December 11, 2014

The war on markets continues:

Citigroup Inc. (C) and Goldman Sachs Group Inc. were among 10 banks fined for failing to shield analysts from pressure to promote stocks a decade after a U.S. crackdown sought to end Wall Street conflicts of interest.

The investment banks promised favorable research to Toys “R” Us Inc. and its private-equity owners in 2010 to win roles in its initial public offering, the Financial Industry Regulatory Authority said today in a statement. The regulator fined the firms a total of $43.5 million, faulting them for “implicitly or explicitly” making promises that their analysts would give positive coverage. Six of the 10 firms didn’t have adequate supervisory procedures to prevent the practice.

Such silliness. Everything needs to be sold and brokerages are sales organizations; pretending otherwise just leads to problems and building an incentive to get around the rules right into the rules. The tension inherent in the current pretense of objectivity is unsustainable; however, as with all other unsustainable financial market tensions, it is impossible to tell just how the situation will eventually resolve.

Rob Carrick of the Globe writes a piece titled Preferred shares will not protect you like bonds will :

Where preferreds do not deliver is in a stock market decline. As the example of the past month shows, you get only a modest buffer against the broader market’s losses. Bonds, by contrast, will often rise in price as stocks sink.

Investors who hold preferred shares have to ask themselves the same question as people who have migrated from bonds to dividend-paying common shares. The question is this: What’s my priority – protecting my portfolio by hedging against stock market risk, or generating an attractive flow of income? If you’re in preferred shares for the income and can live with sliding share prices, then consider them as a bond substitute or companion. If portfolio buoyancy is your goal, then look to bonds and move your preferred shares over the equity side of your portfolio.

Let’s look at part of that again:

Bonds, by contrast, will often rise in price as stocks sink.

What kind of bonds? Long, short, corporate, government? How often will they rise in price as stocks sink? How much? What was the trigger for the decline in stocks? This is all very vague, but ever since Ben Graham made his silly mistake it’s been a very popular fallacy.

As mentioned yesterday, I read through the BoC Financial Stability Report article by Ian Foucher and Kyle Gray titled Exchange-Traded Funds: Evolution of Benefits, Vulnerabilities and Risks:

  • The global market for exchange-traded funds (ETFs) has exhibited strong growth in recent years, reaching US$2.3 trillion by the end of 2013. ETFs have clear advantages for investors, such as low-cost portfolio diversification and the liquidity of an exchange-traded product. However, recent disruptions in certain ETF products have highlighted the need to better understand the vulnerabilities and risks associated with this market.
  • ETFs are generally perceived by investors as having equity-like liquidity, but in times of stress, this liquidity may prove illusory for some funds. Synthetic ETFs also carry additional counterparty and collateral risk. If any of these risks materialized, it could trigger an investor run, which could negatively impact the underlying market as well as other similar funds.
  • The synthetic ETF market in Canada has a high concentration of counterparty risk compared with other jurisdictions. However, given the small size of this market segment, it does not represent a significant vulnerability for the Canadian financial system. Nonetheless, rapid changes in the ETF market imply that authorities need to monitor developments closely.

Well, it’s nice to have Canadian data and Canada-centric discussion, but there’s nothing really new that I can see. See the post Synthetic ETFs a Threat to Financial Stability? for links to a paper on the subject by Srichander Ramaswamy.

And let’s look at another part:

If portfolio buoyancy is your goal, then look to bonds and move your preferred shares over the equity side of your portfolio

Well, for most people that’s a pretty stupid goal, frankly. Ask not what you can do for your portfolio. Ask rather what your portfolio can do for you.

Q: Why did you scrimp and save for forty years?

A: Well, you see, my investment objective is portfolio buoyancy.

If portfolio buoyancy is your goal – for some bizarre reason that almost certainly has nothing to do with your actual life – even CAPM will tell you the right answer: reduce market exposure.

What kind of bonds? Maybe junk energy bonds?

The danger of stimulus-induced bubbles is starting to play out in the market for energy-company debt.

Since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank AG. With oil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights Inc. predicts the default rate for energy junk bonds will double to eight percent next year.

“Anything that becomes a mania — it ends badly,” said Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management. “And this is a mania.”

