What a Trader is reading this week and why: Canada Pension invests abroad, Libor rate-fixing investigation & Greek budget controls

Thursday, February 16, 2012

The Globe and Mail: CPPIB to develop London’s Victoria Circle

The Canadian Pension Plan Investment Board (CPPIB) made some news this week thanks to a big investment in British commercial real estate. This comes after an earlier investment in US commercial real estate. CPPIB said they were going to diversify - and they did! As a trader, I find it fascinating because of what they did not do. They did not invest in Canadian real estate; they did not buy stocks or bonds; they bought British and US commercial real estate. This potentially says a lot about the overall feelings on prices and the outlook towards international assets.

Bloomberg: UBS is said to have sought immunity in Canadian Libor-fixing investigation

This is a small story that could have big consequences once the outcome of what actually happened is discovered…most likely after a few criminal trials. ‘Libor’ is the London Interbank Bank Offer Rate. (Tibor is for Tokyo and Euribor is for Europe.) It is the rate at which banks lend to one another; the posted rate is determined by surveying participating banks. It is alleged that for 3 years (2007-2010), employees at many banks were conspiring to fix the rate, allowing them to profit from this falsely fixed rate. UBS, Switzerland’s biggest bank, has sought immunity before speaking with Canadian regulators with respect to their bank’s role in this alleged fraud. What does this mean? It could be concluded that the seeking of immunity is the bank’s way of saying they had no idea what their employees were doing and what was happening. We’ll see how that plan works out for them…

Bloomberg: Europe demands more Greek budget controls

The situation in Greece is ongoing and to market watchers, a never-ending drama. Greece is bankrupt and is trying to forge a deal with its bondholders and European leaders so as to not default on its debts. This article does a really good job of laying out the political decisions and drama that some of the European leaders are facing. A big divide between Northern Europe (the wealthier countries) and Southern Europe (the poorer countries) is helping to build up the tension and may be preventing a possible resolution. One big positive, in my opinion, is that European financial leaders are doing a relatively good job of suggesting that if Greece does default, the damage has hope of being contained and might not cause complete chaos (just some big problems). Judgment day for the Greek default is March 20th. I would be surprised if we see a concrete resolution earlier than a week before then. That is, if we see resolution at all.

What a Trader is reading this week and why: Shadow banks, TSX circuit breaker & conflicting economic outlooks

Thursday, February 9, 2012

Reuters: Watchdogs to drag shadow banks into the light

The shadow banking industry is a very large industry of which many people are unaware. As this article states, it comprises approximately 25% of the total world banking industry. Shadow banks function somewhat like regular banks; they offer loans to businesses and liquidity to markets. The biggest difference is that they do not take deposits and are not insured like traditional banks. There is also no mechanism to bail them (or their customers) out if there is a problem. Market participants view shadow banks as the grease that keeps the banking world moving; they play a critical role in our financial system. The world’s banking police want to make changes not because shadow banks are inherently bad or mischievous, but because they are unregulated. The main issue is that shadow banking is so big; if something happens to dramatically alter its stability, a shadow bank crisis will affect the stability of all banking systems.

The Globe and Mail: Canadian stocks to get new circuit breaker

A new rule is coming into effect, attempting to regulate wild market swings on the TSX. The rule is relatively simple in concept: to halt any stock that moves more than 10% of the stock value within 5 minutes. This rule will only apply to stocks that are listed in the S&P/TSX composite index. The article also points out that trades will be cancelled if they occur more than 5% above that 10% level when a trade is halted. As a trader, I am not that convinced this rule will prevent the chaos of an event like a flash crash (it would still be chaos, just a different kind). The highlight to me in this article is the part about trades being cancelled above a particular level. There is currently some inconsistency with regards to what trades get cancelled and which ones do not. This could help by providing a clear rule.

The Globe and Mail: Stocks are rising, but a bigger market says they're wrong

The capital markets have been following an unusual pattern lately. Both the bond market and the stock market have been rising together in tandem. These two entities usually move in opposite directions. Market investors who view the short-term to medium-term outlook as negative are buying bonds. While the market investors who are bullish on the short- to medium-term outlook are buying stocks. Is this tandem move just representative of two different economic outlooks or is there more than meets the eye? As the article points out, did stocks just get that cheap in 2011? If it is just a case of two different options, most people put money (literally) on bond traders. They are viewed as some of the smartest and most informed market participants around (although as an equity trader, it pains me to admit that). If one market falters, while the other shoots higher, then it is most likely just a stalemate that needed to be broken. Keep your eye peeled, however, for something else that could be brewing. If both markets start to drop at the same time, it could add more market uncertainty in the year ahead.

What a Trader is reading this week and why: Facebook IPO, merger blocked & shock on Bay Street over class-action ruling

Thursday, February 2, 2012

Bloomberg: Facebook files to raise $5B in biggest internet IPO

It’s official: Facebook will be a public company within the next 6 months. The shear magnitude of this IPO is staggering. So is the wealth of Mark Zuckerberg. This news is not a surprise to market watchers. There is a rule in the US that says a private company cannot have more than 499 investors. Once that line is crossed, they must make their financial reports public which effectively takes down any reason not to become a public company. Two big questions market watchers are eager to figure out: How much will each share be priced and what do they plan to do with all that cash ($5 billion)?!

National Post: EU blocks Deutsche Boerse, NYSE merger

This week another stock exchange deal got blocked by a regulator. Lately more of these types of deals are being rejected at the national level rather than being approved. The feeling of the markets overall is now turning away from looking for these companies to make concessions to merge, and instead trying to turn the focus back on having these companies grow in other ways – i.e. to raise profit margins by running better firms, not by taking over the competition. Although regulators are drawing out the process, they are being clear in not wanting mega-mergers that dominate all business. The only country that appears to be approving of these big deals is the US.

National Post: Class-action ruling shocks Bay Street

This ruling has been sliding under the radar in most financial papers but has been a hot topic in elevators and at evening watering holes on Bay Street. Here’s some back story: Defendants in financial security cases often settle with the regulators to provide swift and hopefully lower cost resolution. A judge in the Court of Appeals has ruled that if a defendant (like a mutual fund company or a CFO) settles with a security commission (like the Ontario Securities Commission) for doing something wrong, that amount must be equal to investor damages in order to close the door on the possibility of a civil suit by the investors. If, however, the settled amount between the defendant and the securities commission is less, investors get the green light to be able to sue the defendant for damages. This new ruling could thus take away any reason to cut a deal with the regulators in the first place (if the defendant could be sued in civil court anyway), or at least take away any reason to settle with a group like the OSC for less than the potential civil amount. This decision was arrived at through the Appeals Court and I suspect it will not be the final ruling on this topic. This is a big deal. This ruling changes not only who might get what settlement, but dramatically affects the process of how that decision is made, as well as the costs and the time to reach a settlement.

The views contained herein are that of the writer – ‘Tusk Trader’ – and not those of Golden Girl Finance Inc. Nothing contained herein is intended to provide personalized financial, legal or tax advice. Nothing should be construed as an offer to sell, or a solicitation of an offer to buy a security, a recommendation for any product or service by Golden Girl Finance or any associated third party, or a suggestion regarding the purchase, holding or sale of securities. Before implementing any financial strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances.