The times, they are a-changing:
More than half of the asset managers polled that use ETFs have fixed income funds in their portfolios now, and the category has seen major growth in the last two years. That compares to more than 80 per cent who use international and domestic equity funds in their investing.
…
Mr. Walker attributes this to regulatory changes making traditional markets more expensive, as well as the maturity and size of the ETF market with secondary markets now available on larger funds.
The WSJ points out:
While it’s important to look at how ETF shares are trading, the fund’s underlying holdings are really the heart of the liquidity issue, experts say.
One reason: Big investors known as “authorized participants” can swap a basket of the fund’s underlying holdings for ETF shares—or vice versa. This process helps arbitrage away significant gaps between the ETF’s share price and its NAV, the value of its underlying holdings. But when the underlying holdings are costly to trade and tough to obtain, authorized participants are less willing to round up that basket of securities. That means big gaps can develop between an ETF’s share price and its NAV.
One place to watch out for these premiums and discounts is in bond ETFs, especially those focused on areas like corporate investment-grade and high-yield, or “junk,” bonds. The iShares iBoxx $ High Yield Corporate Bond Fund closed within 0.5% of NAV on only four days in the fourth quarter, iShares says, and traded at a premium as large as 2.1% in that period.
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When underlying holdings are traded less frequently, or not at all, an ETF’s returns also may diverge from the benchmark it is designed to track. That became an issue for some bond ETFs recently as the Federal Reserve bought up large quantities of agency bonds and mortgage-backed securities, essentially removing them from the market. Vanguard Group recently changed some of its bond index funds and ETFs to benchmarks that exclude these securities purchased by the Fed.The biggest test of bond-ETF liquidity may be yet to come. So far investors have poured money into these products, and many bond ETFs are trading at significant premiums to NAV. But if investors reverse course and stampede out, the trading could get ugly, experts say. Given the relative illiquidity of many of the underlying bonds, the ETFs could start trading at significant discounts to NAV.
“When everybody tries to get out, it’s going to be a debacle,” says Scott Freeze, president of Street One Financial.
Yellen’s speech at Jackson Hole dealt with the labour market:
Labor force participation peaked in early 2000, so its decline began well before the Great Recession. A portion of that decline clearly relates to the aging of the baby boom generation. But the pace of decline accelerated with the recession. As an accounting matter, the drop in the participation rate since 2008 can be attributed to increases in four factors: retirement, disability, school enrollment, and other reasons, including worker discouragement. Of these, greater worker discouragement is most directly the result of a weak labor market, so we could reasonably expect further increases in labor demand to pull a sizable share of discouraged workers back into the workforce. Indeed, the flattening out of the labor force participation rate since late last year could partly reflect discouraged workers rejoining the labor force in response to the significant improvements that we have seen in labor market conditions. If so, the cyclical shortfall in labor force participation may have diminished.
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One convenient way to summarize the information contained in a large number of indicators is through the use of so-called factor models. Following this methodology, Federal Reserve Board staff developed a labor market conditions index from 19 labor market indicators, including four I just discussed.14 This broadly based metric supports the conclusion that the labor market has improved significantly over the past year, but it also suggests that the decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions.Finally, changes in labor compensation may also help shed light on the degree of labor market slack, although here, too, there are significant challenges in distinguishing between cyclical and structural influences. Over the past several years, wage inflation, as measured by several different indexes, has averaged about 2 percent, and there has been little evidence of any broad-based acceleration in either wages or compensation. Indeed, in real terms, wages have been about flat, growing less than labor productivity. This pattern of subdued real wage gains suggests that nominal compensation could rise more quickly without exerting any meaningful upward pressure on inflation. And, since wage movements have historically been sensitive to tightness in the labor market, the recent behavior of both nominal and real wages point to weaker labor market conditions than would be indicated by the current unemployment rate.
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Overall, I suspect that many of the labor market issues you will be discussing at this conference will be at the center of FOMC discussions for some time to come. I thank you in advance for the insights you will offer and encourage you to continue the important research that advances our understanding of cyclical and structural labor market issues.
On a more practical note, the Fed will have to implement monetary policy in a more complicated than usual way when the tightening eventually comes:
The Federal Reserve will probably borrow “several hundred billion” dollars from money-market mutual funds and others to anchor the federal funds rate when it begins tightening policy, according to St. Louis Fed President James Bullard.
“I don’t think it would have to be that large of a program. Possibly several hundred billion would be enough,” Bullard said, referring to the Fed’s overnight reverse repurchase facility, which it has been testing since September.
…
The Fed’s need for a tool to influence repo rates directly arose after almost six years of bond buying to stimulate faster economic growth flooded the banking system with $2.79 trillion of excess reserves. Banks no longer need to borrow reserves in the once-vibrant fed funds market, so the fed funds rate no longer represents the true cost of overnight credit.The fed funds market is “a mere shadow of its former self, but I think we can maintain some of the focus on the federal funds rate on the grounds that that’s the usual rate that we’ve used to communicate to people,” Bullard said.