But after the series of bad days we’ve been having, insurance sure would be nice!

luckInsurance

Well, according to my figures it was a mixed day on the Canadian preferred share market, but it will be remembered from yesterday that the Toronto Stock Exchange sold me moronic data for FTS.PR.F, making it down 11.87% on a bid/bid basis; today it has bounced back 11.16% and that has screwed up the figures again, which are PerpetualDiscounts up 60bp, FixedResets down 54bp and DeemedRetractibles gaining 4bp. The S&P/TSX indices, which use price/price to calculate returns, are TXPR down 54bp and TXPL down 81bp, so it was a pretty rough day. There is yet another lengthy list of performance highlights which is yet again dominated by losing FixedResets – although it is nice to see SLF.PR.G and MFC.PR.F, recent heavy heavy heavy losers, on the plus side of the ledger for a change. Volume was very high.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:

  • based on Implied Volatility Theory only
  • are relative only to other FixedResets from the same issuer
  • assume constant GOC-5 yield
  • assume constant Implied Volatility
  • assume constant spread

Here’s TRP:

impVol_TRP_141211
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So according to this, TRP.PR.A, bid at 20.40, is $1.08 cheap, but it has already reset. TRP.PR.B, bid at 17.25, resetting 2015-6-30 and TRP.PR.C, bid at 19.11, resetting 2016-1-30 are both fairly priced. The TRP issues seem to be steadily rationalizing, but there continues to be pressure on TRP.PR.A.

impVol_MFC_141211
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Excellent performance by MFC.PR.F today restored the Implied Volatility calculation to approximately what is was on December 8. Implied Volatility is very high at 38% – which indicates to me that the market accepts a relatively high degree of directionality (towards par) in future prices – MFC.PR.F, resetting at +141 on 2016-6-19 is about $0.85 cheap, while MFC.PR.H, resetting at +313 on 2017-3-19, is about $1.02 cheap.

As shown by the next two charts, the curve-fitting for MFC is much less ambiguous than it has been for the past two days.

impVol_MFC_141211_varSpread
Click for Big
impVol_MFC_141211_varVol
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Click for Big

BAM is a little hard to figure out.

impVol_BAM_141211
Click for Big

As with MFC on December 9 and December 10, it looks as if extraordinary cheapness in the lowest-spread issue, BAM.PR.X, resetting at +180bp on 2017-6-30, may be throwing off the Implied Volatility calculation; but that would leave the remaining issues trading at an very high Implied Volatility without any reason – whereas the MFC issues have, at a minimum, a chance of becoming subject to NVCC rules.

As calculated, though, BAM.PR.X, bid at 20.10, seems about $0.84 cheap while BAM.PR.R, resetting at +230 on 2016-6-30 and bid at 24.72, seems $1.40 rich.

impVol_FTS_141211
Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 19.10, looks $0.66 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp, and bid at 24.31, looks $0.66 expensive and resets 2019-3-1

