The economy is still in the pits:
Canadian employers created barely any jobs in July, surprising forecasters and reinforcing the Bank of Canada’s decision to keep interest rates low.
Statistics Canada’s monthly tally of hiring and firing produced a net gain of 200 positions last month, as a 60,000 increase in part-time jobs marginally outweighed a 59,700 plunge in full-time positions.
…
StatsCan estimates there were 17,820,900 people working in July, only 0.7 per cent more than a year ago. The labour participation rate, which measures the percentage of the population either working or seeking work, dropped to 65.9 per cent, the lowest since October 2001. Employment in goods-producing industries has shrunk by 56,000 positions this year, reducing the headcount to its lowest since January 2012, according National Bank Financial.
…
Canada’s businesses are wary of using their profits to expand, as demand at home and abroad remains lacklustre.The result is an economy that has plateaued. Construction led the decline in goods-producing industries, as builders cut their payrolls by 42,200 in July from June. Factories added 11,500 workers last month, but there still were 14,200 fewer people working in manufacturing than there were a year earlier. There are now almost two Canadians working in the services industry for every one worker in goods-producing sectors. Employment in health care and social assistance increased by 87,100 positions from July 2013, although health jobs declined by 28,500 last month. Finance and real estate declined by 22,400 in July from a year earlier.
Dan Hallett wrote a piece on the Alterna Bank Market Tracer GIC the other day:
While the issuer – Alterna Bank – doesn’t make an offering document available on its website, it provides a fact sheet and other information with sufficient details to test the product using actual historical data. Using the formulas contained in the fact sheet, I was able to model the S&P/TSX 60 Index to see how often and by how much the GIC would have beaten the pure index investment over both 3 and 5 year terms.
…
From September 1999 through June 2014 there were 141 rolling 3-year periods based on monthly data. … 77 per cent of the time Market Tracer loses. During the little time during which Market Tracer would have done better, its margin of outperformance would have been much smaller than the margin of underperformance.
…
From September 1999 through June 2014 there were 123 rolling 5 year periods based on monthly data. … •In other words, the time Market Tracer would have lost during virtually every five year period by a large margin. And in the few instances where it was successful, it just squeaked by the index.
It’s always good to check things with a simulation, but there is an easier way to understand why this product is no good.
According to the linked fact sheet,
Click for Big
OK, so the total return to maturity on the instrument is dependent upon the average of the index level at every interim month-end. So the return will be path dependent.
What kind of path is best? Well, given a monotonic return function, it is clear that for any given end-value of the index in excess of the initial level, it is best if the market jumps up to that level instantly and remains there for the full term (if the return function is not monotonic, then we want the index level to go arbitrarily high in the first month and remain there until it dives to the end-value at maturity).
OK … from this preliminary insight, we can generalize that we want the good months to come at the beginning of the term and the bad months to come later. What does that remind us of?
Any Reader who didn’t immediately say “Sequence of Returns Risk with Negative Cash Flows” is not sufficiently Assiduous and should read more of my publications. But this insight helps us to determine how this vehicle could be replicated.
If the term is N months, then divide your initial investment into N equal sub-portfolios and invest each one in the index. At the end of every month, liquidate one of the sub-portfolios and keep the proceeds in cash earning no interest; zip, zero, zilch interest. The big Nada.
Then – ignoring the principal protection of the note and assuming that the “Participation Factor” is 100%, the end-value of this investment strategy will be equal to the end-value of the Alterna GIC.
So basically, then, half your investment is in cash earning zero. Is it any wonder the note underperforms the index? The only surprise is that it outperforms sometimes … but I attribute this to the time period Mr. Hallett chose for his simulations. The period 1999-2014 is notable for times at which having a put option on an equity index was a Good Thing.
My attention was brought to an attempt at flim-flam recently:
Canada’s biggest banks accepted tens of billions in government funds during the recession, according to a report released today by the Canadian Centre for Policy Alternatives.
Canada’s banking system is often lauded for being one of the world’s safest. But an analysis by CCPA senior economist David Macdonald concluded that Canada’s major lenders were in a far worse position during the downturn than previously believed.
Macdonald examined data provided by the Canada Mortgage and Housing Corporation, the Office of the Superintendent of Financial Institutions and the big banks themselves for his report published Monday.
It says support for Canadian banks from various agencies reached $114 billion at its peak. That works out to $3,400 for every man, woman and child in Canada, and also to seven per cent of Canada’s gross domestic product in 2009.
The figure is also 10 times the amount Canadian taxpayers spent on the auto industry in 2009.
“At some point during the crisis, three of Canada’s banks — CIBC, BMO, and Scotiabank — were completely under water, with government support exceeding the market value of the company,” Macdonald said.
