Good news from the justice system!
After a 17-year court battle, an Ontario judge has ruled in favour of retail investors who suffered losses as two Canadian companies had let big investors make profitable, improper trades in a number of their funds.
Ontario Superior Court Justice Markus Koehnen in February found that both CI Mutual Funds Inc. and AIC Limited, which is now known as AIC Global Holdings Inc., breached their duty of care to prevent market-timing trades in their funds.
…
The class action includes any investors who held money in AIC funds from Jan. 1, 1999, to Sept. 30, 2003, or CI Mutual funds from Sept. 1, 1998, to Sept. 30, 2003. Counsel for the plaintiffs estimate damages to investors could total as much as $674-million.“There was ample evidence before me to demonstrate that the standard of care during the class period required the defendants to be aware of the dangers of frequent trading in and out of their funds and take reasonable steps to prevent it,” Justice Koehnen said in the court decision. “The harm that frequent trading causes to long-term unitholders has been known for decades.”
…
Justice Koehnen said in his decision that mutual fund prospectuses – documents that are provided to investors upon purchasing a fund – warned that frequent trading caused harm to funds and could result in fees of up to 2 per cent being charged to participants.Despite the contents of their prospectuses, the defendants not only failed to take steps to prevent frequent trading or charge the fees set out in their prospectuses when it occurred, they facilitated the practice by entering into “switch agreements” that allowed certain investors to switch in and out of funds for a much lesser fee of only 0.2 per cent.
The press always gets the issue wrong. The issue isn’t frequent trading, per se, but allowing trades based on stale prices. The fund companies were either crooked or stupid: I don’t care which, I’m just hoping they get bankrupted by the judgement.
The New York Fed has updated the Global Supply Chain Pressure Index:
- Global supply chain pressures decreased considerably in February and are now below the historical average.
- There were significant downward contributions by the majority of the factors, with the largest negative contribution from European Area delivery times.
- The GSCPI’s recent movements suggest that global supply chain conditions have returned to normal after experiencing temporary setbacks around the turn of the year.
BIS has released a working paper by Sonya Zhu titled Volume dynamics around FOMC announcements:
Focus
From 1994 to 2011, about 80% of excess returns in the equity market could be obtained in the 24 hours before scheduled Federal Open Committee (FOMC) announcements. In the standard economic paradigm, price is determined through trading between buyers and sellers. The 1987 market crash demonstrated that the mechanics of trading can significantly affect market prices. To shed light on the price formation process, this paper studies the volume dynamics around FOMC announcements.Contribution
I quantify the volume changes in the stock market around FOMC announcements using intraday data. Most studies that analyse the impact of FOMC announcements on the stock market concentrate on price dynamics. In comparison, the evidence on volume dynamics is scant. I also link the FOMC volume dynamics to a theory of discretionary liquidity trading. Lastly, I examine the FOMC volume dynamics for individual stocks and link it to firm characteristics.Findings
Turnover volume in the stock market decreases before FOMC announcements and increases afterward. Additionally, absolute order imbalance increases ahead of FOMC announcements, especially when the announcements are accompanied by policy rate changes. These findings are consistent with a theory in which some liquidity traders strategically choose to avoid trading at times when private information is present in the market. The FOMC volume dynamics are also found to be more pronounced for stocks that are more exposed to discretionary liquidity trading. On average, one third of the pre-FOMC price drift can be attributed to the volume dynamics and liquidity shocks.Abstract
The stock market volume decreases in anticipation of FOMC announcements and increases afterward. I develop a stylized model and attribute the volume dynamics to discretionary liquidity trading resulting from the presence of private information. Consistent with the model’s prediction, I find information asymmetry increases ahead of FOMC announcements, especially before policy rate changes. Using firm-level high-frequency data, I also find, in the cross-section, that volume changes around these events are particularly stronger for stocks that are more exposed to discretionary liquidity trading. Volume dynamics and liquidity shocks can explain around one third of the pre-FOMC price drift
The Boston Fed has released a Research Department Working Paper by Lara Loewenstein and Paul S. Willen titled House Prices and Rents in the 21st Century:
This paper introduces a framework for interpreting fluctuations in house prices using a new data set of transactions involving single-family and small multifamily homes. The data set includes information on owner- and renter-occupied properties, and it includes sale and rent transactions. The data enable the authors to measure price growth on both types of properties and to calculate a price-to-rent ratio using only renter-occupied properties—properties that are explicitly comparable.
