7 Responses to “March 10, 2009”

1. prefhound says:

   March 10, 2009 at 9:43 pm

   I am amazed that common shares of financials could soar 5-20% on the same day the prefs weaken slightly (especially the levered split shares!)

   That’s not just an inefficient market — it’s insane ….

2. adrian2 says:

   March 10, 2009 at 10:26 pm

   One theory could be that scared people who exited financials earlier and were hiding in prefs got enough courage to reverse their earlier trades, partly fueling the rally in financials by exiting their earlier pref positions.

   Thus sell at whatever price the prefs and buy at whatever price bank and insurance companies common stocks.

   Adrian

3. prefhound says:

   March 10, 2009 at 10:32 pm

   Well, if your hypothesis were true, ttrading volumes should be higher, but I am not sure pref volumes were higher today.

   As to the strategy of replacing bank common with prefs, most 18-month performance is pretty similar. Citigroup is “forcing” prefs into common (no dividend and not cumulative), and James has already pointed out how “common-like” Canadian prefs are becoming.

   Anyway, we will see if there is a pref rally tomorrow…..

4. jiHymas says:

   March 11, 2009 at 12:20 am

   I have to say that I’m with prefhound on this one; and suggest that one potential way of rationalizing the situation is to assume that there is both a difference in risk-aversion between common and preferred investors; and that there is a lag in effects.

   But mostly I think the market is insane. Look at how stable the Fixed-Resets are. If all the problems that perpetualDiscounts were having were due to credit concerns, there would be a much higher correlation between Fixed-Resets and PerpetualDiscounts – after all, the former are just as perpetual as the latter, it’s only the coupon that varies.

   Prefs were starting to get “common-like” in the depths of the crisis, but quantitative analysis brings a measure of doubt about this. In the PerpetualDiscount Seminar I presented a graph of the rolling three year correlation between monthly total returns of PDs and Canadian financial common … it’s not nearly as high as you might think.

5. prefhound says:

   March 11, 2009 at 2:09 pm

   The 3 year correlation is not high — mainly because the decline is only 18 months old. Par Prefs go down when common goes down and do nothing when common goes up. I looked at three pairs from Jan/08 to Mar 6 (biweekly changes):

   RY and RY.PR.W correlation = 0.34 (common down 42%; Pref 22%)
   BMO and BMO.PR.K correlation = 0.48 (common down 51%; Pref 30%)
   Citigroup and C.PR.W correlation = 0.71 (common down 96%; Pref 74%)

   So, broadly speaking, the more the common goes down the greater the correlation between prefs and common. In that respect, I’m not sure how much sense it makes to switch from common to pref in times of distress — this is one of the drawbacks of perpetual pref investing.

   Presumably the same correlation effects would work in reverse in a recovery, so the correlation might remain high until the “dip” was over (assuming it does end!).

6. jiHymas says:

   March 11, 2009 at 3:09 pm

   The bi-weekly correlations you have computed are not particularly high, except for Citigroup – which is another kettle of fish entirely.

   So, broadly speaking, the more the common goes down the greater the correlation between prefs and common.

   In times of disaster, correlations go to 1.0!

7. PrefBlog » Blog Archive » March 19, 2009 says:

   March 19, 2009 at 7:08 pm

   […] good day for prefs – PerpetualDiscounts are now up 1.89% Year-to-Date and up 5.20% from the low on March 10, but still down 5.36% from the high on January […]