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Old 03-15-2012, 07:35 AM   #21
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I believe many of these preferreds have a par value of $25, so you can see how your entry price compares to that and what you would get if called.
The difficulty is figuring out what you should get paid for selling an interest rate call option, because that is what you're doing when you buy a callable bond.
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Old 03-15-2012, 07:42 AM   #22
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The difficulty is figuring out what you should get paid for selling an interest rate call option, because that is what you're doing when you buy a callable bond.
Thats true. There probably not for everyone, but for some they could play a role. I have 3 of them.
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Old 03-15-2012, 07:49 AM   #23
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I am starting to think that a variation on theme "the market can stay irrational longer than you can stay solvent", is "interest rates can remain at irrationally low levels longer than you can stay solvent", maybe true.


Different views are what make a market. And because we'll only know in retrospect who had the better call, we're all just speculating here.

But my speculation is that what we're experiencing is not an irrational market but one that is more like wintertime for bears. It's a time to hibernate and live off your stored reserves. Bears that panic thinking the sun will never come out again go foraging for food too early and fare poorly. Those that wait find that the ground eventually thaws and the berries ripen.

Of course nobody knows if the sun will come back out. But it always has before. Wake me in spring.
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Old 03-15-2012, 10:56 AM   #24
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I am starting to think that a variation on theme "the market can stay irrational longer than you can stay solvent", is "interest rates can remain at irrationally low levels longer than you can stay solvent", maybe true.
One of the hardest things for an "active" investor to accept is that she is nevertheless engaged in a highly passive activity. Most of what we do beyond waiting for good opportunities to offer themselves hurts our performance.

Ha
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Old 03-15-2012, 04:32 PM   #25
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But my speculation is that what we're experiencing is not an irrational market but one that is more like wintertime for bears. It's a time to hibernate and live off your stored reserves. Bears that panic thinking the sun will never come out again go foraging for food too early and fare poorly. Those that wait find that the ground eventually thaws and the berries ripen.

Of course nobody knows if the sun will come back out. But it always has before. Wake me in spring.
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One of the hardest things for an "active" investor to accept is that she is nevertheless engaged in a highly passive activity. Most of what we do beyond waiting for good opportunities to offer themselves hurts our performance.

Ha

Thanks guys, very wise counsel indeed and quite pithy also. Buffett talks about waiting for fat pitches, and I am pretty sure you guys are right and long-bonds aren't anywhere near the strike zone.

I guess I'll sit back and enjoy an unexpectedly large boost income thanks my bank stocks, WFC, and USB making a big dividend increases this week. Especially WFC who's dividend is back $.22 there is a reasonable chance by the end of 2013, the dividend will be back to the pre crisis levels of $.34 and conceivably by the end of the decade the common will generate more income than the preferred today.
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Old 03-16-2012, 05:31 AM   #26
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If it is too good to be true...

The discussion on trust preferred got me looking further into this as something to stick some IRA money currently in cash. As I said earlier I expect most of these issues to be called at par in the next few years, so I am not overly concerned about long term rates going up.

I came across what I thought was very juicy issue a 9.6% Trust Preferred by another strong bank BBT. (BBT/PRB) BB&T announced in during the stress test that they intended to call their TRUPS and the Fed will allow them to do so.

The summary of BBT/PRB is it pay a whooping 9.6% dividend ($.60/quarter) and they are callable on 8/1/2014. The currently trade for $25.75 so I'd lose 3% but I'd collect 9% for almost 2 1/2 years. I even skimmed the prospectus.

Fortunately I came across this article in Seeking Alpha which explained the hidden risk with TRUPS. It turns that many of TRUPS are currently callable (despite what the Prospectus says). The banks can give a 30 day notice and redeem them at par. So rather than have more than 2 years of earning interest at high rate, there is decent chance you'll lose money since most TRUPS are trading above par and you may only have a few months to earn interest.

Once again I learn that TANSTAFL is true.
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Old 03-16-2012, 08:15 AM   #27
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Fortunately I came across this article in Seeking Alpha which explained the hidden risk with TRUPS. It turns that many of TRUPS are currently callable (despite what the Prospectus says). The banks can give a 30 day notice and redeem them at par. So rather than have more than 2 years of earning interest at high rate, there is decent chance you'll lose money since most TRUPS are trading above par and you may only have a few months to earn interest.

Once again I learn that TANSTAFL is true.
I was waiting to learn what risks were causing these to trade at ~9%. Glad you found out, and not the hard way.
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Old 03-16-2012, 11:17 AM   #28
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Some good posts. I have considered pref shares issued by Canadian banks. They are all callable and yield in the low 5% range. I understand the issues as I worked on issuing these when I was working. For me the comparison is with the dividend yields on the common stock. The yield premium on the prefs is around 1-2% over the common. In my view this is not worth giving up the potential growth of the common for the (slightly?) higher security of the prefs. In a banking context the prefs rank behind all depositors and only ahead of the common. Given the leverage inherent in banking, I doubt the prefs would fare too much better than the common in a crisis although dividends on the prefs would likely last longer than dividends on the common. Not sure how the US banks did in this regard in 2008-2009.
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Old 03-16-2012, 11:39 AM   #29
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Not sure how the US banks did in this regard in 2008-2009.
Most of the big U.S. banks got rescued, but as a condition for that rescue were required to raise copious amounts of dillutive equity. Existing shareholders, like those in Citigroup, suffered (and still suffer) losses of ~90%. Owners of preferred securities, after some bowel-clenching volatility, faired far better and can expect maturity of their securites at par.

