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

[Mulligan]

I bought CFC-B on exdiv day, and will need one full dividend ( The May dividend ) to be clear of losses in event of call.

Crossing the fingers......

Interest rates are still close to "Trump Taper" highs, yet preferreds have largely recovered. Not an encouraging sign to buy now. So my focus is buying higher safer ones that should be called but havent. But a few more call kicks to the nards, will change that strategy pretty darn quick!

 

[brewer12345]

Interest rates are still close to "Trump Taper" highs, yet preferreds have largely recovered. Not an encouraging sign to buy now. So my focus is buying higher safer ones that should be called but havent. But a few more call kicks to the nards, will change that strategy pretty darn quick!

That has probably happened because spreads on junky (and preferreds are junky) stuff have tightened tremendously.

 

[Mulligan]

That has probably happened because spreads on junky (and preferreds are junky) stuff have tightened tremendously.

Brewer you cast a more suspicious eye on preferreds now, so you can appreciate this. Many of the "True Believers" of preferreds are really espousing going the higher yielding route as they are less price sensitive to yield increases. And based on a few moments in time they are correct. But in my mind there is a reason why these issues are paying 8-10%. Poor coverage ratios and heavily indebted etc. But we havent been in a sustained long term rate hike era in some time. Many of these issues will at the company level feel the pain too. If they are on adjustable rate loans, or cant get their debt rolled over it could be lights out on some of these issues. So I am not so excited to go that route either.
Restraint from buying may not be the worst decision one could make now in any of the preferred segments.

 

[brewer12345]

Brewer you cast a more suspicious eye on preferreds now, so you can appreciate this. Many of the "True Believers" of preferreds are really espousing going the higher yielding route as they are less price sensitive to yield increases. And based on a few moments in time they are correct. But in my mind there is a reason why these issues are paying 8-10%. Poor coverage ratios and heavily indebted etc. But we havent been in a sustained long term rate hike era in some time. Many of these issues will at the company level feel the pain too. If they are on adjustable rate loans, or cant get their debt rolled over it could be lights out on some of these issues. So I am not so excited to go that route either.
Restraint from buying may not be the worst decision one could make now in any of the preferred segments.

As far as the math goes, they are correct. Duration of a perpetuity is 1/Y, so the higher the Y (yield), the shorter the duration.

As a practical matter, you are correct that there are usually one or more really good reasons why these issues have higher yields. If we were in a more attractive price environment, I might be willing to say that some of these risks are reasonably or even generously compensated for. The plain fact is that is not the case. It is possible that we will see an acceleration of economic growth as overly burdensome/costly regulations are removed, a massive pile of corporate cash is repatriated and deployed, and perhaps some fiscal stimulus happens. Under those circumstances a lot of these riskier bets may be fine. But the compensation for these risks is inadequate, IMO, so I will not be playing.

 

[Texas Proud]

I really do not understand why any old third party trust like CVB was ever around to begin with. The underlying KMI bonds have been around 108 for a long time. They could have called and pocketed the 8% instant profit many years ago. In fact could have made more money earlier.

Well, when all is said and done, I will make $640 plus whatever interest that is coming with the call.. not a great yield, but probably over 3%...

Better than a loss!!!

 

[Texas Proud]

As far as the math goes, they are correct. Duration of a perpetuity is 1/Y, so the higher the Y (yield), the shorter the duration.

As a practical matter, you are correct that there are usually one or more really good reasons why these issues have higher yields. If we were in a more attractive price environment, I might be willing to say that some of these risks are reasonably or even generously compensated for. The plain fact is that is not the case. It is possible that we will see an acceleration of economic growth as overly burdensome/costly regulations are removed, a massive pile of corporate cash is repatriated and deployed, and perhaps some fiscal stimulus happens. Under those circumstances a lot of these riskier bets may be fine. But the compensation for these risks is inadequate, IMO, so I will not be playing.

That does not look like what I learned on duration.... so, looked it up...

But thinking about it... a perpetual with a higher yield would have a shorter duration than one with a lower yield since you would be getting money back faster... however, they are both going to have much higher duration than say a 5 year bond so both will be much more sensitive to interest rate changes than the 5 year...

 

[brewer12345]

That does not look like what I learned on duration.... so, looked it up...

But thinking about it... a perpetual with a higher yield would have a shorter duration than one with a lower yield since you would be getting money back faster... however, they are both going to have much higher duration than say a 5 year bond so both will be much more sensitive to interest rate changes than the 5 year...

If you look it up on line you can find some truly stultifying discussions with lots of calculus. Duration of a perpetuity is a special case compared to bonds.

 

[Mulligan]

Math formulas... Too many years ago for me to remember. But still get the basics... Higher rates are not good for the capital preservation of perpetuals.

 

[Mulligan]

Ouch... so that would be about -$500 ?

Cut my losses even more today, Sunset. Some dumb person wanted them at $10.43 out of the market gate...So I let them have them! Then I clipped 7 more cents buying them all back in a different Roth account at $10.25, so I will net 7 cents profit holding 3 days or so. Not much of a loss now. Not so mad at myself now, as the losses will be trimmed to 15 cents a share. Thats just a daily price wobble.

 

[Coolius]

Ailll

Someone did a dump of AILLL right at market close. Picked up 200 shares at $26.00 even. This got me back to my earlier number shares held, I had sold 200 at $26.38 2 weeks ago.

It went down to $25.90, which is where it sits now.

Maybe some of you got it at that price? Good for you!

Good opportunity for folks wanting to get in, if seller is still there tomorrow.

FWIW

 

[Mulligan]

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

Sitting on some cash now. Most of it tax free so I wont "waste it" on QDI, AILLL. I also sold my KCC. Only netted about 25 cents per share profit on last bunch. CVB pissed me off in principle. I dont know what if any the odds are on the remaining KCC batch being called, but I am done with past call 3rd party trusts over par.

 

[Mulligan]

BTW, I got an answer from someone who invests and writes about bank stock issues. He investigated for me why C-N has never been called. As no reasonable big bank would have a Libor plus 6.37% trup outstanding. The reason is they recieved special grandfathered status for this issue (remember C got hit hard in crisis). As per Dodd/Frank banks over $15 billion were not allowed to count TRUPs as Tier 1 anymore so they have mostly called all of them. Now this doesnt mean they will not call issue. As if Libor escalates the issue will become to expensive to carry. But they do get a nice tax deduction having this as Tier 1 as opposed to non cumulative QDI issues banks must issue now.
I need it to drop more to feel comfortable getting back in again, or wait until next divi is approaching again assuming price doesnt rise for me to risk buying it.

 

[Mulligan]

Sitting on some cash now. Most of it tax free so I wont "waste it" on QDI, AILLL. I also sold my KCC. Only netted about 25 cents per share profit on last bunch. CVB pissed me off in principle. I dont know what if any the odds are on the remaining KCC batch being called, but I am done with past call 3rd party trusts over par.

Glad I listened to myself and ditched KCC. It has been called....
Bought 1000 shares of OSM today. Matures in middle of next month and will goat graze about 13 cents per share owning for this time (two monthly divis).

 

[Golden sunsets]

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

Hey Mul-I monitor this string but have little to add. You all are so much more savvy. I still own what I have bought, Ailll, Cnthp, Cnlpl, and Wfc-l. Don't pay much attention to any of them but to collect the divy's and slightly juice my returns. But isn't KCC the UNUM issue? I ask because the company is in my backyard and I had consideted it at one point but there were no QDI's for a taxable ac. They also just posted stellar earnings. Many of my neighbors are UNUm execs.

 

[Mulligan]

Hey Mul-I monitor this string but have little to add. You all are so much more savvy. I still own what I have bought, Ailll, Cnthp, Cnlpl, and Wfc-l. Don't pay much attention to any of them but to collect the divy's and slightly juice my returns. But isn't KCC the UNUM issue? I ask because the company is in my backyard and I had consideted it at one point but there were no QDI's for a taxable ac. They also just posted stellar earnings. Many of my neighbors are UNUm execs.

There is nothing wrong with the way you are owning these. I got lucky flipping a lot and close to doubled my returns last year doing this. But I will be honest. If I was told doing all this flipping would not change my return I would do it anyways as its fun for me. I cut down my trips to Vegas and increased my trading to take care of the gambling fix. No $25 cab rides or $20 hamburgers either.
Yes, KCC is the UNUM issue. But UNUM had nothing to do with the call. The UNUM bonds are uncallable, its the trust certificates representing ownership of the bonds that are callable. The brokerage found a buyer of the rest of the bonds (at a profit of course) held in the KCC trust. So they called the issue to sell the bonds. They couldnt do that until they controlled the certificates. The trust will be dissolved and the bonds sold off to someone.

 

[Mulligan]

I like this goat grazing stuff. I bought 800 shares of KCC at $28.40. Will hold until cash dispersement Feb. 15 and receive $28.525 for holding 12 days.

 

[Golden sunsets]

Are you squirreling away some Vegas gambling money??


Sent from my iPad using Early Retirement Forum

 

[Mulligan]

Are you squirreling away some Vegas gambling money?[emoji16]


Sent from my iPad using Early Retirement Forum

I have designated budgeted "gambling fund". Fortunately it has done well enough that occasionally I will borrow a few thousand from gambling account to investing account. But never will I do the opposite. That would be a major no- no!

 

[Running_Man]

Well it appears interest rates are not going to break out and instead are falling away rapidly. Could be back under 1.5% on the five year note quickly here

 

[Mulligan]

Well it appears interest rates are not going to break out and instead are falling away rapidly. Could be back under 1.5% on the five year note quickly here

Lets assume 50-75 basis point hikes from Fed this year. Do you think it will have material impact on 10 and 30 year bonds?

 

[Sunset]

I'm thinking if the rate increases are not at the beginning of the year, which I don't think they will be.
There will be no material change.
Sure by the end of 2017, rates could be 0.5% higher, but mostly that will be seen in mortgages/loans not in cd's or interest at the bank.
Therefore, my guess is preferreds will largely hold their price, as the reward spread compared to cd's is so high.

 

[brewer12345]

Lets assume 50-75 basis point hikes from Fed this year. Do you think it will have material impact on 10 and 30 year bonds?

Nope. But if the FOMC decides to stop reinvesting MBS and treasury portfolio cashflows or even start outright sales, that will DEFINITELY affect longer term rates.

 

[Mulligan]

Nope. But if the FOMC decides to stop reinvesting MBS and treasury portfolio cashflows or even start outright sales, that will DEFINITELY affect longer term rates.

I think yours and Sunsets answer pair together. It sure seems possible we are receiving direct yield benefit from Europe and Japan QE. So we really do not have to do anything but status quo. My next purchase though if I can snag it is a term dated issue which would cover my backside.

 

[Running_Man]

Lets assume 50-75 basis point hikes from Fed this year. Do you think it will have material impact on 10 and 30 year bonds?

Recent action would indicate it would merely flatten out the yield curve, so I would say for now I am not expecting any meaningful change in the long term rates. This is not much of a change in stance that I have held for the past 18 months but I was open to the possibility the new administration might take actions that would lead to higher rates and purchased a couple of defensive preferreds for a moderate increase in rates - ALBMP & WFCPRJ but I think we are back to where we were a year ago.

I suspect this may be a reaction to a lack of a move on corporate taxes which by default will delay repatriation of funds and lead to a delay in increased investment in U.S. but to make a definitive link of one action or inaction to a specific market result is usually wrong. CHSCM & WFCPL are having price actions that correspond to lower for longer at this point and MNRPC is up 8 percent from it’s late December lows. ZIRP is a hard task master and holding cards for now it seems to me he is in control until I see interest rates break out to meaningful new highs….

 

[Coolius]

Most of the Preferred stocks on my watchlist have been steady-to-higher for the past couple weeks. Was not able to buy some that I had hoped for.

I agree with Running-man's conclusion that we will be in a lower-for-longer environment for a while.

Will continue to look for sell-offs, especially with the illiquids, but not very optimistic for now, at least.