20 Responses to “August 22, 2019”

1. skeptical says:

   August 23, 2019 at 10:18 am

   Here’s a dispassionate question for everyone:
   When are we going to make the all time lows for mainstream indices?
   I think it will happen within one year time frame, perhaps a lot sooner at the current pace!
   I think the lowest CPD value was 11.21(James would know more on this than I do) in Jan/Feb 2016.
   That was coincident with major equity declines across the world, a plunge in oil prices, massive fall in loonie….crisis all around.
   We are now a couple of percent points higher than that number.
   And nothing terrible has happened in the real world so far. It’s all been in the minds of the preferred investors.
   I think the terrifying thought for most ‘investors’ here is the prospect of negative interest rates. These folks had barely come to terms with living with very low rates for a long time and now this bombshell of negative rates has been dropped.
   It’s a possibility only, we are a good 130 bps from that, but most preferred investors have already abandoned all hope and jumped from the ship. And realized massive losses.
   Even perpetuals are now joining the gloominess and if this continues, there will be some very sweet buying opportunities for those who have some dry powder left.

2. after says:

   August 23, 2019 at 10:24 am

   How long has CPD been available ?
   How can one know what percentage has bailed ?
   If a retiree or other go to the local professional to manage their money, would that pro sell or buy more preferred ? My guess it’s it easy sell to recommend getting rid of them …

3. skeptical says:

   August 23, 2019 at 10:53 am

   https://www.blackrock.com/ca/individual/en/products/239836/ishares-sptsx-canadian-preferred-share-index-fund

   so around since 2007.

   The question is why sell? It’s tough to hold your nerves when the price goes down, but why sell? Nothing fundamental to underlying businesses has changed. There’s a reason why these instruments pay almost twice as much as a GIC.

4. CanSiamCyp says:

   August 23, 2019 at 12:09 pm

   … and the 2x multiple you cite as a discrepancy between the yields of prefs and GICs will only grow!!! As interest rates drop (i.e., GOC5 year), GIC yields will inevitably drop! I note there is now a mortgage available in Germany for -0.5% – if that ever happened here, GICs would yield close to 0%! Then what would your pref with a +250 spread yield? And if you buy at current rock bottom prices and the issuer decides to redeem at par, you have a capital gain! So win, win – either way you win!

   So why sell at current prices indeed skeptical! Well said! To paraphrase my post of the other day, encourage pref investors to laundry their undershorts and get ready to start buying! LOL!

5. skeptical says:

   August 23, 2019 at 12:16 pm

   I regard the preferred market as a market that used to exist 50 or so years ago for mainstream stock indices. At least in terms of the naive investor reactions. The preferred market represents perfectly the Ben Graham’s description of Mr. Market as a schizophrenic.
   Why is something 10% cheaper today than what it was just a couple of days ago. Nothing has changed. Why then?
   Those who master this basic precept will succeed as investors.

6. stusclues says:

   August 23, 2019 at 12:47 pm

   “The question is why sell?”

   Investors are so bamboozled by the financial industry and their financial-industry-produced financial statements that they have forgotten (or maybe never even realized) that mark-to-market is a simply a convention. It has become a near religion.

   That something is worth the last priced paid for it is a belief system (or paradigm) massively reinforced by the fact that so much money is managed (or mis-managed) professionally where mark-to-market is required because of liquidity provisions in the agreements between the investors and their managers.

   I believe this is why so many HNW investors say they prefer private investments. They actually choose lower liquidity to (seemingly) protect themselves from volatility. In reality, they are only walling off Buffet’s “Noisy Neighbor”.

   It isn’t so much that preferred share investors need to steel themselves for volatility and lower prices, they need to understand their own investment horizons and, if those are long term, realize that mark-to-market accounting is simply not an appropriate way to measure the value of their portfolio.

7. jiHymas says:

   August 23, 2019 at 1:41 pm

   I think the lowest CPD value was 11.21(James would know more on this than I do) in Jan/Feb 2016.

   It’s an interesting question and the answer illustrates just why I say that investors should Shut up and clip your coupons!.

