April 14, 2014

It is possible that the US will lose its IMF veto:

At issue is the global community’s efforts to align the IMF’s power structure to match changes in the distribution of strength in the global economy. Each country is assigned shares, or quota, to match its contribution to the world’s gross domestic product. The 2010 changes — which, ironically, were prompted by President Barack Obama — would give more clout to countries such as China and India and reduce the influence of some European nations whose relative share of global GDP has shrunk over time.

The U.S. would remain the IMF’s dominant member. It would retain more than 17 per cent of total shares — which gives the U.S. veto power because approval of members representing 85 per cent of shares is required to approve major decisions. The next closest would be Japan and China, each of which would hold about 6.4 per cent of total quota.

Yet the governance overhaul also requires increased contributions to the fund’s permanent resources. The contributions are akin to insurance, as countries would only lose money if the IMF’s loans to troubled countries went unpaid.

Most legislatures approved the increased financial commitments to the IMF long ago. Mr. Obama, however, has failed repeatedly to muster enough votes in the U.S. Congress to pass the measure. Republican leaders in the House of Representatives and the Senate characterize the Obama administration’s request as akin to asking American taxpayers to bail out troubled countries such as Greece and Portugal.

Seems to me that the IMF should simply let the US drop below 17% if that’s what it wants – and perhaps assign caps to member contributions, instead of quota. If the Chinese want influence, let them buy it. I’ll sell them my share!

Canadian grain farmers aren’t the only ones complaining about railroads:

They can’t move because increasing oil production from North Dakota’s Bakken field, a record grain crop and unprecedented cold weather overwhelmed the U.S. railroad system. In part because of transport delays, coal inventories were down 26 percent in January from a year ago. A quarter of all U.S. freight rail traffic passes through Chicago, or 37,500 rail cars each day. The trip through the city can take more than 30 hours.

Coal producers including the Western Coal Traffic League, whose members are shippers of coal mined west of the Mississippi River, point at inconsistent rail service as the primary culprit and railroads put the blame on Chicago. The group asked on March 24 that the U.S. Surface Transportation Board institute a proceeding to address BNSF’s coal service in the region.

BNSF said in a response to the agency that it plans to spend $5 billion this year on service. “As these resources come on line, service will gradually improve,” it said in a March 25 letter.

Dwell times, a measure of how long loaded railroad cars sit in a railyard, averaged about 26 hours during the first quarter, up from 21 hours during the same period in 2013, AAR data show.

Trains are getting mired in Chicago’s tangle of bottlenecks, said Charles Clowdis, an IHS Global Insight analyst in Lexington, Massachusetts.

Sheryl King reminds us that long rates are different from short rates:

When it comes to any possible bearish sentiment, bond market investors are currently preoccupied with estimating the neutral policy rate for central banks, and how far long-term bond yields may or may not rise. At this point, however, there has very little focus on where the slope of the yield curve will be headed. History suggests it will get a lot flatter as we head toward the first Federal Reserve rate increase at some point in 2015; and Canada’s bond curve will follow suit.

So when will the yield curve start to discount policy tightening? It may already be happening in the U.S., with the curve almost 20 basis points flatter now than it was a few weeks ago. But the Canada curve remains at a cycle high.

The yield curve remains steep because doubt persists about the strength of the economy, which is keeping yields low at the front end of the curve.

Brace yourself for disaster – the regulators are getting interested in the bond market:

Bill Gross and Larry Fink manage a $3 trillion pile of bonds — an amount almost as big as Germany’s economy. Their firms, Pacific Investment Management Co. and BlackRock Inc. (BLK), doubled holdings since 2008, outpacing the market’s growth of 50 percent.

The lopsided bond market has caught the attention of the U.S. Securities and Exchange Commission. Not only is the SEC examining whether the biggest players get preferential prices and access because of their influence, it’s also worried about what happens when the five-year bond rally ends as U.S. policy makers prepare to raise interest rates.

The biggest funds’ dominance may make it harder for everyone to sell when the Fed boosts borrowing costs from record lows and sends bond prices tumbling. In essence, their selling may crowd narrowed exits, making it more painful as all investors race to get out of a falling market.

