November 27, 2018

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Today we learned that the recent – ongoing – market collapse is all the Fed’s fault:

President Trump placed responsibility for recent stock market declines and this week’s General Motors plant closures and layoffs on the Federal Reserve during an interview Tuesday, shirking any personal responsibility for cracks in the economy and declaring that he is “not even a little bit happy” with his hand-selected central bank chairman.

In a wide-ranging and sometimes discordant 20-minute interview with The Washington Post, Trump complained at length about Federal Reserve Chairman Jerome H. “Jay” Powell, whom he nominated earlier this year. He argued that rising interest rates and other Fed policies were damaging the economy — as evidenced by GM’s announcement this week that it was laying off 15 percent of its workforce — though he insisted that he is not worried about a recession.

“I’m doing deals, and I’m not being accommodated by the Fed,” Trump said. “They’re making a mistake because I have a gut, and my gut tells me more sometimes than anybody else’s brain can ever tell me.”

Well, I said on October 29:

Trump trying to pick a fight with the Fed (I think this is probably because he wants some political cover in case a US slowdown does occur to a noticeable degree)

Not the most astute prediction I’ve ever made, but it’s nice to have a winner nevertheless! And, of course, Trump’s huffing and puffing with his version of crony capitalism:

U.S. President Donald Trump said Tuesday that he was “very disappointed” that General Motors was closing plants in the United States and warned that the White House was “now looking at cutting all GM subsidies,” including for its electric cars program.

Trump unleashed on Twitter a day after GM announced it would shutter five plants and slash 14,000 jobs in North America, with many of the job cuts coming from the U.S.Midwest, where the president has promised a manufacturing rebirth.

Politicians are afraid to say it: highly paid manufacturing jobs will all disappear in the near future. Anything repetitive and finicky can be done better by a robot – it’s just a matter of time and money and not too much of those. But in the meantime, there are real people experiencing real pain, so they have to huff and puff.

But the market – according to the chatteratti – is so desperate for good news it will take anything!

The S&P 500 and Dow edged higher on Tuesday after White House economic adviser Larry Kudlow said a meeting between President Donald Trump and his Chinese counterpart on Saturday was an opportunity to “turn the page” on a trade war.

All three major U.S. indexes turned positive after spending much of the session in negative territory, after Kudlow’s comments days ahead of the high-stakes dinner between the two leaders after the G20 summit in Buenos Aires.

But Kudlow also said the White House has been disappointed so far in China’s response to trade issues with the United States. On Monday, Trump threatened to move ahead with additional tariffs on Chinese goods, due to take effect on Jan. 1.

But what a day it was!

TXPR touched a new 52-week low of 632.64 (1.02% down from yesterday‘s close) before closing at 640.91, up 0.28%. Volume was enormous at 4.21-million (shares in the underlying issues, I thing), easily the highest of the last thirty days.

CPD touched a new 52-week low of 12.63 (down 1.48% from yesterday’s close) before closing at 12.87, up 0.39%. Volume was the second-highest of the last thirty days (far ahead of yesterday’s), exceeded only by November 20.

ZPR touched a new 52-week low of 10.34 (down 1.43% from yesterday’s close) before closing at 10.52, up 0.29%. Volume was the third highest of the past thirty days, exceeded only by November 16 and October 29.

