PrefBlog

There was a good US jobs number:

American employers added more workers than forecast in October and a rush of people entering the labor force pushed the jobless rate higher, according to the last report on the labor market before next week’s presidential election.

Broad-based gains in employment — from car dealers and hospitals to factories and construction sites — indicate consumers are likely to spend more freely and shore up the three-year expansion in the face of a global economic slowdown and political gridlock in Washington over taxes and spending.

Hiring increased by 171,000 workers after a 148,000 gain in September that was bigger than first estimated, Labor Department figures showed today in Washington. October’s increase exceeded the most optimistic forecast in a Bloomberg survey with a median projection of a 125,000 gain. Unemployment rose to 7.9 percent.

Federal Reserve Bank of San Francisco President John Williams spoke in defense of QE3 today:

Concern that large-scale asset purchases “might ignite a bout of inflation” are unwarranted because price increases are being held in check by elevated unemployment and an economy that “isn’t operating at full speed,” Williams said.

“Unemployment is — and should be — a central focus of monetary policy right now,” Williams said. “This concentration on getting unemployment down in no way represents a lessening of the importance of price stability,” he said, adding that inflation may slow well below the Fed’s 2 percent goal if the U.S. recovery falters.

Williams said central bank purchases of bonds will help spur U.S. economic growth to 2.5 percent next year and 3.5 percent in 2014 while not fueling inflation.

“Our policy measures are having the desired effects,” Williams said today in remarks prepared for a speech in Salt Lake City. “We have substantial scope to use monetary policy to stimulate the economy without creating too much upward pressure on prices.”

It was a modestly good day for the Canadian preferred share market, with PerpetualPremiums up 9bp, FixedResets flat and DeemedRetractibles gaining 8bp. Volatility was at normal levels, all to the upside with a preponderance of insurance issues. Volume was below average.

Today we had a demonstration of the Law of Conservation of Hardware Manufacturers. RIM had a good day:

RIM shares rallied 10 per cent on Thursday, as of late afternoon, sending them to their highest level since July. The jump followed an update on its BlackBerry 10 device on Wednesday: RIM is testing the new smartphone among 50 wireless carriers, marking a big step toward launching the product early next year – likely some time between January and April.

Scott Anthony of Bloomberg has some colour on why RIM isn’t dead yet:

RIM’s proprietary network and tightly interconnected system allow it to use data incredibly efficiently. Here’s one illustration. The other week I was on an 18-hour flight between Newark and Singapore. Singapore Airlines has started rolling out Internet connectivity on this flight. It isn’t cheap, running $1 per megabyte of data. I didn’t dare turn on my iPhone, or open up Outlook, but I thought going to Web mail would be safe. 15 minutes later I had a $15.30 bill. Then I remembered the Blackberry in my bag. I connected it to the WiFi network, and had roughly 14 hours of email connectivity. By the end of the trip my bill had gone from $15.30 to $15.45.

… and Sharp had a bad one:

Sharp Corp. (6753), the world’s worst- performing major stock, dropped in Tokyo trading after forecasting a record $5.6 billion full-year loss and saying there is “material doubt” about its ability to survive.

The shares fell as much as 5.3 percent to 160 yen and changed hands at 163 yen as of 10:00 a.m., extending this year’s decline to 76 percent, the worst performer among more than 1,600 companies in the MSCI World (MXWO) Index.

Sharp follows Panasonic Corp. (6752) in predicting losses worse than analysts estimated after losing ground to Samsung Electronics Co. (005930) in TVs. Sharp has failed to win a planned 67 billion-yen ($835 million) investment from Taiwan’s Foxconn Technology Group and has had difficulty selling commercial paper as it burns through cash.

Samsung is eating everybody’s lunch … for now:

Samsung Electronics Co. (005930), the world’s biggest maker of TVs and mobile phones, reported record profit that beat analysts’ estimates and forecast intensifying competition as the global economy slows.

Net income in the three months ended Sept. 30 rose 91 percent to 6.56 trillion won ($6 billion), the Suwon, South Korea-based company said in a statement today. That compares with the 6.25 trillion-won average of 27 analyst estimates compiled by Bloomberg.

Operating profit from telecommunications more than doubled as Samsung’s Galaxy devices widened their lead over Apple Inc.’s iPhone. Samsung shares dropped amid concern growth in smartphone demand may have peaked after Apple (AAPL) reported earnings that missed estimates and Microsoft Corp. released its Surface tablet, escalating competition for mobile devices.

