The evisceration of five hundred years of bankruptcy law and the politicization of the process is having an effect:
Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM) are among banks whose debt ratings may be cut by Moody’s Investors Service as it examines whether the U.S. would be less likely to ensure creditors are repaid in a crisis.
Morgan Stanley and Wells Fargo & Co. (WFC) also may be downgraded, Moody’s said yesterday in a report. Citigroup Inc. (C) and Bank of America Corp. (BAC) are under review, with the direction of any rating change uncertain, Moody’s said. Bank of New York Mellon Corp. and State Street Corp. (STT) already were under review.
Moody’s and Standard & Poor’s have said downgrades may be needed because the federal government has new tools to wind down banks instead of rescuing them with taxpayer money. Those plans can include forcing debtholders to incur losses or convert stakes to equity. The policies also may have an impact on ratings of the companies’ deposit-taking subsidiaries.
There’s at least one player who thinks Fed jawboning has worked perfectly:
Federal Reserve Bank of San Francisco President John Williams said speculation over tapering of quantitative easing that drove Treasury yields higher may have helped eliminate some “froth” in the bond market.
Some investors “were thinking the Fed was going to keep buying forever, QE infinity,” Williams said today in a CNBC television interview from Jackson Hole, Wyoming. “We had always communicated that that’s not what our plan was.”
“Some of the adjustment in the bond market probably was kind of bringing people back to reality that this was a program that wasn’t going to continue forever,” he said. “And I think that, maybe, eliminates some of the froth in the bond market.”
Treasury 10-year yields touched a two-year high of 2.93 percent earlier this week on speculation the Federal Open Market Committee will slow its large-scale asset purchases next month.
…
Williams, who has never dissented from a policy decision, said whether tapering takes place later this year depends on economic conditions.“The decision when and if to taper later this year will depend on the data, and specifically are we still seeing signs of positive momentum,” Williams said. “I’m not going to speak about what meeting or not, but I do think that if the data continue to progress as we’ve seen, then I do agree that we should edge down or taper our purchases later this year.”
But on the other hand:
Federal Reserve Bank of Atlanta President Dennis Lockhart said he wouldn’t rule out a September move by the central bank to start tapering its bond-buying program as long as the economy’s performance justifies it.
“I’m looking at the data as whether they are denying or undermining the outlook I have in my head” for moderate growth, Lockhart said in an interview today on Bloomberg Television with Michael McKee from Jackson Hole, Wyoming, where the Kansas City Fed is hosting a conference. “You can take a cautious first step,” which the Fed could conceivably do, he said.
They were worrried about that!
The minutes from the Fed’s July 30-31 meeting reveal policy makers’ anxiety. They describe “volatile” financial markets in response to “policy communications” and economic data, and U.S. interest-rate increases that signaled “heightened financial-market uncertainty about the path of monetary policy.”
Fed officials were “broadly comfortable” with Bernanke’s plan to start reducing bond buying later this year if the economy improves yet decided against adding any more information about the outlook for asset purchases in their July policy statement. They “judged that doing so might prompt an unwarranted shift in market expectations,” according to the minutes, which were released Aug. 21.
There is speculation that all this tapering talk is having a real effect:
Purchases of new U.S. homes plunged 13.4 percent in July, the most in more than three years, raising concern higher mortgage rates will slow the real-estate rebound.
Sales fell to a 394,000 annualized pace, Commerce Department figures showed today in Washington. The reading was the weakest since October and was lower than any of the forecasts by 74 economists Bloomberg surveyed.
A jump in borrowing costs over the past three months may be prompting buyers to hold back, showing the difficult job ahead for Federal Reserve officials as they try to wean the economy from monetary stimulus while sustaining growth.
…
“It’s definitely a rate shock,” said Doug Duncan, chief economist at Fannie Mae in Washington. “You could see another month or two of weak sales or it could go longer. This is a sustainable recovery, but we’ve also said it’s not robust. Along the way, there will be some hiccups. This is certainly a hiccup.”
Naturally, you could spend a week reading all the sell-side chatter:
RBC economist David Onyett-Jeffries is correct to point out that new home sales are only 8 per cent of total residential transactions – the rest are existing homes. In that sense, the disappointment may not be that big a deal for the housing market as a whole.
