Bloomberg has a fascinating article on the value of liquidity:
For an extreme case, look at Bridgewater Associates. The investment manager is the largest holder of the iShares MSCI Emerging Markets ETF (EEM), with $3.3 billion worth of shares. It’s charged 0.67 percent in fees, about four times more than what’s charged for several other liquid, emerging markets ETFs that trade similarly to EEM.
If Bridgewater switched to the iShares Core MSCI Emerging Markets ETF (IEMG), which charges 0.18 percent, they’d save about $15 million each year. But while IEMG trades a healthy $54 million worth of shares daily, EEM trades $2.1 billion worth. With a $3.3 billion stake, you can see why they’d prefer EEM. For the rest of us, IEMG trades plenty.
…
EEM also costs the Ontario Teachers’ Pension Plan and the State of New Jersey Common Pension Plan about $7 million per year. And there are many other high-profile holders of EEM, which has $43 billion in assets. Its cheaper, equally effective, better-performing sibling IEMG has $5 billion.A high-cost ETF is also a big part of hedge fund manager John Paulson’s portfolio. He has $1.3 billion in SPDR Gold Shares (GLD), which charges 0.40 percent. If Paulson moved into the iShares Gold Trust (IAU), which charges 0.25 percent, he’d save $1.9 million per year. Again, there’s a liquidity gap: IAU’s respectable $26 million worth of shares traded daily pales next to GLD’s $768 million.
Let’s see … it’s about seven years since the start of the credit crunch and already we’re seeing demands for growth at all costs. Huh. It usually takes about twenty, but then, we’re Canadian and are therefore smarter bankers than everybody else (1980s excepted):
Peter Routledge at National Bank of Financial says the bank is misguided in limiting its growth in capital markets.
“Some observers argue that RY must limit its growth in capital markets, maintaining this segment’s contribution in the neighborhood of 25% of total earnings, and justify this self-imposed limitation on the view that capital markets activities contain exorbitant tail risks that will ultimately threaten the bank’s capital. We disagree.”
He points to a number of reasons. Even when the financial crisis hit, RBC’s capital markets arm “earned its way through this infamous period and avoided the financial traps into which many other financial institutions fell. The segment also avoided material earnings hits during the equity market correction of the early 2000s.”
That was no accident, he argues. RBC is simply better at risk-return calculations. “This competitive advantage would, if the bank decided to exploit it more aggressively, enable the bank to expand its capital markets revenues and earnings without putting shareholder capital at undue risk.”
Investors and forecasters believe different things:
After giving up on calls last month that Treasury yields will rise in 2014, forecasters are sticking to estimates those on the 10-year note will climb next year and reach 3.6 percent as the Federal Reserve increases interest rates. Yet based on the performance of long-term Treasuries, implied yields suggest investors don’t foresee yields that high for a decade or more.
Getting it right has never been more important. With America’s outstanding public debt at a record $17.7 trillion, Fed Chair Janet Yellen faces the task of lifting rates from close to zero without sparking a surge in funding costs. While economists point to unrest in Ukraine and Gaza for why Treasuries remain in demand, the bond market’s view that the U.S. expansion isn’t strong enough to force the Fed’s hand suggests yields can stay low for years to come.
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Peak rates, known as the neutral or terminal rate, have averaged 4.25 percent when inflation has historically been at the bank’s current target, New York Fed President William Dudley said in May. Trading in the interest-rate swaps suggests benchmark borrowing costs will top out closer to 3 percent.Swaps based on the Fed funds effective rate, a proxy for the target rate, indicate it will average 2.84 percent in 2019. Another gauge, the one-year swap traded five years forward, has fallen a full percentage point this year to 3.2 percent.
Those peak levels are lower than the Fed’s own “dot plot” projections released in June, which showed a long-term forecast of 3.75 percent based on the median estimate. If the bond-market indicators prove to be accurate, they would also be the lowest since the 1950s, according to MKM’s Darda.
Barry Ritholtz of Bloomberg has some wise words on numeracy in general and investing in general:
When it comes to stock picking and portfolio construction, understanding probabilities goes a long way. You must assume that some of your picks aren’t going to work out. Once you recognize that simple reality, you then can have an exit strategy for when those eventualities occur.
Same with portfolio construction. As we showed last week in the annual asset-class performance chart, recognizing what you don’t and can’t possibly know is a key to long-term planning.
Some have suggested starting statistics education in kindergarten. That might be a little radical, but beginning early is crucial. Having an educated population that understands probability and statistics is the key to an informed citizenry and a better economy.
… while Jeff Green and John Irwin of Bloomberg remind us that actually being able to do something is a rare and valuable talent:
Two years out of high school, Evan Fischbach is earning $40,000 a year. His secret: shop class.
Fischbach, 19, has known he wanted to work on cars ever since he took an automotive class in his junior year of high school in Saline, Michigan. His college-educated parents wondered if he was aiming too low.
Then when Fischbach was still a junior, a local auto dealer desperate for mechanics hired him as an apprentice in the service bay. Now he’s earning about three times as much as the average 19-year-old high school grad and slightly more than the national median, according the Bureau of Labor Statistics.
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Fifty years ago, most American kids in middle and high school attended shop class, where they learned to make ash trays, rebuild engines, weld metal and even market products. As the space race gave way to the high-tech era, policy makers decided such skills were unnecessary. College prep classes gradually supplanted shop, which by then was perceived as a place for slackers and stoners.The average number of high school credits earned in career and technical education fell 15 percent from 1990 to 2009 at the same time core academic credits in study areas such as English, math and science rose 20 percent, according to the U.S. Department of Education.
