December 20, 2012

An article of mine has been published in the December Advisor’s Edge Report, titled OSFI’s Academic Foray, which discusses a paper published by OSFI titled Evidence for Mean Reversion in Equity Prices, which they explain as:

OSFI has had discussions with some life insurance industry representatives on equity return models that incorporate mean reversion assumptions. This was done as part of its work on the use of internal models to determine capital requirements for segregated fund guarantees.

OSFI has considered the question of whether such assumptions are prudent, and has decided that it will not review requests for approval to use internal models that incorporate mean reversion in equity returns.

The paper “Evidence for Mean Reversion in Equity Prices” accompanying this letter explains the rationale behind OSFI’s decision. It is being released so that industry participants and other stakeholders can better understand OSFI’s views on this subject.

Sadly, as I conclude:

The OSFI paper held great promise to explain to the investing public why it made a particular decision—a practice that allows us to become more familiar with OSFI’s priorities and the underlying philosophy that forms the framework for its decisions. This promise was not fulfilled.

If OSFI wishes to gain credibility as a knowledgeable and effective regulator of the Canadian financial system, it needs to produce analysis at a much higher standard. Both academia and the private sector offer considerable expertise on regulatory practice, and it should be harnessed.

I’ll post a PDF of the article as published and of my footnoted draft version after a decent interval.

ICE wants to buy the NYSE:

IntercontinentalExchange Inc., the 12-year-old energy and commodity futures bourse, agreed to acquire NYSE Euronext (NYX) for cash and stock worth $8.2 billion, moving to take control of the world’s biggest equities market.

IntercontinentalExchange, based in Atlanta, will pay $33.12 a share for the owner of the New York Stock Exchange, 38 percent above yesterday’s closing price, according to a statement today. Both boards approved the proposal and the companies expect to complete the transaction in the second half of 2013. Last year, the U.S. blocked a joint hostile bid by IntercontinentalExchange and Nasdaq OMX Group Inc. (NDAQ) for the New York-based company on concern the combination would dominate U.S. stock listings.

Merging NYSE Euronext, which owns the biggest exchanges by value of listings in the U.S., France and the Netherlands, with the second-largest futures market underscores both the growing importance of derivatives and the diminishing influence of the 220-year-old NYSE. The Big Board, once the benchmark for global free markets, has seen its share of trading in stocks listed on the exchange decline to 21 percent from 82 percent.

Boyd Erman in the Globe reports:

The trend of international consolidation of stock exchanges appears to be not just over, but unravelling.

As part of their planned combination, IntercontinentalExchange (ICE) and NYSE Euronext say they will look to sell their European equity markets, known as Euronext, in an initial public offering.

NYSE and Euronext combined. NYSE Euronext then tried another deal with Deutsche Boerse of Germany. TMX looked to merge with London Stock Exchange Plc. Singapore’s market looked for a tie-up with Australia’s.

For various reasons, most of those deals failed. The only big one that really got done was the creation of NYSE Euronext. And Thursday, management of NYSE declared the experiment over after synergies between the companies had been limited, and the value of Euronext, such as it is, lost within NYSE. ICE executives also pointed to a need to cut down on the number of businesses the companies would run, and regulatory changes that they said make it hard to run an international stock exchange business.

On a conference call to discuss NYSE Euronext’s planned acquisition by ICE, NYSE chief executive officer Duncan Niederauer conceded the Euronext transaction had been a bust.

“We’ve yet to deliver those returns and prove that hypotheses,” he said.

Pension chickens coming home to roost in the US:

A firefighter in Allentown, Pennsylvania, which plans to lease its water system to meet retirement costs, left last year with an annual pension of $99,289, more than double what state law says was due.

The unauthorized benefits, which some cities resort to partly because they prefer pension perks over raises, add to financial burdens lingering from the recession that ended in 2009. Localities in the sixth-most-populous state face $8.5 billion in unfunded pension liabilities, according to the retirement commission.

Audits of Pennsylvania cities that fall under pension restrictions show that 26 percent have given illegal benefits.

One such municipality was Allentown, a city of 119,000 whose plans are 64 percent funded, according to the retirement commission.

Here’s a good idea from Facebook:

Facebook said the test will start with a “small number of people” and will charge an unspecified fee to ensure a message gets sent to the main inbox — rather than a lower-priority queue — of another user, even a stranger. Facebook will test different fees, starting initially at about $1 per e-mail, according to a person with knowledge of the matter, who asked not to be identified because pricing is private.

“Several commentators and researchers have noted that imposing a financial cost on the sender may be the most effective way to discourage unwanted messages and facilitate delivery of messages that are relevant and useful,” the Menlo Park, California-based company said on its website.

For years, I’ve advocated a system for eMail whereby users pay $0.01 to send each eMail, and receive $0.01 for each email received; balance remitted or billed by the ISP monthly, balances of less than $10 either way are eliminated without payment.