   TMXMoney has a charting feature which allows the selection of any period. When you look at the chart for 2008-11-1 to 2008-12-15, the low close “adjusted for splits and dividends” is 7.4704 on 2008-11-27 … but that includes – I think, there’s no real documentation – an allowance for all the dividends paid from then until now … and nearly 11 years of dividends adds up!

   If instead you click “Unadjusted” as your chart preference, the unadjusted close on 2008-11-27 is 12.90. Quite the difference!

   If we look at the standard chart (under the “Charting” tab) for the last 10-years, we find that the 10-year low is 11.13 on 2016-2-26 … and it returns the same number for both Unadjusted and Adjusted for Splits and dividends, so it’s obviously wrong. If we return to the “Price History” tab for the period from 2016-2-12 to 2016-3-11, we find that the Adjusted Close on 2016-2-26 was 9.5259 … but the unadjusted close was 11.21 on that date; 11.13 on 2016-2-25.

   One needs to be very careful! But it looks to me as if skeptical is close enough for government work and the all-time low (UNADJUSTED!) is 11.13 on 2016-2-25.

   Will we break that figure in the current downdraft? Place yer bets, gents,
   place yer bets!

   I don’t track the price of CPD myself.

   There’s a lot of other very interesting stuff in this thread and I will respond in due course.

8. Jingaly says:

   August 23, 2019 at 2:04 pm

   Fascinating comments above, and I will add two general observations: 1) price rarely equates to value, and 2) price can and will deviate significantly from value, and both 1) and 2) become exacerbated in times of illiquidity. I would also hazard a guess that indexing &/or structured products contribute to this overall illiquidity. It all becomes a negatively reinforcing feedback loop.

   Preferreds should be easier to value than common shares (I know this is a huge generalization) b/c the cash flows are stipulated and/or reasonably estimable in the case of resets. So when price deviates significantly from our own estimates of value, and the condition persists, we wonder how/why. I think it’s because of lack of liquidity.

   I see a lot of comparisons to GIC’s, and I can say from experience, that GIC ladders are used extensively in asset management. James has a fantastic article on comparing GIC’s to preferreds. The main problem with GIC ladders (even though they are perceived as safe), is reinvestment risk in a falling rate environment. The first tranche of a 5 year ladder matures and has to be reinvested for another 5 years at -X bps from when the ladder was first put on. So if 5 year GOC’s ultimately retest the effective lower bound (0% or worse), one would expect that a basket of investment grade preferreds (including some perpetuals, & resets with high enough spreads or min reset guarantees with staggered reset dates) would be preferable to the clear loss of purchasing power in reinvesting GIC ladder tranches at lower rates. But the market simply doesn’t agree.

   I don’t agree with CanSiamCyp’s comment above issuers redeeming at par – it’s entirely optional! An issuer will only redeem at par when it’s in the issuer’s best interest &/or has to: case in point, BAM just implemented an NCIB for up to 10% of its existing preferreds, but none at par, all at current market. I think that this also contributes to price moving lower, anyone who bought BAM fixed resets > 5 years ago at par are likely not going to be made whole, until such time as GOC 5 years increase substantially, a far cry from current expectations. BAM is pretty smart: they raised funds at par when it was advantageous to do so, they are now buying back the issues at a fraction of par.

9. CanSiamCyp says:

   August 23, 2019 at 2:55 pm

   Jingaly: I did not say that issuers would redeem at par! I merely stated that, in the case of an investor buying at current low market prices, if issuers did redeem at par the investor would have a significant capital gain. My point addresses the concern that you raised in your comment about ‘reinvestment risk’. Such redemption is not likely to happen, I agree!

10. skeptical says:

    August 23, 2019 at 5:15 pm

    And now we’ll get some Trump induced declines!
    So the preferreds decline for the following reasons:

    1. Preferred holders get nervous for some reason. Any reason really.
    2. Interest rates begin to fall and nervousness increases.
    3. There’s a broader market decline.
    4. Trump tweets something

    So the preferreds fall for some imaginary and a few real reasons.

    Question- At what yields would you consider adding more to your portfolio of preferreds.

