July 3, 2014

Moody’s has assigned a negative outlook to Ontario:

Moody’s Investors Service has today changed the outlook on the Province of Ontario’s debt and issuer ratings to negative from stable, and at the same time affirmed the Aa2 ratings. This affects approximately CAD 250 billion in debt securities. Moody’s P-1 rating on Ontario’s commercial paper program remains unchanged.

The change in the outlook reflects Moody’s assessment of risks surrounding the province’s ability to meet its medium term fiscal targets. After several years of weak to moderate economic growth, and higher than previously anticipated deficits projected for the next two years, the province is facing a greater challenge to return to balanced outcomes than previously anticipated. Although the province has exceeded fiscal targets in recent years, consolidated deficits have shown little change over the period 2011/12-2013/14, averaging -9.9% of revenues. The required revenue growth, in an environment of continued slower than average economic growth, and necessary operating expense control to achieve fiscal targets will require a considerable shift from recent trends. The province also continues to face large, ongoing capital expenditures which also places pressure on the province’s fiscal position.

Ontario’s rating could be downgraded if the province fails to provide clear signals of its ability and willingness to implement the required measures to redress the current fiscal pressures. Furthermore, if medium-term debt affordability were to deteriorate due to higher-than-expected increases in debt levels or a significant rise in interest rates, the province’s fiscal flexibility would be reduced, exerting downward pressure on the rating.

The outlook could return to stable if the province demonstrates through concrete measures that it will be able to achieve the very constrained expenditure growth rates and expected revenue growth over the term of its fiscal plan.

Oh well. I’m sure the new Ontario Retirement Pension Plan will be a big investor in Ontario bonds.

The political response is standard:

But top cabinet ministers said they were unconcerned about the note from Moody’s.

“The bankers aren’t freaking here,” Finance Minister Charles Sousa said as he headed into a cabinet meeting at Queen’s Park Thursday. “We have controlled our spending, we have taken the necessary steps and we’re not done just yet. We’re still finding more savings in the system.”

Deputy Premier Deb Matthews , who was appointed President of the Treasury Board last week with the task of balancing the budget in three years, brushed off Moody’s warning and said another credit downgrade would not be particularly expensive.

Comrade Peace Prize has taken a firm stand against merit pay:

President Barack Obama criticized the bonus-driven culture of financial trading desks at Wall Street banks as a risk to the stability of the financial system.

Obama said in an interview to be aired tomorrow on American Public Media’s Marketplace radio program that an “unfinished piece of business” is to address banks that “take big risks because the profit incentive and the bonus incentive is there for them.”

Obama said banks need to change “how they work internally” to alter incentives for traders.

“Right now, if you are in one of the big banks, the profit center is the trading desk, and you can generate a huge amount of bonuses by making some big bets,” Obama said. In the event of “a really bad bet,” he added, “you might end up leaving the shop, but in the meantime everybody else is left holding the bag.”

I’m not sure how he reconciles all that with the Volcker Rule, or with the concept of management risk controls, but never mind.

There was a superb US jobs number:

Employers who added 288,000 jobs in June showed they might be taking a more serious look at resumes from the long-term unemployed, who last month accounted for the smallest proportion of U.S. jobless ranks in five years.

Those out of work 27 weeks or longer made up 32.8 percent of unemployed Americans as the overall unemployment rate dropped to an almost six-year low of 6.1 percent, according to Labor Department data released this morning in Washington.

The share of long-term unemployed remains more than twice the historical average of 15.1 percent in data going back to 1948. Other measures of labor market health, including underemployment and participation rates, haven’t returned to pre-recession levels, according to a dashboard of indicators that Federal Reserve Chair Janet Yellen has said she monitors to judge the economic outlook.

About half of the drop in unemployment in the past year is due to the decline among the long-term jobless.

I love it when guys pull a fast one:

A man exploited the perks of business -class travel to feast for free 35 times in a year at Deutsche Lufthansa AG (LHA)’s Munich airport lounge — without ever taking off.

The man used the flexibility of the one-way fare to Zurich to repeatedly reschedule his travel plans after gaining access to food and drink, Munich district court said in a statement. Lufthansa canceled the ticket after more than a year and refunded the price, only for the man to purchase a replacement.

The court ruled that lounge services are provided on the assumption that travelers will seek to fly, and ordered the man to pay Lufthansa 1,980 euros ($2,705), equal to about 55 euros per visit or more than twice the cost of the 744.46-euro ticket. Lufthansa pursued a prosecution only after the man bought the second ticket with the intention of resuming his foraging raids.

Clearly, the Germans have no sense of humour.

And the Mexicans are getting more auto investment – for good reasons and bad:

Mexico has won new auto investments worth $2.4-billion (U.S.) in one week, just $800-million less than the $3.2-billion invested by auto makers in Canada since 2010.

BMW AG said Thursday it will spend $1-billion to build a new plant in Mexico, on the heels of an announcement last week by Daimler AG and Nissan Motor Co. Ltd. that they will invest $1.4-billion to build luxury cars.