But, existing home sales don’t help the construction industry much. Even at much larger numbers, existing sales are not as big a benefit to overall U.S. gross domestic product.
Perhaps more disturbing, the inventory of unsold homes is increasing rapidly. CIBC’s Andrew Grantham writes that “with the number of homes for sale rising and months’ supply increasing to 5.2, from 4.3, the decline certainly seems to be more of a demand than a supply issue.”
Is anyone surprised? The politicization of auto insurance means more regulation:
Ontario’s Liberal government will take two years to cut auto insurance rates by 15 per cent – double the time demanded by the New Democratic Party in its budget deal with the Liberals earlier this year.
…
The government will crack down on insurance fraud by licensing clinics that invoice insurance companies and put in place stricter accident benefit guidelines. Mr. Sousa also appointed a retired judge to study reforms to the insurance dispute resolution system, which suffers from long backlogs that make insurers’ profits unpredictable.
S&P, with a certain amount of obvious self-interest is touting Multi-Asset Solutions in Indexing:
The second trend involves investors thinking more and more of risk factors or risk premia as the building blocks of asset allocation, rather than asset classes. There has been a growing recognition that systematic risk factors explain the majority of long-term portfolio returns, and that a significant portion of the alpha delivered by active managers and alternative managers can be attributed to systematic risk factors (e.g., Ang et al, 2009). The true alpha from pure manager skills accounts for a smaller portion of portfolio returns. In such context, there has been increased interest in using low-cost systematic strategies to capture risk premia. Notably, many so called “alternative beta” or “smart beta” strategy indices have been developed to capture the most well-known systematic risk premia such as value, low volatility and quality in equities, momentum and roll yield in commodities and carry/value/momentum in currencies.
…
The case for index investing traces back to the simple but profound insight that, in aggregate, active management is a zero-sum game before costs and a negative-sum game after costs. Beta can be captured by traditional market benchmarks with very low cost, while alpha is scarce and expensive.In recent years, the concepts of alpha and beta have been evolving. Investors increasingly recognize that alpha should not be defined as the excess return over the market benchmark. A significant portion of the excess return from active management may come from exposures to systematic risk premia. In such context we have witnessed the development of many alternative beta/smart beta strategies that aim to capture systematic risk premia.
Multi-asset solutions can potentially push the boundary of index investing beyond asset class beta and systematic risk premia. As multi-asset solutions become more mainstream in the asset management industry, the potential role of indices in underlying pre-packaged multi-asset investment products may warrant more discussion. Theoretically, index based multi-asset investment vehicles may have the potential to reduce the cost of constructing multi-asset solutions (e.g., management fees, advisor fees). Many empirical studies have investigated whether mutual fund managers or institutional investors have asset allocation / market timing skills. The results are mixed but overall suggest that only a minority of managers possess significant asset allocation / market timing skills. Nevertheless, it remains one of the significant challenges that investors essentially need to be comfortable with delegating the asset allocation tasks traditionally handled by asset allocators and financial advisors alike to index based multi-asset vehicles.
Our research indicates that, beyond the well-established asset class beta and systematic risk premia, there is potentially value in passive multi-asset index solutions. The field will attract further research and it is likely to be an area of future product development and innovations in the index investment industry.
The Ang paper is Ang, Andrew, William N. Goetzmann, and Stephen M. Schaefer. 2009. “Evaluation of Active Management of the Norwegian Government Pension Fund – Global” and is published by the Norwegian government. Too bad we never see anything like this in Canada.
And, holy smokaramas, the Canadian preferred share market is on fire! PerpetualDiscounts won 66bp today, FixedResets gained 39bp and DeemedRetractibles were up 51bp. The Performance Highlights table is suitably lengthy. Volume was merely on the high side of average.
