Desperate for copy, the Financial Post published a column titled Banks’ preferred shares not a sure thing today, which was brought to my attention by Assiduous Reader tobyone in the comments to March 31:
In the April 01 edition of the Financial Post freelance financial journalist Hugh Anderson’s article: “Banks’ preferred shares not a sure thing.” Raises the spectre of dividend cuts, failure of trustcos and regional banks in Canada in the past. I thought I had a sure thing once upon a time but I was mistaken.
Hugh Anderson bills himself as “a freelance financial journalist and a former retail investment advisor”. I am unable to ascertain his performance track record as a retail investment advisor.
The introduction to his article was what first aroused my ire:
Time was when selling a Canadian bank preferred share to a conservative client in a taxable account was a no-worries deal, as the Australians say.
You looked for an issue with a reasonable period until first call without much premium and a decent yield, and moved on to the next client.
That’s all it took, eh? “Reasonable”, “much”, “decent” … not even a mention of credit quality … one shudders to think what his performance was like … but as far as preferred share commentary goes, it’s not the worst I’ve ever seen. If that was the only problem with the column, I’d let it go.
The following display of typical retail stockbroker nonsense, though, really makes me angry:
Remember also that a holder gets that yield only while the bank maintains its dividend. Too many investors forget that a preferred share is not a bond or a deposit note, even when issued by a Canadian bank. Dividends on preferred shares are no more guaranteed than dividends on common shares. In extreme circumstances they are much easier to cut or eliminate than interest payments on debt securities.
Unthinkable, you say. Maybe, but I do remember that being said about certain big trust companies in Canada a decade or two ago, before they eliminated dividend payments on their way to collapse or absorption.
A similar fate awaited shareholders in two Canadian regional banks a while ago.
Nothing is absolutely unthinkable at a time when a venerable U.S. investment bank implodes over a weekend, and when the U.S. Federal Reserve is keeping others alive with unlimited credit.
Well, lets look at this step by step:
Dividends on preferred shares are no more guaranteed than dividends on common shares.
Yes they are, in so far as one can use the word “guarantee” (which isn’t very far). Every preferred share prospectus I’ve ever seen has included the provision that dividends on common cannot be paid unless the company is paying dividends on the preferreds. If a company wants to save some money on its dividend payments, the common will get hit first.
In extreme circumstances they are much easier to cut or eliminate than interest payments on debt securities.
This part is true.
I do remember that being said about certain big trust companies in Canada a decade or two ago, before they eliminated dividend payments on their way to collapse or absorption.
Everything else said in this column is forgivable. This isn’t. Mr. Anderson provides no analysis or comparatives to show that these are, or could be, related events. What’s the point here? That it is possible for companies to default? We know that, Mr. Anderson – what we’re concerned about, first, last and always, is the probability of default.
This sentence shows Mr. Anderson’s experience as a retail stockbroker: no analysis, no perspective, nothing but the airy whipping up of fear in order to appear wise – with just barely enough factual backup to provide plausible excuses for underperformance.
Assiduous Reader kaspu in the previously mentioned comments said it best:
“I thought I had a sure thing once upon a time but I was mistaken.”
With respect, there is never, ever, EVER, a sure thing.
Quite right. There is never, ever, EVER a sure thing. So you do your homework, in order to tilt the odds in your favour; and you diversify – because even if your analysis is perfect today (which it won’t be … all we can ever hope for is an analysis that’s pretty good), something might happen tomorrow.
In his efforts to cause alarm amongst his readers, Mr. Anderson has done them a grave disservice. Risk should never be discussed without attention paid to its minimization, especially in an article targetted towards inexperienced investors. What mother, for instance, would send a child to school with the warning that a car might hit them? Wouldn’t most mothers, at their most explicit, say “Look both ways before crossing, because a car might hit you”?
Hmmm, maybe we can hope that silly trash talk could be a bottom indicator.
I’ve never been impressed with the Globe’s coverage of fixed income, so now we can add the Financial Post. With only newspapers and advisors like this to go on, it is no wonder retail investors get lousy results.
but this should be seen as a good thing, no? after all, investors read this trash, it causes prefs to get battered even more, and that creates the wonderful buying opps that you seem to aspire to . . . you should be happy because you want lousy results, don’t you?
BMO.PR.L started trading today . . . 24.75 – 24.80 with kazillions on the offer, and after only 8400 bidding at 24.55 and 24.75, nothing bidding at all until 23.51 . . . a total piece of @!(^&*^ [as predicted]
but then again, this is a good thing, too, right? because you can buy more at a lower price and enjoy a higher yield!
am I starting to get it now, ph? you should be proud of me!
madequota
You know, madequoata, normally I would point out to you where you can put your incessant bitching and moaning.
However, I am a guest here, on Mr. Hymas’ kind sufferance, and this blog is, in my opinion, a very valuable resource. I also promised my kids that I would try and take the road less travelled.
So….
Let me just point out this.
You may in fact be correct. Maybe there are too many prefs being issued at prices you don’t like. Maybe the market makers are, in fact, part of a global conspiracy to give you trader’s heartburn. I really don’t know, and, quite frankly, I don’t have the time or patience to worry about such things.