There’s some bad news for Canadian capital spending:

Suncor Energy Inc.’s three major oil sands projects are facing delays as soaring costs and competitive oil markets force the energy giant to join the growing ranks of Canadian resource companies pulling back from expensive growth plans.

Canada’s largest oil company said its planned Voyageur upgrader is “struggling” to make financial sense, its undeveloped Fort Hills bitumen mine has likely been delayed by about a year, and the timetable for its Joslyn mine remains up in the air. As Suncor reviews the economics of all three projects, it sliced its 2012 budget by 11 per cent.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums down 8bp, FixedResets off 2bp and DeemedRetractibles gaining 3bp. Volatility picked up a little, but it’s still pretty quiet! Volume was a little below average.

It has been a good year for corporate bond issuance:

Corporate bond sales surged to $3.3 trillion this year, challenging the record in 2009, as investors sought higher-yielding alternatives to government securities and companies took advantage of borrowing costs at all-time lows.

General Electric Co. (GE), the biggest maker of power-generation equipment, led issuers this month with a $7 billion bond offering, according to data compiled by Bloomberg. Along with software provider Oracle Corp. (ORCL)’s $5 billion sale, they paced $347 billion of bond issuance in October, a record for the month, and left sales about $116 billion shy of the $3.4 trillion reached by this time three years ago.
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Yields on bonds sold by companies around the world fell to a record 2.676 percent on Oct. 15 from 3.981 percent at the end of last year, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index.

In the spirit of Hallowe’en, here’s an illustration from an absolutely fascinating article titled Animal Mind Control:

DBRS confirmed Valener at Pfd-2(low) (VNR.PR.A):

DBRS has today confirmed Valener Inc.’s (Valener) Cumulative Rate Reset Preferred Shares, Series A at Pfd-2 (low), with a Stable trend. The rating is based on the credit quality of Valener’s 29%-owned Gaz Métro Limited Partnership (GMLP), which guarantees the First Mortgage Bonds (rated “A” by DBRS) of Gaz Métro inc. (GMi). GMi owns the remaining 71% of GMLP. GMLP’s core business is regulated natural gas distribution in Québec, which generates strong cash flow due to a supportive and stable regulatory environment. GMLP also benefits from cash flow diversification from its investments in energy distribution in Vermont and the pipeline business (see the rating report on Gaz Métro inc. dated October 31, 2012). Valener’s rating is one notch lower than the rating of GMi, reflecting its structural subordination to GMLP.

The assigned provisional rating is based on the following factors: (1) Strong and predictable cash flow from GMLP to Valener. GMLP has made cash distributions to its partners in an amount of over 90% of its net income, excluding non-recurring items, for most years over the last 20 years. (2) GMLP is expected to continue to maintain its distributions of at least 85% of its net income, excluding non-recurring items, as set out under the partnership agreement between Valener and GMLP (the Partnership Agreement). In the event that GMi, as general partner of GMLP, intends to distribute less than 85% of its net income, excluding non-recurring items, it would require the approval of at least 90% of GMi’s directors. (3) Valener’s non-consolidated debt-to-capital structure is expected to remain below 20%. If its non-consolidated debt leverage ratio is above 20%, Valener is expected to issue equity to bring the ratio back under the 20% threshold in a timely manner. (4) DBRS expects that the majority of Valener’s cash flow will be derived from GMLP. Any material investment carried out by Valener and not through GMLP could have a negative rating impact. (5) DBRS expects that Valener will maintain its 29% interest in GMLP and its pro rata representation on GMi’s board of directors.

The assigned rating incorporates the limited control of Valener over GMLP due to its limited partnership status. However, this limited control is mitigated by the distribution protection clause in the Partnership Agreement, as mentioned above.

DBRS confirmed Power Corporation at Pfd-2(high) (POW.PR.A, POW.PR.B, POW.PR.C, POW.PR.D, POW.PR.F, POW.PR.G):

DBRS has today confirmed the long-term and preferred shares ratings of Power Corporation of Canada (POW or the Company) at A (high) and Pfd-2 (high), respectively. The trend on the ratings remains Stable. The credit strength of POW is directly tied to its 66.1% equity interest in Power Financial Corporation (PWF; see separate press release), which represents a substantial majority of the Company’s earnings and cash flow, as well as 82% of the Company’s estimated net asset value as of June 30, 2012. The Senior Debt rating of the Company is A (high), or one notch below the AA (low) rating on the Senior Debentures of PWF, reflecting the structural subordination of the holding company’s obligations.