The authors look at the potential drivers of house-price and rent movements during their sample period of 2001 through 2021. These include increases in preferences for housing (preference shocks) and beliefs about future house-price price growth (expectation shocks). Expectation shocks, which generate self-fulfilling price increases, are often the cause of housing bubbles.
While each of the shocks that the authors examine can increase house prices, their implications for the prices of renter-occupied housing, owner-occupied housing, and rent differ. By examining changes in rent, in the price-to-rent ratio, and in the ratio between the prices of owner-occupied houses and renter-occupied houses (the price-to-price ratio), the authors assess which type of shock can best explain the house-price booms of the early 2020s and the early 2000s.
Key Findings
The sources of growth in house prices varied during the sample period. Early in the period, the price-to-rent ratio and the price-to-price ratio determined house-price growth, while rent growth was relatively minimal. But in the latter years, rent growth became more important and was the main driver of house-price growth during the boom at the start of this decade.
According to theory, positive expectation shocks raise the price-to-rent ratio as households and investors buy houses partly in anticipation of future capital gains. Expectation shocks are a plausible explanation for the boom of the 2000s but not for the boom of the 2020s.
An increase in preferences for housing raises both rents and houses prices, according to theory, leaving the price-to-rent ratio unchanged. As noted above, rent growth was the main driver of house-price growth at the start of this decade. The authors find that of the 15 percentage point growth in house prices in 2021, about two-thirds came from nominal rent growth and only about one-quarter came from growth in the price-to-rent ratio. They therefore conclude that a preference shock is a plausible explanation for the boom.
US factory orders fell, but but by less than expected:
Factory orders dropped 1.6% after increasing 1.7% in December. Economists polled by Reuters had forecast orders declining 1.8%. Orders rose 4.3% on a year-on-year basis in January.
…
The drop in factory orders in January mostly reflected a 13.3% decline in transportation equipment, which followed a 15.8% jump in December. Transportation equipment orders were weighed down by a 54.5% tumble in orders for civilian aircraft. Motor vehicle orders increased 1.3%.Orders for machinery shot up 1.6%, while bookings for computers and electronic products rose 0.6%. Orders for electrical equipment, appliances and components surged 1.3%. There were also gains in orders for primary metals, fabricated metal products, as well as defense aircraft.
Shipments of manufactured goods increased 0.7%, the biggest gain since August, after falling 0.6% in December. The stock of manufactured goods at factories was unchanged after rising 0.4% in December. While that bodes well for future production, that could chip at gross domestic product this quarter.
Unfilled orders at factories were unchanged as a jump in unfinished work for computers and related products were offset by decreases in consumer goods.
| 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 | 0.0000 % | 2,556.4 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0000 % | 4,903.1 |
| Floater | 8.82 % | 9.02 % | 50,703 | 10.24 | 2 | 0.0000 % | 2,825.7 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.4397 % | 3,342.7 |
| SplitShare | 5.03 % | 7.00 % | 52,809 | 2.74 | 7 | -0.4397 % | 3,991.9 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.4397 % | 3,114.6 |
| Perpetual-Premium | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.4071 % | 2,750.7 |
| Perpetual-Discount | 6.20 % | 6.34 % | 62,899 | 13.38 | 35 | 0.4071 % | 2,999.5 |
| FixedReset Disc | 5.43 % | 7.78 % | 88,196 | 11.75 | 61 | -0.3143 % | 2,261.6 |
| Insurance Straight | 6.14 % | 6.23 % | 89,212 | 13.64 | 20 | -0.0273 % | 2,924.9 |
| FloatingReset | 9.79 % | 10.05 % | 32,810 | 9.58 | 2 | -0.1566 % | 2,587.6 |
| FixedReset Prem | 6.54 % | 6.38 % | 219,928 | 3.97 | 2 | -0.0980 % | 2,364.6 |
| FixedReset Bank Non | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.3143 % | 2,311.8 |
| FixedReset Ins Non | 5.31 % | 7.26 % | 69,643 | 12.11 | 13 | -0.3737 % | 2,444.0 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| SLF.PR.C | Insurance Straight | -1.85 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 18.60 Evaluated at bid price : 18.60 Bid-YTW : 6.00 % |
