Preferred Stock Investing-The Good , The Bad and The In Between 2015 - 2020

[Winemaker]

I used to make wine, and you can enrich the alcohol level by adding sugar to the mix after it has been fermenting a week, made some very strong stuff sometimes.

You are correct, however I make any sugar adjustments to MY wine initially for whites to 21 Brix, which is about 12% alcohol. At the winery, the law prevents sugar additions, which even if permitted, goes onto the label, which is a bigger than a can of worms, and just under javelin catching.

 

[Slow But Steady]

Not to stifle the wine-making conversation, but does anybody else think the preferreds are getting a bit ahead of themselves again? We're still in a rising-rate environment, to my thinking.

 

[Coolius]

Yes, nice to return to our regularly scheduled programming....

For those holding CNLPL & CNTHP, a possible swap opportunity:

Sell CNLPL @ $53.70 ( current bid ), buy CNTHP @ $53.30 ( current ask ).

Gain of $0.40/share on the swap, not including commissions.

CNTHP went ex-div last Friday, that is why there's a discrepancy.

I will pass on this, as I have full positions of both issues, not willing to reduce CNLPL at this time.

 

[brewer12345]

Not to stifle the wine-making conversation, but does anybody else think the preferreds are getting a bit ahead of themselves again? We're still in a rising-rate environment, to my thinking.

I cannot justify the pricing on preferreds or junk bonds. If I weren't such a coward I would go short.

 

[Mulligan]

Mulligan, I would also pick up a bottle of Torrontes (grape type) wine from Argentina. It is an aromatic, lighter white that reminds me a lot of Riesling, gewurtztraminer, etc. Should be relatively inexpensive and would do the trick.

I wrote that one down...I have really never been to a "Wine Store" before, but will when we go to the city again... Maybe I will get lucky and snag the Torrontes and Winemakers Frenchie 13% er in the same haul.

 

[Mulligan]

Not to stifle the wine-making conversation, but does anybody else think the preferreds are getting a bit ahead of themselves again? We're still in a rising-rate environment, to my thinking.

Slow, you bring up an excellent point. In review, the long end of treasury yield is basically the same as last year. So preferreds should roughly be where they were a year ago (discounting the mid summer crazed run up). But, the consensus opinion is rates will move north going forward. Guessing rates is fool hardy, but I have been spot on past 3 years ignoring the drum beat. But I am considerably more tepid, now buying some short term plays that mature in a year or so. Now, I have a lot in perpetuals, that I will never sell no matter what happens, so that money I just disregard....Anyhow, the reality now is this...Either the market is telling us something by preferreds moving back up, or it is a last free gift opportunity to bail with capital intact...You can then take this money and put it in overpriced overvalued common stocks, bonds susceptible to some behind the woodshed arse beatings, 2% CDs, or dig up the coffee can in back yard and stuff more coinage in the can. Im overjoyed with the options!

 

[Mulligan]

I cannot justify the pricing on preferreds or junk bonds. If I weren't such a coward I would go short.

If the big preferred funds would run up a bit more, I would love to short those funds, while staying long with my illiquid perpetuals. But that will never happen as I am a coward too.

 

[Mulligan]

I cannot justify the pricing on preferreds or junk bonds. If I weren't such a coward I would go short.

I dont really follow the true junk bond market, but the junk bond index yield I read in paper daily appears over heated and ripe for correction. It is under 6% and was around 9% about a year ago. But I have not researched this index to understand what it is as that yield seems real low. You can buy lower investment grade baby bonds and investment grade preferreds with considerably higher yields than that. So this junk bond index yield doesnt make sense to me without understanding the criteria used for it.

 

[brewer12345]

I dont really follow the true junk bond market, but the junk bond index yield I read in paper daily appears over heated and ripe for correction. It is under 6% and was around 9% about a year ago. But I have not researched this index to understand what it is as that yield seems real low. You can buy lower investment grade baby bonds and investment grade preferreds with considerably higher yields than that. So this junk bond index yield doesnt make sense to me without understanding the criteria used for it.

Basically they pick a bunch of specific junk bonds to make up an index just like they do with stocks. These tend to be larger issues and the most liquid, and they also come from all sectors. When money is pouring into the junk sector it goes right into these issues. When it is pouring out...

