September 25, 2013

One thing (well, one of many things) that has bothered me over the years is the story of Henry Ford as philantropist:

Henry Ford’s vision was that a mass-manufacturing solution would save so much money that his investments would soon pay off. They did, and there was a side benefit: Ford could then afford to pay his workers a much higher wage than average — $5 a day — which made them into consumers who could afford his cars. It’s the kind of long-range view that Ford and other automakers are taking now toward China.

This is repeated so often I sometimes think I must be the only person in the world who realizes that it doesn’t make any sense at all. You can’t get rich taking in each other’s laundry. I find that Ford itself promulgates this myth, albeit with enough supporting narrative to make the real story clear:

After the success of the moving assembly line, Henry Ford had another transformative idea: in January 1914, he startled the world by announcing that Ford Motor Company would pay $5 a day to its workers. The pay increase would also be accompanied by a shorter workday (from nine to eight hours). While this rate didn’t automatically apply to every worker, it more than doubled the average autoworker’s wage.

While Henry’s primary objective was to reduce worker attrition—labor turnover from monotonous assembly line work was high—newspapers from all over the world reported the story as an extraordinary gesture of goodwill.

After Ford’s announcement, thousands of prospective workers showed up at the Ford Motor Company employment office. People surged toward Detroit from the American South and the nations of Europe. As expected, employee turnover diminished. And, by creating an eight-hour day, Ford could run three shifts instead of two, increasing productivity.

Henry Ford had reasoned that since it was now possible to build inexpensive cars in volume, more of them could be sold if employees could afford to buy them. The $5 day helped better the lot of all American workers and contributed to the emergence of the American middle class. In the process, Henry Ford had changed manufacturing forever.

I suspect that this myth was developed in an attempt to spike the guns of the nascent socialist movement:

The fact is that about 6% of Americans were voting Socialist that year, and any decent newspaper would be keeping track of the local races. It’s also important to note that there were many political parties then, including multiple leftist parties, and it would be not unusual to have half a dozen candidates for any office.

Also of note is that socialists were already closely aligned with labor unions, and this is evident in the platform planks.

And to those who think the socialist movement in America has been a failure, take a look at the list of platform planks from 1914: women’s suffrage, clean schools, child labor laws, free schoolbooks, public sector unions, workplace safety inspections, etc.

Every time I see the hoary old chestnut of perpetual motion by high wages repeated, I get just a little more irritated. What Henry Ford did was to increase productivity – wages were increased solely because he had to. It is increased productivity that makes us rich.

There are rumours of potential big changes in the corporate bond markets:

Deutsche Bank AG (DBK) is trying to drum up interest with some of its largest competitors to create a multi-dealer U.S. bond trading platform at the same time that asset managers discuss ways to make buying and selling debt easier, according to people familiar with the matter.

Europe’s biggest investment bank by revenue has pitched its plan for an electronic trading network to JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Barclays Plc (BARC), according to five people briefed on the talks, who asked to not be named because the discussions are private. Executives at State Street Corp. (STT) and FMR LLC’s Fidelity Investments are among institutional investors that have held a series of meetings, the last one in July in New York, to address the difficulty of finding the bonds they want to trade, according to two different people.

The platform, dubbed Oasis, from Frankfurt-based Deutsche Bank is aimed at the least-active part of the $4.2 trillion-a-year market where bonds might not trade for days or weeks, two of the people said. It follows a more successful introduction of the same idea in Europe, according to one executive.

Oasis clients would tell their bank how much of a particular corporate bond they want to buy or sell, a process known as an indication of interest, and the dealer would enter a resting order into the electronic system, two of the people involved said. If another party is interested and the trade crosses, the transaction would be done between banks so that the clients remain anonymous, the people said.

Information leakage, or the possibility of rival investors profiting off an investor’s plan to trade, is a major concern among bank clients that Oasis is meant to address, the people said. If the system succeeds, clients could eventually be allowed to access Oasis directly, they said.

