16 Responses to “October 23, 2023”

1. hrseymour says:

   October 24, 2023 at 10:28 am

   I am US based, and own preferreds in both US and Canadian markets. The US market is rational — we have rate resets (and floaters). They don’t trade at the insane discounts like on the TSE. What gives? My best theory is that the market is too small to interest big buyers. Or maybe fear that the carbon based energy market will collapse in a few years bringing down the entire Canadian economy?

2. stusclues says:

   October 24, 2023 at 10:55 am

   “My best theory is that the market is too small to interest big buyers. Or maybe fear that the carbon based energy market will collapse in a few years bringing down the entire Canadian economy?”

   It can’t be the latter or we would see this play out in debt markets too.

   I have a hard time with the “market too small” argument also because, well, it isn’t that small. It is measured in trillions of CAD. This should be big enough for moderately sized investment shops, family offices, etc. to be excited about. Where are the animal spirits that mobilize these guys? At some point, they will show up.

3. hrseymour says:

   October 24, 2023 at 4:26 pm

   Two more “theories”:

   – Fear that through legal trickier preferreds will stop pay their coupons.
   – Contrarian fear that Canadian interest rates will head back down to zero.

   Lack of “animal spirits” doesn’t feel like the whole explanation. The rate reset and floater payouts (and especially future payouts if interests plateau) is bewilderingly high. Almost 13% at the moment for TRP-H backed by a US$34B company, with TRP-B set to reset even higher than that (at its current quote)?

4. avocado says:

   October 24, 2023 at 5:26 pm

   > Fear that through legal trickier preferreds will stop pay their coupons.

   Ferengi rule of acquisition #8: Small print leads to large risk.

5. skeptical says:

   October 24, 2023 at 6:21 pm

   Or may be, just may be, it’s one of those recurring buying opportunities that market gods keep on throwing.

   the last few that arose were the GFC 2008 crash, 2013 taper tantrum, 2015/16 oil price collapse, 2018 Powell Pivot and then the covid crash. And now we have this ongoing rate increase crash.

   For all those incessantly complaining about preferreds, here’s an example of some blue chip Canadian common stocks:

   1. Enb: down about 25 to 30% from ATH and back to 2013 levels. If interest rates remain high, they have a tonne of fixed rate perpetuals that will always get paid before the commons.
   2. TRP- Same story
   3. BNS- Back to 2007. So only a dividend play
   4. CM- Back to what year?
   5. CU- Same price as a decade ago.
   6. Pembina- Back to 2013?
   plus so many more.

   Personally, I find Canadian businesses to be only Too big to fail, non-innovative and only viable because of regulatory capture. And their primary attraction is dividend. And that’s exactly what I want from a fixed income provider-boring, mature and stable. And reliable, with some bailouts and off the cuff regulation changes built in. Remember the MFC/IAF hedge fund thing back in 2018?

   I got curious and checked the long term returns for the TSX proxy ETF XIC.
   Since Feb 2001(which was really not a high point), the CAGR has been 6.6%, including the capital gains and dividends reinvested.

   https://www.blackrock.com/ca/investors/en/products/239837/ishares-sptsx-capped-composite-index-etf#/

   So why would someone not build a portfolio of 7% perpetuals with very high credit rating and much secure dividend?

   Many readers of this forum already do and if someone wants to own mature blue chip Canadian equities, the perpetuals/resets are a great opportunity.

   TRP.PR.G is another example. At zero Goc5, it will yield 5.2%. Where’s the downside, other than the company going bust?

6. Nestor says:

   October 24, 2023 at 7:18 pm

   well said skeptical.

7. Nestor says:

   October 24, 2023 at 7:36 pm

   interest rates are not going back to zero in anyone’s lifetime. that’s my bet. the great experiment from 2008 is over. it was an abject failure.

8. stusclues says:

   October 24, 2023 at 9:04 pm

   “Or may be, just may be, it’s one of those recurring buying opportunities that market gods keep on throwing.”

   I like this.

   “Fear that through legal trickier preferreds will stop pay their coupons.”

   I don’t like this. Companies don’t think this way, not good ones anyway. There is no person with any serious responsibility at RBC, or ENB, or FFH, or other serious issuers in Canada that spends their day trying to think of ways to screw over preferred share holders. Doesn’t happen. Access to capital markets is earned over time when companies meet expectations and fulfill their obligations.

   A big question is why aren’t more companies aggressively buying and retiring their preferred shares at these prices? It would be highly accretive to book value per share to do so in this environment for many companies. I think one answer is the high emphasis that investors put on debt/equity ratios (for some good reasons!). Buying back prefs lowers the denominator so increases the ratio. Borrowing to do so makes it worse. So this leaves FCF as the main source of funds for pref buy backs and FCF has a lot of competing uses.

9. baffled says:

   October 25, 2023 at 7:09 am

   stusclues says: , your last paragraph is a good answer to a question i have asked my self many times . thanks

10. skeptical says:

    October 25, 2023 at 12:26 pm

    TMX has added price history going back upto 20 years. Wow.
    That tells you how so many of the perpetuals are getting close to GFC lows.

11. jiHymas says:

    October 25, 2023 at 1:12 pm

    I suspect that in addition to retail morale, there is also retail tax-loss selling. 2022 was a major down-year and 2023 isn’t much better.

    Sell before everything goes to zero! Don’t buy, because it’s all going to zero!

12. niagara says:

    October 25, 2023 at 6:57 pm

    “Sell before everything goes to zero! Don’t buy, because it’s all going to zero!”

    James, I bought a little GWO.PR.S today since at $18, as it is a 7.3% yield ….forever. So, at the end of the day, what do I see on the screen? a $0 bid. or maybe that means no bid? Mkt maker had to rush home to get in a quick 9 holes with this lovely late Oct weather here in S Ont I suppose….Ought to look good on my m2m tomorrow morning!

    So, zero here we come!

    Another day, another woeful performance by prefs.

13. jiHymas says:

    October 25, 2023 at 8:56 pm

    So, at the end of the day, what do I see on the screen? a $0 bid. or maybe that means no bid? Mkt maker had to rush home to get in a quick 9 holes with this lovely late Oct weather here in S Ont I suppose

    No bid. But that’s at 4:30pm, after the extended session! Orders can be cancelled after 4pm and often; the ‘closes’ published on-line are not, in fact, closes, but dim reflections of the close, degraded from the ‘4pm prices’ by cancellations. See the post More on the TMX Close != Last and the links therein for more information.

14. DR says:

    October 26, 2023 at 1:26 pm

    niagara,

    i know the daily m2m is rather meaningless but it is nonetheless dispiriting to see one’s portfolio take a huge hit due to this effect.

    to counter it, i have bids in slightly below the mkt for each of my names for a board lot at a minimum or something larger at the bid side of the market if i am accumulating a particular series.

    however, there is nothing one can do if it has a US listing and its a Canadian holdiay as TD at least will use the US closing price on those days which is also often near zero.

15. DR says:

    October 26, 2023 at 1:27 pm

    oops. forgot to add that ALL my orders are always GTC so that they dont get cancelled at day’s end or those later cutoffs that James mentions

16. DR says:

    October 26, 2023 at 1:39 pm

    “dim reflections of the close”

    TD uses bid side for M2M purposes after the cancellations of day orders but if memory serves (from managing my mom’s account) I think RBC may removed GTC orders from the book and resubmit them prior to next opening but don’t quote me on that