“You say you dislike floating rate issues. Why then does the system love BAM.PR.B?”
Well! That was a lovely eMail to receive! Don’t I have enough problems spouting my opinions without having to worry about consistency?
HIMIPref™ does love BAM.PR.B. It is ranked as the best single preferred share in the marketplace, so let’s dig into the numbers a little and see what’s what. Very briefly, the issue is currently callable at $25.00 and pays 70% of Canada prime, so the annual dividend is currently $1.05. It’s a member of the “Floaters” index, so let’s compare it with those issues:
| |
BAM.PR.B |
BAM.PR.K |
TOC.PR.B |
AL.PR.E |
| Credit (DBRS) |
Pfd-2(low) |
Pfd-2(low) |
Pfd-2(low) |
Pfd-2(low) |
| 9/26 quote |
24.20-27 |
24.25-38 |
25.33-46 |
26.60-74 |
| Dividend |
1.05 |
1.05 |
1.05 |
1.50 |
| Average Trading |
222,586 |
97,663 |
44,673 |
53,081 |
| Curve Analysis performed for taxable accounts |
| Price due to Base Rate |
22.04 |
22.05 |
22.34 |
23.33 |
| Price due to Short-Term |
0.10 |
0.10 |
0.10 |
0.14 |
| Price due to Long-Term |
0.70 |
0.67 |
0.67 |
0.90 |
| Price due to Credit Spread (2) |
-0.91 |
-0.87 |
-0.87 |
-0.98 |
| Price due to Liquidity |
0.99 |
-0.03 |
-0.41 |
-0.40 |
| Price due to FloatingRate |
3.47 |
3.30 |
3.32 |
3.78 |
| Price due to Credit Spread (low) |
-0.40 |
-0.38 |
-0.38 |
-0.43 |
| Price due to Error |
0.00 |
0.14 |
0.19 |
0.18 |
| Curve Price |
25.99 |
24.98 |
24.95 |
26.52 |
| Price Disparity |
1.72 |
0.60 |
-0.38 |
-0.08 |
The key figure here is the Price Disparity which is a major influence on valuation. “Price Disparity is high” implies “HIMIPref™ loves”.
In tracing the source of the price disparity, we find two table rows of note: the Liquidity adjustment and the Floating Rate adjustment – these are both elements of the Yield Curve Calculation. Briefly: the market is now placing a huge premium on liquidity. When the entire HIMIPref™ universe is analyzed, it is found that there is a very definite liquidity effect: issues with high Average Trading Values are generally a lot more expensive than a straightforward analysis of their expected cashflows would indicate. Similarly, Floating Rate issues are far more expensive than their expected cash flows would indicate (which is why I don’t like ’em!). Note that cash flow expectations for floating rate issues are calculated with the view that Prime is what it is and ever shall be, world without end.
So … that’s why HIMIPref™ loves BAM.PR.B! It’s not due to any particular factor – it is based on the idea that, should the market come to value its characteristics in the same manner as the market values those characteristics for all the other preferreds analyzed, then it will go up in price – big time!
Is this guaranteed? Of course not. There may be elements that the market is pricing that are ignored by HIMIPref™, most obviously “Company Specific Effects”, i.e., maybe the market just doesn’t like BAM. I have not been able to define, parameterize and test a formulation of such an effect that leads to better results, but that doesn’t mean that it doesn’t exist, and certainly doesn’t mean that it doesn’t exist right now at this moment for BAM only!
HIMIPref™ is a statistical system. The market is a sometimes illogical beast. All one can do is make lots of small “bets” when the odds are in your favour (rather than making one big bet!) to give the statistics a chance to work. Some trades will work out nicely, others won’t … the idea is to accept that and to keep rolling the slightly-loaded dice!
