18 Responses to “August 21, 2024”

1. paullo says:

   August 22, 2024 at 7:21 am

   Good morning:

   This week I changed from the ema.pr.c issue to ema.pr.f issue. I sold ema.pr.c at 22.25 and bought ema.pr.f at 18.94 (not brilliant entry/exit points but that is for a different discussion). All the math that I do says it was a great trade (YTW, long term reset math, dividend differential over the next 4 years when ema.pr.c resets). I realize that my math might not work if the GoC 5 year drops to 1% between now and January, a risk I am happy to take. As well, I don’t really care about liquidity, as my prefs are a very long term position that I intend to maintain. Interested to hear if anyone thinks I am missing something.

   Paul

2. jiHymas says:

   August 22, 2024 at 8:46 am

   Interested to hear if anyone thinks I am missing something.

   You’ve also got less call risk with EMA.PR.F. Keeping your projected return probability distribution high is an important element of preferred share portfolio management.

3. stusclues says:

   August 22, 2024 at 8:51 am

   “Interested to hear if anyone thinks I am missing something.”

   IVT suggests that .C is much cheaper than .F, trading around 88% of its fair price vs 96% for F.

4. alex3 says:

   August 22, 2024 at 9:28 am

   @ stusclues

   Excuse my ignorance, what is IVT and how do you access it?

5. peet says:

   August 22, 2024 at 9:48 am

   “All the math that I do says it was a great trade …”

   For those comparison purposes did you use the Yield Calculator for Resets found provided by James under “Calculators” on the right? It all depends on the inputs which you assume, doesn’t it?

6. jiHymas says:

   August 22, 2024 at 10:31 am

   IVT suggests that .C is much cheaper than .F, trading around 88% of its fair price vs 96% for F.

   Not sure how you got that result. I have added a chart as an addendum to the post with GOC5=3.01%, Spread 417bp and Volatility 6%, with the following issue inputs:

   Ticker	New Bid	Spread	Ann Div	CurrYield
   ema-pa.to	14.8	184	1.2125	8.19%
   ema-pc.to	22.35	265	1.415	6.33%
   ema-pf.to	18.75	263	1.41	7.52%
   ema-ph.to	23.25	254	1.3875	5.97%
   ema-pj.to	20.72	328	1.5725	7.59%

   Before anybody gets upset with me, note that “Ann Div” and “CurrYield” are calculated according to the projected reset rates using the GOC-5 value indicated.

7. jiHymas says:

   August 22, 2024 at 10:38 am

   what is IVT and how do you access it?

   IVT = Implied Volatility Theory

   See the essay Implied Volatility For FixedResets: 2016 Edition

   The associated spreadsheet and many of its embedded Visual Basic for Applications (“VBA”) procedures will have to be edited for most of the tabs (nothing really substantive, just the initial function that’s called that tells subsequent functions where to get the required data). Also, issue lists will need to be updated.

8. stusclues says:

   August 22, 2024 at 11:09 am

   “Not sure how you got that result.”

   I ignored the minimum resets, so used just A,C,F. I used the resulting 4.2% hypothetical new issue spread as a “target” spread to calculate “fair” prices of $16.94, $19.75 and $19.68 respectively.

9. jiHymas says:

   August 22, 2024 at 11:45 am

   I ignored the minimum resets, so used just A,C,F.

   I displayed the two with floor rates but did not use them in the calculation.

   I used the resulting 4.2% hypothetical new issue spread as a “target” spread to calculate “fair” prices of $16.94, $19.75 and $19.68 respectively.

   Doesn’t that make EMA.PR.A about $2 cheap and EMA.PR.F only about $1 cheap, compared to EMA.PR.C absurdly rich?

   My calculation (with GOC-5 = 3.01%) yields theoretical prices of 16.89, 19.71 and 19.64, respectively.

10. stusclues says:

    August 22, 2024 at 12:19 pm

    Yes James you are right. A then F then C, cheapest to most expensive. I have that result also just mixed then up when I posted. I also had not updated my GOC5 from 3.033. our results are close enough to make the point.

11. jiHymas says:

    August 22, 2024 at 1:34 pm

    It is also of note that EMA.PR.J, with its floor rate of GOC5=0.97% is also significantly cheap by this analysis.

    Floor rates just ain’t worth what they used to be!

12. paullo says:

    August 23, 2024 at 2:04 pm

    Thanks for the help. My math started with F reset rate of 2.63% + GOC and C reset rate of 2.65% + GOC. I looked at their resets in 2029 and 2030 as generating the same future dividends (I realize the resets are offset 12 months but I feel there is no way to know when the GOC will be higher/lower in that 12 month period). I then went about adding up the extra dividend generated by C between now and then versus F (turns out to be a fairly small amount; about 60 cents if F resets in Jan 2025 with a GOC of 2.5%; about $1.60 if F resets in Jan 2025 with a GOC of 1.5%. This math adjusts for buying 1.18 shares of the F to spend the same $22.50 that it costs for 1 share of C. In my opinion, A is a completely different beast because the reset rate is so different (1.84%). Thanks again guys.