Investors and their banks may have trouble moving more of the market onto computers. Corporate debt is unsuitable for full electronic trading, according to a study last month by McKinsey & Co. and Greenwich Associates. There are more bonds than stocks, and debt trades less frequently, making a full transition to computer-based buying and selling unlikely, the consultants said.

Dealers have resisted a shift to electronic bond trading because the increased transparency can cut profits. In the 90 days after the Financial Industry Regulatory Authority’s Trace started disseminating prices of junk bonds, trading in the securities dropped 41 percent, according to Massachusetts Institute of Technology and Harvard University researchers.

I think the process is doomed to failure, although it might be a step in the right direction. The big problem is lack of inventories, which are small because the profits are thin and the capital expensive. I think the only logical goal is for the big pension funds to act more like trading desks, making markets and swapping stuff in and out of their portfolios on demand (while maintaining overall portfolio objectives) – the way, for instance, I have been trading fixed income in my small way for the past twenty-one years (although, with respect to bonds, only through brokers). I suspect, however, that there are immense cultural and regulatory roadblocks between the current reality and the endgame.

There’s a funny story on French regulation:

This week, a Paris court of appeal ordered the cosmetics chain Sephora to close its flagship store on the avenue at 9 p.m., rather than staying open until midnight during the week and until 1 a.m. on Fridays and Saturdays.

But at a time when the national economy remains stuck in a rut and unemployment continues to rise, this latest ruling on Sephora has struck a raw nerve. The case was brought by a consortium of labour unions, which has been zealous in its attempts to have the store-closing hour law enforced, arguing that it needs to protect workers from unscrupulous owners who force them to work antisocial hours. But that logic is patently untrue in this case.

The cosmetics chain reckons it does about 20 per cent of its business after 9 p.m., and the 50 sales staff who work the late shift do so voluntarily – and are paid an hourly rate that is 25 per cent higher than the day shift. Many of them are students or part-time workers, and they have publicly expressed their indignation about being put out of work by labour unions.

S&P has a very interesting report on Exchange operational issues and problems thereof and credit implications thereof thereof:

We view stock exchanges’ higher vulnerability to operational risk (compared with derivative and futures exchanges), primarily as a function of the numerous point-to-point connections between stock exchanges and the variety of order types they process. Derivatives and futures exchanges, like IntercontinentalExchange and CME Group, tend to have “vertical silo” business models, in which the listings, trading, and clearing of contracts are done under one roof. This means they are less connected to other exchanges and clearinghouses.

The greater fragmentation in the equities markets (especially in the U.S.) creates more interconnectivity between exchanges, which leaves them more vulnerable to operational failures. There are 16 SEC-registered securities exchanges and more than 50 alternative trading platforms in the U.S., each of which is linked with others though a vast web of connections, including those that provide connectivity, routing services, and market data. And additional regulatory and disclosure requirements for stock exchanges, such as the consolidated tape–which provides real time data on prices and trading volumes–increase the complexity of the systems and exposure to operational problems.

Numerous order types also add to the complexity of the equities markets and amplify operational risk. To make the matter even more complicated, there have been discrepancies around how some exchanges execute their order types compared with their own rule books. For example, in January 2013, BATS announced that upon a National Best Bid and Offer (NBBO) update on BATS’ BYX Exchange, BZX Exchange, and BATS Options, it had discovered a problem with its matching engine that caused the execution of a short sale order at a price that was equal to or less than the NBBO. The problem started in 2008, but it took the company more than four years to identify it.

There’s been another breakthrough in solar energy technology, not made in Ontario as we spent all the potential research money on not-ready-for-prime-time technology:

The Fraunhofer Institute for Solar Energy Systems ISE, Soitec, CEA-Leti and the Helmholtz Center Berlin jointly announced today having achieved a new world record for the conversion of sunlight into electricity using a new solar cell structure with four solar subcells. Surpassing competition after only over three years of research, and entering the roadmap at world class level, a new record efficiency of 44.7% was measured at a concentration of 297 suns. This indicates that 44.7% of the solar spectrum’s energy, from ultraviolet through to the infrared, is converted into electrical energy. This is a major step towards reducing further the costs of solar electricity and continues to pave the way to the 50% efficiency roadmap.

