Market Timing?

I received the following eMail from a Reader who is not as Assiduous as he should be:

I haven’t been to your blog for a while but I went there today to get your perspective on what was happening with preferred spreads. Sure looks like a buying opportunity at 6%+ as one of your readers commented (RY, SLF , Pow, Pwf …. do not hesitate , do not be afraid , do not analyse to much , BUY !!). Others would analyze as don’t buy to average down. What’s your (long term) perspective on all this? Are you buying (what would be your top 10 list in this market)? Regards,

P.S. Feel free to post on your blog.

The post being referred to is Party Like It’s 1999!, in which I made the point that the interest-equivalent PerpetualDiscount spread was pretty close to a ten year high; the comment quoted was by Assiduous Reader lafontaine. And as far as a “Top 10 List” is concerned … I offer that service – not precisely ‘Top 10’ but the same idea – through my monthly newsletter, PrefLetter.

I don’t like market timing and I don’t do market timing. Financial Markets are chaotic; things that weren’t important a year ago can become the driving force in the blink of an eye; the Law of Unintended Consequences punishes any policy-maker with the temerity to indulge in central planning (and any portfolio manager with the temerity to overlay his own projections on policy changes); and, perhaps most insidiously, there are a lot of players with a vested interest in confusing the issue.

Journalists need something to write about; Dealers want to change your analysis of a situation so you’ll trade. Financial advisors find it easier to convince clients that the account is being aggressively and pro-actively managed in their best interest if there are a few actual trades to point at.

And every trade costs money – commissions and spread and sometimes market impact.

My philosopy is to be fully invested at all times. Make yourself an asset allocation based on your personal needs and your long-term view of expected risks and returns. Review it once a year. Always ask yourself: ‘What if I’m wrong?’

A disdain for market timing does not mean inactivity. My fund does an awful lot of trading … but this is never because of a view that the market is going to go up or down. It’s simply me telling the cowboys: ‘You want to trade? You want to pay the spread? You want to pay the cost of market impact? OK, you can pay that to me. Twist my arm!’ I’m not always right when I agree to a trade. Fortunately, I don’t have to be right every time to do a good job for my clients. Historically, my assessments of relative value have been accurate enough to outperform the market – although, I must point out, that is no guarantee for the future!

The more similar two instruments, the easier it is to identify the cheap one. Two discounted perps from the same issuer are easy to compare. A PerpetualDiscount and a PerpetualPremium from the same issuer is a little harder. A PerpetualDiscount and cash is … difficult in the extreme.

That being said, I think the recent decline in the market is overdone. It has happened without corresponding declines in the broader credit markets; it has happened without particularly horrible news from the issuers [bank common shareholders may well suffer in the coming months. So? I’m buying their prefs on the basis of them being able to (i) continue paying the dividend, and (ii) avoiding a bankruptcy that would impair my capital. I can’t see any but the most infinitesimal changes in the probability of those two outcomes]. Inflation is always a worry, but (a) it appears to be under control, and (b) back on the Central Bankers’ agendas and (c) not considered a major problem by the broader credit markets.

I consider that the extra interest-equivalent yield provided by preferreds handsomely compensates for their additional term risk, liquidity risk and credit risk (provided you don’t overdo it! What if I’m wrong?). As spreads increase without a clear fundamental driver, I suspect that more and more people will eventually agree with me. These people will pile into the market, absorbing spread costs and market impact costs … and I will certainly exert my utmost efforts to put myself in position to say ‘Thank you very much! Ka-Ching!

Monday June 23 will be a most interesting day. We can expect BCE issues to skyrocket, as the chances of the deal closing have increased; to the extent that (i) the money that may be received by BCE preferred shareholders will the reinvested in the preferred market and (ii) the market anticipates this tsunami of money; we may well see a good pop in the broader preferred share market. Will I bet on it? Have I bet on it? No and No.

11 Responses to “Market Timing?”

  1. […] one of the year’s easier calls, BCE issues skyrocketted today … now, if only I’d known that while Friday’s […]

  2. […] shareholders – see, for example, Party Like it’s 1999!, New Trough for Preferreds? and Market Timing?. And I will be posting more! Without wishing to rub salt into the wounds of other preferred share […]

  3. […] I like flattery as much as anybody else … but remember my feelings about market timing! I may think that this episode is overblown, I may be able to show it’s a ten-year high, I […]

  4. […] yields, I’ve been thinking a bit about how the spread – which I consider quite excessive, but what do I know? – might be traded away by investors unwilling to time the […]

  5. […] it will take the credit crunch a great deal of time to unwind – and while I continue to disdain market timing, these elevated yields should gradually attract bond investors, which will help prices recover. But […]

  6. […] it would have been better to have held cash during this period and lost nothing; but that would be market timing. I cannot predict the overall direction of the market, nor have I ever met anybody who can. The way […]

  7. […] this environment is X, I’ll listen! For a while, anyway. That sort of speculation is simply market timing and I don’t put much credence in […]

  8. […] think the macro-economic approach works at all in the long term – see, for example, my post on market timing, for […]

  9. […] readers will be well aware of my disdain for market timing. The market goes up, the market goes down … the characteristics of the asset class […]

  10. […] I’m not much of a fan of market timing, but nevertheless this seems a bit overreaching to me. We have a government agency pronouncing […]

  11. […] of its resolution and as a matter of investment philosophy I eschew market timing (see LINK and LINK). Investors are generally much better off by forming an asset allocation plan based on the long […]

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