Before anybody gets too excited, though, remember just how much ground there is to make up! CPD closed at $15.98 today. Add back about $0.06 dividends that went ex today, call it $16.04. That’s above the close of August 12 ($15.98) but below August 9 ($16.07), to say nothing of July 31 ($16.46). And every single member of the PerpetualPremiums index is, at today’s “last” bid, expected to migrate to PerpetualDiscounts at the August month-end rebalancing.
| 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 | 0.2146 % | 2,632.0 |
| FixedFloater | 4.34 % | 3.63 % | 34,439 | 18.08 | 1 | -2.0134 % | 3,828.0 |
| Floater | 2.55 % | 2.89 % | 69,280 | 19.95 | 5 | 0.2146 % | 2,841.8 |
| OpRet | 4.67 % | 4.30 % | 73,608 | 2.80 | 3 | 0.3908 % | 2,601.4 |
| SplitShare | 4.74 % | 4.40 % | 56,149 | 3.86 | 6 | 0.3644 % | 2,952.3 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.3908 % | 2,378.7 |
| Perpetual-Premium | 5.81 % | 5.85 % | 119,950 | 14.06 | 12 | -0.0068 % | 2,229.7 |
| Perpetual-Discount | 5.68 % | 5.83 % | 158,592 | 14.12 | 25 | 0.6625 % | 2,273.8 |
| FixedReset | 5.01 % | 3.87 % | 246,849 | 3.76 | 84 | 0.3928 % | 2,437.8 |
| Deemed-Retractible | 5.25 % | 5.21 % | 197,201 | 6.95 | 43 | 0.5128 % | 2,306.1 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| GWO.PR.N | FixedReset | -2.39 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.01 Bid-YTW : 4.83 % |
| BAM.PR.G | FixedFloater | -2.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 22.37 Evaluated at bid price : 21.90 Bid-YTW : 3.63 % |
| PWF.PR.P | FixedReset | -1.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 22.89 Evaluated at bid price : 23.66 Bid-YTW : 3.86 % |
| HSB.PR.C | Deemed-Retractible | 1.05 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.91 Bid-YTW : 5.30 % |
| FTS.PR.F | Perpetual-Discount | 1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 21.80 Evaluated at bid price : 21.80 Bid-YTW : 5.65 % |
| ENB.PR.P | FixedReset | 1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 22.57 Evaluated at bid price : 23.60 Bid-YTW : 4.55 % |
| TRP.PR.A | FixedReset | 1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 24.10 Evaluated at bid price : 24.48 Bid-YTW : 4.07 % |
| BAM.PR.Z | FixedReset | 1.07 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-12-31 Maturity Price : 25.00 Evaluated at bid price : 25.40 Bid-YTW : 4.60 % |
| CIU.PR.C | FixedReset | 1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 22.47 Evaluated at bid price : 23.01 Bid-YTW : 3.67 % |
| GWO.PR.I | Deemed-Retractible | 1.20 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.12 Bid-YTW : 6.57 % |
| ENB.PR.T | FixedReset | 1.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 22.56 Evaluated at bid price : 23.61 Bid-YTW : 4.54 % |
| SLF.PR.H | FixedReset | 1.22 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.90 Bid-YTW : 4.20 % |
| GWO.PR.H | Deemed-Retractible | 1.26 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.78 Bid-YTW : 6.60 % |
| HSE.PR.A | FixedReset | 1.30 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 22.71 Evaluated at bid price : 23.38 Bid-YTW : 4.09 % |
| CU.PR.F | Perpetual-Discount | 1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 21.30 Evaluated at bid price : 21.30 Bid-YTW : 5.31 % |
| BAM.PR.X | FixedReset | 1.38 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 22.26 Evaluated at bid price : 22.85 Bid-YTW : 4.34 % |
| BAM.PR.M | Perpetual-Discount | 1.46 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 20.15 Evaluated at bid price : 20.15 Bid-YTW : 6.00 % |
| BAM.PR.N | Perpetual-Discount | 1.51 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 20.12 Evaluated at bid price : 20.12 Bid-YTW : 6.01 % |
| BAM.PF.B | FixedReset | 1.54 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 22.33 Evaluated at bid price : 23.15 Bid-YTW : 4.86 % |
| ENB.PR.D | FixedReset | 1.54 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 22.67 Evaluated at bid price : 23.70 Bid-YTW : 4.45 % |
| RY.PR.C | Deemed-Retractible | 1.59 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.21 Bid-YTW : 5.09 % |