The Company remains exposed to the advice-centered distribution model of protection and wealth management products and services through its indirect investment in PWF’s major subsidiaries, Great-West Lifeco Inc. (GWO) and IGM Financial Inc. (IGM). Correspondingly, it is vulnerable to the financial market and economic volatility that affects asset management fees, required actuarial reserves tied to equity markets, and the level of interest rates, as well as credit loss provisions.
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As the controlling shareholder of PWF, and, by extension, of GWO and IGM, POW defines the strategic vision for its financial services investments, while setting the “tone from the top” in terms of conservative management style and risk analysis and tolerance. The Company’s senior officers and delegates exercise a greater degree of influence through their active participation on the respective boards and board committees of POW’s various subsidiaries than is generally the case at more widely held companies. Such an integrated management and governance approach is seldom encountered, and it has served the Company’s stakeholders well.

On a stand-alone basis, POW’s financial profile is very conservative, with debt and preferred shares representing just 13.1% of capitalization, albeit up from 7.9% at year-end 2007. There is no double leverage in the Company’s capital structure as only shareholders’ equity, and not the proceeds from debt or preferred shares, is invested in the Company’s investment portfolio. Financial leverage appears to be used to fund a portfolio of cash and short-term investments and a modest level of working capital.

DBRS confirmed PWF at Pfd-1(low) (PWF.PR.A, PWF.PR.E, PWF.PR.F, PWF.PR.G, PWF.PR.H, PWF.PR.I, PWF.PR.K, PWF.PR.L, PWF.PR.M, PWF.PR.O, PWF.PR.P and PWF.PR.R):

DBRS has today confirmed the long-term and preferred shares ratings of Power Financial Corporation (PWF, the Company or the Group) at AA (low) and Pfd-1 (low), respectively. The rating trends remain Stable. The financial strength of PWF is largely derived from its controlling interests in two of Canada’s leading financial service providers: Great-West Lifeco Inc. (GWO – senior rating of AA (low)), one of the three largest life insurance concerns in Canada, and IGM Financial Inc. (IGM – senior rating of A (high)), one of the largest mutual fund complexes in Canada as measured by long-term assets under management (AUM) on June 30, 2012. These two interests, accounting for approximately 90% of the Company’s earnings, dividends and asset value, are a source of stable recurring earnings and cash flow. Under the strategic leadership of the Company, both GWO and IGM have become increasingly diversified as they have grown both organically and by acquisition. The Company has correspondingly increased its exposure to the wealth management business in all of its chosen geographies. Both of these subsidiaries, in turn, benefit from the Company’s hands-on governance, and risk-averse culture.
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Given an uncertain economic environment that could limit organic growth, DBRS expects that PWF will take advantage of its strong financial position to pursue small tactical acquisitions in the financial services arena. Pressures on regulatory capital adequacy could conceivably encourage a number of financial institutions to sell certain business lines at opportunistic prices, which would complement and leverage those of the Company. For example, achieving additional scale in Putnam through the acquisition of incremental AUM with a shared distribution channel would bring its financial results closer to the Company’s original target while supporting broader growth initiatives. That PWF retains the ability to consider such value-added acquisitions in the current environment is a testament to its conservative financial profile and its long-term perspective.
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The Company’s financial leverage has been maintained at the same level for the past ten years. At a 17.6% unconsolidated total debt ratio at the end of June 2012, the Company’s capitalization remains conservative, with no double leverage when the perpetual preferred shares are treated as permanent equity. Debt service coverage ratios are similarly strong at between 13 and 15 times on an operating earnings basis and between 8 and 9 times on a cash flow basis. Liquidity is not a source of concern, with close to $1 billion in cash and short-term securities at the holding company at June 30, 2012, in addition to stores of liquidity at both GWO and IGM with which to shore up regulatory capital or to facilitate potential strategic acquisitions. Such retention of liquid assets in the current uncertain economic environment reflects a unified and consistent approach to risk management across the organization. Financial flexibility is additionally enhanced by the proven access by the Company and its investee companies to capital markets funding, notably perpetual preferred shares.

