Sloppy, Sloppy Markets!

Assiduous readers will be well aware of my disdain for market timing. The market goes up, the market goes down … the characteristics of the asset class don’t change very quickly and the steady drip, drip, drip of dividends eventually overwhelms the transient excitement of day to day noise. You just have to make sure you’re well diversified, invest in companies of good, solid investment grade, don’t get excited … and did I mention diversification? Lightning can strike at any time and you should never be in a position where it can wipe you out.

Up, down, piffle, that’s what I say!

But I do get highly annoyed when I see the market behaving in a stupid way. You wan’t to say a proper risk premium is 20bp – that’s fine. You want to say the risk premium should be 1000bp – that’s fine too. I don’t have any problems with that. We all have our individual investment objectives, risk tolerances, views on predicted apocalypses … overall market spreads, their proper levels and interpretation are always open for discussion and analysis.

But let’s not be stupid, OK? Let’s not be like the June 2008 market when it appeared that the market assigned a negative value to embedded call options. And let’s have similar issues from a single issuer at least trade within shouting distance of each other!

Almost a year ago, I wrote a post on yield differences, amazed that the market for Weston Prefs could be so inefficient. It’s true, of course, that there are fewer players in the Pfd-3 playground and so a certain lack of efficiency is to be expected … but never-the-less, a 34bp spread between the high- and low-yielding Weston Pref was rather extreme. I also looked at the spreads on investment-grade issuers at that time, just to show what a more efficient market looked like.

And now I’m going to update that table to last night’s close:

Yield Spreads of
Perpetual Discount Issues
of the Same Name
BMO Pfd-1 N/A 29bp
BNS Pfd-1 6bp 32bp
CM Pfd-1 11bp 47bp
CU Pfd-2(high) N/A 25bp
ELF Pfd-2(low) 3bp 25bp
GWO Pfd-1(low) 11bp 121bp
HSB Pfd-1 N/A 28bp
LB Pfd-3 12bp N/A
MFC Pfd-1(low) 1bp 24bp
NA Pfd-1(low) 26bp 48bp
POW Pfd-2(high) 14bp 46bp
PWF Pfd-1(low) 17bp 37bp
RY Pfd-1 11bp 74bp
SLF Pfd-1(low) 9bp 14bp
TCA Pfd-2(low) N/A 16bp
TD Pfd-1 6bp 15bp
W Pfd-2(low) 17bp 19bp

The fund I manage, Malachite Aggressive Preferred Fund, has been doing quite a bit of intra-issuer trading in the past several months – I highlighted an example of this for August 2008. These wide intra-issuer spreads are symptiomatic of a market starved for liquidity – suppliers of that liquidity can (if patient) very often get an extremely good price for it.

3 Responses to “Sloppy, Sloppy Markets!”

  1. lafontaine says:

    …market starved for liquidity….

    You are right !! Your insight ( comment 2 days ago) made me realise that in this market , only one thing is important : CASH
    I was showing my wife the chart of PWF.PR.I for the last 5 years , an ocean of tranquility for 56 months and then BOUM , all over the place and getting worst ( what a day today)…
    I take a lot of pleasure reading your blog and hope all will be OK on the long run but not so sure for the come months.

    Assidious reader Louis

  2. […] can I say? It was a lousy day. It was a sloppy day. Long Corporates in Canada have come back in to 7.50%; PerpetualDiscounts now yield 7.56% pre-tax […]

  3. […] for Fixed-Resets … so I won’t discuss it here. Instead, I will refer to my last post on Sloppy, Sloppy Markets and take another look at a not-entirely-randomly chosen example of market inefficiency in the […]

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