S&P is also taking a wait and see attitude towards Fairfax, proud issuer of XXX:

Standard & Poor’s Ratings Services said today that the Sept. 23, 2013, signing of a letter of intent by an investor consortium led by Fairfax Financial Holdings Ltd. (Fairfax) to acquire BlackBerry Ltd., subject to due diligence, for approximately $4.7 billion has no effect on the ratings on Fairfax. As disclosed in the announcement, Fairfax currently owns about 10% of BlackBerry’s common shares, which it intends to contribute to the transaction. We expect the consortium to complete its due diligence by Nov. 4, 2013. If satisfactory, the consortium would enter into a definitive transaction agreement with BlackBerry at that time. Until then BlackBerry will be free to consider alternative offers. We will monitor the development of this transaction during the next six weeks and evaluate any potential impact on Fairfax as more information becomes available about the financing structure and the likelihood of the transaction being completed.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 11bp, FixedResets ostensibly down 42bp and DeemedRetractibles up 21bp. The large FixedReset loss is about half due to a single issue, FTS.PR.K, which ostensibly closed at 20.27-24.29, 1×1 after trading 31,415 shares in a range of 24.25-50. So this is either a lazy market maker or stupid dumb reporting by the Toronto Stock Exchange – I can’t be bothered to work out which. The Performance Highlights table is extremely lengthy. Volume was very high.

PerpetualDiscounts now yield 5.53%, equivalent to 7.19% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.9%, so the pre-tax interest-equivalent spread (in this context, the Seniority Spread) is now about 230bp, a small (and perhaps spurious) decline from the 235bp reported September 18.

