PrefBlog

Interesting article about the R&D Tax Credits:

Open Text Corp. chairman Tom Jenkins, who spent the past year investigating Canada’s R&D spending, said he was stunned at how little effort is spent figuring out what works, and what doesn’t.

That’s true of all government programmes – particularly securities regulation, I might say. If it sounds good, do it! is the slogan, and if you go back to something after five years and find out it’s done nothing – or made matters worse – in order to change the programme … well, that would look like you made a mistake, so don’t check.

Europe is having some success in gaining the ability to manipulate sovereign debt markets:

The European Union reached a deal as part of a short-selling law that will pave the way for an optional ban on naked credit-default swaps on sovereign debt.

Poland, which holds the rotating presidency of the EU, and lawmakers from the European Parliament, reached the accord at a meeting in Brussels, EU spokeswoman Chantal Hughes said.

Under today’s deal, traders may be prevented from buying CDS on government bonds unless they either own the sovereign debt or other assets whose price moves in tandem with it. Nations will have the right to opt out of the measure if they detect signs that it may affect their borrowing costs.
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German Finance Minister Wolfgang Schaeuble and lawmakers in the European Parliament have called for a ban on naked CDS trades on government debt over concerns the practice fueled the euro zone’s debt crisis. Germany already has restrictions on using swaps to bet on sovereign defaults.

Some European governments have also criticized the use of short selling to bet against bank stocks, arguing that the practice has roiled markets. Volatility that sent European bank stocks to two-year lows led France, Spain, Belgium and Italy in August to impose temporary bans on short selling that remain in force.

I’m not sure that this will have any effect – buying protection naked is simply a convenient way to short bonds. Sovereigns are, as a rule, fairly easy to borrow and therefore also fairly easy to short. Forward and Futures contracts are also generally available.

Moody’s cut Spain two notches:

Spain’s credit rating was cut for the third time since June 2010 by Moody’s Investors Service as Europe’s sovereign-debt crisis threatens to engulf the nation.

Moody’s reduced its ranking to its fifth-highest investment grade, cutting it by two levels to A1 from Aa2, with the outlook remaining negative, the rating company said in a statement today. Standard & Poor’s downgraded Spain on Oct. 14 to its fourth-highest investment grade after Fitch Ratings cut it to the same level on Oct. 7, the day it also downgraded Italy.

Spain continues to be vulnerable to market stress and event risk while already moderate growth prospects for the nation have been scaled back further, Moody’s said in the statement.

Tomorrow’s report will be greatly delayed because I’m going to go see Chess again. Yes, I know that when I reviewed it on October 7 I said I didn’t like the production … but six months ago when I heard it was coming to town, I decided that if I was going to wait twenty-five years to see a show, I was damn well going to see it twice.

It was a negative day for the Canadian preferred share market, with PerpetualDiscounts losing 18bp, FixedResets down 11bp and DeemedRetractibles off 6bp. Volatility was mild. Volume was heavy.

Say what you like about the Occupy Wall Street crowd, there can be no doubt about their realism and effectiveness:

About 1,000 people gathered in the heart of Toronto’s financial district beginning at 10 a.m. local time to protest inequality and advocate higher taxes for the wealthy. About an hour later, organizers began moving the demonstration to nearby St. James Park.

“To see people take action like this is amazing,” said Neal Hamell, a student from London, Ontario, who traveled to Toronto today to join the protests. “I’d like to see change. If this doesn’t do anything, then something is wrong with the world.”

I understand that on Wednesday they’re going to bring peace to the Middle East, but have not yet decided what to do in the afternoon.

Sparks are flying over the Tobin Tax:

German Chancellor Angela Merkel criticized governments including President Barack Obama’s administration for refusing to make the financial sector pay for the global financial crisis, and vowed to push for a financial transaction tax until it applies at least in Europe.

“It’s not acceptable that especially those outside the euro region, who are time and again pushing us to take broad- based action to manage the debt crisis, are at the same time flatly refusing to impose a financial transactions tax,” Merkel said at a labor union congress in the city of Karlsruhe yesterday. “I think this is not okay. We want, and we have to make, financial market participants contribute to the costs of crisis management.”

SLF is forecasting a big loss for 11Q3:

Sun Life Financial Inc. (TSX: SLF) (NYSE: SLF) announced preliminary estimates for the third quarter of 2011. The Company expects to report a loss of $621 million for the quarter. On an operating basis, the loss is expected to be $572 million. Results for the third quarter include losses related to substantial declines in both equity markets and interest rate levels, which particularly impacted the individual life and variable annuity businesses in SLF U.S. The third quarter was a period of exceptional market volatility. North American equity markets dropped by 12% – 14%, while yields on fixed income securities fell amid economic uncertainty in the European Union and U.S. monetary policy actions aimed at lowering interest rates on long-term treasuries. In the U.S., treasury rates reached historic lows, with 30-year yields down 146 basis points to 2.91%. Under the Canadian insurance accounting model, the future impact of September 30, 2011, market conditions is reflected in our current period results.