But I will tell you this, and hopefully you and other readers will take some benefit from this.
For the past 15 years, prefs is what I do. About 90% of the portfolio I manage, privately, is made up of Canada, U.S. and foreign fixed income and prefs. It’s a large portfolio, in the mid 8 figures, and, if I screw it up, I’m personally screwed. My style is radically different from Mr. Hymas, but it suits me. So when I see that BMO L, of which I purchased at the issue, 6000, is now trading at $.25 less than what I payed for it, I can assure that I’m not dancing on the hood of my car. But, on the other hand, I’m not placing ashes on my head, and rocking back and forth in grief. It’s called PERSPECTIVE. The absolute bottom line to me is safe tax-efficient yield and cash flow. In the current enviroment, and for the foreseeable future, it is an economic fact that we are in a low interest rate enviroment. It is also a reasonable assumption that over the next number of years BMO will most likely not renege on its debt obligations. So the fact that at $25 the BMO L will give me a very safe, after tax return of 8.12% makes me happy. No, it is not GOOGLE that I could have bought at 60, see it is rise to 750, and slide to 450, and maybe, God knows, rise to 2,000. On the other hand, I sleep well at night knowing that over the past 15 years and , hopefully for a while to come, I am getting a compound return that is close to 10.5% annually. I can live with that.
I may buy more BMO here. Maybe not. I own a lot of BMO canada and US prefs, and I do have an allocation script that I like to follow. But do you honestly think that, with a multi-year horizon in place, I ultimately give a crap whether what I bought is, on any one day, $.25 less than what I payed for it, especially when I know that in 3 months I am guaranteed a very nice tax-efficient payment that will compensate me? Trading prefs, especially on the issue, is fun and I do it as much as anyone. But to assume that quick fast pref-trading is the same as pref-investing is, in my opinion, horseshit.
Here endeth the lesson.
OK Mr. Kaspu . . . that was not a bad dissertation. I think that managing a “mid 8 figures” portfolio must be pretty challenging. I also know that, being 90% composed of prefs, it has sufferred huge damage over the past 12 months . . . especially since you prefer to minimize trading. Beyond that, since it is not entirely your money, you must be feeling some pressure from those who are reading your “statements”. I have no problem with anything you’ve said there, so far.
However, just because you are such a big money investor, that buying a bunch of prefs for $1500 too much (6000 x .25) doesn’t bother you, I would venture that most readers here, including myself, are not quite as portfolio-heavy as you, and as such, the $1500 is more of an issue . . . especially if losing it can be avoided.
My comments here have always been trader-perspective, and for you to judge that my viewpoint is nothing more than “fast pref-trading horseshit”, demonstrates a number of things about your character.
I agree that this blog is an invaluable resource; it is why I continue to come here, and post my thoughts. I will continue to do so. But let’s agree on another thing . . . you don’t much like me, and now that I’m familiar with your attitude, I think you are somewhat of a jackass.
I will ignore your commentaries, and simply ask that you ignore mine as well. Deal?
madequota
Just one minor correction. It is, in fact, entirely my own money. I am answerable only to my wife, kids, and dog, in that order.The pressure that I feel, is the small one in my forebrain that usually indicates an incipient headache brought on by a lack of patience.
We’re dancing awfully close to the line, guys.
Anyway, madequota. I wrote this post because I was pretty irritated at the fear-mongering in the article. This type of article is simply not helpful to anybody.
As you know, I spend considerable time keeping this post up to date and writing articles for Canadian Moneysaver and Advisor’s Edge Report. I do this for three reasons:
(i) I love to see my words in print.
(ii) I want to educate investors
(iii) I love to see my name on the byline.
Look at reason #2. I’m not doing it because I’m a kind person, I do it because I think, ultimately, it will put some money in my pocket. My ideal path for a reader is:
(a) learns something about prefs
(b) decides that what I write makes sense
(c) invests on his own, using the concepts I attempt to describe
(d) decides that while the asset class is great and the investment approach adds value, it takes too long and it’s too complicated.
(e) decides to get the work done by a knowledgable advisor
(f) i.e., me.
The article written in the Post is not helpful – either to this process or to the investor’s financial well-being. By scaremongering, it just makes the whole process seem mysterious and somewhat akin to gambling.
Perhaps I could make a bit of money by writing such articles and buying on the resultant dips. But:
(i) That would be dishonest
(ii) That would not make a lasting business
(iii) If I wanted to do that kind of thing, I’d start a common stock hedge fund and go after Bear, Lehman and HBOS.
Anyway … I remain a bit puzzled by your trading strategy. It seems that you consider yourself a trader and attempt to make your money by trading – I don’t know what specific kind of trading, whether it’s scalping, liquidity provision, momentum, or what, but under the general heading of “trading”, anyway.
And yet it also seems that you are net long the market. Shouldn’t you be shorting something (CPD, DPS.UN, other funds, individual issues) to make yourself market-neutral?
