15 Responses to “December 16, 2024”

1. fsabbagh says:

   December 17, 2024 at 8:55 am

   I have a lot of my cash coming to Maturity. They were locked up for 1 to 1.5 year at a rate of 5 to 6%. Now thinking of moving it into preferreds but wondering if we can have another downturn like Oct ’23. Another concern I have is the quality of the preferreds. Brookfield with commercial property can be risky though many don’t believe that. Are you guys still buying at this time? What are you doing with your free cash flow in this low and going lower interest environment?

2. stusclues says:

   December 17, 2024 at 10:36 am

   “I have a lot of my cash coming to Maturity. They were locked up for 1 to 1.5 year at a rate of 5 to 6%. Now thinking of moving it into preferreds …”

   If this is your thought process, why wouldn’t others have the same?

   Look at James’ FR-5YR Canada Spread chart that he publishes with his MAPF Performance review each month. Is 6% “normal”? Not IMO.

   If you think the curve has further to fall (I do), then FRs have upside. The further you think it will fall, the more excited you should get.

3. skeptical says:

   December 17, 2024 at 12:26 pm

   There will always be downturns. That’s the risk side of getting higher returns. but the way Canadian economy is behaving, we could be heading back into lower rates and the extreme punishment that savers get as a result of that.
   Preferreds still offer close to 6% or so in different flavours. There are so many experts here, including our host and his recommendation letter who can set you on a path to better returns.

4. IrateAR says:

   December 17, 2024 at 1:57 pm

   Personally I’m very long right now expecting reinvestment of redemption money at month end and likely in January to keep pushing things higher.

   I don’t have a view on yield curve moves but I expect that the lower bank of Canada rate and the pending resets of the names that reset at very low rates in 2020-2021 to more reasonable yields is going to be positive for prefs over the next 1-2 years. Assets have been steadily flowing out of the ETFs even as the prefs rallied over the last year. I think nobody wants to hold ZPR etc. when you can get a similar yield from cash but they’ll look more and more attractive again as a gap opens.

   As far as a downturn… a lot of names are trading right now based on the the expectation or possibility that they’ll be redeemed at $25. If credit markets take a bad turn there could be a vicious move in these as they return to trading based on yield in addition to the damage from worse credit conditions. Buying low reset / sub-$20 names might be the safer choice if you don’t want to deal with the redemption drama.

5. fsabbagh says:

   December 17, 2024 at 10:42 pm

   Thank guys for your thoughts. Is there a way to be notified when someone makes a comment on this blog?

6. fsabbagh says:

   December 17, 2024 at 10:46 pm

   BTW, I am subscribed to James’ newsletter. I base my purchases on it.

7. Nestor says:

   December 18, 2024 at 7:27 am

   “…but wondering if we can have another downturn like Oct ’23.”

   of course they will. 2022-23, 2018-2020, 2015, 2007-8, etc… down turns happen. nobody knows when. if you’re afraid, don’t buy. wait for the down turn. whenever that is.. (likely, the moment you buy them. it happens)

   ” Brookfield with commercial property can be risky.. ”

   everything has risk. if you’re worried, don’t buy brookfield paper…

   “.. in this low and going lower interest environment?”

   3% range for 3 month, 5 and 10 year canada rates. if you’re worried about lower rates, buy fixed rate prefs. or long bonds. will rates go lower on the short end, it seems that way. but then, you can say bye bye to the loonie. maybe better not to invest in canada at all..

   skeptical is right, spreads between 5 year FR and canada’s are still huge. the spreads should compress. should. they don’t have to. they can blow out again. but you’re making 6% more than 5 year canada’s. thats some cushion. fixed resets also pay on average more than perpetual discounts. so still a great deal.

   nobody knows what will happen tomorrow. nobody. rates can collapse if the economy tanks, rates may skyrocket if we have a liz truss moment in this country. the loonie will probably go to 60 cents .. or not. who knows.

   canada has no real functioning government right now. it’s in total shambles. trump is giggling every minute he things of this country. italy’s government has stood for 2 years, looks like a model for political stability considering what’s happening in Germany, France and the UK.

   are you buying prefs for the income? or speculating on gains? how much of your portfolio is in prefs? can you stomach a 20-25% drop in prefs if/when it happens?

   these things only you can answer.

   iv’e been long. i’m still long. i see no reason to get out right now. tomorrow, that can change. or later today. who knows….

8. jiHymas says:

   December 18, 2024 at 11:02 am

   nobody knows what will happen tomorrow. nobody. rates can collapse if the economy tanks, rates may skyrocket if we have a liz truss moment in this country. the loonie will probably go to 60 cents .. or not. who knows.

   Agreed. I tell clients that asset allocation should be done on the basis of the portfolio’s long-term requirements vs. the long-term characteristics of each asset class. Short-term allocation decisions are a form of market timing and should be eschewed.

