15 Responses to “June 17, 2019”

1. skeptical says:

   June 18, 2019 at 12:15 am

   Where do you guys think that preferred shares will find a bottom? I recognize the tenets of contemporary investing wisdom don’t encourage market timing etc, but I’m curious.
   The spreads are already very wide as compared to historical norms, but what does the chicken little aka Canadian preferred shares investor really want?
   I’ve a strong feeling that we’ll retest the lows seen during early 2016 some time in not too distant future.
   Imagine, price adjusted spread (effective spread with GOC5 at zero) at 5% for blue chips. We are currently at between 3.8 to 4.2% for MFC, NAC, TRP, BCE, FFH and many others. Imagine this spread becoming 5%.
   Would that be the bottom? Or would investors want even more?
   I know nobody can answer that, but I just wanted to think aloud in front of an audience that thinks about these things.

2. baffled says:

   June 18, 2019 at 5:55 am

   skeptical , working from a variation of what keynes said “the market can stay irrational longer than you can stay solvent ” , you can bet the spread will grow wider than you can imagine , just enjoy and keep buying . at some point the companies will save a lot by refinancing at lower rates , and the spread widening will stop as they all get called in .

3. after says:

   June 18, 2019 at 6:14 am

   Thought the same, keep $ around for possible lower prices.

4. Jingaly says:

   June 18, 2019 at 9:54 am

   Cdn preferreds are the Rodney Dangerfield of the financial universe

5. skeptical says:

   June 18, 2019 at 10:11 am

   This is the chart. Will Canada appear anywhere here in the near future?

   https://pbs.twimg.com/media/D9V4Sb9XUAI8F3y.png:large

6. baffled says:

   June 18, 2019 at 10:50 am

   maybe not near future , but i think there is a good chance in 5 years .

7. BarleyandHops says:

   June 18, 2019 at 5:38 pm

   Might be me, but what I have noticed over the last few days is “sell at market”. And, some rather large positions, too. Kinda like 2016 all over again.

   Me thinks we are in a Japanese spin of keeping interest rates low for an extended time, really extended time.

   That said. I think inflation will tick up ’cause of food stuffs (read pork Asia). The lag for interest policy will be lagged. EU might now be seeking stimulus as some data points to growth slowing down. Stagflation once again?

8. skeptical says:

   June 18, 2019 at 5:58 pm

   BarleyandHops

   I think inflation might be a boogeyman that never arrives. Reason? Demographics. If it were not for a somewhat good quality immigration system in Canada, we’d have absolutely horrible demographics here. Same with the US. Most of the Western Europe and Japan suffers from declining growth rates or outright declines in population. India’s growth rate is slowing down too. I think it’s only Africa with great demographics but rather underdeveloped economic system.

   So in a world which is not growing demographically, what’s going to cause inflation?

   On the other side, we have so many businesses across the world that are real zombies, with barely the ability to service their debt. Governments aren’t in a much better shape either. So if there’s a meaningful rate increase, there will be carnage in both stock and bond markets.

9. paradon says:

   June 18, 2019 at 8:16 pm

   I can accept that a pref with the risk of a reset at a lower yield would be out of favour but that doesn’t explain why straights or resets without that risk are trading at such a big discount. If we accept that interest rates will be low for an extended period then that makes those issues even more attractive.

10. baffled says:

    June 19, 2019 at 5:59 am

    skeptical , given the chart you showed with all the negative rates , and the likely direction of rates being down and possibly going negative in canada , you would think the good div payers and the fixed rate perpetual pref should be trading a lot higher with much lower yields. aside from the gov risk of the div tax credit being changed , the other risk is the issue is called and you have money that has to be reinvested , possibly at a higher price and lower yield , if the current prices stop being give away prices

11. skeptical says:

    June 19, 2019 at 6:17 am

    IMHO, the pref market is full of chicken littles who get overly worried even for things that don’t impact them. What do you do in such a condition?

    1. Actively exploit the inefficiencies in the market.
    2. If you can’t or won’t do that, just sit back and enjoy the dividends.
    3. Stop looking for an affirmation every day that your decisions are correct from Mr. Market, as Mr. Graham used to say. Here’s an excerpt from Mr. Buffett’s letter(not linking or the post will get lost):

    Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

    Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market’s quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions, he will name a very low price, since he is terrified that you will unload your interest on him.

    Mr. Market has another endearing characteristic: He doesn’t mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.

    But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren’t certain that you understand and can value your business far better than Mr. Market, you don’t belong in the game. As they say in poker, “If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”

    4. I think perpetuals and other min rate resets will eventually find their footing and trade where they should be trading. It’s like the preferred market hadn’t quite recovered from the Dec 2018 selling when this second bout of selling started in May/June.
    5. The great thing is that for perpetuals, we can all just go quiet and collect the dividends and meet our cash flow needs. Isn’t that really the purpose for investing in this asset class- to get tax advantaged cash flow without selling the principal?

12. mr_j936 says:

    June 19, 2019 at 12:11 pm

    straight perpetuals did not fall that hard, I see maybe a 5% drop on the ones I have (I don’t have that many) It is a shame that straight perpetuals do not have a dedicated index. ZPR is all resets and cpd is mostly resets…
    Sometimes I wonder if I should just drip straight perpetuals. It’s much easier to predict the outcome. I feel like I am holding a lottery ticket with the resets I have, depending on my luck that week when they will be resetting, it will determine the money I will make the next 5 years…

13. BarleyandHops says:

    June 19, 2019 at 5:49 pm

    @ skeptical

    Short answer for inflation is: FOOD.

    And, I think in a more immediate way.Swine Flu is causing major supply disruption in pork in Asia and other parts, all of Asia, China has exhausted cold storage facilities to manage supply, Vietnam has seen retail pork prices rise 35% in the last three months (ah, they eat a lot of pork), an African nation is asking farmers who had their land confiscated, to return to the country that basically kicked them out (SA is in the throws of nationalizing land and kicking out farmers which will have longer term impacts) so that production can begin again, various trades issues and tariffs have caused (will cause) producers to go bankrupt (US soy farmers) and supply chains to narrow causing price increases, some countries now aggressively enforcing offshore fishing rights causing supply interruptions and shortages (seen the price of crab and lobster lately after the US initiatives on trade?).

    As a naive person, food stuffs are on tract, imho, for a 10-20% increase in the next year or so. How does this factor into any Fed decision for interest rates> Dont know. But I sense consumers will feel the pinch.

14. skeptical says:

    June 19, 2019 at 6:40 pm

    BarleyandHops
    Don’t you know they don’t count food, house prices and gasoline in the inflation calculations! So no inflation there.

15. BarleyandHops says:

    June 20, 2019 at 9:48 am

    @ skeptical

    Thats why I said “Dont know”

    I sense consumers will feel the pinch. Less discretionary spending as staples are put on the table. Inflation caused by the price of oil in the 70s was real to consumers and to quell this, interest rates shot up dramatically (there were other factors, tho) – a decision was to stop inflation what ever the fall out.

    So the reality is dont know. We do know scarcity causes prices to rise. And food is one of those ubiquitous things, like oil.