For a lot of reasons, the junk market is prone to periodic over and undervaluation. This seems to have been exacerbated by newly popular junk funds and (especially) ETFs. Preferred ETFs are around, but I don't think that they are yet popular enough to do the same to the preferred market (yet).

 

[Slow But Steady]

You can then take this money and put it in overpriced overvalued common stocks, bonds susceptible to some behind the woodshed arse beatings, 2% CDs, or dig up the coffee can in back yard and stuff more coinage in the can. Im overjoyed with the options!

At the moment, I'm sitting on a bunch of cash. It's not in the backyard coffee can, but it's basically the same thing. The options aren't great right now, are they?

Are you still holding PFK? I see it closed just under $26 yesterday.

 

[Mulligan]

At the moment, I'm sitting on a bunch of cash. It's not in the backyard coffee can, but it's basically the same thing. The options aren't great right now, are they?



Are you still holding PFK? I see it closed just under $26 yesterday.

I sold a 1000 yesterday. I just had to though didnt want to. For all intents that is a years divis in relation to par and only 16 months left to maturity. I dont want to sell all of the shares as Im afraid of what I would buy with the idle cash.

 

[Mulligan]

I took that PFK money and bought 2000 shares of OSBCP at $10.23 today. Dedicated seller sitting there patiently selling, so I was able to gobble up my allotment all at once. Im starting to develop an unhealthy Putin/Trump "Bromance" with bank and financial preferreds and debt. This will be the end for me in this sector...High enough for me.

 

[MooreBonds]

Stupid question: given that perpetual preferreds have very, very long durations, what is the risk management strategy for this stuff in a rising rate environment?

I'm a bit different than most of the active posters in this preferred thread in that I still have about 10 years +/- until I pull the rip cord - so for me, I would simply plow new monies into new (higher yielding) preferreds, and gradually increase my overall yield over time with new contributions and income from my existing holdings.

About 1/3 of my preferred allocation is in issues with final maturities in about 15 years or less. So only 2/3 is exposed to perpetual (or long-dated enough maturities to be close to perpetual). And since my overall investment stash is only about 15% in fixed income/preferreds, only about 10% of my entire portfolio is exposed to perpetuity-like sensitivity. And a handful of the issues are very, very thinly traded that have decently high rates that don't really trade much or are volatile, so even if rates did rise a bit, the rates are still high enough to be okay to be "trapped in it".

 

[brewer12345]

I'm a bit different than most of the active posters in this preferred thread in that I still have about 10 years +/- until I pull the rip cord - so for me, I would simply plow new monies into new (higher yielding) preferreds, and gradually increase my overall yield over time with new contributions and income from my existing holdings.

About 1/3 of my preferred allocation is in issues with final maturities in about 15 years or less. So only 2/3 is exposed to perpetual (or long-dated enough maturities to be close to perpetual). And since my overall investment stash is only about 15% in fixed income/preferreds, only about 10% of my entire portfolio is exposed to perpetuity-like sensitivity. And a handful of the issues are very, very thinly traded that have decently high rates that don't really trade much or are volatile, so even if rates did rise a bit, the rates are still high enough to be okay to be "trapped in it".

Scares the willies out of me, but if you are comfy taking this risk and understand it, bon chance.

 

[clifp]

I'm not sure how many people are around when Brewer first recommended ISM/OSM.

It was a very good call on his part, but OSM is going to mature in March of this year and ISM next year.

Anybody have recommendations on corporate inflation adjusted bonds or preferred (I'm not at all comfortable with fixed bonds in this environment)

 

[brewer12345]

clifp, I think I would expand your search to include floating rate corporates. These will usually be based on 3 month or 6 month LIBOR (or something similar) plus a spread. There are a bunch of them flopping around so you can pick a selection to avoid too much concentration in a name and not take duration risk. Should be available in both investment grade and junk rating levels.

 

[Mulligan]

I'm not sure how many people are around when Brewer first recommended ISM/OSM.

It was a very good call on his part, but OSM is going to mature in March of this year and ISM next year.

Anybody have recommendations on corporate inflation adjusted bonds or preferred (I'm not at all comfortable with fixed bonds in this environment)

I have dug pretty deep over the past few years and the only ones I know of are OSM, ISM, and PFK. I own a few thousand still of PFK. There was a massive dump about three weeks ago that took it to $25.12. I bought at $25.20. It is now $25.90 or so. Too high to buy right now as it matures 4/18. Pays CPI plus 2.4%.