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 1.5545 % 2,662.9
FixedFloater 0.00 % 0.00 % 0 0.00 0 1.5545 % 4,886.3
Floater 4.36 % 4.37 % 38,077 16.59 4 1.5545 % 2,816.0
OpRet 0.00 % 0.00 % 0 0.00 0 -0.2488 % 3,178.9
SplitShare 4.63 % 5.14 % 80,536 4.65 7 -0.2488 % 3,796.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 -0.2488 % 2,962.0
Perpetual-Premium 5.97 % 6.02 % 53,058 13.77 3 0.1210 % 2,842.1
Perpetual-Discount 5.79 % 5.98 % 76,637 13.89 31 -0.1641 % 2,832.1
FixedReset Disc 4.91 % 5.74 % 163,813 14.46 58 0.1414 % 2,271.5
Deemed-Retractible 5.52 % 7.47 % 81,806 5.12 26 0.0146 % 2,843.2
FloatingReset 4.07 % 4.77 % 36,543 5.37 6 -0.4486 % 2,577.5
FixedReset Prem 5.12 % 4.70 % 234,443 2.51 22 0.1416 % 2,496.8
FixedReset Bank Non 2.98 % 4.26 % 119,245 2.95 6 0.0207 % 2,565.0
FixedReset Ins Non 4.97 % 8.12 % 127,019 5.21 22 -0.1830 % 2,264.4
Performance Highlights
Issue Index Change Notes
W.PR.H Perpetual-Discount -5.70 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 22.22
Evaluated at bid price : 22.50
Bid-YTW : 6.20 %
MFC.PR.H FixedReset Ins Non -4.61 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.71
Bid-YTW : 9.11 %
MFC.PR.L FixedReset Ins Non -2.36 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 18.60
Bid-YTW : 10.10 %
PWF.PR.Q FloatingReset -2.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 18.85
Evaluated at bid price : 18.85
Bid-YTW : 4.41 %
MFC.PR.K FixedReset Ins Non -2.06 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.00
Bid-YTW : 9.78 %
BAM.PF.C Perpetual-Discount -2.01 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 19.00
Evaluated at bid price : 19.00
Bid-YTW : 6.51 %
TRP.PR.H FloatingReset -1.96 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 14.51
Evaluated at bid price : 14.51
Bid-YTW : 5.21 %
TD.PF.J FixedReset Prem -1.94 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 22.13
Evaluated at bid price : 22.70
Bid-YTW : 5.46 %
PWF.PR.S Perpetual-Discount -1.90 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 20.15
Evaluated at bid price : 20.15
Bid-YTW : 6.03 %
BAM.PR.C Floater -1.83 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 14.50
Evaluated at bid price : 14.50
Bid-YTW : 4.83 %
IFC.PR.F Deemed-Retractible -1.62 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.12
Bid-YTW : 7.04 %
VNR.PR.A FixedReset Disc -1.61 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 21.73
Evaluated at bid price : 22.05
Bid-YTW : 5.74 %
RY.PR.S FixedReset Disc -1.37 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 22.30
Evaluated at bid price : 23.06
Bid-YTW : 5.13 %
POW.PR.G Perpetual-Discount -1.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 23.83
Evaluated at bid price : 24.17
Bid-YTW : 5.86 %
TD.PF.E FixedReset Disc -1.35 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 21.60
Evaluated at bid price : 22.00
Bid-YTW : 5.74 %
PWF.PR.P FixedReset Disc -1.27 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 16.30
Evaluated at bid price : 16.30
Bid-YTW : 5.74 %
W.PR.J Perpetual-Discount -1.26 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 23.21
Evaluated at bid price : 23.51
Bid-YTW : 6.03 %
TD.PF.K FixedReset Disc -1.24 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 22.34
Evaluated at bid price : 23.11
Bid-YTW : 5.31 %
TD.PF.A FixedReset Disc -1.22 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 20.30
Evaluated at bid price : 20.30
Bid-YTW : 5.63 %
PVS.PR.G SplitShare -1.21 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2026-02-28
Maturity Price : 25.00
Evaluated at bid price : 24.40
Bid-YTW : 5.32 %
BAM.PF.B FixedReset Disc -1.14 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 20.00
Evaluated at bid price : 20.00
Bid-YTW : 6.26 %
BIP.PR.E FixedReset Disc -1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 21.17
Evaluated at bid price : 21.17
Bid-YTW : 6.29 %
BMO.PR.E FixedReset Prem -1.05 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 22.62
Evaluated at bid price : 23.65
Bid-YTW : 5.27 %
HSE.PR.C FixedReset Disc -1.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 20.40
Evaluated at bid price : 20.40
Bid-YTW : 6.59 %
TRP.PR.D FixedReset Disc 1.07 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 18.85
Evaluated at bid price : 18.85
Bid-YTW : 6.28 %
TRP.PR.K FixedReset Prem 1.10 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-05-31
Maturity Price : 25.00
Evaluated at bid price : 24.82
Bid-YTW : 5.14 %
CM.PR.Q FixedReset Disc 1.10 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 21.57
Evaluated at bid price : 21.96
Bid-YTW : 5.65 %
BMO.PR.C FixedReset Prem 1.12 % YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-05-25
Maturity Price : 25.00
Evaluated at bid price : 24.45
Bid-YTW : 5.23 %
RY.PR.Z FixedReset Disc 1.13 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 20.50
Evaluated at bid price : 20.50
Bid-YTW : 5.54 %
MFC.PR.M FixedReset Ins Non 1.29 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 19.65
Bid-YTW : 9.14 %
HSE.PR.A FixedReset Disc 1.46 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 14.55
Evaluated at bid price : 14.55
Bid-YTW : 6.55 %
CU.PR.D Perpetual-Discount 1.62 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 21.29
Evaluated at bid price : 21.29
Bid-YTW : 5.79 %
POW.PR.D Perpetual-Discount 1.65 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 20.95
Evaluated at bid price : 20.95
Bid-YTW : 6.06 %
TRP.PR.A FixedReset Disc 1.68 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 16.92
Evaluated at bid price : 16.92
Bid-YTW : 6.27 %
IAG.PR.G FixedReset Ins Non 1.69 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.05
Bid-YTW : 7.74 %
TRP.PR.B FixedReset Disc 1.70 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 14.32
Evaluated at bid price : 14.32
Bid-YTW : 6.12 %
BAM.PF.F FixedReset Disc 1.82 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 20.75
Evaluated at bid price : 20.75
Bid-YTW : 6.31 %
CU.PR.E Perpetual-Discount 1.85 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 20.95
Evaluated at bid price : 20.95
Bid-YTW : 5.89 %
MFC.PR.G FixedReset Ins Non 1.88 % YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.15
Bid-YTW : 7.69 %
CM.PR.O FixedReset Disc 1.90 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 20.40
Evaluated at bid price : 20.40
Bid-YTW : 5.70 %
RY.PR.H FixedReset Disc 1.96 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 20.85
Evaluated at bid price : 20.85
Bid-YTW : 5.49 %
HSE.PR.E FixedReset Disc 2.00 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 21.40
Evaluated at bid price : 21.40
Bid-YTW : 6.73 %
RY.PR.M FixedReset Disc 2.02 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 21.37
Evaluated at bid price : 21.68
Bid-YTW : 5.53 %
EMA.PR.H FixedReset Disc 3.45 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 22.80
Evaluated at bid price : 24.00
Bid-YTW : 5.07 %
BAM.PR.B Floater 9.29 % The presumed bid of 16.00 is an artefact of my pricing algorithm. The closing quote was actually 17.00 offered, no bid, so my system assumes that a poor, but reasonable bid price is $1 less than the offer. Sadly, the offer price is ridiculous – the issue traded 3,398 shares today in a range of 14.45-85.

