July 19, 2011

The BoC remains on hold:

Overall, the Bank projects the economy will expand by 2.8 per cent in 2011, 2.6 per cent in 2012, and 2.1 per cent in 2013, returning to capacity in the middle of 2012.

Total CPI inflation is expected to remain above 3 per cent in the near term, largely reflecting temporary factors such as significantly higher food and energy prices. Core inflation is slightly firmer than anticipated, owing to temporary factors and to more persistent strength in the prices of some services. Core inflation is now expected to remain around 2 per cent over the projection horizon. Total CPI inflation is expected to return to the 2 per cent target by the middle of 2012 as temporary factors unwind, excess supply in the economy is gradually absorbed, labour compensation growth stays modest, productivity recovers, and inflation expectations remain well-anchored.

The Bank’s projection assumes that authorities are able to contain the ongoing European sovereign debt crisis, although there are clear risks around this outcome.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn, consistent with achieving the 2 per cent inflation target. Such reduction would need to be carefully considered.

Ooooh! It will have to be carefully considered! I hadn’t realized that! Thank goodness Mr. Carney is governor!

Frankly, I think the BoC is getting a little behind the curve.

The fight over BMO’s annuity continues:

A handful of the top life insurers have banded together and written a letter to the Office of the Superintendent of Financial Institutions, demanding that the regulator immediately stop Bank of Montreal from selling a product that it recently rolled out called BMO Lifetime Cash Flow.

The product provides buyers 55 and older with guaranteed payments for life. But banks are not allowed to sell most types of insurance in their branches, and the life insurance sector thinks this product is suspiciously similar to an annuity – which is one of the insurance products that are forbidden in bank branches.

The largest players have pooled their legal resources and crafted a detailed letter for OSFI outlining why they believe BMO’s product violates the federal Bank Act. And, they complain, the result is that banks have obtained an advantage over insurers.

That’s because BMO does not have to abide by the same capital and reserve requirements as an insurer who issues annuities, says the letter, a copy of which was obtained by the Globe.

Sure sounds like an annuity to me, although I haven’t heard BMO’s side of it. The answer, however, is not prohibition – the answer is an encouragement of specialization by the capital rules. Similarly to my belief that financial institutions should make a choice between banking and trading – and pay a surcharge on the capital charges required for activities that are outside their specialty – banks and insurers should make a choice between banking and insurance. BMO should be allowed to sell all the annuities it wants – but it should be putting up at least 25% extra capital on these products because insurance is not its specialty.

Moody’s downgraded TRE:

Moody’s Investors Service Inc. downgraded the debt of Sino-Forest Corp. Tuesday morning.

The rating agency cut the corporate family and senior unsecured debt ratings of the troubled forestry company to B1, or “speculative,” from Ba2 and said it continues to review the company for a further possible action.

The move, which affects US$1.9-billion of debt, does not come as a surprise after Moody’s indicated in early June it put Sino-Forest under review for possible downgrade and Standard & Poor’s cut its credit rating for the company on Jun. 30.

Ken Chan, a Moody’s vice-president and senior analyst, said the action reflects the ratings agency’s feeling that Sino-Forest’s operations have been negatively affected by the company’s current investigations commissioned following the research report from Muddy Waters LLC.

“Its financial performances are expected to weaken and therefore be more appropriately positioned in the single-B level,” Mr. Chan said, adding, “The company’s ability to access external funding from the bank and capital markets is also significantly and adversely affected in the interim.”

Moody’s also put five states on Review-Negative:

Five of the 15 states with top bond ratings from Moody’s Investors Service may be downgraded because their dependence on federal revenue makes them vulnerable to a U.S. credit cut should talks to raise the debt limit fail.

Maryland, New Mexico, South Carolina, Tennessee and Virginia are under review, New York-based Moody’s said in a statement today. The action affects $24 billion of general- obligation and related debt, Moody’s said. The states are rated Aaa, Moody’s top municipal grade.

Tara Perkins of the Globe reports that no Canadian banks are G-SIFIs:

No Canadian banks are currently considered “systemically important,” this country’s financial regulator says.

No Canadian banks are on the current list of 28 banks that made the cut (an honour that institutions do not want, since it means tougher requirements), says a spokesman for the Office of the Superintendent of Financial Institutions.

Most observers didn’t expect any of the Canadian banks to be on the list, although there has been some debate about Royal Bank of Canada, the country’s largest.

But OSFI notes that the process of determining which banks are on the list is dynamic, because inputs such as size are constantly changing for all banks.

Every day, a little freedom is eroded:

Sorry, parents, but no little Lucifers will be entering this world. Not in New Zealand, anyways.

The country’s Registrar of Births, Deaths and Marriages is cracking down on parents who want to give their little bundle of joy names that are too creative.

It effectively banned the name Lucifer after getting the request from not one, not two but three parents.

Funny, I thought it was the Registrar’s job to record things, not to judge whether or not the parents were looney-tunes. But I guess I’m old fashioned.

It was a positive day for the Canadian preferred share market, with PerpetualDiscounts up 4bp, FixedResets winning 10bp and DeemedRetractibles gaining 6bp. Volatility was low. Volume was average.

