8 Responses to “June 25, 2013”

1. nervousone says:

   June 26, 2013 at 10:15 am

   OK, here is a fact: With every drop of 50 bps on the long bond, perp share prices will drop on average 15%. Examples: SLF.PR.D, WN.PR.E, BAM.PR.M all trading near par a month ago, with the long yield at 2.5%. Now the yield’s closer to 3%, and all three of these are down several dollars/share. Based on this trend, if the long yield gets to 4%, which it probably will within the next 4 – 6 weeks, these perps, and pretty much all others will be trading in the $17 – $18 range.

   And then the banks will start to issue . . . and issue . . . and issue (before it’s too late for them to shore up their Tier 1 capital ratios with this kind of paper).

   There is nothing that can be done about it. Carnage is underway.

2. nervousone says:

   June 26, 2013 at 10:28 am

   On the other hand . . . Bernanke’s comments were probably badly misunderstood by the market in general . . . and even if he was planning on slowing QE down later this year, the billions of dollars of market value that have evaporated because of his musings will almost certainly cause the economy to collectively pull in its reigns.

   Therefore, gold will recover probably sooner than later, the long bond yield will drop to more accomodative levels, and prefs that have lost a few dollars per share now will almost certainly rise.

   This could very easily by the most obvious pref share buying opportunity of the last three years.

   Anyone have any guidance on this one?!

3. jiHymas says:

   June 26, 2013 at 12:58 pm

   OK, here is a fact: …

   Your fact relies on several assumptions, each of which is open to dispute:

   – you are assuming that perpetual yields will move in lockstep with yields on the Canada long bond. This is not necessarily the case – spreads widened considerably during the Credit Crunch; I expect to see a degree of narrowing during the recovery.

   – you are assuming the Modified Duration on a perp is 30; this will only be the case when the yield is 1/30, or about 3.33%. There is also convexity to consider. It’s easiest to work out the current yield when the price is at your target level of $17-$18, approximate this to be equal to the actual yield, and work out the required benchmark yield given this datum.

   – You are assuming that insurance perps (e.g. SLF.PR.D) are in fact perps, whereas I consider them to be DeemedRetractibles.

   Anyone have any guidance on this one?!

   As I stated to the point of weariness in my Globe & Mail Q&A yesterday, I don’t do market timing. Therefore, my guidance is: if preferred shares make sense for your portfolio in terms of their yield and their Preservation of Income characteristics, they’re a buy. If they do not make sense for your portfolio in terms of their characteristics, they’re a sell.

4. nervousone says:

   June 26, 2013 at 1:29 pm

   Hi James,

   Thank you for the feedback. Please do not get frustrated with investors concerned about market timing.

   It would be a wonderful world if pref issuers would put the paper to the market, and offer investors some kind of feature to eliminate the “on paper only” downsides of market timing. In a way, they tried to do this with the introduction of the rate reset preferreds, and with some success.

   Unfortunately, this protection is not possible, so pref investors (like investors in anything) have to at the very least, watch the current value of their investments fluctuate. Market timing is a fact of life, and if there is an opportunity to make a buy that takes advantage of this, or to make a sell to avoid the downside of this, then savvy investors can accentuate their investment, pref or otherwise, by taking advantage of this.

   People love to see investments go up . . . and despise the converse effect (unless they believe in short-selling, but that’s another conversation!).

   In any case, we’re all just trying to gaze into the crystal ball, see the future with clarity, and invest today based on this intrinsic wisdom. Can’t be done, I know . . . but can be calculated sometimes!

   I would also like to say, that I’ve always found your blog and daily postings to be highly informative, deadly accurate, and extremely worthwhile. You’re a specialist in a field that really has no other specialist, and I know your regular readers and subscribers respect this. I also respect this, or I wouldn’t still be here. But sometimes your readers have some interesting perspectives, and that’s what makes a blog . . . well, a blog! Hope to be able to contribute now and then!

5. jiHymas says:

   June 26, 2013 at 2:45 pm

   In a way, they tried to do this with the introduction of the rate reset preferreds, and with some success.

   FixedResets were invented because
   – Issuers were having difficulty selling Straight Perpetuals
   – Issuers wanted to reduce their funding costs.

   The reset mechanism is indeed a benefit – but you pay through the nose for it, in terms of diminished expected returns.

   In any case, we’re all just trying to gaze into the crystal ball …

   Don’t get me wrong, I do sympathize with your desire for a good prediction. I’ve been looking for a competent market-timing specialist for years! I’ve talked to many people who have built their whole business around their uncanny ability to predict market movements!

   If I ever find one of these guys who isn’t a charlatan, I’ll let you know.

   Hope to be able to contribute now and then!

   Happy to have you aboard! If nothing else, being asked questions I don’t want to answer helps keep me honest.

6. adrian2 says:

   June 27, 2013 at 8:48 am

   with the long yield at 2.5%. Now the yield’s closer to 3%, and all three of these are down several dollars/share. Based on this trend, if the long yield gets to 4%, which it probably will within the next 4 – 6 weeks

   I’m willing to take a bet that the long bonds will not get to 4% in the next 4 – 6 weeks.

   Adrian

7. nervousone says:

   June 27, 2013 at 12:45 pm

   Hi adrian,

   Well, we got 2 bps back yesterday, and by mid-day today, we have another 5 back; gold’s been bouncing around the bottom and looks to be trying to come back; silver’s got a pretty solid rebound underway, oil’s up almost $2 after 2 days of smaller gains, and all markets are firmly up.

   If this relative sanity can hold, then you are absolutely right, and the other scenario I described as a buying opp on some of those beaten up prefs becomes the possible play of the day!

   Sorry about this border line market timing comment, James, but I couldn’t control myself!

8. jiHymas says:

   June 27, 2013 at 2:36 pm

   Sorry about this border line market timing comment, James, but I couldn’t control myself!

   Make all the market timing comments you like – I find them interesting. Just don’t ask me to make any myself!