August 11, 2015

The SEC took down a major trading operation today:

While the SEC has uncovered and successfully litigated hacking and trading schemes in the past, today’s international case is unprecedented in terms of the scope of the hacking at issue; the number of traders involved; the number of securities unlawfully traded; and the amount of profits generated. Over the course of 5 years, the 32 defendants named in this complaint are charged with carrying out a brazen scheme to steal non-public earnings information for hundreds of publicly traded companies, and then placing thousands of trades through a network of U.S. and overseas traders located in the Russian Federation, Ukraine, Malta, Cyprus, France, New York, Pennsylvania and Georgia—geographies electronically connected by this illicit network.

According to the complaint, these traders located across the globe executed thousands of illicit trades on the basis of this material, nonpublic information, concealing their scheme by spreading the transactions across multiple accounts held in the names of many individuals and entities. And, the traders were market savvy, using equities, options and contracts-for-differences to maximize their profits.

Two Ukrainian hackers are charged with spearheading the scheme, Ivan Turchynov and Okelsandr Ieremenko. Along with the 30 other defendants, they are collectively alleged to have made more than $100 million in illegal profits by trading based on pre-release corporate earnings announcements stolen from multiple newswire services. We charged these defendants in a complaint unsealed today with multiple securities fraud violations, seeking disgorgement and penalties, and we obtained an asset freeze against the overseas traders, which secured at least $20 million of the defendants’ ill-gotten gains. And the SEC’s investigation continues.

Ontario has released some more details of the Ontario Retirement Pension Plan:

Employers and employees who participate in a comparable pension plan will not be required to participate in the ORPP.

There are considerable differences between DB and DC pension plans. For example, DC plans do not require employer matching. They also do not allow for the pooled longevity and investment risk that provide people the assurance they will not outlive their savings, and protect them from market volatility.

Actuarial analysis has been conducted to place a value on these differences, and determine a contribution rate that would be able to reliably deliver the same level of retirement income replacement as the ORPP. For this reason, to be considered comparable, a DC plan must:

  • •Have a minimum annual contribution rate of 8 per cent
  • •Require at least 50 per cent matching of the minimum rate from employers.
orppGraphic_150811
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Holy Smokes, but they don’t like DC plans, do they? Eight percent contribution rate? Craziness. And nobody in their right mind will start a DB plan.

Oil got whacked today:

Crude closed at the lowest level in more than six years in New York as OPEC production climbed while China’s devaluation of the yuan bolstered concern that the world’s second-biggest economy will slow.

West Texas Intermediate futures tumbled 4.2 percent. The Organization of Petroleum Exporting Countries raised output by 100,700 barrels a day to 31.5 million last month, the most since June 2012, the group said in its monthly report, citing external sources. The Chinese move may curb demand as import costs rise.

WTI for September delivery fell $1.88 to $43.08 a barrel on the New York Mercantile Exchange. It was the lowest settlement since March 2009. The contract touched $42.69, the lowest intraday price since March 18.

… and emerging market currencies were whacked in the fallout from the Yuan devaluation reported yesterday:

China’s devaluation will spark another wave of declines, said David Woo, Bank of America Corp.’s head of rates and foreign-exchange research in New York. The Asian nation is vital to the global economy, accounting for about 27 percent of growth.

“This will trigger competitive devaluation around the world that will start in Asia but definitely not end in Asia,” said Woo, who’s been predicting China would act since January.

emergingCurrency_150811
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There are local repercussions as well:

The Canadian dollar closed at 76.31 cents (U.S), down 0.61 cents (U.S) from Monday’s close of 76.92 cents (U.S).

There is speculation that the much anticipated rate hike in September from the U.S. Federal reserve may be put on hold after China’s move to depreciate its currency

It was a mixed-negative day for the Canadian preferred market, with PerpetualDiscounts flat, FixedResets off 39bp and DeemedRetractibles gaining 4bp. TRP issues were notable on the unfortunate side of the Performance Highlights table. Volume was low.

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_150811
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TRP.PR.B, which resets 2020-6-30 at +128, is bid at 13.91 to be $0.81 rich, while TRP.PR.C, resetting 2016-1-30 at +154, is $0.82 cheap at its bid price of 14.10.

impVol_MFC_150811
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Another good fit today!

Most expensive is MFC.PR.I, resetting at +286bp on 2017-9-19, bid at 24.50 to be 0.41 rich, while MFC.PR.K, resetting at +222bp on 2018-9-19, is bid at 21.23 to be $0.41 cheap.

impVol_BAM_150811
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The fit on the BAM issues continues to be horrible.