More than five years of near-zero interest rates from the Fed has propelled corporate bonds to record performance and the biggest debt managers have ballooned in size. Pimco, Vanguard Group Inc. and Fidelity Investments manage 39 percent of all mutual fund-owned taxable bonds today, up from 18 percent in 1997, according to Morningstar Inc. data. The smallest 205 fund providers manage 0.1 percent of the market.

At the same time, regulators are examining the way larger firms benefit in markets where transactions are often executed the same way they were a decade ago — through telephone conversations and e-mails.

In this two-tiered market, brokers choose which rivals and clients may see their bond prices on electronic trading systems by turning quotes on and off. Dealers often give bigger investors better prices in return for all of the business they do with Wall Street.

The SEC is examining to what extent smaller buyers are disadvantaged, and whether the behavior constitutes market manipulation, according to two people with direct knowledge of the matter who asked not to be identified because the probe hasn’t been made public.

Finra is examining whether Wall Street firms overcharge investors and whether they unfairly allocate new corporate debt issues to reward certain clients, Nancy Condon, a spokeswoman, confirmed in an e-mail last week.

It’s getting tougher to trade bonds as the business gets less profitable for Wall Street. Corporate-debt trading volumes in the U.S. have failed to keep pace with issuance, increasing 14 percent since 2010 as outstanding notes grew by 33 percent, according to Finra and Bank of America Merrill Lynch index data.

Requirements that banks hold more cash in the event their investments tank have prompted dealers to reduce their inventories, giving the biggest managers even more sway in the market. The largest dealers had slashed their holdings of corporate bonds to $56 billion as of a year ago from $235 billion in 2007, according to Fed Bank of New York data. The inventories worked to cushion against price swings and made it easier to trade in larger sizes.

There’s a little pushback on the evil-HFT narrative:

Michael Lewis’s argument that the $23 trillion U.S. stock market is rigged in favor of speed traders is careless, according to Nasdaq OMX Group Inc. Chief Executive Officer Robert Greifeld.

The controversy over high-frequency trading intensified with the publication of Lewis’s book “Flash Boys” on March 31. Lewis argues that the fastest trading firms prey on slower investors by getting early access to nonpublic information.

“I think that was irresponsible on his part,” Greifeld said in an interview on PBS’s “Charlie Rose” show. “I feel poorly for the academics. Our markets are researched more than any other market that’s out there.”

Greifeld said about 100 academic papers have been written about how the U.S. markets operate and a similar number have been produced on overseas markets. Academics who have spent their careers studying markets are divided on high-speed trading, he said, with some in favor of it and some opposed.

“It’s not a story-telling type of issue,” he said. “It’s really dense academic papers to get through what happens in the marketplace.”

Mind you, the Europeans are seizing the opportunity to have more regulators writing more rules:

European Union lawmakers are poised to approve some of the toughest restrictions in the world on high-frequency trading, the first crackdown in the aftermath of Michael Lewis’s latest book, “Flash Boys.”

The curbs are part of revamped EU markets legislation ranging from commodity derivatives speculation to investor protection. The high-frequency trading limits include standards meant to keep the price increment for securities from being too small, mandatory tests of trading algorithms and requirements that market makers provide liquidity for a set number of hours each day.

Members of the European Parliament will vote tomorrow on EU rules that also include a requirement for traders to have their algorithms tested on venues and authorized by regulators. The assembly in Strasbourg, France, is set to endorse a tentative deal reached with governments on the measures earlier this year.

So … when do you figure the first scandal about a regulatory clerk selling code after approving it is going to happen? Another point of interest is … if an HFT firm discusses with the regulators what they have to do to get approval, does this mean that the regulators are in the business of writing code? That line of reasoning has been advanced in connection with Credit Rating Agencies and structured products!

Here’s a good joke!

Click for Big

Howard Gold comments on MarketWatch:

Its 20th annual Quantitative Analysis of Investor Behavior paints such a grim picture that if it were a painting, it would look like Edvard Munch’s “The Scream.”

After citing familiar figures on how individual investors substantially underperform the market averages because of terrible market timing, the firm, which has reported these statistics for 20 years, calls out investors’ obtuseness and the miserable failure of the financial-services industry to change their dysfunctional behavior.

“After decades of analyzing investor behavior in good times and in bad times, and after enormous efforts by thousands of industry experts to educate millions of investors, imprudent action continues to be widespread,” the report asserted.

