One Bull Checks In

As mentioned yesterday, I received some interesting correspondence recently:

Love your blog !

I have been buying preferred shares for the last 10 years and discovered your site last month…

My porfolio of pref ( middle six figures ) consist only of bank shares and Power Corp /Power Financial, all perpetual discount.

Sometime I  try to balance my portfolio with the ups and down of the market but I buy for the long term. 

But these days I do not understand the pref market : today I  bought PWF.PR.G 5,90 perpetual at par ( $25,06) ( in Qc X 1.35 : 7,965 % ), last week NA.PR.K 5,85 at par ( $25)(QC X 1,35 : : 7,90%) .

Meanwhile you are lucky if you get 5% on a 10 years municipal bond and 5,5% on a 20 years bonds ( ex: Greater Toronto Airport .) and the bank are signing 5 years morgage for 5,69%.

I understand the risks and the nature of the Pref , but   I wonder if I am missing something ( market disruption /Subprime /long term inflation )or if this is the buying opportunity of the decade ?
Thank you for your blog

Well, this is obviously a very sensible, wise and discerning correspondent – that’s obvious, because he likes the blog.

But let’s just take a VERY quick look at his question regarding “buying opportunity of the decade”. We’ll compare current yields with those of October 31, 2000, with help from the Bank of Canada’s yield look-up service, CanadianBondIndices, the HIMIPref™ Indices for October 31, 2000 and yesterday’s values:

Yield Comparisons
  2000-10-31 2007-10-10
Long Canada Yield 5.61% 4.80%
Long Corporate Yield 7.14% 5.90%
PerpetualDiscount Yield 6.03% 5.42%
Equivalency Factor 1.31 1.40
PerpetualDiscount Interest Equivalent 7.90% 7.59%
Canada Bond / Perpetual Discount
229bp 279bp
Corporate Bond / PerpetualDiscount
76bp 169bp

So … I have to agree with my correspondent that spreads look pretty attractive now!

Note that all this is very approximate. At some indeterminate time in the future, HIMIPref™ 2006 2007 2008 will be ready for testing. This new version of the programme will extend the analytics to bonds; enormous quantities of data will be purchased at ruinous expense; the analysis will allow for swaps between investment universes (although this feature might have to wait until HIMIPref™ 2009 is ready) and at that time, with lots of testing and data and controls to ensure that, for instance, there’s nothing fishy going on with the credit quality of the sampled universes, I will be much happier about saying whether spreads are wide.

But it does look pretty good, doesn’t it?

4 Responses to “One Bull Checks In”

  1. […] My bullish correspondent has been busy and gleefully siezed on my comment yesterday that: There was good volume in the preferred share market today … and continued declines in the perpetual sector which, quite frankly, I am at a loss to understand. … rate, the steepening in the past three weeks is stupendous. This is really strange! […]

  2. […] Update, 2007-10-19: I should also link to two of my other posts on this general topic: One Bull Checks in and Reflections on a Bull […]

  3. […] After having given so much attention to the neighborhood bull, it seems only fair to allow some comments from the bears! Hi James: […]

  4. […] Meanwhile, long Canadas yield 4.04% (!) for an interest-equivalent spread of about 365bp – this has widened considerably since this was checked on October 10. […]

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