September 25, 2012

Charles Plosser of the Philiadelphia Fed outlined his opposition to QE3, including one very good point:

Continued expansion of the Fed’s balance sheet has other costs as well. By greatly expanding the size of the Fed’s balance sheet, the new asset-purchase program will exacerbate the challenges that the Fed will face when it comes time to exit this period of extraordinary accommodation, risking higher inflation and harm to the Fed’s reputation and credibility. I have been a student of monetary theory and policy for over 30 years. One constant is that central banks tend to find it easier to lower interest rates than to raise them. Moreover, identifying turning points is difficult even in the best of times, so timing the change in the direction of policy is always a challenge. But this time, exit will be even more complicated and risky. With such a large balance sheet, our transition from very accommodative policies to less accommodative policies will involve using tools we have not used before, such as the interest rate on reserves, term deposits, and asset sales. Once the recovery takes off, long rates will begin to rise and banks will begin lending the large volume of excess reserves sitting in their accounts at the Fed. This loan growth can be quite rapid, as was true after the banking crisis in the 1930s, and there is some risk that the Fed will need to withdraw accommodation very aggressively in order to contain inflation. At this point, it is impossible to know whether such asset sales will be disruptive to the market. A rapid tightening of monetary policy may also entail political risks for the Fed. We would likely be selling the longer maturity assets in our portfolio at a loss, meaning that we may be unable to make any remittances to the U.S. Treasury for some years. Yet, if we don’t tighten quickly enough, we could find ourselves far behind the curve in restraining inflation.

The SEC has hardened its stance that investing has nothing to do with fundamentals:

A New York-based brokerage allowed overseas clients to run a scheme aimed at distorting stock prices by rapidly canceling orders, according to the U.S. Securities and Exchange Commission.

Clients of Hold Brothers On-Line Investment Services were “repeatedly manipulating publicly traded stocks” by placing and erasing orders in an illegal strategy designed to trick others into buying or selling, the SEC said today in a release. Hold Brothers, its owners, and the foreign firms Trade Alpha Corporate Ltd. and Demonstrate LLC agreed to settle allegations that the New York broker failed to supervise customers and pay $4 million in total SEC fines.

The SEC complaint targeted practices that abused high-speed computer trading on American equity venues. As high-frequency activity has grown in recent years, the agency’s efforts to stop fraudulent practices such as “layering” or “spoofing” have extended to the automated trading tactics.

“The fairness principle that underlies the foundation of our markets demands that prices of securities accurately reflect a genuine supply of and demand for those securities,” Daniel M. Hawke, the chief of the SEC’s enforcement division’s market abuse unit, said in the statement. “The SEC will not tolerate any abusive practice that is designed to distort these natural forces.”

Bluffing is part of the trading game. A fundamental investor can often take advantage of the little boys’ games. But logic has no relevance to regulation.

The Kansas City Fed has a good review of deposit insurance:

The effect on the financial system of this emergency assistance and related risk-taking incentives is difficult to assess and measure. However, a unique circumstance in the 1930s provides an insight into how a piece of the federal safety net—federal deposit insurance—has altered the financial landscape. The vast majority of U.S. banks quickly became insured after the Federal Deposit Insurance Corporation (FDIC) began offering deposit insurance in 1934. Many state-chartered banks in Kansas, however, chose to remain uninsured. Why
did these Kansas banks think they could operate successfully without deposit insurance following the worst banking crisis in U.S. history?
Also, how did these banks differ from the banks that quickly adopted deposit insurance, and what might these differences tell us about
deposit insurance?

Another forthcoming article asks have cheques met their match?:

During the last decade, both demand-side and supply-side factors have contributed to a surge in new methods of making person-to-person (P2P) payments. On the demand side, the driving factors have been the emergence of new forums for commerce such as online auctions and the increasing desire by consumers to monitor and control payments. On the supply side, the main factors have been technological advancements such as faster Internet speeds, increased computing power and smartphones. Despite the surge in new P2P payment methods, studies show that consumers in the United States still prefer to make payments to other people with checks and cash. In fact, P2P payments by check are the only type of check payment that is still increasing. If consumers could be induced to use a digital alternative to P2P payments by cash and check, the efficiency and safety of the U.S. payments system might be enhanced.