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 -0.3316 % 2,554.1
FixedFloater 4.11 % 3.43 % 31,729 18.43 1 0.0000 % 4,037.7
Floater 2.65 % 2.85 % 63,821 20.10 5 -0.3316 % 2,757.7
OpRet 4.61 % 1.47 % 68,400 0.51 3 0.2441 % 2,645.3
SplitShare 4.75 % 4.62 % 59,717 4.05 6 0.1957 % 2,950.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.2441 % 2,418.8
Perpetual-Premium 5.86 % 5.87 % 125,696 13.97 2 0.0591 % 2,264.6
Perpetual-Discount 5.54 % 5.53 % 140,667 14.36 36 0.1080 % 2,356.5
FixedReset 4.93 % 3.67 % 242,855 3.67 85 -0.4238 % 2,454.4
Deemed-Retractible 5.10 % 4.45 % 196,168 3.75 43 0.2052 % 2,386.3
Performance Highlights
Issue Index Change Notes
FTS.PR.K FixedReset -17.10 % The “last” quote sold to me at an enormous price by the Toronto Stock Exchange is 20.27-24.29, 1×1 after trading 31,415 shares in a range of 24.25-50. So this is either a lazy market maker or stupid dumb reporting by the Exchange.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-25
Maturity Price : 20.27
Evaluated at bid price : 20.27
Bid-YTW : 5.01 %
SLF.PR.G FixedReset -2.74 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.45
Bid-YTW : 4.26 %
TRI.PR.B Floater -2.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-25
Maturity Price : 21.08
Evaluated at bid price : 21.08
Bid-YTW : 2.48 %
BAM.PF.D Perpetual-Discount -1.72 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-25
Maturity Price : 21.08
Evaluated at bid price : 21.08
Bid-YTW : 5.85 %
CIU.PR.C FixedReset -1.56 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-25
Maturity Price : 21.85
Evaluated at bid price : 22.10
Bid-YTW : 3.86 %
BAM.PR.M Perpetual-Discount -1.41 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-25
Maturity Price : 20.35
Evaluated at bid price : 20.35
Bid-YTW : 5.87 %
BAM.PF.C Perpetual-Discount -1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-25
Maturity Price : 20.45
Evaluated at bid price : 20.45
Bid-YTW : 5.97 %
PWF.PR.S Perpetual-Discount -1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-25
Maturity Price : 22.29
Evaluated at bid price : 22.58
Bid-YTW : 5.39 %
MFC.PR.J FixedReset -1.07 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-03-19
Maturity Price : 25.00
Evaluated at bid price : 24.93
Bid-YTW : 4.11 %
TRP.PR.B FixedReset -1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-25
Maturity Price : 20.36
Evaluated at bid price : 20.36
Bid-YTW : 4.10 %
GWO.PR.N FixedReset -1.06 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.40
Bid-YTW : 4.57 %
IFC.PR.C FixedReset -1.05 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.34
Bid-YTW : 3.72 %
FTS.PR.J Perpetual-Discount -1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-25
Maturity Price : 22.37
Evaluated at bid price : 22.70
Bid-YTW : 5.27 %
ELF.PR.H Perpetual-Discount 1.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-25
Maturity Price : 23.86
Evaluated at bid price : 24.24
Bid-YTW : 5.77 %
HSB.PR.D Deemed-Retractible 1.00 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.20
Bid-YTW : 4.32 %
SLF.PR.A Deemed-Retractible 1.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.63
Bid-YTW : 5.94 %
GWO.PR.G Deemed-Retractible 1.32 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.86
Bid-YTW : 5.78 %
RY.PR.C Deemed-Retractible 1.44 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-11-24
Maturity Price : 25.00
Evaluated at bid price : 25.40
Bid-YTW : 4.04 %
ELF.PR.G Perpetual-Discount 1.86 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-25
Maturity Price : 21.85
Evaluated at bid price : 21.85
Bid-YTW : 5.54 %
Volume Highlights
Issue Index Shares
Traded
Notes
FTS.PR.E OpRet 90,900 Nesbitt crossed blocks of 50,000 and 40,000, both at 25.95.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-25
Maturity Price : 25.75
Evaluated at bid price : 25.90
Bid-YTW : 1.47 %
RY.PR.D Deemed-Retractible 70,639 TD bought 14,400 from RBC at 25.22, then crossed 40,000 at the same price.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.22
Bid-YTW : 4.45 %
BAM.PR.T FixedReset 67,825 TD crossed 60,700 at 24.22.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-25
Maturity Price : 22.97
Evaluated at bid price : 24.14
Bid-YTW : 4.43 %
BMO.PR.K Deemed-Retractible 63,794 Nesbitt crossed 50,000 at 25.85.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-11-25
Maturity Price : 25.00
Evaluated at bid price : 25.75
Bid-YTW : 4.40 %
BNS.PR.L Deemed-Retractible 57,855 TD crossed 50,000 at 25.40.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.38
Bid-YTW : 4.40 %
BNS.PR.Q FixedReset 54,394 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 3.72 %
There were 61 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
FTS.PR.K FixedReset Quote: 20.27 – 24.49
Spot Rate : 4.2200
Average : 2.2600

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-25
Maturity Price : 20.27
Evaluated at bid price : 20.27
Bid-YTW : 5.01 %

TRP.PR.C FixedReset Quote: 23.15 – 23.80
Spot Rate : 0.6500
Average : 0.4314

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-25
Maturity Price : 22.62
Evaluated at bid price : 23.15
Bid-YTW : 3.93 %

CIU.PR.C FixedReset Quote: 22.10 – 23.00
Spot Rate : 0.9000
Average : 0.7068

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-25
Maturity Price : 21.85
Evaluated at bid price : 22.10
Bid-YTW : 3.86 %

BAM.PF.C Perpetual-Discount Quote: 20.45 – 20.91
Spot Rate : 0.4600
Average : 0.3064

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2043-09-25
Maturity Price : 20.45
Evaluated at bid price : 20.45
Bid-YTW : 5.97 %

IAG.PR.A Deemed-Retractible Quote: 22.10 – 22.53
Spot Rate : 0.4300
Average : 0.2885

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.10
Bid-YTW : 6.06 %

GWO.PR.Q Deemed-Retractible Quote: 23.85 – 24.30
Spot Rate : 0.4500
Average : 0.3203

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.85
Bid-YTW : 5.74 %

8 Responses to “September 25, 2013”

  1. nervousone says:

    In the on-going saga of market impact reporting inefficiencies, the US Labour Dept. today surpassed themselves in the ability to be totally and completely inaccurate.

