8 Responses to “August 14, 2009”

1. GAndreone says:

   August 15, 2009 at 10:27 am

   Regarding Yawn, Yawn, Yawn.

   1) Does it not make it more difficult for you to compose the recommended PD share issues for your August prefletter?

   2) If we accept the common belief that “interest rates” are at the lowest possible level, at what yield do you estimate the PD’s will become more boring just like the FR’s?

   3) Do you agree that if 2 is correct then the price of PD’s can only stay fixed or decline?

   4) If 3 is correct what is the historic probability of “interest rates” returning to current levels within 30 years?

2. jiHymas says:

   August 15, 2009 at 12:30 pm

   1) No. I recommend ‘best in class’ and do not seek to time the market; nor do I recommend that readers attempt to time the market (although, naturally, a lot of them will anyway).

   2) I don’t know what is meant by “interest rates”. Which interest rates?

   3) If the yield on PDs is at its lowest possible level, then this is simply a mathematical truism. The dividends will continue to flow into investor’s pockets, however … and that’s a rather big “if” in the first place.

   4) I don’t understand what is meant by the phrases “historic probability”, “interest rates” or “current levels”.

3. GAndreone says:

   August 15, 2009 at 9:13 pm

   OK James,

   Definitions

   1) “interest rates” is the rates of interest paid that have an effect on the price and yield of PD’s and FR’s

   2) “historic probability” is the probability calculated from the last 90 years of “interest rates” data

   3) “current levels” is the interest levels both risk-free and spread that combine to produce the current yield on both PD’s and FR’s

   I guess what I was looking for is the estimated numbers of years one would have to hold a PD to maximize the probability of not having to suffer a capital loss assuming that the loss is inevitable!

4. jiHymas says:

   August 15, 2009 at 9:44 pm

   I still don’t understand what you’re driving at, but suspect that you’re attempting to torture data beyond its applicablity to current investment policy.

   I don’t understand the last part, either, but I did write an article Perpetual Misperceptions that might, if I’m lucky, answer your question.

5. GAndreone says:

   August 15, 2009 at 11:57 pm

   An example will clarify the point.

   1) If a PD is purchased for $20 with an annual dividend of $0.40 the probability of selling that PD for $20 during the following 30 years is close to 0.

   2) If a PD is purchased for $20 with an annual dividend of $4.00 the probability of selling that PD for $20 during the following 30 years is close to 100%.

   What is the probability of selling a PD for $20 that has an annual dividend of $1.20 during the following 30 years?

6. jiHymas says:

   August 16, 2009 at 12:14 am

   Light begins to dawn!

   Unfortunately, I don’t know. That’s market timing and I don’t do that.

   I would be comfortable saying that the normal range for the PerpetualDiscount Interest-Equivalent spread over corporates is 100-150bp, highly skewed so that there is a substantial presence in the 150-250 range.

   Taking 175 as a conservative average, then

   (corporates + 1.75%)/1.4 = 6%

   resolves to

   corporates / 1.4 = 4.75%

   corporates = 6.65%

   Bearing in mnd that this is a complete ballpark number and there is basis risk between long corporates and perpetualDiscounts, I’d say your question resolves to:

   For what percentage of time through the business cycle can one expect long corporates to yield less than 6.65%?

   I’m afraid you’ll have to ask someone braver than me to answer that.

7. GAndreone says:

   August 16, 2009 at 9:53 am

   Thank you for your answer. Your answers, all of your publications and seminars have helped immensely. I can honestly say that they have been responsible for making my investment returns in pref shares very profitable!

8. jiHymas says:

   August 16, 2009 at 4:01 pm

   Well … it wasn’t really all that good an answer. But any answer will incorporate so much basis risk that results must be considered very, very suspicious – and I won’t put my name to any of them!

   There’s a fairly lengthy discussion of basis risk in this month’s PrefLetter.