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 -0.1226 % 2,521.9
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.1226 % 3,992.6
Floater 3.01 % 3.10 % 62,468 19.50 4 -0.1226 % 2,680.9
OpRet 4.40 % -9.95 % 27,474 0.08 2 0.1567 % 2,755.8
SplitShare 4.29 % 4.03 % 41,608 3.72 5 0.2125 % 3,178.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.1567 % 2,519.9
Perpetual-Premium 5.44 % -1.15 % 74,743 0.08 20 0.0118 % 2,474.8
Perpetual-Discount 5.23 % 5.13 % 110,442 15.23 15 0.5967 % 2,630.9
FixedReset 4.31 % 3.79 % 215,621 16.45 75 -0.5437 % 2,500.7
Deemed-Retractible 5.00 % -1.37 % 101,195 0.21 40 0.0430 % 2,600.2
FloatingReset 2.55 % 2.03 % 63,755 3.46 5 -0.1100 % 2,541.4
Performance Highlights
Issue Index Change Notes
IFC.PR.A FixedReset -5.29 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.61
Bid-YTW : 4.70 %
PWF.PR.T FixedReset -4.66 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 22.89
Evaluated at bid price : 24.12
Bid-YTW : 4.00 %
MFC.PR.H FixedReset -2.24 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 25.27
Bid-YTW : 4.07 %
BMO.PR.M FixedReset -2.22 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.65
Bid-YTW : 3.52 %
TRP.PR.A FixedReset -2.11 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 20.40
Evaluated at bid price : 20.40
Bid-YTW : 4.14 %
CU.PR.C FixedReset -1.96 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 23.48
Evaluated at bid price : 25.00
Bid-YTW : 3.78 %
BMO.PR.Q FixedReset -1.85 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.90
Bid-YTW : 3.67 %
BAM.PF.B FixedReset -1.83 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 22.96
Evaluated at bid price : 24.30
Bid-YTW : 4.14 %
BAM.PR.Z FixedReset -1.77 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 23.44
Evaluated at bid price : 25.20
Bid-YTW : 4.33 %
MFC.PR.L FixedReset -1.68 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.58
Bid-YTW : 3.96 %
ENB.PR.T FixedReset -1.62 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 21.94
Evaluated at bid price : 22.40
Bid-YTW : 4.42 %
BAM.PR.X FixedReset -1.51 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 20.10
Evaluated at bid price : 20.10
Bid-YTW : 4.27 %
FTS.PR.M FixedReset -1.50 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 23.16
Evaluated at bid price : 25.00
Bid-YTW : 3.87 %
TRP.PR.E FixedReset -1.39 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 23.10
Evaluated at bid price : 24.80
Bid-YTW : 3.86 %
BNS.PR.P FixedReset -1.33 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-04-25
Maturity Price : 25.00
Evaluated at bid price : 25.16
Bid-YTW : 3.27 %
BAM.PF.A FixedReset -1.32 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 23.28
Evaluated at bid price : 25.02
Bid-YTW : 4.27 %
FTS.PR.K FixedReset -1.26 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 22.97
Evaluated at bid price : 24.31
Bid-YTW : 3.62 %
NA.PR.S FixedReset -1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 23.24
Evaluated at bid price : 25.10
Bid-YTW : 3.79 %
BNS.PR.Y FixedReset -1.09 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.60
Bid-YTW : 3.50 %
BNS.PR.Z FixedReset -1.07 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.11
Bid-YTW : 3.59 %
FTS.PR.J Perpetual-Discount -1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 23.39
Evaluated at bid price : 23.75
Bid-YTW : 5.02 %
BNS.PR.R FixedReset -1.01 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.39
Bid-YTW : 3.47 %
SLF.PR.G FixedReset 2.77 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.05
Bid-YTW : 5.49 %
MFC.PR.F FixedReset 5.06 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.75
Bid-YTW : 5.28 %
FTS.PR.F Perpetual-Discount 11.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 23.70
Evaluated at bid price : 24.01
Bid-YTW : 5.13 %
Volume Highlights
Issue Index Shares
Traded
Notes
TRP.PR.A FixedReset 275,974 Will reset at 3.266% effective December 31. Desjardins crossed 200,000 at 20.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 20.40
Evaluated at bid price : 20.40
Bid-YTW : 4.14 %
MFC.PR.N FixedReset 189,774 Recent new issue.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.02
Bid-YTW : 3.79 %
ENB.PR.N FixedReset 63,796 TD crossed 21,800 at 23.30.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 22.36
Evaluated at bid price : 23.02
Bid-YTW : 4.42 %
ENB.PR.B FixedReset 58,272 TD crossed 39,700 at 23.10.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 22.44
Evaluated at bid price : 22.90
Bid-YTW : 4.22 %
TRP.PR.E FixedReset 56,600 RBC crossed 50,000 at 25.27.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 23.10
Evaluated at bid price : 24.80
Bid-YTW : 3.86 %
BAM.PR.Z FixedReset 47,893 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 23.44
Evaluated at bid price : 25.20
Bid-YTW : 4.33 %
There were 53 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IFC.PR.A FixedReset Quote: 22.61 – 24.07
Spot Rate : 1.4600
Average : 0.8330

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 22.61
Bid-YTW : 4.70 %

PWF.PR.T FixedReset Quote: 24.12 – 25.56
Spot Rate : 1.4400
Average : 0.9067

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 22.89
Evaluated at bid price : 24.12
Bid-YTW : 4.00 %

TD.PR.S FixedReset Quote: 25.23 – 26.35
Spot Rate : 1.1200
Average : 0.6319

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.23
Bid-YTW : 3.15 %

BAM.PF.B FixedReset Quote: 24.30 – 24.92
Spot Rate : 0.6200
Average : 0.3781

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 22.96
Evaluated at bid price : 24.30
Bid-YTW : 4.14 %

MFC.PR.H FixedReset Quote: 25.27 – 25.94
Spot Rate : 0.6700
Average : 0.4360

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2017-03-19
Maturity Price : 25.00
Evaluated at bid price : 25.27
Bid-YTW : 4.07 %

FTS.PR.K FixedReset Quote: 24.31 – 24.96
Spot Rate : 0.6500
Average : 0.4235

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2044-12-11
Maturity Price : 22.97
Evaluated at bid price : 24.31
Bid-YTW : 3.62 %

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