    Believe it or not, they’ve added a new revision concept to their usual previous 2 months revision we get with every new monthly jobs report. They’ve actually re-revised their previously revised monthly numbers for the entire 12 month period ending March 2013 . . . and it is significant. And they’re going to revise this number again next February! James, please get me some blood pressure medication before I explode.

    Anyway, this is not good news for Adrian and her $100 bet with me, since the bond market will certainly have to “back-factor in” this latest “good news” story, and the FOMC minions will certainly have to upgrade their tapering mantra once again. I can already hear the chanting from the likes of Bullock, Yellen, and all the other hawkish FOMC inflation paranoiacs.

    Here’s the release:

    —————–

    WASHINGTON, Sept 26 (Reuters) – The U.S. economy likely
    created 345,000 more jobs in the 12 months through March 2013
    than previously estimated, the Labor Department said on
    Thursday.
    The reading is a preliminary estimate of the department’s
    annual “benchmark” revision to closely watched payrolls data.
    Once a year, the government compares its non-farm payrolls
    data, based on monthly surveys of a sample of employers, with a
    much more complete database of unemployment insurance tax
    reports.
    It said its latest comparison suggests the level of
    employment in March was 0.3 percent higher than it had
    previously stated.
    A final benchmark revision will be released in February
    along with the department’s report on employment in January.

  2. adrian2 says:

    Anyway, this is not good news for Adrian and her $100 bet with me

    You may be nervous, but for the second time, 99% of people named Adrian, Rocky’s wife notwithstanding, are male.

    As for the bet with me, you’ve lost that long time ago (remember next time when you make a prediction, give a number, or give a date, never both 😉 )

  3. […] gaining 6bp and DeemedRetractibles off 19bp; the FixedReset figure is affected by a reversal of yesterday’s nonsense with FTS.PR.K; the ridiculous gain computed from Toronto Stock Exchange data was worth a […]

  4. nervousone says:

    adrian, you are so cute! . . . what are you saying then, that you are part of the 1% minority? . . . I would be willing to bet that you are actually female (but then I might be running up a debt burden here . . . hmmm, have to think about that)

    James, it’s good to see some “social media” kind of dialogue in the blog here! Maybe there is life after prefs!

    p.s. adrian, typically when creating a “handle” online, capitalizing the first letter indicates “male”, and lower case indicates “female” . . . have I just revealed something about myself with that comment!?

  5. jiHymas says:

    I wouldn’t bother about him, adrian2.

    I figured out who he was a little while ago.

    He’s been on this blog before, using a variety of aliases, signing up with a variety of free eMail addresses. Each of his prior handles has been banned for immature behaviour. I’m sure that banning his current persona is simply a matter of time.

  6. nervousone says:

    James,

    I actually respect this website, and have always enjoyed commenting here. I have always believed the daily summaries are second to none when it comes to the very specialized category of preferred share investing.

    It sounds like, somehow, my tongue and cheek with adrian has been taken the wrong way. I will sincerely apologize for that; no real harm or insult was ever intended.

    James, I’m not sure why I’ve never been able to get onto your good side, but some things are just not doable I suppose. In any case it sounds like this might be a good time to avoid the insult of being banned, and take my leave.

    Thank you again, and best of luck to all.

  7. […] to my rant of September 25, I was infuriated by the “Moment in Time” feature in today’s Globe (not available […]

  8. […] “Seniority Spread”) is now about 245bp, a significant increase from the 235bp reported September 25, as long corporate yields have declined about 10bp on the week, while PerpetualDiscounts […]

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