Losses from equity market and interest rate movements were at the high end of the ranges previously disclosed in the Company’s Management’s Discussion and Analysis for the second quarter of 2011. Key drivers which resulted in market impacts at the high end of the estimated ranges included uneven movements across the yield curve and the impact of large, simultaneous movements in both interest rates and equity markets. Updates to the Company’s actuarial methods and assumptions, which generally take place in the third quarter of each year, contributed approximately $200 million to the loss. Sun Life Assurance Company of Canada remains well capitalized, with a Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio that is estimated to be approximately 210% as at September 30, 2011.

The Company currently expenses hedging costs for variable annuities and segregated funds in the period in which they are incurred. In the fourth quarter of 2011, the Company plans to make a method and assumption change related to the valuation of its variable annuity and segregated fund liabilities whereby it will provide for the estimated future lifetime hedging costs of these contracts in its liabilities. This change is expected to result in a higher level of future earnings from in-force contracts than would be the case using the current methodology. The impact of this change on the net income of the Company in the fourth quarter will depend on interest rates and other market conditions as at December 31, 2011, as well as further refinements to the valuation methodology. If this change was made under current market conditions the expected one-time reduction in fourth quarter net income is estimated to be approximately $500 million. The impact of this change on the MCCSR ratio of Sun Life Assurance is expected to be positive, as the increase in variable annuity and segregated fund liabilities will reduce the amount of regulatory required capital for these products.

How ’bout those Germans, eh? Refusing to write Europe a blank cheque!

.Germany said European Union leaders won’t provide the complete fix to the euro-area debt crisis that global policy makers are pushing for at an Oct. 23 summit.

German Chancellor Angela Merkel has made it clear that “dreams that are taking hold again now that with this package everything will be solved and everything will be over on Monday won’t be able to be fulfilled,” Steffen Seibert, Merkel’s chief spokesman, said at a briefing in Berlin today. The search for an end to the crisis “surely extends well into next year.”

Group of 20 finance ministers and central bankers concluded weekend talks in Paris endorsing parts of Europe’s emerging plan to avoid a Greek default, bolster banks and curb contagion. Providing a week to act, they set the Oct. 23 meeting of European leaders in Brussels as the deadline.

Lapdog Carney’s getting a lot of press, shilling for his political master.

Fortis Alberta issued 30-year paper at 4.54%.

It was a mixed day in the Canadian preferred share market, with PerpetualDiscounts winning 23bp, FixedResets up 2bp and DeemedRetractibles losing 13bp. Insurers figured prominently on the wrong side of the performance table, presumably due to Sun Life’s announcement. Volume was above average.

DBRS has released its 11Q3 Review of the SplitShares Market.

The Europeans may be facing reality:

European officials are considering writedowns of as much as 50 percent on Greek bonds, a backstop for banks and continued central bank bond purchases as key planks in a revamped strategy to combat the debt crisis, people familiar with the discussions said.

The Greek bond losses may be accompanied by a pledge to rule out debt restructurings in other countries that received bailouts, such as Portugal, to persuade investors that Europe has mastered the crisis, said the people, who declined to be identified because the negotiations will run for another week.

And you see that? They’ll pledge that this will be absolutely the last time! We’re saved!

However, they have take decisive steps to prove they’re the same old clowns:

The European Union may impose position limits for commodities derivatives and curbs on high- frequency trading as part of plans to overhaul the region’s financial-market rules.

The European Commission, the 27-nation EU’s executive arm, is seeking limits on the number of commodity derivative contracts “any given market members or participants can enter into over a specified period of time, or alternative arrangements” with the same impact, according to copies of proposals set for release on Oct. 20 that were obtained by Bloomberg News.
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Algorithmic and high-frequency trading can give rise to risks such as systems “overreacting” to market events and causing “volatility” according to the draft EU measures. These types of trading can also lend themselves to “certain forms of abusive behavior if misused.”

Planned measures include requiring high-frequency trading firms to prove that they have sufficient risk controls in place and to ensure that clients with direct access to the markets are “properly qualified.”

“Detailed organizational requirements regarding these new forms of trading” will be set out in subsequent EU laws, according to the documents. The EU also plans to list specific examples of trading strategies that should be banned and punished by regulators as market manipulation.

On market abuse, the EU proposals include ensuring that firms found guilty of illegal practices can be fined up to ten percent of annual sales, and that criminal sanctions can be used against traders.

“requiring high-frequency trading firms to prove that they have sufficient risk controls in place”! Hah! There’s a good little avenue for regulatory extortion right there! That is not a thing susceptible to proof – you show me a system that’s 99.999999% effective, then it’s a trivial matter for me to show you the 99.9999995 percentile. However, the demagoguery will serve to distract attention from the mess the politicians have made of sovereign finances, so who cares?

Now that his boss has provided the script, Lapdog Carney is eager to show his loyalty:

The Occupy Wall Street demonstrations and other expressions of frustration with the global economic and financial system highlight the need for policy makers to show they are serious about forcing change, Bank of Canada governor Mark Carney says.

This is all about protests across Canada, intended to raise awareness about what Good People the protesters are. I understand that afterwards they’re going to have a Slut Walk!

It was another strong day for the Canadian preferred share market, with PerpetualDiscounts winning 38bp, FixedResets up 26bp and DeemedRetractibles gaining 27bp. Volatility was good. Volume was a touch on the light side.