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 -0.1538 % 2,432.3
FixedFloater 0.00 % 0.00 % 0 0.00 0 -0.1538 % 3,658.2
Floater 2.49 % 2.35 % 40,823 21.32 4 -0.1538 % 2,626.3
OpRet 4.86 % 2.24 % 62,662 0.20 9 0.0728 % 2,448.9
SplitShare 5.23 % 1.40 % 55,233 0.60 6 0.2166 % 2,514.4
Interest-Bearing 0.00 % 0.00 % 0 0.00 0 0.0728 % 2,239.3
Perpetual-Premium 5.69 % 5.01 % 128,369 0.84 13 -0.0274 % 2,090.7
Perpetual-Discount 5.43 % 5.46 % 109,556 14.69 17 0.0447 % 2,202.5
FixedReset 5.14 % 3.14 % 199,594 2.66 58 0.1044 % 2,322.7
Deemed-Retractible 5.07 % 4.77 % 255,316 7.89 47 0.0584 % 2,165.0
Performance Highlights
Issue Index Change Notes
PWF.PR.A Floater -1.33 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-07-19
Maturity Price : 22.01
Evaluated at bid price : 22.25
Bid-YTW : 2.35 %
TRI.PR.B Floater 1.08 % YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-07-19
Maturity Price : 23.20
Evaluated at bid price : 23.50
Bid-YTW : 2.21 %
BAM.PR.O OpRet 1.25 % YTW SCENARIO
Maturity Type : Option Certainty
Maturity Date : 2013-06-30
Maturity Price : 25.00
Evaluated at bid price : 26.02
Bid-YTW : 2.99 %
Volume Highlights
Issue Index Shares
Traded
Notes
SLF.PR.E Deemed-Retractible 109,208 Nesbitt crossed 100,000 at 21.95.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 21.95
Bid-YTW : 6.15 %
BMO.PR.M FixedReset 98,300 Anonymous sold a block of 10,000 to TD and blocks of 10,000 and 15,300 to RBC, all at 26.21. RBC crosse 25,400 at 26.23.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-08-25
Maturity Price : 25.00
Evaluated at bid price : 26.23
Bid-YTW : 2.96 %
IAG.PR.F Deemed-Retractible 53,203 Desjardins crossed 50,000 at 25.80.
YTW SCENARIO
Maturity Type : Hard Maturity
Maturity Date : 2022-01-31
Maturity Price : 25.00
Evaluated at bid price : 25.75
Bid-YTW : 5.60 %
TD.PR.A FixedReset 40,873 Nesbitt crossed 30,000 at 26.07.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 26.07
Bid-YTW : 3.17 %
TD.PR.C FixedReset 34,256 Nesbitt crossed 30,000 at 26.52.
YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-01-31
Maturity Price : 25.00
Evaluated at bid price : 26.51
Bid-YTW : 3.04 %
BMO.PR.K Deemed-Retractible 24,516 YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-11-25
Maturity Price : 25.00
Evaluated at bid price : 25.92
Bid-YTW : 4.66 %
There were 30 other index-included issues trading in excess of 10,000 shares.
Wide Spread Highlights
Issue Index Quote Data and Yield Notes
FTS.PR.E OpRet Quote: 27.12 – 27.75
Spot Rate : 0.6300
Average : 0.4383

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-06-01
Maturity Price : 25.75
Evaluated at bid price : 27.12
Bid-YTW : 2.19 %

BMO.PR.K Deemed-Retractible Quote: 25.92 – 26.32
Spot Rate : 0.4000
Average : 0.2376

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2016-11-25
Maturity Price : 25.00
Evaluated at bid price : 25.92
Bid-YTW : 4.66 %

PWF.PR.A Floater Quote: 22.25 – 23.00
Spot Rate : 0.7500
Average : 0.6533

YTW SCENARIO
Maturity Type : Limit Maturity
Maturity Date : 2041-07-19
Maturity Price : 22.01
Evaluated at bid price : 22.25
Bid-YTW : 2.35 %

TD.PR.I FixedReset Quote: 27.15 – 27.39
Spot Rate : 0.2400
Average : 0.1519

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2014-07-31
Maturity Price : 25.00
Evaluated at bid price : 27.15
Bid-YTW : 3.20 %

TCA.PR.X Perpetual-Premium Quote: 50.11 – 50.50
Spot Rate : 0.3900
Average : 0.3032

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2013-10-15
Maturity Price : 50.00
Evaluated at bid price : 50.11
Bid-YTW : 5.43 %

IGM.PR.B Perpetual-Premium Quote: 25.55 – 25.89
Spot Rate : 0.3400
Average : 0.2652

YTW SCENARIO
Maturity Type : Call
Maturity Date : 2018-12-31
Maturity Price : 25.00
Evaluated at bid price : 25.55
Bid-YTW : 5.54 %

2 Responses to “July 19, 2011”

  1. pugwash says:

    Hello Mr Hymas,

    I read the credit analysis of Yellow in Prefletter and decided to put some spice in my solid but bland portfolio – I became a proud owner of YLO.PR.B – nothing seems to have happened to the Yellow company since my trade but the prefs have dropped 25% since my investment.

    Seems a good time to buy more – have I gone mad?

    Puggy

  2. jiHymas says:

    There are two ways to react to a mysterious drop in the price of something you hold:

    i) Method 1 is to ask yourself “What do these guys know that I don’t know?”, conclude that the answer is “Probably a lot”, and sell while the stuff you own is still worth something.

    ii) Method 2 is to double check your rationale for holding it in the first place and, if you can truly and objectively conclude that nothing has, in fact, changed … think about buying some more (subject, of course, to asking yourself But what if I’m wrong? and maintaing prudent levels of concentration in the security at issue).

    With respect to Method 1, I once had a consulting contract with a much bigger firm. My boss insisted on selling something for which I thought Method 2 was applicable, on the grounds that “Then we won’t have to worry about it any more.”

    With respect to Method 2, remember Warren Buffet’s aphorism:

    Be fearful when others are greedy, and be greedy when others are fearful.

    To which I would add the proviso: But don’t ever, EVER, be stupid. Every trade must be examined on its own merits, not a psychological evaluation of what everybody else thinks.

    So, Puggy, I don’t think you’ve gone mad – yet. If, however, you get excited and overweight YLO.PR.B beyond the bounds of prudence dictated by your portfolio … then I might change my mind.

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