 

[Freedom56]

The retail sector is in for more pain. I have been at our home in South Florida since December 10, 2016 and noticed something that has not happened during the last 6 years that I have been coming here during high season in Florida. Retail shops are relatively empty. The shopping outlets are empty. People are going out to restaurants but even that sector isn't doing that well. Three restaurants shut down during the 1st week of January 2017 in the heart of downtown West Palm Beach. I see office and construction workers buying their lunches from Publix Supermarket rather than go to restaurants. I never expected office worker to buy lunches at supermarkets. Even the Home Depots here are relatively empty. Furniture stores are completely empty. Home and condo sales have slowed down. If rates move up from here, there is a high chance of a recession.

 

[clifp]

clifp, I think I would expand your search to include floating rate corporates. These will usually be based on 3 month or 6 month LIBOR (or something similar) plus a spread. There are a bunch of them flopping around so you can pick a selection to avoid too much concentration in a name and not take duration risk. Should be available in both investment grade and junk rating levels.

Are these available on Schwab?

 

[Mulligan]

The retail sector is in for more pain. I have been at our home in South Florida since December 10, 2016 and noticed something that has not happened during the last 6 years that I have been coming here during high season in Florida. Retail shops are relatively empty. The shopping outlets are empty. People are going out to restaurants but even that sector isn't doing that well. Three restaurants shut down during the 1st week of January 2017 in the heart of downtown West Palm Beach. I see office and construction workers buying their lunches from Publix Supermarket rather than go to restaurants. I never expected office worker to buy lunches at supermarkets. Even the Home Depots here are relatively empty. Furniture stores are completely empty. Home and condo sales have slowed down. If rates move up from here, there is a high chance of a recession.

I got an unsubstantiated theory that goes along with your anecdotal observations. Incomes have been relatively flat over the past several years, yet new car sales have been up. Not only does that choke off disposable cash today but for 5-7 years going forward with car payments. It sure seems that would suck a lot of disposable dollars out of the economy.

 

[brewer12345]

Are these available on Schwab?

Yes. I have not looked in a while, but IIRC in the advanced bond search screen you can specify floating rate bonds. Many corporate issuers will do combo deals where they offer multiple issues of debt at the same time and one might be a 5 year fixed rate, another might be a 7 year floater and the third might be a 10 year fixed. So there is a bunch of this paper from investment grade and junk names floating around out there in registered bonds tradable by the likes of us small fry.

 

[Mulligan]

Are these available on Schwab?

This is just me but I would not be too enthused with many of the libor preferreds that are in the 3 -4% range. Over the years they have started to rachet down the kickers. Many of their prices are factoring this trade play in. It will take some heavy lifting to get these Libor plus 3.5% kickers to get them to a respectable yield that will challenge the 6.5% to 7% fixed issues that are fixed.
The good ones such as C-N and ALLY-A with high kickers are at extreme call risk and over par.

 

[brewer12345]

This is just me but I would not be too enthused with many of the libor preferreds that are in the 3 -4% range. Over the years they have started to rachet down the kickers. Many of their prices are factoring this trade play in. It will take some heavy lifting to get these Libor plus 3.5% kickers to get them to a respectable yield that will challenge the 6.5% to 7% fixed issues that are fixed.
The good ones such as C-N and ALLY-A with high kickers are at extreme call risk and over par.

I was talking about registered corporate bonds, not exchange traded preferreds. If you are buying investment grade senior unsecured bonds, they are a LOT lower risk than preferred stocks. Not surprisingly, their yields reflect this.

 

[Mulligan]

I was talking about registered corporate bonds, not exchange traded preferreds. If you are buying investment grade senior unsecured bonds, they are a LOT lower risk than preferred stocks. Not surprisingly, their yields reflect this.

I know, that is why I specifically stated preferreds in my comment.

 

[Mulligan]

Finished selling off the last of my 3000 shares of PFK this week. About 60 cents profit per share. It is trading now over 10 divis above par leaving only 40 cents or so on table until 4/18 call. Not enough to keep. Sold off my WHLRP for a quick $200 profit holding less than 2 weeks.
Bought more PUK- on modest drop today, bought a slug of C-N again to capture divi next week and hope they dont call the thing. Threw caution into wind and bought 100 shares of CPE-A today.