| MFC.PR.B | Deemed-Retractible | 1.64 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.01 Bid-YTW : 6.66 % |
| POW.PR.D | Perpetual-Discount | 1.76 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 21.66 Evaluated at bid price : 22.01 Bid-YTW : 5.74 % |
| ENB.PR.H | FixedReset | 1.76 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 22.33 Evaluated at bid price : 23.10 Bid-YTW : 4.37 % |
| PWF.PR.K | Perpetual-Discount | 1.85 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 21.65 Evaluated at bid price : 22.00 Bid-YTW : 5.67 % |
| HSB.PR.D | Deemed-Retractible | 1.91 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.08 Bid-YTW : 5.09 % |
| ENB.PR.Y | FixedReset | 2.01 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 22.45 Evaluated at bid price : 23.40 Bid-YTW : 4.49 % |
| CU.PR.G | Perpetual-Discount | 2.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 21.23 Evaluated at bid price : 21.23 Bid-YTW : 5.33 % |
| BNS.PR.Y | FixedReset | 2.05 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.42 Bid-YTW : 4.11 % |
| TRP.PR.B | FixedReset | 2.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 21.34 Evaluated at bid price : 21.65 Bid-YTW : 3.87 % |
| PWF.PR.L | Perpetual-Discount | 2.15 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 22.09 Evaluated at bid price : 22.35 Bid-YTW : 5.76 % |
| BNA.PR.E | SplitShare | 2.23 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2017-12-10 Maturity Price : 25.00 Evaluated at bid price : 24.75 Bid-YTW : 5.09 % |
| GWO.PR.G | Deemed-Retractible | 2.50 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.40 Bid-YTW : 6.12 % |
| MFC.PR.F | FixedReset | 2.53 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.30 Bid-YTW : 4.85 % |
| BAM.PR.T | FixedReset | 2.56 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 22.90 Evaluated at bid price : 24.00 Bid-YTW : 4.51 % |
| FTS.PR.H | FixedReset | 2.62 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 21.15 Evaluated at bid price : 21.15 Bid-YTW : 4.16 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BNS.PR.J | Deemed-Retractible | 120,300 | RBC bought 17,000 from TD at 25.00. Nesbitt crossed 100,000 at 25.08. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.00 Bid-YTW : 5.33 % |
| ENB.PR.Y | FixedReset | 77,650 | National crossed three blocks, 15,000 shares, 17,400 and 11,400, all at 22.90. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 22.45 Evaluated at bid price : 23.40 Bid-YTW : 4.49 % |
| ENB.PR.H | FixedReset | 70,408 | Scotia crossed three blocks, of 27,000 shares, 16,300 and 12,700, all at 22.82. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 22.33 Evaluated at bid price : 23.10 Bid-YTW : 4.37 % |
| RY.PR.Y | FixedReset | 62,866 | Nesbitt crossed 50,000 at 26.00. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-11-24 Maturity Price : 25.00 Evaluated at bid price : 26.04 Bid-YTW : 2.71 % |
| BAM.PF.A | FixedReset | 47,030 | RBC crossed 25,000 at 24.65. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 23.02 Evaluated at bid price : 24.63 Bid-YTW : 4.82 % |
| FTS.PR.H | FixedReset | 38,065 | National crossed 26,000 at 21.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2043-08-23 Maturity Price : 21.15 Evaluated at bid price : 21.15 Bid-YTW : 4.16 % |
| There were 36 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| BAM.PR.G | FixedFloater | Quote: 21.90 – 22.96 Spot Rate : 1.0600 Average : 0.6497 YTW SCENARIO |
| MFC.PR.J | FixedReset | Quote: 25.01 – 25.46 Spot Rate : 0.4500 Average : 0.2730 YTW SCENARIO |
| HSB.PR.C | Deemed-Retractible | Quote: 24.91 – 25.34 Spot Rate : 0.4300 Average : 0.2695 YTW SCENARIO |
| MFC.PR.K | FixedReset | Quote: 23.91 – 24.49 Spot Rate : 0.5800 Average : 0.4247 YTW SCENARIO |
| BAM.PF.B | FixedReset | Quote: 23.15 – 23.65 Spot Rate : 0.5000 Average : 0.3525 YTW SCENARIO |
| CIU.PR.C | FixedReset | Quote: 23.01 – 23.69 Spot Rate : 0.6800 Average : 0.5387 YTW SCENARIO |
indeed it was a good day in the pref market. i’ve been buying some of your recommendations over the last few days, and am very happy. thank you again.