The cheapest issue relative to its peers is BAM.PR.Z, resetting at +296bp on 2017-12-31, bid at 21.80 to be $1.26 cheap. BAM.PF.E, resetting at +255bp on 2020-3-31 is bid at 21.71 and appears to be $1.20 rich.

impVol_FTS_150811
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FTS.PR.H, with a spread of +145bp, and bid at 16.05, looks $0.56 expensive and resets 2020-6-1. FTS.PR.G, with a spread of +213bp and resetting 2018-9-1, is bid at 19.93 and is $0.78 cheap.

pairs_FR_150811
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Investment-grade pairs predict an average three-month bill yield over the next five-odd years of -0.17%, with no outliers. There is one junk outlier below -1.00%.

pairs_FF_150811
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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

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 -0.7220 % 1,992.8
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.7220 % 3,484.2
Floater 3.68 % 3.71 % 53,771 18.02 3 -0.7220 % 2,118.4
OpRet 0.00 % 0.00 % 0 0.00 0 0.3356 % 2,776.3
SplitShare 4.58 % 4.76 % 57,842 3.13 3 0.3356 % 3,253.6
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.3356 % 2,538.6
Perpetual-Premium 5.72 % 5.37 % 63,420 2.07 9 0.0309 % 2,484.7
Perpetual-Discount 5.41 % 5.41 % 80,137 14.73 29 -0.0045 % 2,609.4
FixedReset 4.72 % 3.96 % 202,373 15.87 87 -0.3873 % 2,228.1
Deemed-Retractible 5.12 % 5.22 % 104,114 5.45 34 0.0415 % 2,577.6
FloatingReset 2.32 % 3.26 % 45,342 6.01 9 -0.0995 % 2,247.6
Performance Highlights
Issue Index Change Notes
BAM.PR.X FixedReset -4.86 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 16.45
Evaluated at bid price : 16.45
Bid-YTW : 4.11 %
TRP.PR.C FixedReset -3.69 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 14.10
Evaluated at bid price : 14.10
Bid-YTW : 3.98 %
ENB.PR.F FixedReset -2.97 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 16.35
Evaluated at bid price : 16.35
Bid-YTW : 5.16 %
TRP.PR.D FixedReset -2.56 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 20.20
Evaluated at bid price : 20.20
Bid-YTW : 4.01 %
TRP.PR.E FixedReset -2.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 20.20
Evaluated at bid price : 20.20
Bid-YTW : 4.08 %
TRP.PR.A FixedReset -2.23 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 17.50
Evaluated at bid price : 17.50
Bid-YTW : 3.96 %
FTS.PR.H FixedReset -2.19 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 16.05
Evaluated at bid price : 16.05
Bid-YTW : 3.48 %
RY.PR.M FixedReset -2.16 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 22.34
Evaluated at bid price : 23.14
Bid-YTW : 3.57 %
VNR.PR.A FixedReset -2.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 21.40
Evaluated at bid price : 21.40
Bid-YTW : 4.21 %
HSE.PR.C FixedReset -2.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 21.55
Evaluated at bid price : 21.85
Bid-YTW : 4.57 %
ENB.PR.T FixedReset -1.72 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 16.61
Evaluated at bid price : 16.61
Bid-YTW : 5.13 %
PWF.PR.S Perpetual-Discount -1.28 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 22.06
Evaluated at bid price : 22.41
Bid-YTW : 5.38 %
GWO.PR.N FixedReset -1.16 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.18
Bid-YTW : 7.39 %
SLF.PR.G FixedReset -1.13 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 16.65
Bid-YTW : 7.16 %
CM.PR.Q FixedReset -1.03 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 22.78
Evaluated at bid price : 24.00
Bid-YTW : 3.56 %
BMO.PR.Y FixedReset -1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 22.84
Evaluated at bid price : 24.15
Bid-YTW : 3.55 %
MFC.PR.G FixedReset -1.02 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 24.25
Bid-YTW : 4.17 %
POW.PR.B Perpetual-Discount 1.04 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 23.95
Evaluated at bid price : 24.20
Bid-YTW : 5.58 %
ENB.PR.B FixedReset 1.42 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 15.73
Evaluated at bid price : 15.73
Bid-YTW : 5.12 %
PWF.PR.R Perpetual-Premium 1.58 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 24.66
Evaluated at bid price : 25.15
Bid-YTW : 5.49 %
MFC.PR.L FixedReset 1.94 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.52
Bid-YTW : 5.29 %
SLF.PR.H FixedReset 2.03 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.10
Bid-YTW : 5.76 %
Volume Highlights
Issue Index Shares
Traded
Notes
CU.PR.H Perpetual-Discount 268,550 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 23.38
Evaluated at bid price : 23.69
Bid-YTW : 5.57 %
RY.PR.I FixedReset 107,972 Desjardins crossed 11,100 at 25.05. TD crossed blocks of 50,000 and 25,000 at the same price. National sold 10,500 to anonymous at the same price again.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.03
Bid-YTW : 3.08 %
RY.PR.H FixedReset 56,050 Desjardins crossed 50,000 at 22.60.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 22.04
Evaluated at bid price : 22.52
Bid-YTW : 3.42 %
ENB.PR.T FixedReset 54,828 RBC crossed 40,000 at 16.55.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 16.61
Evaluated at bid price : 16.61
Bid-YTW : 5.13 %
FTS.PR.H FixedReset 50,090 TD crossed 44,400 at 16.55.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 16.05
Evaluated at bid price : 16.05
Bid-YTW : 3.48 %
TD.PF.D FixedReset 46,224 Desjardins crossed 21,600 at 24.35. TD crossed 16,000 at the same price.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 22.92
Evaluated at bid price : 24.35
Bid-YTW : 3.49 %
There were 21 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
MFC.PR.M FixedReset Quote: 21.86 – 22.53
Spot Rate : 0.6700
Average : 0.4200