Most individuals would receive payments, if any. Businesses would probably have to pay something, but $0.01 is a very cheap delivery charge for a legitimate business communication.

You want a spam-less eMail system? That’s how you get a spam-less eMail system. But all the damn hippies chant: ‘The Internet should be free!’ and I don’t think we’ll ever see that on a public system. Hippies destroyed the Internet!

It was a positive day for the Canadian preferred share market, with both PerpetualPremiums and FixedResets gaining 3bp, while DeemedRetractibles won 14bp. Volatility was low. Volume was very high.

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 -0.1600 % 2,480.1
FixedFloater 4.30 % 3.66 % 31,858 17.95 1 0.0453 % 3,738.2
Floater 2.80 % 2.99 % 59,751 19.74 4 -0.1600 % 2,677.9
OpRet 4.63 % 1.92 % 57,831 0.49 4 0.2586 % 2,594.0
SplitShare 4.64 % 4.74 % 58,262 4.39 2 0.1009 % 2,872.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2586 % 2,372.0
Perpetual-Premium 5.25 % 0.65 % 73,718 0.18 30 0.0265 % 2,325.7
Perpetual-Discount 4.86 % 4.88 % 134,163 15.62 4 0.0712 % 2,634.6
FixedReset 4.93 % 3.09 % 231,013 4.31 77 0.0267 % 2,454.0
Deemed-Retractible 4.89 % 2.01 % 116,070 0.39 46 0.1425 % 2,421.4
Performance Highlights
Issue Index Change Notes
IAG.PR.F Deemed-Retractible 1.17 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-03-31
Maturity Price : 26.00
Evaluated at bid price : 26.88
Bid-YTW : 4.05 %
MFC.PR.H FixedReset 1.55 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 26.18
Bid-YTW : 3.42 %
Volume Highlights
Issue Index Shares
HSB.PR.E FixedReset 84,154 National crossed 20,000 at 26.58; Desjardins crossed 50,000 at the same price.
Maturity Type : Call
Maturity Date : 2014-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.50
Bid-YTW : 2.46 %
RY.PR.N FixedReset 81,232 RBC crossed 80,000 at 26.27.
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 26.25
Bid-YTW : 2.33 %
NA.PR.Q FixedReset 52,860 National crossed blocks of 20,000 and 30,000, both at 26.20.
Maturity Type : Call
Maturity Date : 2017-11-15
Maturity Price : 25.00
Evaluated at bid price : 26.18
Bid-YTW : 2.88 %
ENB.PR.T FixedReset 52,435 Recent new issue.
Maturity Type : Limit Maturity
Maturity Date : 2042-12-20
Maturity Price : 23.13
Evaluated at bid price : 25.12
Bid-YTW : 3.75 %
ENB.PR.B FixedReset 49,782 TD crossed 12,400 at 25.28.
Maturity Type : Limit Maturity
Maturity Date : 2042-12-20
Maturity Price : 23.28
Evaluated at bid price : 25.24
Bid-YTW : 3.64 %
BAM.PR.K Floater 49,349 Scotia crossed 25,000 at 17.60.
Maturity Type : Limit Maturity
Maturity Date : 2042-12-20
Maturity Price : 17.48
Evaluated at bid price : 17.48
Bid-YTW : 3.00 %
There were 55 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.R Perpetual-Premium Quote: 26.75 – 27.10
Spot Rate : 0.3500
Average : 0.2505

Maturity Type : Call
Maturity Date : 2021-04-30
Maturity Price : 25.00
Evaluated at bid price : 26.75
Bid-YTW : 4.62 %

CIU.PR.C FixedReset Quote: 24.70 – 25.04
Spot Rate : 0.3400
Average : 0.2412

Maturity Type : Limit Maturity
Maturity Date : 2042-12-20
Maturity Price : 23.21
Evaluated at bid price : 24.70
Bid-YTW : 2.78 %

MFC.PR.C Deemed-Retractible Quote: 24.18 – 24.59
Spot Rate : 0.4100
Average : 0.3155

Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.18
Bid-YTW : 4.98 %

ENB.PR.D FixedReset Quote: 25.20 – 25.46
Spot Rate : 0.2600
Average : 0.1685

Maturity Type : Limit Maturity
Maturity Date : 2042-12-20
Maturity Price : 23.21
Evaluated at bid price : 25.20
Bid-YTW : 3.63 %

PWF.PR.I Perpetual-Premium Quote: 25.68 – 25.93
Spot Rate : 0.2500
Average : 0.1640

Maturity Type : Call
Maturity Date : 2013-01-19
Maturity Price : 25.00
Evaluated at bid price : 25.68
Bid-YTW : -16.10 %

PWF.PR.P FixedReset Quote: 25.13 – 25.35
Spot Rate : 0.2200
Average : 0.1347

Maturity Type : Limit Maturity
Maturity Date : 2042-12-20
Maturity Price : 23.41
Evaluated at bid price : 25.13
Bid-YTW : 3.02 %

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