What a day for central bankers! Even Parakeet Poloz was handed a script:
Bank of Canada Governor Stephen Poloz said the economy has “lots of room to grow,” suggesting a spate of stronger data points won’t sway the central bank from its plan to leave interest rates unchanged at least until well into next year.
Mr. Poloz made the comments in an interview Friday, after Statistics Canada reported milder inflation and stronger-than- expected retail sales. At the same time, the vast majority of jobs created this year in Canada are part-time positions, a phenomenon that Mr. Poloz said is a “symptom of slack” in the labour market. That argues in favour of maintaining a policy of low borrowing costs, as the economy is a long way from putting pressure on inflation.
There is a thought-provoking piece on The Dish:
As the indispensable Valleywag tells us this morning, people within the app economy are catching on to the fact that it’s not, actually, an industry in which they can achieve long-term economic security, let alone riches. The bottom 47% of developers make less than $100 a month. Studies have shown that the vast majority of revenues goes to a tiny fraction of developers. The numbers are even more stark when it comes to in-app revenue. Less than .01% of all apps will be considered a financial success, according to some estimates. It turns out that, as in so many other things in the American economy, the app industry is a winner-take-all field, a lottery ticket economy where a tiny number make out like bandits and most people can’t get ahead. And as usual, it’s only the biggest firms– Apple, Google, Microsoft– which are getting ahead.
So all the kids who heard the clarion call and rushed out to get CS degrees, or to drop out under the advice of Peter Thiel, and start coding in their basements– are they all chumps? Do they deserve scorn? Do they deserve to be unable to scratch out a living? Of course not. Like so many others, most of them did what their society told them to do to pursue the good life: work hard, go to school, and try to provide value for people so that you can earn a living. They were sold on a social contract that is failing them. No one can be reasonably expected to predict what skills the economy will value five, ten, twenty years in advance. The urge to call out others for what you perceive as their bad choices is destructive in a labor economy where, despite gains in overall unemployment rate, workers still have remarkably little bargaining power, thanks to underemployment, lack of benefits, low pay, and poor hours. Rather than succumbing to our petty insecurities by blaming others for their economic conditions, we need to look at the macroeconomic factors that are hurting our labor markets. We need to recognize that automation and artificial intelligence are pushing us towards a new era of work– one with tremendous potential productivity gains, but also tremendous uncertainty for labor, even educated labor. It’s time to stop calling people chumps and start building the kind of social system that can guarantee basic material security for all of our people, so that we can all share in the staggering gains of efficiency and productivity that technology is bringing about.
deBoer is too pessimistic. While apps are clearly the sexy part of the coding world, they’re not the total of it. A skilled coder can make good money working for … just about any company big enough to write its own code. Of more interest is the emphasis on macro-economic factors … I believe that we are heading towards an era of increased personal service in a polarized economy; personal service up to and including a return of full-time servants. That’s a shift that will take some getting used to!
Tim Kiladze of the Globe writes a good piece on private equity valuation:
The issue is a hot one at the University of Toronto’s Rotman International Centre for Pension Management, which is run by renowned pension expert Keith Ambachtsheer. At this very moment the ICPM is doing research to find better ways to come up with mid-point valuations for illiquid, private assets.
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When pressed about their private equity exposures, Canada’s pension funds often point out that their private asset portfolios are largely comprised of infrastructure investments, such as toll roads or water utilities. Because these assets are government regulated and are often essential to daily life, they are widely viewed as extremely safe alternatives that are bound to see their values rise in the long run.Not everyone is convinced. Jim Keohane, chief executive officer of HOOPP, the pension plan for Ontario health care workers, stresses that these assets are still illiquid. “Liquidity can have tremendous value at certain points in time,” he said, adding that the risk premiums embedded in the values for these rarely traded assets often aren’t high enough. “From what we can see in pricing, it’s just not there.”
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“I go to meeting after meeting, and I hear over and over again, ‘I just made this investment last year and the regulator came in and changed the rules on me.’ That happens all the time,” he said.The Canada Pension Plan Investment Board, for one, recently invested in Gassled, Norway’s offshore gas pipeline system, and shortly after, the country announced major cuts to gas transportation tariffs, prompting the Canadian fund and its investment partners to sue, tying them – and their capital – to a lawsuit that could drag on for years.
Speaking of government regulation, maybe we’ll get more interference from the feds in the rail system, to deal with this year’s projected bumper harvest:
The ripening corn and soybean fields stretch for miles in every direction from Dennis Wentworth’s farm in Downs, Illinois. As he marveled at his best-yielding crops ever, he wondered aloud where the heck he’ll put it all.
“Logistics are going to be a huge problem for everyone,” the 62-year-old grower said, adding that he has invested in boosting output rather than grain bins. When harvesting starts in a few weeks, Wentworth expects his 150-year-old family farm to produce 10 percent more than last year’s record. “There are going to be some big piles of grain on the ground this fall.”