In addition to significantly lower labour costs than both Canada and the United States, Mexico is also an export powerhouse, boasting free-trade agreements with more than 40 countries and ports on both the Atlantic and Pacific oceans that operate year-round.

“The large number of international free trade agreements – within the NAFTA area, with the European Union and the MERCOSUR member states, for example – was a decisive factor in the choice of location,” BMW said in a statement announcing the investment.

Mexico’s foreign investment agency, ProMexico, is aggressively courting auto investments and offers generous incentives, industry sources have said.

The federal and Ontario governments offer incentives to auto makers to locate in Canada. But a report issued last year by the Canadian Automotive Partnership Council, an industry-union group set up to advise the governments on the auto sector, complained about the way the Canadian funds are administered.

“In Mexico, for example, rarely will one see repayable contributions or restrictive covenants that can claw back co-investment programs,” the report said. “Through ProMexico, companies can secure cash grants with no strings attached.”

It was another positive day for the Canadian preferred share market, with PerpetualDiscounts gaining 6bp, FixedResets winning 17bp and DeemedRetractibles up 10bp. Volatility was minimal. Volume was low.

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 3.14 % 3.13 % 23,408 19.42 1 0.0000 % 2,531.9
FixedFloater 4.28 % 3.55 % 30,392 18.23 1 0.4067 % 4,016.0
Floater 2.88 % 2.98 % 46,574 19.80 4 0.5378 % 2,748.5
OpRet 4.02 % -6.43 % 88,647 0.08 1 -0.1566 % 2,721.1
SplitShare 4.69 % 3.72 % 54,804 3.15 6 -0.0200 % 3,128.8
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.1566 % 2,488.2
Perpetual-Premium 5.51 % -2.80 % 79,425 0.08 17 0.1685 % 2,423.4
Perpetual-Discount 5.23 % 5.14 % 111,931 15.03 20 0.0618 % 2,573.4
FixedReset 4.38 % 3.56 % 204,983 6.65 76 0.1720 % 2,562.3
Deemed-Retractible 4.97 % 1.07 % 135,185 0.14 43 0.0953 % 2,549.0
FloatingReset 2.66 % 2.21 % 119,836 3.91 6 0.4096 % 2,508.7
Performance Highlights
Issue Index Change Notes
SLF.PR.I FixedReset 2.32 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.50
Bid-YTW : 1.80 %
Volume Highlights
Issue Index Shares
CM.PR.O FixedReset 131,850 Recent new issue.
Maturity Type : Limit Maturity
Maturity Date : 2044-07-03
Maturity Price : 23.26
Evaluated at bid price : 25.31
Bid-YTW : 3.71 %
BMO.PR.T FixedReset 54,876 Recent new issue.
Maturity Type : Limit Maturity
Maturity Date : 2044-07-03
Maturity Price : 23.25
Evaluated at bid price : 25.32
Bid-YTW : 3.64 %
RY.PR.T FixedReset 52,986 RBC crossed 49,900 at 25.40.
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 25.39
Bid-YTW : 0.10 %
SLF.PR.H FixedReset 42,163 RBC crossed 39,900 at 25.40.
Maturity Type : Call
Maturity Date : 2016-09-30
Maturity Price : 25.00
Evaluated at bid price : 25.46
Bid-YTW : 3.07 %
MFC.PR.H FixedReset 31,800 Nesbitt crossed 25,000 at 26.30.
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 26.40
Bid-YTW : 2.53 %
RY.PR.E Deemed-Retractible 25,793 TD crossed 25,000 at 25.68.
Maturity Type : Call
Maturity Date : 2014-08-02
Maturity Price : 25.50
Evaluated at bid price : 25.71
Bid-YTW : 0.27 %
There were 22 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.H FixedReset Quote: 26.40 – 27.50
Spot Rate : 1.1000
Average : 0.6040

Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 26.40
Bid-YTW : 2.53 %

TRP.PR.A FixedReset Quote: 23.26 – 23.55
Spot Rate : 0.2900
Average : 0.1945

Maturity Type : Limit Maturity
Maturity Date : 2044-07-03
Maturity Price : 22.40
Evaluated at bid price : 23.26
Bid-YTW : 3.70 %

TD.PR.S FixedReset Quote: 25.19 – 25.55
Spot Rate : 0.3600
Average : 0.2712

Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.19
Bid-YTW : 3.26 %

CU.PR.F Perpetual-Discount Quote: 22.35 – 22.64
Spot Rate : 0.2900
Average : 0.2245

Maturity Type : Limit Maturity
Maturity Date : 2044-07-03
Maturity Price : 22.06
Evaluated at bid price : 22.35
Bid-YTW : 5.07 %

TD.PR.Z FloatingReset Quote: 25.30 – 25.59
Spot Rate : 0.2900
Average : 0.2328

Maturity Type : Call
Maturity Date : 2018-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.30
Bid-YTW : 2.30 %

BAM.PR.Z FixedReset Quote: 26.02 – 26.20
Spot Rate : 0.1800
Average : 0.1372

Maturity Type : Call
Maturity Date : 2017-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.02
Bid-YTW : 3.58 %

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