Russia is intervening in the currency markets:
Russia’s central bank sold $420 million of foreign currency in its third day of interventions this month to slow the ruble’s world-beating decline.
The monetary authority spent the funds on Oct. 6 to shore up the ruble, the latest data on its website showed today. The bank also said it shifted the upper boundary of the currency’s trading band by 5 kopeks yesterday. The exchange rate was little changed at 44.6979 versus the dollar-euro basket as of 10:12 a.m. in Moscow today.
Bank of Russia will probably need to spend as much as $30 billion by year-end to slow the decline in the ruble, which lost 14 percent against the dollar last quarter, according to UralSib Capital.
…
Demand for dollars and euros is growing among Russian companies as they contend with $54.7 billion of debt repayments in the next three months, according to central bank data.
A little bird asked me to comment on a paper by Pablo Fernandez of University of Navarra – IESE Business School titled CAPM: An Absurd Model:
The CAPM is an absurd (having no rational or orderly relationship to human life; contrary to all reason or common sense) model because its assumptions and its predictions/conclusions have no basis in the real world. The use of CAPM is also a source of litigation: many professors, lawyers… get nice fees because many professionals use CAPM instead of common sense to calculate the required return to equity. Users of the CAPM make many illogical errors valuing companies, accepting/rejecting investment projects, evaluating fund performance, pricing goods and services in regulated markets, calculating value creation…
According to the dictionary, a theory is “an idea or set of ideas that is intended to explain facts or events”; and a model is “a set of ideas and numbers that describe the past, present, or future state of something”. With the vast amount of information and research that we have, it is quite clear that the CAPM is neither a theory nor a model because it does not “explain facts or events”, nor does it “describe the past, present, or future state of something”.
It is important to differentiate between a fact (something that truly exists or happens: something that has actual existence; a true piece of information) and an opinion (what someone thinks about a particular thing). The CAPM could be described as an uninformed opinion, and not as a sensible opinion.
We all should try to explain a portion of “the world as it is”, not of “the world according to a wrong theory” nor of “the world if men were not men”. Ricardo Yepes, professor of philosophy of my university, wrote: “Learning means being able to keep perceiving reality as it truly is: complex – and not trying to fit every new experience into a closed and pre-conceived notion or overall scheme”. We may find out an investor’s expected IBM beta and expected market risk premium (MRP) by asking him. However, it is impossible to determine the expected IBM beta and the expected MRP of the market (for the market as a whole), because these two parameters do not exist. Different investors have different cash flow expectations and use different expected (and required) returns to equity (different expected market risk premium and different expected beta). One could only talk of the beta and the market risk premium if all investors had the same expectations. But investors do not have homogeneous expectations.
Sections 11 and 12 show how to calculate required returns in a sensible way and how to use betas being a reasonable person.
…
Just an example: calculation of the beta of electrical companies done by a European Electricity Regulatory Commission. “We calculate the betas of all traded European companies. Leveraged betas were calculated using 2 years of weekly data. The Market Index chosen was the Dow Jones STOXX Total Market Index. There is a great dispersion (from -0.24 to 1.16) and some odd betas (negative and higher than one). We decided to maintain all betas… To unlever the betas, we assumed that the beta of the debt is zero for all companies. Then, the Commission calculates the average of the unlevered betas and relever it using an objective debt to equity ratio based on the average debt to equity ratio of comparable companies. The levered beta proposed by the Commission for the transport activity is 0.471870073”The Commission acknowledges that calculated betas have a “great dispersion (from -0.24 to 1.16)” but calculates the average of all of them and finally provides betas with a precision of 9 figures after the decimal point!
…
According with the CAPM “the market” assigns a beta to every company and that beta may be calculated with a regression of historical data. Of course, every investor should use this “market beta”. As we have already mentioned, the first problem is that this “market beta” does not exist.When we calculate betas using historical data we encounter several well-known problems:
1. They change considerably from one day to the next.
2. They depend very much on which stock index is used as the market reference.
3. They depend very much on the historical period (5 years, 3 years…) used.
4. They depend on what returns (monthly, yearly…) are used to calculate them.
5. Very often we do not know if the beta of one company is lower or higher than the beta of another.
6. Calculated betas have little correlation with stock returns.
7. β = 1 has a higher correlation with stock returns than calculated betas for many companies
8. The correlation coefficients of the regressions used to calculate the betas are very small.
9. The relative magnitude of betas often makes very little sense: companies with high risk often have lower calculated betas than companies with lower risk.