The Canadian preferred share market closed the month on a high note, with PerpetualPremiums up 12bp, FixedResets gaining 2bp and DeemedRetractibles winning 24bp. Given the surge, it was surprising that volatility was so muted. Volume was above average.

PerpetualDiscounts now yield 4.93%, equivalent to 6.41% interest at the standard equivalency factor of 1.3x. Long corporates are now at about 4.3%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now 210bp, a slight (and perhaps spurious) increase from the 205bp reported October 24.

Sandy did some damage:

Citigroup Inc. (C), the third-largest U.S. bank, said its offices at 111 Wall St. will be unusable for weeks after Hurricane Sandy battered lower Manhattan with water and power outages.

“The building experienced severe flooding and will be out of commission for several weeks,” Chief Executive Officer Michael Corbat wrote in a memo to employees today.

The New York-based firm is still assessing when buildings at 388 and 390 Greenwich St. can reopen, a process complicated by power and transit outages, he said.

It was a mixed day for the Canadian preferred share market, with PerpetualPremiums gaining 5bp, FixedResets off 3bp and DeemedRetractibles up 11bp. Volatility was non-existent. Volume was extremely low.

UBS is cutting way back on investment banking:

UBS AG (UBSN), Switzerland’s largest bank, will cut as many as 10,000 jobs companywide as the trading business shrinks, a person with knowledge of the plan said.

The bank had about 63,250 employees as of June 30, according to its most recent financial report, which means the staff cut could equal 16 percent. UBS already announced it is reducing risk-weighted assets at the investment bank by more than half from September 2011 levels, mostly in fixed income.

The plan will lead to a further reduction of as much as 100 billion Swiss francs ($107 billion) of risk-weighted assets, the person said. Much of the fixed-income operations will be put in a new unit that will hold non-core assets, and [investment-bank co-head Carsten] Kengeter will probably give up his current role to head the new unit, the person said.

There are threats of turmoil in Italy:

Former Italian prime minister Silvio Berlusconi said his party, the biggest in parliament, may end support for Premier Mario Monti’s government because its policies are deepening the country’s recession.

The People of Liberty party needs to consider that “with a no-confidence vote by us, we would determine a situation that would be interpreted in a certain way by the financial markets and would cause early elections,” Berlusconi, 76, told reporters yesterday near Milan. “We will consider these facts and decide whether to immediately withdraw our support of the government.”
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“It’s impossible to say what is in Berlusconi’s head now, but if he decides to end his support to Monti, early elections become almost inevitable,” said Roberto D’Alimonte, a professor of politics at Rome’s LUISS University. “Berlusconi would lose the elections anyway, but would likely get more votes thanks to an anti-austerity platform and that would increase his party’s bargaining power in the next parliament.”
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Monti is still implementing some of the steps aimed at containing debt and keeping the deficit under 3 percent of gross domestic product this year. Industrial output unexpectedly rose in August, signalling the recession may be easing and consumer confidence gained this month as the government announced tax cuts for the lowest earners to offset the effect of an increase on the value-added levy in 2012.

Government micro-management of the mortgage market is getting popular:

The monetary policy committee, led by Governor Stanley Fischer, cut the rate by a quarter-point to 2 percent, the Jerusalem-based bank said on its website today. None of the 24 economists surveyed by Bloomberg predicted the decision.
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The Bank of Israel also released, together with the rate decision, new draft directives aimed at cooling the mortgage market, which are expected to go into effect on Nov. 1. The directives limit mortgages to 70 percent of the value of the home, with the exception of new home buyers, who will be permitted to borrow up to 75 percent.

I will admit that I was inclined to be rather contemptuous of today’s shut-down of the NYSE – until I saw this picture from Manhattan:

Click for Big

This has had an effect on power supply:

Con Edison shut down power to parts of downtown Manhattan, including Wall Street and the nation’s financial nerve center, as the storm surge, boosted by high tide, sent saltwater pouring into its underground power network.
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About 250,000 customers in Manhattan were without power as of 9 p.m. on Oct. 29 local time after flooding in substations caused outages from the lower tip of the island to East 39th Street, the utility said in a statement. It may need to cut power in additional areas of downtown, as well as in parts of Brooklyn, Queens and the Bronx due to record tides and surge from Sandy,the utility said in a separate statement last night.

It was a day of very little price movement for the Canadian preferred share market, with PerpetualPremiums gaining 1bp, FixedResets down 3bp and DeemedRetractibles off 1bp. There was no volatility of note. Volume was low.