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The federal government claims it was offering the banks ‘liquidity support,’ but it looks an awful lot like a bailout to me,” says Macdonald.
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“It would have been cheaper to buy every single share in these companies,” Macdonald said.
One would hope that somebody commenting on the banking system – any banking system – would understand the difference between solvency and liquidity; but it is apparent from the last three quoted paragraphs that Mr. Macdonald either doesn’t know or doesn’t care. So, the Canadian Centre for Policy Alternatives has merely cemented its reputation for pig-ignorance; but maybe they were able to reinforce the prejudices of their donors sufficiently to stay afloat for a little while longer.
It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 29bp, FixedResets off 5bp and DeemedRetractibles gaining 3bp. Volatility was minimal. Volume was very awfully extremely low.
And now it’s time to do PrefLetter. I’ve got my supplies … two boxes of doughnuts, three packages of Nibs (cherry), three large bags of potato chips, eight packages of cookies and a large container of salted roast peanuts. Let’s eat right to keep fit, that’s what I say!
| 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 | -0.4709 % | 2,624.3 |
| FixedFloater | 4.17 % | 3.40 % | 28,495 | 18.60 | 1 | -0.0438 % | 4,163.9 |
| Floater | 2.92 % | 3.05 % | 45,549 | 19.58 | 4 | -0.4709 % | 2,713.7 |
| OpRet | 4.03 % | 0.69 % | 73,291 | 0.08 | 1 | -0.0785 % | 2,715.8 |
| SplitShare | 4.24 % | 3.81 % | 56,348 | 3.97 | 6 | 0.2007 % | 3,131.4 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0785 % | 2,483.3 |
| Perpetual-Premium | 5.49 % | -3.04 % | 82,538 | 0.08 | 19 | 0.0372 % | 2,436.1 |
| Perpetual-Discount | 5.23 % | 5.18 % | 115,394 | 15.17 | 17 | 0.2854 % | 2,590.9 |
| FixedReset | 4.29 % | 3.56 % | 195,205 | 8.68 | 75 | -0.0521 % | 2,560.3 |
| Deemed-Retractible | 5.00 % | 2.07 % | 112,411 | 0.30 | 42 | 0.0323 % | 2,550.5 |
| FloatingReset | 2.65 % | 2.06 % | 78,034 | 3.78 | 6 | 0.0263 % | 2,521.6 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| CIU.PR.C | FixedReset | -1.85 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-08 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 3.38 % |
| FTS.PR.J | Perpetual-Discount | 1.79 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-08 Maturity Price : 24.04 Evaluated at bid price : 24.44 Bid-YTW : 4.92 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| GWO.PR.N | FixedReset | 138,510 | Desjardins crossed 130,700 at 21.15. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.17 Bid-YTW : 4.83 % |
| BMO.PR.W | FixedReset | 95,375 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-08 Maturity Price : 23.13 Evaluated at bid price : 24.95 Bid-YTW : 3.58 % |
| MFC.PR.B | Deemed-Retractible | 47,332 | Scotia crossed 14,900 at 23.30. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.22 Bid-YTW : 5.67 % |
| ENB.PF.C | FixedReset | 44,585 | Nesbitt crossed 24,400 at 25.13. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-08 Maturity Price : 23.16 Evaluated at bid price : 25.11 Bid-YTW : 4.09 % |
| TD.PF.B | FixedReset | 43,965 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-08 Maturity Price : 23.17 Evaluated at bid price : 25.03 Bid-YTW : 3.60 % |
| ENB.PF.E | FixedReset | 40,648 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-08 Maturity Price : 23.12 Evaluated at bid price : 25.00 Bid-YTW : 4.09 % |
| There were 9 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| IAG.PR.F | Deemed-Retractible | Quote: 25.95 – 26.30 Spot Rate : 0.3500 Average : 0.2294 YTW SCENARIO |
| CU.PR.D | Perpetual-Discount | Quote: 24.33 – 24.75 Spot Rate : 0.4200 Average : 0.3114 YTW SCENARIO |
| CU.PR.E | Perpetual-Discount | Quote: 24.36 – 24.73 Spot Rate : 0.3700 Average : 0.2667 YTW SCENARIO |
| TRP.PR.D | FixedReset | Quote: 25.25 – 25.47 Spot Rate : 0.2200 Average : 0.1435 YTW SCENARIO |
| IFC.PR.C | FixedReset | Quote: 25.65 – 25.90 Spot Rate : 0.2500 Average : 0.1808 YTW SCENARIO |
| SLF.PR.A | Deemed-Retractible | Quote: 23.74 – 24.03 Spot Rate : 0.2900 Average : 0.2219 YTW SCENARIO |