| BIP.PR.E | FixedReset Disc | -1.78 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 22.06 Evaluated at bid price : 22.64 Bid-YTW : 7.27 % |
| BN.PR.X | FixedReset Disc | -1.69 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 15.74 Evaluated at bid price : 15.74 Bid-YTW : 8.38 % |
| PVS.PR.K | SplitShare | -1.57 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2029-05-31 Maturity Price : 25.00 Evaluated at bid price : 22.00 Bid-YTW : 6.88 % |
| BIP.PR.F | FixedReset Disc | -1.42 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 20.85 Evaluated at bid price : 20.85 Bid-YTW : 7.76 % |
| BN.PR.T | FixedReset Disc | -1.31 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 15.10 Evaluated at bid price : 15.10 Bid-YTW : 8.93 % |
| BN.PF.B | FixedReset Disc | -1.20 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 18.07 Evaluated at bid price : 18.07 Bid-YTW : 8.62 % |
| TRP.PR.G | FixedReset Disc | -1.16 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 17.11 Evaluated at bid price : 17.11 Bid-YTW : 8.63 % |
| IFC.PR.G | FixedReset Ins Non | -1.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 21.60 Evaluated at bid price : 21.60 Bid-YTW : 7.24 % |
| MFC.PR.Q | FixedReset Ins Non | -1.12 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 21.25 Evaluated at bid price : 21.25 Bid-YTW : 7.26 % |
| BMO.PR.T | FixedReset Disc | -1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 17.53 Evaluated at bid price : 17.53 Bid-YTW : 8.09 % |
| FTS.PR.F | Perpetual-Discount | 1.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 20.20 Evaluated at bid price : 20.20 Bid-YTW : 6.12 % |
| FTS.PR.G | FixedReset Disc | 1.05 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 18.34 Evaluated at bid price : 18.34 Bid-YTW : 7.84 % |
| SLF.PR.G | FixedReset Ins Non | 1.07 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 13.25 Evaluated at bid price : 13.25 Bid-YTW : 8.46 % |
| GWO.PR.M | Insurance Straight | 1.26 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 23.03 Evaluated at bid price : 23.30 Bid-YTW : 6.23 % |
| RY.PR.O | Perpetual-Discount | 1.49 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 22.22 Evaluated at bid price : 22.50 Bid-YTW : 5.48 % |
| BMO.PR.Y | FixedReset Disc | 1.50 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 18.93 Evaluated at bid price : 18.93 Bid-YTW : 7.67 % |
| CU.PR.H | Perpetual-Discount | 3.50 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 21.29 Evaluated at bid price : 21.29 Bid-YTW : 6.22 % |
| POW.PR.A | Perpetual-Discount | 4.14 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 22.11 Evaluated at bid price : 22.39 Bid-YTW : 6.35 % |
| CU.PR.F | Perpetual-Discount | 4.92 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 18.56 Evaluated at bid price : 18.56 Bid-YTW : 6.11 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.Z | FixedReset Disc | 90,100 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 17.95 Evaluated at bid price : 17.95 Bid-YTW : 7.93 % |
| BMO.PR.E | FixedReset Disc | 68,584 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 21.51 Evaluated at bid price : 21.85 Bid-YTW : 7.17 % |
| TRP.PR.A | FixedReset Disc | 52,092 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 14.45 Evaluated at bid price : 14.45 Bid-YTW : 9.10 % |
| IAF.PR.I | FixedReset Ins Non | 41,300 | YTW SCENARIO Maturity Type : Call Maturity Date : 2023-04-30 Maturity Price : 25.00 Evaluated at bid price : 24.91 Bid-YTW : 4.98 % |
| GWO.PR.N | FixedReset Ins Non | 36,000 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 12.36 Evaluated at bid price : 12.36 Bid-YTW : 8.61 % |
| BMO.PR.T | FixedReset Disc | 35,005 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2053-03-06 Maturity Price : 17.53 Evaluated at bid price : 17.53 Bid-YTW : 8.09 % |
| There were 15 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| CM.PR.Q | FixedReset Disc | Quote: 19.10 – 20.50 Spot Rate : 1.4000 Average : 0.8837 YTW SCENARIO |
| TRP.PR.A | FixedReset Disc | Quote: 14.45 – 15.48 Spot Rate : 1.0300 Average : 0.5759 YTW SCENARIO |
| SLF.PR.D | Insurance Straight | Quote: 18.71 – 19.80 Spot Rate : 1.0900 Average : 0.7077 YTW SCENARIO |
| PWF.PR.T | FixedReset Disc | Quote: 19.10 – 20.10 Spot Rate : 1.0000 Average : 0.6370 YTW SCENARIO |
| BN.PR.K | Floater | Quote: 13.35 – 14.35 Spot Rate : 1.0000 Average : 0.6764 YTW SCENARIO |
| IFC.PR.E | Insurance Straight | Quote: 21.35 – 21.98 Spot Rate : 0.6300 Average : 0.4016 YTW SCENARIO |
Hi,
If we are entering a 1980’s style of inflation (some say this will be an inflationary decade), how will preferreds in perform? Were there many preferreds back in the 80’s and how did they do?