11. Jason says:

    August 23, 2019 at 5:53 pm

    A couple months back I contempleted doubling down by buying on margin (and posted on here looking for feedback). The decline this past week was finally enough to warrant proceeding. Time may prove that I was too early, but I think in the long run I’ll be happy with my decision (unless the BOC 5 yr rate goes negative for an extended period!). Posted some of my thoughts here: https://www.reddit.com/r/CanadianInvestor/comments/cu1jba/buying_preferred_shares_on_margin_revisited/

12. CanSiamCyp says:

    August 23, 2019 at 6:01 pm

    This is almost like market timing!

    Probably wiser to develop a plan:
    1. Pick several specific issuers you wish to add to your portfolio
    2. Within those issuers look for issues that meet your criteria (i.e. spread if rate resets, current market price cf. par, current yield, etc.)
    3. Decide how much money you wish to allocate per quarter for the next 6 quarters to purchase prefs (i.e. until Trump is voted out)
    4. Divide the amount in #3 across the selected issues in #2 so you know your target amount per issue
    5. Place your bid good for 90 days for each issue with an eye on the 52 week low for each issue
    6. Sit back and wait for Trump to tweet
    7. If/when order fills rinse (your tighty whiteys) and repeat (the next quarterly cycle)!

    Sounds like a plan!

    Maybe I’ll follow it myself! Lol!!!

13. CanSiamCyp says:

    August 23, 2019 at 6:22 pm

    Jason: Read your post and the comments below. Excellent work!

14. Tim says:

    August 23, 2019 at 10:00 pm

    CPD started trading on Apr. 10, 2007.

    Yahoo Finance has CPD unadjusted prices back to Oct. 25, 2007, almost at the start of the fund. These can be downloaded.

    start of data period
    2007-10-25 close: $18.27

    Highest close: $18.90 on 2007-11-09

    Lowest close: $11.06 on 2016-01-18 and 2016-01-20
    Lowest intraday: $11.02 on 2016-01-21

    Highest close (2016 to today): $14.60 on 2018-01-09

    Today’s close: $11.48

    Putting in reasonable assumptions for dividends in the first few months of missing data, the total paid-out dividends up from the start of the fund through last month are $9.10.

15. Jingaly says:

    August 24, 2019 at 10:31 am

    @CanSiamCyp, no worries

    @jason, a couple of questions: how did you select your basket? & how have you been able to accumulate large positions? For example, IFC.PR.A trades < 10k per day. Must have taken a while to buy all of these issues?

16. skeptical says:

    August 24, 2019 at 11:31 am

    Jason, you must love Brookfield…a quarter of your portfolio is in Broofield entities.
    If you don’t mind sharing, how are your mark to market numbers looking like at this moment?

17. Jason says:

    August 24, 2019 at 12:46 pm

    > a couple of questions: how did you select your basket?

    I went into it a bit on that reddit thread, but I built a PHP/mysql database of all preferred share issues, then whenever I’m looking to make a trade I click a button to refresh current prices & ex-dividend dates (through an automated script that scrapes the tmxmoney.com website), current BOC 5y rate, 3 month t-bill rate, and prime rate, then loops through each issue and calculates the expected time weighted IRR. Should come up with the same results as James YTW except I’ve been more conservative about my assumptions on redemption of non NVCC insured issues. From there I then rank them by expected return/credit grade, but occassionally tweak that based on my own assessments (ie personally I don’t think Transalta or Altagas are at as great a risk as the credit grade would imply). I’ve also tried to get a spread of reset dates (and all things being equal prefer those that are at least a couple years out, as I’m hoping Trump is out of office and things get back to normal by then!). Many of my early purchases were perpetuals, but lately have been more focusing on rate reset as it seems there is more upside potential there. I also subscribe to James’ newsletter to ensure I’m on track, and that we come to the same conclusions.

    > how have you been able to accumulate large positions? For example, IFC.PR.A trades you must love Brookfield…a quarter of your portfolio is in Broofield entities.

    Yeah I agree, way too much 🙁 Last week I just kept averaging down on
    BAM.PR.S when I actually shouldn’t have bought any! The risk/reward ratio just seemed too good to pass up. I’ve had a sell in on BAM.PR.K for awhile, but the market clearly hasn’t gone my way on that one – should have cut my losses sooner!

    Ultimately though I do think Brookfield is a very well run entity, and I’m also a long time holder of their common stock (and BPY in my TFSA).