13. Brassens says:

    August 23, 2024 at 2:53 pm

    I understand that you have to take some assumption but is a GOC at 3% highly probable a year from now? This gives a big advantage to the A and F compared to the C.
    If I look at today’s price, a GOC dropping to 2.8 would give F the same yield as C. It would need the GOC to drop at 2.6 for A to be at the same current yield as C. I understand that this is a rather short sighted view.
    I feel that we have some time before the A, F and J ‘s price really goes up. Meanwhile, the yield on C is significantly higher.

    full disclosure, I own C since August 2023, just before it’s reset. I am also considering swaping for another issue, but not conviced yet.

14. IrateAR says:

    August 23, 2024 at 3:34 pm

    Late to this but I think I agree – I see A cheapest followed by B F and J close together and then C E H and L close together for most expensive right now.

15. jiHymas says:

    August 25, 2024 at 10:30 am

    I then went about adding up the extra dividend generated by C between now and then versus F … In my opinion, A is a completely different beast because the reset rate is so different (1.84%).

    You did a good trade, paullo, and don’t let nobody tell you any different!

    Two things come to mind:

    (i) the Issue Reset Spreads are so close on the two issues you compared that extending the term of your yield analysis won’t make much difference, but when you start comparing issues with significantly different spreads, it just might. Spreads are forever (well, ’til call, anyway!) and current dividend rates are transient; having a short cut-off time for the measurement means you run the risk of underweighting the importance of the spread and overweighting the current dividend rate.

    I suggest you take a look at the Yield Calculator for Resets which automates the process of a thirty-year estimation period – I take the view that going beyond thirty years is pointless because decent benchmarks are hard to come by.

    (ii) Could you elaborate on what you consider to be the differences that destroy comparability of EMA.PR.A?

16. peet says:

    August 25, 2024 at 1:24 pm

    “I suggest you take a look at the Yield Calculator for Resets …”

    I couldn’t agree more. As James once posted in Financial Wisdom Forum,

    “the simplest way to come to an actionable investment conclusion based on yield is to use a proper FixedReset yield calculator ( as linked above) and fiddle with the constant continuing GOC-5 rate until the calculated yields on two of these instruments are equal given that continuing basis yield. …If the rate actually experienced (still assuming constancy!) is higher, the A will be the better investment. If lower, B will be better. … You can then take a view on the likelihood of these outcomes and invest accordingly. “

17. paullo says:

    August 25, 2024 at 7:08 pm

    “You did a good trade, paullo, and don’t let nobody tell you any different!”

    Thank you. Was just double checking with this team (sometimes you miss part of the picture)

    “Could you elaborate on what you consider to be the differences that destroy comparability of EMA.PR.A?”

    “Destroy” might be too strong of word but in my opinion, comparing F and C was easy because the 2.63% plus 5Y GoC was so close to the 2.65% plus 5y GoC. I assumed that was a wash. Now, two variables – GoC reset rate for F in 2025 (which I calculated at 1.5% and 2.5% and loved the F math either way). Second variable, movement of the 5y GoC between the different future reset windows (2029; 2030). I see no reason to assume that 2029 will be higher than 2030 or that 2030 will be higher than 2029. I believe nobody can see that far into the future with any real accuracy. Therefore, trade the C’s for the F’s.

    Now when we compare F/C to A; if the GoC rate in the future (again 2029 / 2030) is 0.5% versus 3%, I believe YTW flips in terms of whether it favours F/C or A.

    Full disclosure – early in the week, I traded C’s for F’s. Later in the week, I had more C’s I wanted to trade out of. I was indifferent on whether I traded into F’s or A’s. But damn those A’s are hard to get. Big spread. I was on the bid side several days and got none. Settled for more F’s replacing the final C’s in my portfolio.

    Thanks again, all.

    Paul

18. August 28, 2024 « PrefBlog says:

    August 29, 2024 at 9:45 am

    […] PerpetualDiscounts now yield 6.09%, equivalent to 7.92% interest at the standard equivalency factor of 1.3x. Long corporates yielded 4.83% on 2024-8-23 and since then the closing price of ZLC has changed from 15.45 to 15.35, a decrease of 65bp in price, implying an increase of yields of 5bp (BMO reports a duration of 12.44, but don’t disclose whether this is Macaulay or Modified; I will assume Modified) to 4.88%. Therefore, the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 305bp from the 320bp reported August 21. […]