Thx
Ferris
James would know better for sure, but the oldest preferred that I know of is BN.PR.B issue in 11-1984 at the price of $25. Yesterday it closed at $13.37, the max price looked that was in 07-2007 at $24.98 and the min in 06-2020 at $7.74. BOC inflation calculator says that $25 from 1984 should be around $65 today. There is a reason why it has not been redeem yet and it is not hard to guess it.
Just wondering if anyone has any opinion on RBC proposition to increase its preferred shares limit from 20b to 30b:
https://www.rbc.com/investor-relations/_assets-custom/pdf/2023englishproxy.pdf
Page 8
I am wondering if this should be seen as neutral or negative for current RBC pref holders. Maybe there are some hidden implications that I do not see. Thanks for any input
Sabbagh’s question brings back memories of my dad, who was active in the ’80s, but the action was entirely about bonds and short-term T-bills. I never heard of a “preferred share market” during those years. Perhaps James will know better but I rather doubt we can learn much about pref behaviour from the 1980s. It’s also interesting that James’s historical overview (“Preferred Share Information”) lists only 4 companies (Argus, Alcan, Brookfield and Power Financial) with prefs going back to 1986 or earlier, and not surprisingly, given the extreme inflationary environment, the ones issued in the 80s were all floaters. BN.PR.B and PWF.PR.A are the extant survivors.
DrSpinz , i saw that in my proxy materials , it sounds to me they maybe are expecting stricter/ higher capital limits to be imposed so they are getting approval in advance for issuing more pref instead of common . another possibility , they are planning a big $ takeover , and getting prior approval for financing flexibility . there are lots of ways they could raise funds , common , debt , pref . so maybe i am wrong , but i see this as them maintaining their financing flexibility
BN.PR.B issue in 11-1984 at the price of $25…
nice …. 39 years of paying dividends every quarter. i wonder what that adds up to
@Nestor Re: “wonder what that adds up to”. I just estimated. The sum of all estimated nominal dividend amounts for BN.PR.B since issuance is roughly $39.
Had each year’s dividends been invested to preserve purchasing power for subsequent years (using the “All items” series from Statistics Canada CPI table 18-10-0005-01), the dividends would be equivalent to roughly $66 in 2022 dollars. I got to wondering what the total value might be if all dividends had instead been re-invested in BN.PR.B itself but I’m lacking the historical price data needed to figure that out. 😀
cwrea says:
March 7, 2023 at 5:45 pm
that’s interesting. thanks. there have been some pretty wild swings in these two shares over the years. let’s see how higher rates for longer affect prices. i would have thought investors would be buying floaters and fixed resets by the truckload by now, considering what kind of yields you’re getting. oh well. i’m perfectly happy to collect the dividends for now even if prices don’t “normalize” whatever that means these days.
i’m able to see a chart of pwf.pr.a as far back as 1990.
(sorry, didn’t finish) … maybe i do a back of the envelope calculation from then to see what plowing back the dividends annually might mean overall ..