The BoC has released a working paper by Donald Coletti, René Lalonde, Paul Masson, Dirk Muir and Stephen Snudden titled Commodities and Monetary Policy: Implications for Inflation and Price Level Targeting:
We examine the relative ability of simple inflation targeting (IT) and price level targeting (PLT) monetary policy rules to minimize both inflation variability and business cycle fluctuations in Canada for shocks that have important consequences for global commodity prices. We find that commodities can play a key role in affecting the relative merits of the alternative monetary policy frameworks. In particular, large real adjustment costs in energy supply and demand induce highly persistent cost-push pressures in the economy leading to a significant deterioration in the inflation – output gap trade-off available to central banks, particularly to those pursuing price level targeting.
Jonathan Weil of Bloomberg decries dynamic provisioning:
Dynamic provisioning is a euphemism for an old balance- sheet trick called cookie-jar accounting. The point of the technique is to understate past profits and shift them into later periods, so that companies can mask volatility and bury future losses. Spain’s banks began using the method in 2000 because their regulator, the Bank of Spain, required them to.
…
The danger with the technique is it can make companies look healthy when they are actually quite ill, sometimes for years, until they finally deplete their excess reserves and crash. The practice also clashed with International Financial Reporting Standards, which Spain adopted several years ago along with the rest of Europe. European Union officials knew this and let Spain proceed with its own brand of accounting anyway.
Assiduous Readers with long memories will remember my post titled FRBB Looks at Dynamic Provisioning. The FRBB paper concluded, in part:
We argue that, had U.S. banks set aside general provisions in positive states of the economy, they would have been in a better position to absorb their portfolios’ loan losses during the recent financial turmoil. The allowances accumulated by means of the hypothetical dynamic provision during the cyclical upswing would have reduced by half the amount of TARP funds required. However, the cyclical buffer for the aggregate U.S. banking system would have been depleted by the first quarter of 2009, which suggests that the proposed provisioning model for expected losses might not entirely solve situations as severe as the one experienced in recent years.
So just remember: just because something is good doesn’t mean it’s a panacea. Ain’t nuthin a panacea.
Meanwhile, Spend-Every-Penny wants countries to guarantee deposits in banks they don’t regulate:
Canada is urging the euro zone to embrace a common bank-deposit guarantee as a concrete step to boost market confidence.
The stand – confirmed Friday in a speech by Finance Minister Jim Flaherty – provides the first specifics as to what Canada will push for next week when Prime Minister Stephen Harper and Mr. Flaherty attend the G20 leaders’ summit in Los Cabos, Mexico.
In his speech in Ottawa, the minister praised a proposal from Mario Draghi, the head of the European Central Bank, who has called for a fund to guarantee bank deposits in the 17-member euro zone.
It’s not clear to me why anybody would think that any rational person would base his finances on the word of a European politician anyway. I wouldn’t have any significant money deposited in any of the shaky-country banks anyway … and, if I lived there, would be inclined to be dubious about any European deposits for fear of post-exit confiscation anyway. My preference would be hard assets, by which I mean a box of Krugerrands and a pistol.
Alpha Trading asks the question – can a bank-owned utility do anything useful?:
Alpha, Canada’s newest stock exchange, wants to become the home to the country’s technology sector.
A Deloitte Inc. study commissioned by Alpha found what most observers of the tech sector in this country already know: that the tech industry is stunted. Tech as a percentage of GDP is below the G-20 average and forecast to fall behind Mexico and Saudi Arabia in a few years, the report found.
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The report, which included interviews with 22 tech sector leaders, laid out a five-point agenda for fixing the problem. The proposed solutions include more support for crowdfunding, establishing a pre-initial public offering “grey” market in tech securities and creating an exchange that focuses on tech. Alpha wants to be that exchange.
BBD.PR.D got whacked today after the announcement of the reset rate, closing down 1.40, or 7.89%, on heavy volume (for this issue!) of 32,479 shares. However, even at the quote of 15.90-35, it’s still idiotically expensive relative to BBD.PR.B at 14.95-05, with which it is interconvertible. I’ve been warning of this in PrefLetter for months. With charts and diagrams!