It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 1bp, FixedResets off 7bp and DeemedRetractibles down 8bp. Volatility was low (Floaters don’t count!). Volume was low.
PerpetualDiscounts now yield 5.16%, equivalent to 6.71% interest at the standard equivalency factor of 1.3x. Long corporates are now at about 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 250bp, a widening from the 240bp reported September 10.
| 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 | 3.13 % | 3.12 % | 23,525 | 19.44 | 1 | -0.2079 % | 2,671.5 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.7553 % | 4,099.0 |
| Floater | 2.91 % | 3.07 % | 62,551 | 19.58 | 4 | -0.7553 % | 2,752.3 |
| OpRet | 4.04 % | 1.81 % | 111,987 | 0.08 | 1 | 0.0000 % | 2,732.5 |
| SplitShare | 4.29 % | 4.00 % | 89,954 | 3.85 | 5 | 0.1193 % | 3,156.2 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0000 % | 2,498.6 |
| Perpetual-Premium | 5.49 % | 0.07 % | 78,136 | 0.08 | 18 | 0.0937 % | 2,453.9 |
| Perpetual-Discount | 5.32 % | 5.16 % | 95,861 | 15.14 | 18 | 0.0142 % | 2,592.5 |
| FixedReset | 4.22 % | 3.73 % | 168,986 | 16.36 | 74 | -0.0741 % | 2,552.8 |
| Deemed-Retractible | 5.02 % | 2.33 % | 101,409 | 0.23 | 42 | -0.0831 % | 2,561.5 |
| FloatingReset | 2.58 % | -4.24 % | 79,206 | 0.08 | 6 | -0.1890 % | 2,548.8 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| PWF.PR.P | FixedReset | -1.89 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-08 Maturity Price : 21.80 Evaluated at bid price : 22.29 Bid-YTW : 3.61 % |
| BAM.PR.B | Floater | -1.32 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-08 Maturity Price : 17.17 Evaluated at bid price : 17.17 Bid-YTW : 3.07 % |
| BAM.PR.K | Floater | -1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-08 Maturity Price : 17.14 Evaluated at bid price : 17.14 Bid-YTW : 3.08 % |
| TRP.PR.B | FixedReset | -1.04 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-08 Maturity Price : 19.05 Evaluated at bid price : 19.05 Bid-YTW : 3.82 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BAM.PF.G | FixedReset | 740,320 | New issue settled today. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-08 Maturity Price : 23.12 Evaluated at bid price : 25.00 Bid-YTW : 4.34 % |
| FTS.PR.M | FixedReset | 93,750 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-08 Maturity Price : 23.18 Evaluated at bid price : 25.10 Bid-YTW : 3.95 % |
| BMO.PR.S | FixedReset | 78,090 | RBC crossed 75,000 at 25.39. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.40 Bid-YTW : 3.75 % |
| MFC.PR.K | FixedReset | 70,460 | RBC crossed 63,900 at 25.02. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.01 Bid-YTW : 3.84 % |
| MFC.PR.H | FixedReset | 64,790 | RBC crossed 60,100 at 26.16. YTW SCENARIO Maturity Type : Call Maturity Date : 2017-03-19 Maturity Price : 25.00 Evaluated at bid price : 26.14 Bid-YTW : 2.77 % |
| RY.PR.H | FixedReset | 61,010 | RBC crossed 50,000 at 25.35. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-10-08 Maturity Price : 23.29 Evaluated at bid price : 25.36 Bid-YTW : 3.69 % |
| There were 23 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| CIU.PR.C | FixedReset | Quote: 20.39 – 21.24 Spot Rate : 0.8500 Average : 0.7318 YTW SCENARIO |
| TRP.PR.B | FixedReset | Quote: 19.05 – 19.39 Spot Rate : 0.3400 Average : 0.2411 YTW SCENARIO |
| MFC.PR.B | Deemed-Retractible | Quote: 22.92 – 23.20 Spot Rate : 0.2800 Average : 0.1816 YTW SCENARIO |
| CU.PR.F | Perpetual-Discount | Quote: 22.15 – 22.34 Spot Rate : 0.1900 Average : 0.1302 YTW SCENARIO |
| BAM.PR.K | Floater | Quote: 17.14 – 17.30 Spot Rate : 0.1600 Average : 0.1022 YTW SCENARIO |
| NA.PR.M | Deemed-Retractible | Quote: 26.36 – 26.53 Spot Rate : 0.1700 Average : 0.1138 YTW SCENARIO |