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 16.00
Evaluated at bid price : 16.00
Bid-YTW : 4.37 %

Volume Highlights
Issue Index Shares
Traded
Notes
RY.PR.Q FixedReset Prem 578,123 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-05-24
Maturity Price : 25.00
Evaluated at bid price : 25.73
Bid-YTW : 4.29 %
TD.PF.H FixedReset Prem 316,362 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-10-31
Maturity Price : 25.00
Evaluated at bid price : 25.38
Bid-YTW : 4.45 %
BMO.PR.B FixedReset Prem 295,806 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2022-02-25
Maturity Price : 25.00
Evaluated at bid price : 25.21
Bid-YTW : 4.60 %
TD.PF.G FixedReset Prem 205,470 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-30
Maturity Price : 25.00
Evaluated at bid price : 25.80
Bid-YTW : 4.29 %
RY.PR.R FixedReset Prem 111,104 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-08-24
Maturity Price : 25.00
Evaluated at bid price : 25.80
Bid-YTW : 4.30 %
CM.PR.R FixedReset Disc 88,099 YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 22.74
Evaluated at bid price : 23.69
Bid-YTW : 5.70 %
There were 58 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
PWF.PR.A Floater Quote: 18.27 – 21.00
Spot Rate : 2.7300
Average : 1.6139

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 18.27
Evaluated at bid price : 18.27
Bid-YTW : 3.81 %

W.PR.H Perpetual-Discount Quote: 22.50 – 23.92
Spot Rate : 1.4200
Average : 0.7951