It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 5bp, FixedResets down 9bp and DeemedRetractibles gaining 15bp. Volatility was average. Volume was very low.
| 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 | -0.4184 % | 2,309.1 |
| FixedFloater | 4.46 % | 3.85 % | 22,933 | 17.60 | 1 | 0.0000 % | 3,534.7 |
| Floater | 3.15 % | 3.15 % | 71,980 | 19.37 | 3 | -0.4184 % | 2,493.2 |
| OpRet | 4.82 % | 2.48 % | 39,266 | 1.02 | 5 | 0.1009 % | 2,506.0 |
| SplitShare | 5.26 % | -7.35 % | 45,670 | 0.51 | 4 | -0.0645 % | 2,720.1 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1009 % | 2,291.5 |
| Perpetual-Premium | 5.44 % | 3.00 % | 77,148 | 0.57 | 26 | -0.0534 % | 2,230.5 |
| Perpetual-Discount | 5.05 % | 5.06 % | 120,841 | 15.35 | 7 | -0.2598 % | 2,448.9 |
| FixedReset | 5.05 % | 3.22 % | 206,762 | 7.77 | 71 | -0.0921 % | 2,390.3 |
| Deemed-Retractible | 5.02 % | 3.90 % | 149,246 | 2.67 | 45 | 0.1537 % | 2,303.8 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| PWF.PR.P | FixedReset | -1.21 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-06-15 Maturity Price : 23.38 Evaluated at bid price : 25.28 Bid-YTW : 2.97 % |
| BAM.PR.M | Perpetual-Discount | -1.19 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-06-15 Maturity Price : 22.85 Evaluated at bid price : 23.31 Bid-YTW : 5.08 % |
| GWO.PR.H | Deemed-Retractible | 1.13 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.27 Bid-YTW : 5.24 % |
| IAG.PR.A | Deemed-Retractible | 1.21 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.38 Bid-YTW : 5.48 % |
| BMO.PR.J | Deemed-Retractible | 1.69 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2016-02-25 Maturity Price : 25.00 Evaluated at bid price : 25.88 Bid-YTW : 3.57 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.T | FixedReset | 134,130 | RBC crossed two blocks of 50,000 each and one of 10,000, all at 26.75. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-08-24 Maturity Price : 25.00 Evaluated at bid price : 26.70 Bid-YTW : 3.22 % |
| BNS.PR.X | FixedReset | 79,790 | RBC crossed blocks of 10,000 and 62,900, both at 26.68. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-25 Maturity Price : 25.00 Evaluated at bid price : 26.65 Bid-YTW : 3.04 % |
| BNS.PR.K | Deemed-Retractible | 62,400 | RBC crossed 58,000 at 25.77. YTW SCENARIO Maturity Type : Call Maturity Date : 2012-07-15 Maturity Price : 25.50 Evaluated at bid price : 25.77 Bid-YTW : -0.65 % |
| RY.PR.N | FixedReset | 54,689 | Scotia crossed 50,000 at 26.36. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-02-24 Maturity Price : 25.00 Evaluated at bid price : 26.30 Bid-YTW : 3.31 % |
| CM.PR.L | FixedReset | 42,030 | Scotia crossed 14,200 at 26.85; Desjardins crossed 25,300 at 26.88. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-04-30 Maturity Price : 25.00 Evaluated at bid price : 26.85 Bid-YTW : 2.88 % |
| MFC.PR.F | FixedReset | 34,443 | Scotia crossed 15,300 at 23.75. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.68 Bid-YTW : 4.03 % |
| There were 14 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BAM.PR.B | Floater | Quote: 16.65 – 17.29 Spot Rate : 0.6400 Average : 0.4604 YTW SCENARIO |
| IAG.PR.F | Deemed-Retractible | Quote: 25.86 – 26.45 Spot Rate : 0.5900 Average : 0.4205 YTW SCENARIO |
| CIU.PR.B | FixedReset | Quote: 26.76 – 27.21 Spot Rate : 0.4500 Average : 0.3219 YTW SCENARIO |
| POW.PR.A | Perpetual-Premium | Quote: 25.42 – 25.72 Spot Rate : 0.3000 Average : 0.1877 YTW SCENARIO |
| FTS.PR.H | FixedReset | Quote: 25.10 – 25.40 Spot Rate : 0.3000 Average : 0.2040 YTW SCENARIO |
| ELF.PR.G | Perpetual-Discount | Quote: 22.80 – 23.07 Spot Rate : 0.2700 Average : 0.1872 YTW SCENARIO |