“Attempts to correct irrational investor behavior through education have proved to be futile. The belief that investors will make prudent decisions after education and disclosure has been totally discredited.”

I know I’ve discussed DALBAR somewhere. In PrefLetter, I think. Dan Hallet has discussed DALBAR:

I suspect that DALBAR calculates what it calls investor returns by applying dollar-weighted fund redemption rates to benchmark returns – rather than applying a DWRR [Dollar Weighted Rate of Return] calculation directly to the funds. And if they’re doing that, they’re not calculating investor returns.

If I’m right, it’s not clear exactly what they’re calculating. But this explains why their figures show such staggering gaps of several percentage points. My research on this topic over the past 13 years is more in line with figures I’ve seen from Morningstar.com. In the U.S., Morningstar calculates what they call “investor returns” using the same method I have for more than a dozen years – i.e. calculating actual fund DWRR. … But even that is an estimate because it’s based on monthly data; and daily fund flows are required for a precise DWRR. But DALBAR’s reported figures aren’t even an estimate because they appear to blend fund flows with index returns.

Accordingly, DALBAR is probably correct in direction – i.e. whether TWRR [Time Weighted Rate of Return] is higher or lower than DWRR – but not even close in quantifying the gap between the two measures.

You can buy the DALBAR report for USD 775. That’s right, only USD 775! Damn well better be right.

There’s always a lot of political argument about contracting-out … for instance, only Rob Ford was brave enough to defy the unions and contract out garbage collection in Toronto. Many people will claim that government services are cheaper because there is no built-in profit … many people should price a visit to the International Space Station:

Later this month, a company called SpaceX is scheduled to launch its Falcon 9 rocket on a routine supply mission to the International Space Station (ISS). But if all goes as planned, this mission could herald the beginning of something decidedly not routine: the use of private, reusable rockets to service America’s space program.

SpaceX and another private launch company, Orbital Sciences, are the beneficiaries of a recent shift in the American space program toward privatizing more routine missions – such as the transport of supplies and eventually people to and from the ISS. While this upcoming mission is only a preliminary test, SpaceX eventually hopes to dramatically reduce the cost of launching cargo and people into space by eventually making both the first and second stages of its rockets reusable. Last year, the company estimated that once its rockets are able to land back on earth and, after re-fueling, quickly be re-launched, the cost for a trip to the ISS could drop to as low as from $5 million to $7 million.

Factoring in NASA’s financial assistance in developing the Falcon 9 rocket and the cost of the 12-launch contract, the space agency is paying SpaceX about $166 million per launch to the ISS. By contrast, estimates for the cost of sending the recently retired space shuttle to the ISS range as high as $1.5 billion, including the money spent developing and building the shuttles.

It was a modestly positive day for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp and both FixedResets and DeemedRetractibles up 5bp. Volatility was higher than usual, with a number of FixedReset winners. Volume was below average.