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Surging crop supplies may exacerbate the squeeze on grain storage and shipping. BNSF Railway Co., owned by Warren Buffett’s Berkshire Hathaway Inc. (BRK/B), and Canadian Pacific Railway Ltd. struggled with “greater-than normal” demand from shippers of coal, oil and Midwest crops, the USDA said this month in a report.Combined with inventories left from the 2013 harvest, production of all grains and oilseeds will boost 2014 supply to 26.97 billion bushels, USDA data show. That’s more than the 23.4 billion of storage on farms and grain-company silos as of Dec. 1, the government estimated in a Jan. 10 report.
“I don’t know where it will all go this year,” said Richard Guse, a 54-year-old farmer from Waseca, Minnesota, who owns a 1 million-bushel grain elevator that he expanded in the past year by 275,000 bushels. “We need better roads and faster train shipping to keep the grain moving,” Guse said this week while inspecting fields as part of the Pro Farmer crop tour.
As a concerned citizen, I have finally been brave enough to buy some early corn for dinner and will work night and day to reduce the surplus to the best of my ability.
It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 19bp, FixedResets up 12bp and DeemedRetractibles gaining 8bp. Volatility was nil. 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 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 | 0.1677 % | 2,617.0 |
| FixedFloater | 4.17 % | 3.42 % | 26,456 | 18.56 | 1 | 0.0000 % | 4,156.5 |
| Floater | 2.93 % | 3.07 % | 47,043 | 19.51 | 4 | 0.1677 % | 2,706.2 |
| OpRet | 4.05 % | -2.13 % | 90,552 | 0.08 | 1 | -0.0790 % | 2,726.0 |
| SplitShare | 4.23 % | 3.78 % | 69,521 | 3.98 | 6 | 0.1052 % | 3,153.7 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0790 % | 2,492.7 |
| Perpetual-Premium | 5.49 % | -1.26 % | 82,618 | 0.08 | 19 | 0.0351 % | 2,437.9 |
| Perpetual-Discount | 5.22 % | 5.17 % | 111,770 | 15.17 | 17 | 0.1889 % | 2,599.3 |
| FixedReset | 4.28 % | 3.62 % | 186,358 | 6.68 | 76 | 0.1193 % | 2,572.2 |
| Deemed-Retractible | 4.98 % | 2.36 % | 104,020 | 0.26 | 42 | 0.0768 % | 2,558.4 |
| FloatingReset | 2.64 % | 2.07 % | 89,739 | 3.80 | 6 | 0.0131 % | 2,523.9 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| No individual gains or losses exceeding 1%! | |||
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| ENB.PF.E | FixedReset | 139,670 | RBC bought blocks of 20,600 and 26,800 from Nesbitt at 25.05. TD crossed 45,000 at the same price. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-22 Maturity Price : 23.13 Evaluated at bid price : 25.05 Bid-YTW : 4.14 % |
| MFC.PR.M | FixedReset | 118,885 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-12-19 Maturity Price : 25.00 Evaluated at bid price : 25.10 Bid-YTW : 3.85 % |
| BAM.PR.T | FixedReset | 112,419 | TD crossed 50,000 at 25.70. RBC crossed 42,900 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-03-31 Maturity Price : 25.00 Evaluated at bid price : 25.71 Bid-YTW : 3.63 % |
| FTS.PR.G | FixedReset | 100,600 | RBC crossed 100,000 at 25.25. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-22 Maturity Price : 23.28 Evaluated at bid price : 25.10 Bid-YTW : 3.54 % |
| BMO.PR.T | FixedReset | 81,480 | TD crossed 50,000 at 25.25. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-22 Maturity Price : 23.24 Evaluated at bid price : 25.25 Bid-YTW : 3.66 % |
| RY.PR.Z | FixedReset | 60,351 | Nesbitt crossed 50,000 at 25.43. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-22 Maturity Price : 23.31 Evaluated at bid price : 25.42 Bid-YTW : 3.57 % |
| There were 20 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| W.PR.H | Perpetual-Premium | Quote: 25.06 – 26.06 Spot Rate : 1.0000 Average : 0.6239 YTW SCENARIO |
| PVS.PR.C | SplitShare | Quote: 26.10 – 27.10 Spot Rate : 1.0000 Average : 0.6712 YTW SCENARIO |
| GWO.PR.I | Deemed-Retractible | Quote: 23.01 – 23.50 Spot Rate : 0.4900 Average : 0.3019 YTW SCENARIO |
| BAM.PR.N | Perpetual-Discount | Quote: 21.52 – 21.96 Spot Rate : 0.4400 Average : 0.2589 YTW SCENARIO |
| RY.PR.F | Deemed-Retractible | Quote: 25.61 – 26.01 Spot Rate : 0.4000 Average : 0.2744 YTW SCENARIO |
| RY.PR.G | Deemed-Retractible | Quote: 25.61 – 25.91 Spot Rate : 0.3000 Average : 0.2080 YTW SCENARIO |