“scalping, liquidity provision, momentum”
Thank you for the comments, and a sincere apology for approaching the line. It just seems sometimes, that readers here just don’t want to face the day to day realities of the market, instead opting for the attitude that all will be well in the long term. Actually, history has shown in most market-related cases that things do work out in the long-term, but even so, is there harm in micro-analyzing a situation with the goal of achieving short-term gains? There is a big difference between that . . . and “bitching, moaning, and whining” . . . all words that have been used to describe my comments here.
BMO.PR.L is a great example. Some readers here think I’m poo-pooing the stock when I use flowery descriptions of my feeling that it will open below par. It doesn’t mean that I don’t want to own the stock. On the contrary, 5.8% money as I’ve mentioned before is particularly attractive, especially when dividend tax credits, and declining interest rate environments are factored in. I’d just prefer to pay $24.75/share, instead of $25.00; that’s all. National’s 6% money is pretty interesting as well; I’d have my theories on where it will open; and I would say that I will be within a nickel or dime of that call on opening day, but if readers here would rather think that $25 is the only number they need to hear, then so be it, I will retain my [cyber] breath!
I’m happy to elaborate on my trading strategy . . . but I have to ask that you define some of those terms. I think I understand momentum, but what exactly do you mean by the other two? I’m sure I do all to some extent, just never put a label on it!
madequota
There’s an explanation of scalping at Investopia which also covers momentum trading.
By liquidity provision I mean … well, I guess I mean slow scalping! Somebody trading in this way – according to my definition – would look for a large big-ask spread and simply call a market on it … put in a bid five cents higher than the market-maker’s and an offer five cents lower, for instance.
Naturally, there’s all kinds of overlap between “investing” and “trading” strategies – I consider my style to be liquidity provision, but on a time scale longer than mere hours. ‘This stuff is out of style? OK, back up the truck!’
But I’m still interested in learning whether you are, in fact, net long the market and if so, why?
I’ll go back to my original comment and react to madequota and kaspu in due course.
Unlike Mr. Hymas, my feeble attempts at investor education support hopes for their not being swizzed by all and sundry in a Canadian financial industry that extracts several $billion too much in fees and other damaging practices. This is NOT out of (financial) self-interest, but rather out of charity and trying to be a better person for the good of the underdogs.
You can tell from this attitude that I’ve never had a job in the industry. With assistance of Mr. Hymas, I do have a CFA designation and the code of conduct of CFA Charterholders requires them to put the client’s interests first. Because I’m retired I have time for investor education as a “charity” or giving back contribution. I am also living off my prefs (which, although in a smaller portfolio than Kaspu, don’t really cause me much concern, and my wife doesn’t understand the things anyway). But I digress…
As a budding investor advocate, I can’t really be positive about crappy journalism stimulating new lows that might trigger retail investors to bail out of a good investment at the wrong time (the original post). I might be smart enough to take advantage (only time will tell), but I suspect the article in question is damaging to hapless individual investors (and their ineffectual value-destroying advisors).
So, to madequota’s first (perhaps sarcastic?) point — I am not celebrating with my comment — merely making an observation along the lines that maximum stupidity occurs close to a bottom.
I’ not offended at all by madequota’s response, but rather very pleased with the diversity of perspectives we have here: the analytical Mr. Hymas; the insightful trader madequota; and the long-term rock of stability kaspu. With diversity of perspective we won’t always agree on everything (other than prefs are interesting, inefficiently priced and rewarding to own). I think that’s great, but the differences seem to (unnecessarily) frustrate both madequota and kaspu at times.
Pref on!
BMO.PR.L started trading today . . . 24.75 – 24.80 with kazillions on the offer, and after only 8400 bidding at 24.55 and 24.75, nothing bidding at all until 23.51 . . . a total piece of @!(^&*^ [as predicted]
Maybe they should have issued it with a bigger coupon.
I’m sorry … I’ve managed to resist the temptation to suggest this all day … but I can’t suppress the urge any longer!
OK you guys, the one thing I never thought either of you would be able to make me do here . . . is smile . . . which I am doing now.
And next week, when Laurentian comes to market at 6.2%, I will test this new-found attitude by trying to keep smiling!
So is this blog now something like The National’s “at issue” panel then?
James is Peter Manbridge trying to moderate the whole deal with a combination of balance, and analysis?
PH is the Decima guy, Richard Gregg I believe his name is, trying to demonstrate balance and ingenuity whenever possible,
Kaspu is Chantel Hebert, portraying a firm understanding of the overall situation, but always putting an emotional spin on the story,
and I am Andrew Coyne, who perpetually hates everything and is constantly on the lookout for perceived stupidity in the story?
Everyone else who posts drop in on occasion to fill out the panel as the guest commentator.
Maybe we should approach the CBC with an idea here? or maybe Rick Mercer would have a better venue!
madequota
[…] the risk/return spectrum that will be of interest to many investors. I will note that despite some alarmist stockbroker talk very few issues actually default. There are nine defaulted issues on the NYSE, according to Quantum […]
[…] did it last year and now they’ve done it again: a short piece titled The ‘risk’ of Preferred […]