Had the banks not been rescued, common and preferred shareholders were almost certainly both looking at $0 recoveries which is what Lehman TRUPs holders received (I believe).
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Old 03-16-2012, 12:31 PM   #30
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Some good posts. I have considered pref shares issued by Canadian banks. They are all callable and yield in the low 5% range. I understand the issues as I worked on issuing these when I was working. For me the comparison is with the dividend yields on the common stock. The yield premium on the prefs is around 1-2% over the common. In my view this is not worth giving up the potential growth of the common for the (slightly?) higher security of the prefs. In a banking context the prefs rank behind all depositors and only ahead of the common. Given the leverage inherent in banking, I doubt the prefs would fare too much better than the common in a crisis although dividends on the prefs would likely last longer than dividends on the common. Not sure how the US banks did in this regard in 2008-2009.
Sometimes preferreds can be quite the deal. Back in the 80s, or maybe the recession of early 90s there was a Pittsburg Bank (can't remember the name) in trouble, and both the common and the $25 cumulative preferred suspended their dividends and got very cheap. The bank recovered and the preferred quickly announced the resumption of its dividend and the payment of a lump sum in satisfaction of the arrears.

Another massive pfd payoff came from the Penn Central Series B preferreds, par $25. As I rememember, these paid no dividend, and were essentially a stub to receive the final workout payments from the PC Bankruptcy settlement. Cash had alreadey been paid, and a Series A preferred with much higher ranking was paying a regular dividend and trading near par. I was familiar with these since I had participated in the bankruptcy via secured and mortgage bonds on different roads of the PC system. Anyway, my memory is that the Series B drifted down slightly below $5 where I bought some on the NYSE. IRRC correctly it paid off at par within the year.

Ha
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Old 03-16-2012, 12:31 PM   #31
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Thanks Gone4Good. That's what I would have thought. given what I know about the CDN banks(quite a lot), I would still stay with the common but for a risk averse investor the prefs could make some sense.
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Old 03-16-2012, 03:46 PM   #32
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Sometimes preferreds can be quite the deal. Back in the 80s, or maybe the recession of early 90s there was a Pittsburg Bank (can't remember the name) in trouble, and both the common and the $25 cumulative preferred suspended their dividends and got very cheap. The bank recovered and the preferred quickly announced the resumption of its dividend and the payment of a lump sum in satisfaction of the arrears.

Another massive pfd payoff came from the Penn Central Series B preferreds, par $25. As I rememember, these paid no dividend, and were essentially a stub to receive the final workout payments from the PC Bankruptcy settlement. Cash had alreadey been paid, and a Series A preferred with much higher ranking was paying a regular dividend and trading near par. I was familiar with these since I had participated in the bankruptcy via secured and mortgage bonds on different roads of the PC system. Anyway, my memory is that the Series B drifted down slightly below $5 where I bought some on the NYSE. IRRC correctly it paid off at par within the year.

Ha
Yep, at times these can be a great investment. I was watching the preferred of Aspen Re (Bermuda reinsurer) crater during the crisis despite the fact that the company had essentially no exposure to any of it. When the company offered to buy a large amount of the issue at 50% of par, I bought quite a bit. These are now trading around par, although I have not looked in a bit.
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Old 03-16-2012, 03:54 PM   #33
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Most of the big U.S. banks got rescued, but as a condition for that rescue were required to raise copious amounts of dillutive equity. Existing shareholders, like those in Citigroup, suffered (and still suffer) losses of ~90%. Owners of preferred securities, after some bowel-clenching volatility, faired far better and can expect maturity of their securites at par.

Had the banks not been rescued, common and preferred shareholders were almost certainly both looking at $0 recoveries which is what Lehman TRUPs holders received (I believe).
In general the bailouts have been great for bond holders and lousy for stockholders. Perferred's being a hybrid have done ok in some case and poorly in others. I think the owners of preferred for the too big to fail banks were very lucky. On the other hand GM, Chrysler preferred owners got wiped out. My question is did AIG have preferred stock before the bailout and if so what happened to the holders?
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Old 03-16-2012, 03:59 PM   #34
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On the other hand GM, Chrysler preferred owners got wiped out. My question is did AIG have preferred stock before the bailout and if so what happened to the holders?
People forget that GM and Chrysler actually filed for bankruptcy. They weren't bailed out.

AIG's creditors did get bailed out, and I'm pretty sure that also includes the TRUPs.
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Old 03-17-2012, 12:05 PM   #35
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I year or so ago I put a little into the John Hancock Closed End Fund PDT. PDT uses margin and has a high expense ratio, but it has a solid track record. I've looked at several of the preferred ETFs as well and in time will probably add one.
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