : 0.7300
Average : 0.5719

Maturity Type : Call
Maturity Date : 2014-03-05
Maturity Price : 50.00
Evaluated at bid price : 51.16
Bid-YTW : 4.45 %

RY.PR.H Deemed-Retractible Quote: 26.34 – 26.90
Spot Rate : 0.5600
Average : 0.4135

Maturity Type : Call
Maturity Date : 2016-05-24
Maturity Price : 25.25
Evaluated at bid price : 26.34
Bid-YTW : 4.75 %

BAM.PR.K Floater Quote: 14.02 – 14.45
Spot Rate : 0.4300
Average : 0.3231

Maturity Type : Limit Maturity
Maturity Date : 2041-10-11
Maturity Price : 14.02
Evaluated at bid price : 14.02
Bid-YTW : 3.77 %

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