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 22.22
Evaluated at bid price : 22.50
Bid-YTW : 6.20 %

MFC.PR.H FixedReset Ins Non Quote: 20.71 – 21.89
Spot Rate : 1.1800
Average : 0.7146

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 20.71
Bid-YTW : 9.11 %

TRP.PR.F FloatingReset Quote: 17.29 – 18.35
Spot Rate : 1.0600
Average : 0.6855

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2048-11-27
Maturity Price : 17.29
Evaluated at bid price : 17.29
Bid-YTW : 5.31 %

IFC.PR.F Deemed-Retractible Quote: 23.12 – 24.25
Spot Rate : 1.1300
Average : 0.7687

YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2025-01-31
Maturity Price : 25.00
Evaluated at bid price : 23.12
Bid-YTW : 7.04 %

EML.PR.A FixedReset Ins Non Quote: 25.70 – 26.40
Spot Rate : 0.7000
Average : 0.4243

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-17
Maturity Price : 25.00
Evaluated at bid price : 25.70
Bid-YTW : 4.81 %

4 Responses to “November 27, 2018”

  1. Sluggo219 says:

    Yesterday’s price action and volumes seem to suggest real money has found some value at these levels. Thoughts?

  2. jiHymas says:

    Yesterday’s price action and volumes seem to suggest real money has found some value at these levels.

    Your guess is as good as mine! I don’t do market timing.

  3. skeptical says:

    Since you brought up the past, a couple of question for you Sir James.

    1. Why did you change the interest equivalence factor from 1.4x to 1.3x? To account for changes in the dividend taxation? What was the trigger point.
    2. Why are you underweight perpetuals in your fund (about 10 to 15% I think) when just a decade ago you held most value in perpetuals. Doesn’t the higher interest rate risk kind of neutralize the credit risk in perpetuals by higher coupons, in pretty much all times? You also mentioned in your earlier writings somewhere that not everything should be accomplished from the Preferred market and that there are better places to manage interest rate risk.
    Given that the Central Banks just might not go higher than a couple or three rate hikes before this business cycle goes kaput, wouldn’t it make sense to be overweight perpetuals?

  4. jiHymas says:

    Why did you change the interest equivalence factor from 1.4x to 1.3x? To account for changes in the dividend taxation?

    Yes.

    What was the trigger point.

    This happened effective 2011-2-5. In the March, 2011, edition of PrefLetter, I explained:

    As a result of various legislative changes, I have changed the “standard conversion factor” (the amount by which dividend yield is multiplied to obtain the interest yield required to result in the same amount of after-tax income) from 1.4x to 1.3x. It will be noted that the value of this factor can vary substantially between provinces and between income groups; a particularly insidious adjustment (decreasing the factor by about 0.1) results if the taxpayer is subject to OAS clawback. Illustrative figures are shown in Tables 1-3 with marginal rate figures supplied by Ernst & Young as of 2011-1-15 (see http://www.ey.com/CA/en/Services/Tax/Tax-Calculators-2011-Personal-Tax); please consult your personal tax advisor to confirm the rate appropriate for you.

    Why are you underweight perpetuals in your fund (about 10 to 15% I think)

    As of October month-end the fund held about 21% in Straight Perpetuals, comprised of 12.1% PerpetualDiscount and 8.9% DeemedRetractibles. This is slightly in excess of the weights for both the BMO-CM “50” index and TXPR.

    A neutral setting would be exactly equal to index weight. The fund’s objective is to outperform its benchmark index; any variance from this is a question of taking a view on relative valuation.

    Which is not to say that the composition doesn’t vary at all: at the end of 2016, for instance, the fund was 12.2% invested in Straights.

    just a decade ago you held most value in perpetuals.

    A decade ago there was no significant population of FixedResets.

    Doesn’t the higher interest rate risk kind of neutralize the credit risk in perpetuals by higher coupons, in pretty much all times?

    I don’t understand what this means.

    Given that the Central Banks just might not go higher than a couple or three rate hikes before this business cycle goes kaput, wouldn’t it make sense to be overweight perpetuals?

    That would be taking a view, and a very strong one, based on nothing more than opinion. That’s not what I do.

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