   Of course, most potential clients conclude from this that I don’t know what I’m talking about and entrust their assets to the smoke-and-mirrors land of traditional investment management and the media, where the mantra is that clients must trade like hell and incur lots of juicy commissions in order to stay on top of things in this ever-changing world, but that’s life!

   Is there a way to be notified when someone makes a comment on this blog?

   I think so! There’s an RSS ‘comments feed’ specified under the heading ‘Meta’ way, way down near the bottom of the right-hand navigation panel of the blog, but I don’t know how to use it. Maybe somebody else can help; if not, there will be some kind of information available somewhere on the internet.

   I am subscribed to James’ newsletter. I base my purchases on it.

   Thank you for your confidence!

9. stusclues says:

   December 18, 2024 at 11:51 am

   “where the mantra is that clients must trade like hell and incur lots of juicy commissions in order to stay on top of things in this ever-changing world, but that’s life”

   Well, there is always [Claude] Shannon’s Demon that can be applied to make some of this trading not-so-useless but it is surprisingly little known and rarely applied, especially by traditional investment management who are incented to NOT do any real work for their fees.

10. jiHymas says:

    December 18, 2024 at 12:02 pm

    there is always [Claude] Shannon’s Demon

    Well, sure, there are lots of approaches, some better than others and some much, much worse.

    Shannon’s Demon, for instance, relies on the assumption that the long-term return from the underlying asset is zero. However, if the asset is in an uptrend, you will be foregoing positive returns and lose all your clients. If the asset goes to zero, you will lose all your money.

    I suspect, too, that there is a ‘buy high sell low’ bias in the Demon, but I haven’t worked that out properly yet. At the very least, there is also the assumption that the gains and losses experienced on a daily basis are deterministic: I’m pretty sure that if the asset’s returns are thought to become zero in the long term, there will be a difference between an asset that returns 1% every period for 100 period and negative whatever-it-is-to-come-to-zero for one period and one that behaves in the opposite manner, depending on the sequence of returns, but again I haven’t worked that out properly.

    I trade like hell, but that’s to take advantage of transient supply and demand changes for individual issues (much like market making, but slower), not because of any grandiose idea that I know how future world events are going to affect the prices of individual securities. I’m fully invested at all times because I don’t know what the hell the market is going to do in the short, medium or long term. I attempt to provide my clients with the sum of (i) the index return and (ii) an increment due to trading activity, which I hope will be positive.

    The market makers want you to trade like hell, so they can earn the commissions and spread. The media wants you to read their commentary, so they can sell your interest in the content to their advertisers. Neither cheerleader really cares if their advice works out well for the investor.

11. stusclues says:

    December 18, 2024 at 1:18 pm

    “Shannon’s Demon, for instance, relies on the assumption that the long-term return from the underlying asset is zero. However, if the asset is in an uptrend, you will be foregoing positive returns and lose all your clients. If the asset goes to zero, you will lose all your money.”

    You’re describing the Demon as he laid it out, which is fair enough.

    For a very long time, I have used position-limit approach to manage risk. This forces me to trim holdings on individual price increases and buy on price decreases. I keep meticulous records of activity related to individual positions and calculate IRRs for every holding. I’ve observed over time that this risk-management approach contributed alpha under most circumstances (a stock price going straight up is not one of them).

    When I became aware of Shannon’s Demon, I realized that his Demon causes a reduction in volatility drag on the portfolio, which is where the alpha originates. Therefore, probably over-simplistically, I consider my position maintenance approach to be a (highly bastardized) form of his Demon.

    I also stay fully invested and I also trade preferred shares using a form of your IVT.

    “The market makers want you to trade like hell, so they can earn the commissions and spread. The media wants you to read their commentary, so they can sell your interest in the content to their advertisers. Neither cheerleader really cares if their advice works out well for the investor.”

    Yep.

12. jiHymas says:

    December 18, 2024 at 1:45 pm

    I have used position-limit approach to manage risk.

    Then you will be earning the rebalancing premium. In contrast to Shannon’s Demon, this has a buy-low-sell-high bias, to which I have no objection as part of a portfolio management strategy.

13. Nestor says:

    December 18, 2024 at 2:16 pm

    i guess rates aren’t going down after all… lol

14. jiHymas says:

    December 18, 2024 at 2:18 pm

    Wait, at least one of my worries is not correct.

    The portfolio rebalances into 50% cash, 50% risk asset after every period. So
    (i) there is a buy-low-sell-high bias
    (ii) To this extent, this is just the rebalancing premium.

    I must have misread the source article. Sorry.

15. stusclues says:

    December 18, 2024 at 2:43 pm

    “Then you will be earning the rebalancing premium”

    I usually call it volatility harvesting, which I see your link actually does too 🙂 I can see that my Shannon’s Demon reference, while analogous, probably just introduces confusion.

    “Therefore, it is possible to create
    portfolios of individual stocks and bonds designed to maximize
    the rebalancing benefit. This practice is called volatility
    pumping or volatility harvesting and was first formalized by
    Oxford professor David Luenberger in his textbook Investment
    Science (Oxford University Press, 1997)”