9 Responses to “December 24, 2018”

1. Tim says:

   December 25, 2018 at 7:38 pm

   James, a special commendation on finding an explosion picture with a Christmas theme!

   I rebalanced (again) yesterday, selling bonds to buy more prefs. At some future point, they will be priced higher when fear subsides and I will rebalance back. In the meantime, I will be paid 5.9% annually on my purchase.

2. jiHymas says:

   December 26, 2018 at 3:30 am

   James, a special commendation on finding an explosion picture with a Christmas theme!

   Thanks! I was very pleased with myself!

   I rebalanced (again) yesterday, selling bonds to buy more prefs. At some future point, they will be priced higher when fear subsides and I will rebalance back. In the meantime, I will be paid 5.9% annually on my purchase.

   An excellent approach!

3. Tim says:

   December 26, 2019 at 9:29 pm

   An update a year later:

   By fluke, Dec. 24, 2018 was almost the very bottom price point for prefs in 2018. I sold some bonds and bought prefs that day and felt I had gotten lucky on the pricing.

   At that point, prefs (and equities) had fallen in price by about 15% over the previous three months, a fall that seemed unsupported by fundamentals, and I felt a recovery would be likely over the next 12 months.

   Well, equities did recover within a few months but not prefs, sadly, as they turned out to have a lot further to fall. We’ve come back again from the valleys of late August, but as of Dec. 24, 2019, the price on those prefs is virtually identical to what they were exactly a year earlier. Meanwhile, bonds have surprised with a great 7.5% total return this year.

   I have (as James says) clipped my pref coupons and it looks like the dividends will be the whole total return this year. A better result than 2018, at least.

   It’s a surprise though. I had thought prefs would recover at least some of that 2018 Q4 price fall by now.

   Here’s to a better 2020 for pref investors! If the 5Y rate holds, there will be a lot of fixed reset prefs resetting higher in 2020.

4. skeptical says:

   December 27, 2019 at 9:25 am

   IMHO, preferreds trade on the basis of solid fundamentals driven by the triad of interest rates, credit rating and the coupon/spread.
   The stock market in general has traded for the last many years on the basis of Central Bank driven liquidity and multiple expansion. As noted in many places, there was practically no earnings growth in S&P500 in2019, yet the index surged by about 30%.
   If anyone here follows John Hussman’s work, he’s been under performing the broader markets for almost a decade. Why? He’s clinging to the fundamental story whereas the markets now trade on CB Interventions, ZIRP, QE, Story Stocks, Momentum and FOMO. Historical PE and CAPE have little relevance.

   Preferreds will have their day when people begin to appreciate what they are getting- a solid yield backed by the enhanced security of preferred instruments and solid credit rating, coupled with favorable tax treatment.

   This situation isn’t too unlike late 1990s early 2000s when Value assets were deeply mispriced and story/momentum was the king.

   At a certain plane, I’m glad that we have at least an asset class that isn’t grossly overpriced. Because if the Preferreds were priced normally for the current environment, we’d be seeing perpetuals yielding less than 4%. We should be happy that we get close to 5.5%. These days won’t last for long as both IGM, West Coast Energy and more recently PWF/POW redemptions have shown.

   Happy Holidays to everyone!

5. baffled says:

   December 27, 2019 at 1:47 pm

   skeptical , i agree with what you said , you just left out 1 thing about how the markets trade ,….trump tweets .

6. skeptical says:

   December 27, 2019 at 2:56 pm

   skeptical , i agree with what you said , you just left out 1 thing about how the markets trade ,….trump tweets .
   Of course, that too.
   I think when there’s total recklessness in the market with no regard to really anything, this is what happens. Eerily similar to late 99 and early 2000s. Very low returns for the next decade or so for the broader markets are baked in the cake at this point.

7. Tim says:

   December 27, 2020 at 10:19 pm

   An update two years later:

   > By fluke, Dec. 24, 2018 was almost the very bottom price point for prefs in 2018. I sold some bonds and bought prefs that day and felt I had gotten lucky on the pricing.

   At market close on Dec. 24, 2020, those pref units are at exactly the same unit price as what I bought them at two years previously. And what a ride down and back up in 2020…

   In comparison, the bond fund units I sold in 2018 have had a unit price appreciation of 9% during those two years.

   I’ve been ahead on the monthly coupon payments, of course, but still not yet at break-even on this particular bond to pref swap.

   Still, broad bond funds have a YTM of around 1.3% right now and the longer interest rates stay even lower than this, the lower bond YTM drifts. That’s a untenable number over the maturity period and I’ve kept buying some prefs this whole time to support my overall portfolio yield.

   At some point, prefs will do better than bonds again, as their fundamentals say they should — eventually.

   Here’s to 2021.

8. baffled says:

   December 28, 2020 at 6:43 am

   Tim says: , just curious , what does , ” At some point, prefs will do better than bonds again” .. mean for you ? if the price of the prefs goes up and you sell , you loose your cash flow . for me as long as nothing happens for the worse with the company , i hold for the div and dont care about price unless it goes down so i can buy more .

9. Tim says:

   December 28, 2020 at 11:08 am

   @baffled

   I’m thinking of the general principle that, over the long term, the (total) return on invested capital should reflect the degree of risk investors are asked to assume.

   So, over the long term, preferred shares, as an asset class, should reward investors more than those choosing to invest in, say, bonds from the same issuers.

   This risk-relationship appears to hold true in the US market. While this isn’t an exact match of issuers, the ten year annualized total return of the S&P US Preferred Stock Index is 6.74% while the ten year annualized total return of the S&P 500 Bond Index is 5.62%.

   In Canada, the S&P/TSX Preferred Share Index has had a ten year annualized return of 1.71% while the FTSE Canada Universe Bond Index has a ten year annualized return of 4.47%.

   Of course, the Canadian preferred market is quite different structurally from the US market especially due to the dominance of rate resets in Canada.

   I’m not seeking to make the case that putting capital into preferred shares in Canada is a bad idea. That’s an individual decision.

   I do believe that — eventually — the total return on Canadian preferred shares will be higher than similar bonds because that’s how an efficient market should work.

   As a weaker statement, I hope that at some time in the next few years there will be a sustained rise in preferred share validations to reflect their fundamental risk-reward value. I also hope their potential falls in price during market downturns become materially less than equivalent common shares because that also would make sense from fundamentals.

   But the Canadian preferred market is small, pretty illiquid and dominated by retail investors, and can resist what fundamentals would suggest for long periods of time.