    > If you don’t mind sharing, how are your mark to market numbers looking like at this moment?

    I just looked – my pref portfolio is now down close to $40k so far (not including dividends). Obviously not ideal, but I’m not too worried, nothing 9 months of dividends won’t solve! If only I knew how to time market bottoms! 😉

18. jiHymas says:

    September 11, 2019 at 12:24 am

    If a retiree or other go to the local professional to manage their money, would that pro sell or buy more preferred ? My guess it’s it easy sell to recommend getting rid of them …

    It depends on the professional.

    Pretty much every stockbroker in Canada and a good chunk of the institutional crowd are professional salesmen, not professional analysts. Therefore, the advice they give you will be the advice they think you want to hear. The good ones are very good at this game and get paid a huge amount of money to reflect their clients’ views back at them in a deep voice. The average ones are merely average at guessing and make less. And future returns will be good or bad completely independently of their actual advice.

    Why do you think that stockbrokers don’t publish composite returns? Why do you think that CRM-2, with its highly touted performance reporting, uses Dollar Weighted returns rather than Time-Weighted? (hint: Dollar Weighted returns are much, much less useful when comparing returns between advisors).

    There was an amusing Credit Crunch story about an advisor in the post Shut Up and Clip Your Coupons. The investor was upset about massive unrealized losses on his Straight Perpetuals (it was the fourth quarter of 2008) and got a stockbroker at another firm to have a look at his portfolio and give his advice:

    I have spoken to a new financial adviser at the the National Bank and he implies that I am indeed in trouble with the preferreds, especially the Perpetuals. He is implying that I will have to sell at least some at a loss.

    Well, of course that’s what he said. He wanted the account, so he had to say the portfolio contained troublesome issues that would have to be sold, which was exactly what the potential client was expecting to hear. He wouldn’t have got the account if he’d just said something like … ‘they’re still paying income, yields are very high right now, shut up and clip your coupons.’ So he worked on the investor’s fear. What else could one possibly expect?

19. jiHymas says:

    September 11, 2019 at 12:36 am

    How long has CPD been available ?
    How can one know what percentage has bailed ?

    According to the Blackrock Semi-Annual Financials there were 106,150,000 shares outstanding at June 30, compared to 113,250,000 at year-end.

    So there were net redemptions of about 7-million units, or a hair under 7% of the total.

    Note, however, that units are redeemed by market-makers, who receive the underlying securities in exchange, which they they have to sell (or, more likely, use to pay back securities that they sold short while accumulating their CPD position, since the essence of market-making is to be pretty well hedged at all times).

    And you don’t know who bought those securities. It’s unlikely, but possible, that they’re exactly the same people who sold their CPD position. However, I suspect that if you looked at all Canadian preferred share exposure on a very detailed basis, you would find that exposure has moved, to some extent, from Canadian retail to mostly-Canadian-but-some-foreign institutional accounts. But an academic could get a perfectly good paper published with little more than that data … it’s getting the data that’s the hard part.

20. jiHymas says:

    September 12, 2019 at 12:48 am

    I note there is now a mortgage available in Germany for -0.5% – if that ever happened here, GICs would yield close to 0%!

    There’s a bit more detail on the German market in the comments to August 16

    To paraphrase my post of the other day, encourage pref investors to laundry their undershorts and get ready to start buying! LOL!

    … and a week later, a significant recovery started. Hmmmm …

    Why is something 10% cheaper today than what it was just a couple of days ago. Nothing has changed. Why then?
    Those who master this basic precept will succeed as investors.

    What you are describing is a behavioural drop of 10%, not fundamental.

    As a rough rule of thumb, I regard all behavioural stuff as being about trading, while all fundamental stuff is about investing.

    My philosophy as an investor is simply to stick to my guns when the ‘behaviouralist’ crowd takes over the market and take advantage of any pricing discrepancies that might arise. This means that sometimes – like now, for instance – I am left underperforming, with not much of a story to tell clients other than my admonitions that fundamentals haven’t changed and they should also stick to their guns.

    Traders, on the other hand, couldn’t care less about fundamentals. It’s all about whether they can buy something now for less than they will sell it for, preferably within ten minutes. It’s a skill, it’s necessary for smoothly functioning markets and it can be very, very lucrative.