The Fed cut rates by 25bp, to 4.25%.
Many were disappointed it wasn’t 50bp.
But bonds benefitted from asset reallocation, even in Canada.
‘Nuff said?
A very active day in the preferred market, but with no major trends. The poor old BAM floaters finally caught a bid!
| Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30 | |||||||
| Index | Mean Current Yield (at bid) | Mean YTW | Mean Average Trading Value | Mean Mod Dur (YTW) | Issues | Day’s Perf. | Index Value |
| Ratchet | 4.99% | 4.98% | 94,740 | 15.49 | 2 | -0.0817% | 1,048.5 |
| Fixed-Floater | 4.82% | 4.92% | 93,864 | 15.61 | 8 | +0.2844% | 1,033.6 |
| Floater | 5.59% | 5.69% | 96,390 | 14.25 | 2 | 0.6526% | 849.1 |
| Op. Retract | 4.87% | 4.00% | 81,251 | 3.68 | 16 | +0.0733% | 1,033.2 |
| Split-Share | 5.30% | 6.25% | 99,770 | 4.08 | 15 | +0.0854% | 1,027.3 |
| Interest Bearing | 6.26% | 6.59% | 68,952 | 3.49 | 4 | +0.1298% | 1,062.5 |
| Perpetual-Premium | 5.80% | 5.33% | 83,032 | 5.84 | 11 | +0.0240% | 1,014.6 |
| Perpetual-Discount | 5.46% | 5.51% | 368,938 | 14.61 | 55 | +0.0586% | 930.2 |
| Major Price Changes | |||
| Issue | Index | Change | Notes |
| POW.PR.D | PerpetualDiscount | -1.2452% | Now with a pre-tax bid-YTW of 5.52% based on a bid of 23.00 and a limitMaturity. |
| PIC.PR.A | SplitShare | -1.1170% | Asset coverage of just under 1.7:1 as of December 6, according to Mulvihill. Now with a pre-tax bid-YTW of 5.91% based on a bid of 15.05 and a hardMaturity 2010-11-01 at 15.00. |
| PWF.PR.L | PerpetualDiscount | -1.0566% | Now with a pre-tax bid-YTW of 5.52% based on a bid of 23.41 and a limitMaturity. |
| BAM.PR.N | PerpetualDiscount | +1.0177% | Now with a pre-tax bid-YTW of 6.44% based on a bid of 18.86 and a limitMaturity. |
| BAM.PR.G | FixFloat | +1.2840% | |
| BCE.PR.R | FixFloat | +1.3704% | |
| BAM.PR.B | Floater | +1.2840% | |
| ELF.PR.F | PerpetualDiscount | +1.8993% | Now with a pre-tax bid-YTW of 6.29% based on a bid of 21.46 and a limitMaturity. |
| Volume Highlights | |||
| Issue | Index | Volume | Notes |
| BCE.PR.R | FixFloat | 144,480 | |
| CM.PR.J | PerpetualDiscount | 143,409 | Now with a pre-tax bid-YTW of 5.58% based on a bid of 20.47 and a limitMaturity. |
| BCE.PR.T | FixFloat | 139,490 | |
| WN.PR.A | Scraps (would be PerpetualDiscount but there are credit concerns) | 135,915 | Now with a pre-tax bid-YTW of 7.88% based on a bid of 18.57 and a limitMaturity. Compare with Dec. 5 quotations and current values for WN.PR.C (7.51%), WN.PR.D (7.33%) & WN.PR.E (7.43%). |
| BAM.PR.M | PerpetualDiscount | 128,005 | Now with a pre-tax bid-YTW of 6.45% based on a bid of 18.83 and a limitMaturity. |
| CM.PR.I | PerpetualDiscount | 124,160 | Now with a pre-tax bid-YTW of 5.59% based on a bid of 21.34 and a limitMaturity. |
| IQW.PR.C | Scraps (would be OpRet but there are credit concerns) | 123,700 | Now with a pre-tax bid-YTW of 136.24% (annualized!) based on a bid of 20.25 and a softMaturity 2008-2-29 at 25.00. Somebody trying an arbitrage despite the dividend suspension? The common is at a mere $2.45 at the close today … the floor conversion price is $2.00 … but I still say an attractive package can be put together if you guard against soaring common prices with call options! |
| MIC.PR.A | PerpetualPremium | 101,100 | Will be redeemed December 31. |
| GWO.PR.F | PerpetualPremium | 100,651 | Now with a pre-tax bid-YTW of 5.00% based on a bid of 25.92 and a call 2012-10-30 at 25.00. |
There were fifty-three other index-included $25.00-equivalent issues trading over 10,000 shares today.
Correct me if I’m wrong, but I don’t think there’s a market for IQW options (in Canada or US)… So, as far as I can tell there’s no pure arbitrage play on IQW.PR.C as there’s no way to guard against the common dropping well bellow $2.00.
I don’t know if there’s an exchange-traded market for IQW options or not. If there is, it’s probably teetering on the edge of closure, given that the stock is now trading below the “option eligible” price of $5. A major player could probably do a bunch OTC though.
The risk isn’t that the common will drop below $2, it’s that it will suddenly rise before the conversion price determination period. The basic idea is that you buy IQW.PR.C … say 1000 shares. This should be convertible into $25,000 worth of common at 95% of the market price, as calculated in the weeks prior to conversion … so say that’s $26,000 at market price, or say that’s 10,000 shares of IQW at today’s price (assuming today’s price is $2.60, for the sake of an example.
So you short 10,000 IQW and buy 1,000 IQW.PR.C … proceeds are $26,000 from the short and pay (say) $20,000 for the pref to net out to a position of $6,000 cash + securities that should disappear on conversion.
If the common goes to $2, you’ll get more IQW on conversion which may then be sold, which is a good thing.
The risk – and the reason you need some calls – is … what if IQW goes to $10 AFTER you’ve shorted the common but BEFORE the conversion price gets calculated? Conversion of the preferreds will then only get you 2,600 shares, so you’ll have your $6,000 cash but still be short 7,400 IQW for a massive, massive loss.
Really, the whole arbitrage thing is a bit dicey and – if there are no exchange-traded options anyway – impossible for retail. IQW.PR.C remains an interesting equity substitute for those who actually like the company though!
Yes, indeed if you were to sell short right away then you need to worry about the price of the common rising.
What I had in mind was to just buy the preferred for now. Then gradually sell short the common during the 20 day valuation period prior to the conversion. Assuming that by doing this gradually I could sell all the common stock I would receive from the conversion at approximately the conversion price. Assuming this was done “perfectly”, the strategy would be profitable as long as the common share price will be 1.64 or more during the conversion valuation period (assuming we buy IQW.PR.C at the current price of 20.50). If the price drops below 1.64 we lose.
However, there’s another downside to my strategy. Profit is limited to 28.4% (if the common trades at 2.10 or more during the conversion period).
So, without crunching any volatility numbers, I would say that IQW.PR.C is fairly priced right now. We make some money if the common’s price doesn’t change. We make a bit of money (or lose less) if the common reduces in price. BUT, if the common appreciates more than 28.4%, we make less money than buying the common directly. Given the recent volatility in IQW, I think that a 28.4% appreciation or a 29% devaluation (to 1.64) is not out of the question.
If one could trade IQW options, they would probably be quite expensive due to the high volatility. So hedging the position would more or less eliminate the profit.
It’s a conundrum, isn’t it?
I always remember: “A hedge is defined as a position taken on to negate the effect of an otherwise profitable strategy” … and a story of a trader who had a picture of the Maze at Hampton Court on his terminal with the title “The only perfect hedge.”