It was a moderately good day for the Canadian preferred share market, with PerpetualPremiums winning 13bp, FixedResets gaining 4bp and DeemedRetractibles up 6bp. Volatility was minimal. Volume returned to low levels.

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 0.2663 % 2,453.7
FixedFloater 4.46 % 3.83 % 38,145 17.62 1 1.4755 % 3,572.8
Floater 2.99 % 3.00 % 56,206 19.71 3 0.2663 % 2,649.4
OpRet 4.66 % 3.29 % 53,606 1.45 4 0.0576 % 2,551.6
SplitShare 5.45 % 4.89 % 70,719 4.57 3 0.0663 % 2,815.3
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0576 % 2,333.2
Perpetual-Premium 5.28 % 3.03 % 93,128 1.02 28 0.1345 % 2,290.8
Perpetual-Discount 4.92 % 4.93 % 105,396 15.63 3 0.4718 % 2,562.9
FixedReset 4.96 % 3.07 % 178,915 4.30 72 0.0414 % 2,431.8
Deemed-Retractible 4.94 % 3.52 % 121,554 1.06 46 0.0671 % 2,372.2
Performance Highlights
Issue Index Change Notes
BAM.PR.G FixedFloater 1.48 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-25
Maturity Price : 22.13
Evaluated at bid price : 21.32
Bid-YTW : 3.83 %
Volume Highlights
Issue Index Shares
Traded
Notes
ENB.PR.P FixedReset 361,615 Recent new issue.
YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-25
Maturity Price : 23.09
Evaluated at bid price : 25.00
Bid-YTW : 3.76 %
RY.PR.T FixedReset 120,157 TD crossed 100,000 at 26.99.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 26.95
Bid-YTW : 2.37 %
RY.PR.L FixedReset 100,414 TD crossed 100,000 at 26.15.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-02-24
Maturity Price : 25.00
Evaluated at bid price : 26.09
Bid-YTW : 2.81 %
BMO.PR.K Deemed-Retractible 59,808 Nesbitt crossed 50,000 at 26.30.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2012-11-25
Maturity Price : 26.00
Evaluated at bid price : 26.31
Bid-YTW : 0.47 %
BNS.PR.T FixedReset 53,414 TD crossed 49,600 at 26.85.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-04-25
Maturity Price : 25.00
Evaluated at bid price : 26.77
Bid-YTW : 2.28 %
BNS.PR.Z FixedReset 31,993 YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.15
Bid-YTW : 3.07 %
There were 16 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
IAG.PR.E Deemed-Retractible Quote: 26.15 – 26.40
Spot Rate : 0.2500
Average : 0.1407

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-12-31
Maturity Price : 25.00
Evaluated at bid price : 26.15
Bid-YTW : 5.16 %

ELF.PR.H Perpetual-Premium Quote: 26.12 – 26.50
Spot Rate : 0.3800
Average : 0.2782

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2021-04-17
Maturity Price : 25.00
Evaluated at bid price : 26.12
Bid-YTW : 5.03 %

BAM.PF.A FixedReset Quote: 25.40 – 25.65
Spot Rate : 0.2500
Average : 0.1625

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2042-09-25
Maturity Price : 23.23
Evaluated at bid price : 25.40
Bid-YTW : 4.11 %

RY.PR.T FixedReset Quote: 26.95 – 27.20
Spot Rate : 0.2500
Average : 0.1629

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-08-24
Maturity Price : 25.00
Evaluated at bid price : 26.95
Bid-YTW : 2.37 %

BMO.PR.L Deemed-Retractible Quote: 27.01 – 27.19
Spot Rate : 0.1800
Average : 0.1108

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-05-25
Maturity Price : 26.00
Evaluated at bid price : 27.01
Bid-YTW : 0.39 %

SLF.PR.I FixedReset Quote: 25.36 – 25.55
Spot Rate : 0.1900
Average : 0.1316

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.36
Bid-YTW : 3.89 %

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