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 -1.1447 % 2,424.3
FixedFloater 4.69 % 4.24 % 33,989 17.97 1 0.3469 % 3,660.0
Floater 3.00 % 3.10 % 49,343 19.48 4 -1.1447 % 2,617.6
OpRet 4.37 % -4.40 % 34,011 0.13 2 -0.0388 % 2,690.0
SplitShare 4.81 % 4.38 % 65,065 4.24 5 0.0159 % 3,085.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.0388 % 2,459.8
Perpetual-Premium 5.55 % -4.35 % 107,247 0.09 13 -0.1299 % 2,383.5
Perpetual-Discount 5.43 % 5.36 % 120,916 14.58 23 0.0056 % 2,483.8
FixedReset 4.68 % 3.53 % 202,402 4.20 79 0.0459 % 2,532.6
Deemed-Retractible 5.03 % -0.21 % 150,981 0.12 42 0.0508 % 2,491.2
FloatingReset 2.64 % 2.44 % 199,414 4.11 5 -0.0080 % 2,480.0
Performance Highlights
Issue Index Change Notes
PWF.PR.A Floater -2.68 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 19.22
Evaluated at bid price : 19.22
Bid-YTW : 2.75 %
FTS.PR.G FixedReset 1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 23.17
Evaluated at bid price : 24.89
Bid-YTW : 3.74 %
FTS.PR.H FixedReset 1.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 21.49
Evaluated at bid price : 21.84
Bid-YTW : 3.63 %
IFC.PR.C FixedReset 1.17 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 26.00
Bid-YTW : 2.59 %
BAM.PR.T FixedReset 1.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 23.28
Evaluated at bid price : 24.70
Bid-YTW : 4.02 %
TRP.PR.C FixedReset 2.48 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 22.38
Evaluated at bid price : 22.72
Bid-YTW : 3.60 %
Volume Highlights
Issue Index Shares
RY.PR.Z FixedReset 273,946 RBC bought blocks of 12,400 and 10,000 from Scotia at 25.50 and crossed blocks of 50,000 and 20,000 at 25.54. Scotia crossed 25,000 at 25.50. TD crossed 100,000 at 25.52.
Maturity Type : Call
Maturity Date : 2019-05-24
Maturity Price : 25.00
Evaluated at bid price : 25.53
Bid-YTW : 3.46 %
CM.PR.L FixedReset 178,088 Called for redemption.
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 4.92 %
TRP.PR.E FixedReset 108,000 Scotia crossed 24,400 at 25.45 and bought 12,900 from RBC and 10,000 from TD at the same price. Desjardins crossed 50,000 at the same price again.
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 23.26
Evaluated at bid price : 25.41
Bid-YTW : 3.86 %
RY.PR.I FixedReset 84,950 Scotia crossed 39,600 at 25.60; TD crossed 41,000 at the same price.
Maturity Type : Call
Maturity Date : 2019-02-24
Maturity Price : 25.00
Evaluated at bid price : 25.59
Bid-YTW : 3.11 %
TD.PR.E FixedReset 82,100 Called for Redemption.
Maturity Type : Call
Maturity Date : 2014-05-30
Maturity Price : 25.00
Evaluated at bid price : 24.98
Bid-YTW : 4.76 %
ENB.PR.J FixedReset 77,926 TD crossed blocks of 10,000 and 50,000, both at 25.35.
Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 23.25
Evaluated at bid price : 25.26
Bid-YTW : 4.14 %
There were 26 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.A Floater Quote: 19.22 – 20.00
Spot Rate : 0.7800
Average : 0.5839

Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 19.22
Evaluated at bid price : 19.22
Bid-YTW : 2.75 %

ELF.PR.G Perpetual-Discount Quote: 21.34 – 21.73
Spot Rate : 0.3900
Average : 0.3061

Maturity Type : Limit Maturity
Maturity Date : 2044-04-14
Maturity Price : 21.34
Evaluated at bid price : 21.34
Bid-YTW : 5.60 %

BNS.PR.R FixedReset Quote: 25.58 – 25.84
Spot Rate : 0.2600
Average : 0.1828

Maturity Type : Call
Maturity Date : 2019-01-26
Maturity Price : 25.00
Evaluated at bid price : 25.58
Bid-YTW : 3.28 %

TD.PR.S FixedReset Quote: 25.27 – 25.42
Spot Rate : 0.1500
Average : 0.0891

Maturity Type : Call
Maturity Date : 2018-07-31
Maturity Price : 25.00
Evaluated at bid price : 25.27
Bid-YTW : 3.08 %

TD.PR.O Deemed-Retractible Quote: 25.28 – 25.43
Spot Rate : 0.1500
Average : 0.0913

Maturity Type : Call
Maturity Date : 2014-05-14
Maturity Price : 25.25
Evaluated at bid price : 25.28
Bid-YTW : 0.79 %

BMO.PR.J Deemed-Retractible Quote: 25.84 – 25.99
Spot Rate : 0.1500
Average : 0.0939

Maturity Type : Call
Maturity Date : 2014-05-14
Maturity Price : 25.50
Evaluated at bid price : 25.84
Bid-YTW : -4.65 %

2 Responses to “April 14, 2014”

  1. gsp says:

    CM.PR.L matures April 30th rather than May 30th. Bid YTW is substantially lower than posted.

  2. jiHymas says:

    Yes, this is a programming bug, as noted in the comments to January 27.

    I should fix this sometime soon, but it has been low priority as it doesn’t affect my valuation measures much and doesn’t affect my trading at all.

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