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.86
Bid-YTW : 5.26 %

VNR.PR.A FixedReset Quote: 21.40 – 21.99
Spot Rate : 0.5900
Average : 0.3794

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 21.40
Evaluated at bid price : 21.40
Bid-YTW : 4.21 %

RY.PR.M FixedReset Quote: 23.14 – 23.78
Spot Rate : 0.6400
Average : 0.4383

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 22.34
Evaluated at bid price : 23.14
Bid-YTW : 3.57 %

FTS.PR.H FixedReset Quote: 16.05 – 16.60
Spot Rate : 0.5500
Average : 0.3807

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 16.05
Evaluated at bid price : 16.05
Bid-YTW : 3.48 %

GWO.PR.F Deemed-Retractible Quote: 25.47 – 25.89
Spot Rate : 0.4200
Average : 0.2732

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2015-09-10
Maturity Price : 25.00
Evaluated at bid price : 25.47
Bid-YTW : -8.42 %

CM.PR.Q FixedReset Quote: 24.00 – 24.50
Spot Rate : 0.5000
Average : 0.3782

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2045-08-11
Maturity Price : 22.78
Evaluated at bid price : 24.00
Bid-YTW : 3.56 %

2 Responses to “August 11, 2015”

  1. Louisprefs says:

    Hello James,

    I haven’t posted for years now but prefs look particularly interesting again nowadays.

    Have you seen the announcement by BAM on Monday that they are to buy back, for cancellation, on the public market up to 10% of their pref issues? It is the first time I see such a thing. Due to their stated limit of purchase of 25% of the (low) daily volume of most of these issues, it seems impossible to me for them to be even close to buy back 10% at that pace over the period of one year this is to be effective. So what is this? A mere trick to get attention over their prefs or truly an indication that BAM’s prefs are undervalued on the market?

  2. jiHymas says:

    Due to their stated limit of purchase of 25% of the (low) daily volume of most of these issues, it seems impossible to me for them to be even close to buy back 10% at that pace over the period of one year this is to be effective. So what is this?

    It’s the rules of the Toronto Stock Exchange. According to Joe Brennan of Shea Nerland Calnan LLP:

    The Toronto Stock Exchange places the following limits on purchases made under NCIBs:

    (a) Such purchases may not aggregate more than the greater of:

    (i) 25% of the average daily trading volume of the shares; and

    (ii) 1,000 shares; and

    (b) Over a 12-month period, commencing on the date specified in the notice of the normal course issuer bid submitted by the company to the TSX, such purchases may not exceed the greater of:

    (i) 10% of the public float (i.e. shares held by persons that are not insiders of the company and are free from resale restrictions), or

    (ii) 5% of the outstanding shares;

    on the first day of the 12-month period.

    So the daily limit is set by market volume and the annual limit is set by the outstanding shares. For reasonably liquid common shares this does not lead to any major problems, but for less liquid preferreds you can arrive at the internal contradiction you note.

    Normal Course Issuer Bids can normally be treated as jokes, but given the current extreme valuations … not so much. BAM is the ultimate parent of BRF, which has recently executed a NCIB, albeit a very small one.

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