DBRS has some comments on the proposed Burger King – Tim Horton’s tie-up:
Should an official agreement or offer be announced, DBRS would review the value and form of financing, structure of the transaction and resulting combined entity, as well as the business plan and financial management intentions going forward. The combination of THI and Burger King would result the third-largest quick-serve restaurant in the world with 18,000 restaurants in over 100 countries. DBRS notes that Burger King has significantly higher leverage than THI (approximately 5.0 times (x) lease-adjusted debt-to-EBITDAR versus approximately 2.77x for THI, both for the last 12-months ended Q2 2014).
DBRS also notes that THI’s Senior Unsecured Debt contains a change of control trigger provision that requires the occurrence of both a change of control and a rating event (i.e., downgrade below investment grade). If triggered, the provision requires than an offer be made to repurchase at a price equal to 101% of the outstanding Senior Unsecured Debt of the Company.
Towers Perrin has released the Pension Finance Watch for July 2014:
Negative equity returns pushed the pension index down in July. The Towers Watson Pension Index declined 1.6% for the month to 73.9, and has now dropped 5.5% for the year.
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Our liability index (based on projected benefit obligations) increased 0.3% for July, all of which represents interest accumulation. The changes in asset and liability values caused the Towers Watson Pension Index to drop 1.6% to 73.9.
The 73.9% funding figure is at the high-end of the post-Credit Crunch Range, but well below the pre-Credit Crunch range.
It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts down 12bp, FixedResets off 6bp and DeemedRetractibles gaining 10bp. Volatility was minimal. Volume was very extremely awfully 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 | 0.0977 % | 2,619.5 |
| FixedFloater | 4.17 % | 3.42 % | 26,696 | 18.55 | 1 | 0.0000 % | 4,156.5 |
| Floater | 2.93 % | 3.07 % | 47,792 | 19.50 | 4 | 0.0977 % | 2,708.8 |
| OpRet | 4.05 % | -1.72 % | 90,189 | 0.08 | 1 | 0.0000 % | 2,726.0 |
| SplitShare | 4.23 % | 3.80 % | 67,064 | 3.98 | 6 | -0.0198 % | 3,153.1 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0000 % | 2,492.7 |
| Perpetual-Premium | 5.49 % | -3.71 % | 84,005 | 0.08 | 19 | -0.0103 % | 2,437.6 |
| Perpetual-Discount | 5.23 % | 5.17 % | 111,145 | 15.16 | 17 | -0.1207 % | 2,596.2 |
| FixedReset | 4.23 % | 3.66 % | 187,952 | 6.66 | 74 | -0.0630 % | 2,570.6 |
| Deemed-Retractible | 4.99 % | 2.40 % | 104,267 | 0.25 | 42 | 0.0970 % | 2,560.9 |
| FloatingReset | 2.64 % | 2.06 % | 87,335 | 3.80 | 6 | 0.0459 % | 2,525.1 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| FTS.PR.F | Perpetual-Discount | -1.67 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-25 Maturity Price : 23.75 Evaluated at bid price : 24.20 Bid-YTW : 5.06 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| ENB.PF.E | FixedReset | 98,583 | CIBC sold 10,000 to anonymous at 25.05. RBC crossed 50,000 at 25.06. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-25 Maturity Price : 23.13 Evaluated at bid price : 25.05 Bid-YTW : 4.18 % |
| BNS.PR.O | Deemed-Retractible | 67,226 | TD crossed 50,000 at 26.25. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-09-24 Maturity Price : 25.75 Evaluated at bid price : 26.20 Bid-YTW : -10.86 % |
| TD.PF.B | FixedReset | 63,105 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-25 Maturity Price : 23.21 Evaluated at bid price : 25.12 Bid-YTW : 3.69 % |
| BNS.PR.Z | FixedReset | 54,864 | RBC crossed 50,000 at 24.44. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.49 Bid-YTW : 3.42 % |
| MFC.PR.K | FixedReset | 54,090 | Desjardins crossed 50,000 at 24.98. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.95 Bid-YTW : 3.79 % |
| BMO.PR.W | FixedReset | 40,455 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-08-25 Maturity Price : 23.17 Evaluated at bid price : 25.06 Bid-YTW : 3.66 % |
| There were 11 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| TD.PR.T | FloatingReset | Quote: 25.36 – 26.36 Spot Rate : 1.0000 Average : 0.5577 YTW SCENARIO |
| FTS.PR.F | Perpetual-Discount | Quote: 24.20 – 24.79 Spot Rate : 0.5900 Average : 0.3983 YTW SCENARIO |
| GWO.PR.N | FixedReset | Quote: 21.35 – 21.83 Spot Rate : 0.4800 Average : 0.3131 YTW SCENARIO |
| PVS.PR.C | SplitShare | Quote: 26.10 – 27.10 Spot Rate : 1.0000 Average : 0.8432 YTW SCENARIO |
| PWF.PR.P | FixedReset | Quote: 23.50 – 23.90 Spot Rate : 0.4000 Average : 0.3011 YTW SCENARIO |
| TD.PR.P | Deemed-Retractible | Quote: 26.06 – 26.38 Spot Rate : 0.3200 Average : 0.2402 YTW SCENARIO |