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

[Running_Man]

Incidentally Copyright's answer is pretty much the amount of thought that has gone into this latest economic experiment, pretty much drops the entire economy of the United States to a blog post on a preferred stock forum. But since this is so imprecise that is why I am so worried about preferred stock pricing. They get destroyed in two ways off that formula - exploding money supply driving up interest rates or contracting velocity. I will wait this out until I can see a better resolution and Copyright's layout is as precise as anyone at the FED knows at the present time

 

[Mulligan]

Thanks Copyright and RM. Though I probably need to sit in a students desk and you two would need to be up at the chalkboard for a longer period of time than you all would want to for me to fully and completely understand it all, ha.

 

[BeachOrCity]

I think the key with all of this is to remember that even the BEST economists can’t accurately predict where all this infusion into the money supply will lead.
Many predict inflation but if all credible fiat currencies increase money supply by roughly the same amount does that still result in inflation? If the US Dollar becomes less valuable, other currencies need to be more valuable. Which major currency won’t have big central bank issues??

My personal strategy for a while is defensive. I know I will need to jump back in (equities). I know when I do I will dollar cost average it. But I don’t have a handle yet on parameters and timing.

 

[brokrken]

Great discussion, guys. I'm in the same boat as Mully, just sitting over here at my desk taking notes!

 

[Running_Man]

I think the key with all of this is to remember that even the BEST economists can’t accurately predict where all this infusion into the money supply will lead. THIS IS ABSOLUTELY TRUE, they were off by 100% on guessing unemployment 7 days into this.......
Many predict inflation but if all credible fiat currencies increase money supply by roughly the same amount does that still result in inflation? While the relative value of the currencies would not change, the nominal value of each currency would decline. In other words perhaps Gas would go from $2 to $4 a gallon in the US and from $1 to $2 a liter in Canada in Canadian dollars. This would still have the effect of devaluing savings and reducing debts even though currencies don't change on a relative basis, if I had to guess this is what the FED is hoping to achieve prehaps even a 100% inflation over the next few years but it is harder to achieve than Central Banks plan, Japan has been unsuccessful in trying to do this for 30 years. If the US Dollar becomes less valuable, other currencies need to be more valuable. Which major currency won’t have big central bank issues?? SWISS FRANC which is about 1:1 to US dollar right now

My personal strategy for a while is defensive. I know I will need to jump back in (equities). I know when I do I will dollar cost average it. But I don’t have a handle yet on parameters and timing.

See red answers

 

[bobandsherry]

Yeah. I doubt that either. According to page 9 you shared, their dividends are $14 million/yr, right?

Like you, I just considered what the QDI rate would be. I put some bids in on several issues, got these picked up:
PCG-A @ 25.45 (7.03%)
PCG-C @ 21.08 (7.09%)
PCG-H @ 18.68 (7.22%)

Now to watch and wait.

Someone wanted to unload PCG-A today, I saw a drop from $26.19 to $21.801, would then have div % after arrears payment (hopeful) at 8.5%. So I snapped up shares and unloaded my PCG-C and some of the PCG-H for slight profit to trade for a better overall return. PCG-A last trade $22.36.

 

[capjak]

who drove up price of AILLL today.

 

[Coolius]

I was watching the rise in AILLL. No rationale for that action.
Sold a portion of my holdings for average price of $32.


Bought them all back later at around $27.


Mulligan thinks there may have been a fat finger buy that triggered some algos/bots which caused a run. High was $45 - wish I had got that one.

 

[Mulligan]

Someone wanted to unload PCG-A today, I saw a drop from $26.19 to $21.801, would then have div % after arrears payment (hopeful) at 8.5%. So I snapped up shares and unloaded my PCG-C and some of the PCG-H for slight profit to trade for a better overall return. PCG-A last trade $22.36.

Bob, I am going to try to ignore mine and let things play out. I kept it small so I wont panic, ha... The preferreds are money good IF IF IF they can get this bankruptcy exit done...The market tanking is making it a bit difficult as part of the exit plan is recapitalizing with common and that is a bit dreary right now...That being said I bet there will be trading opportunities here as it could ne volatile a while. Im not looking as I am afraid I would get too deep in it all...

 

[capjak]

seems I always miss these one offs

 

[Mulligan]

I was watching the rise in AILLL. No rationale for that action.
Sold a portion of my holdings for average price of $32.


Bought them all back later at around $27.


Mulligan thinks there may have been a fat finger buy that triggered some algos/bots which caused a run. High was $45 - wish I had got that one.

Well we still scored nicely...I just got back in a couple weeks ago and made $4 a share flipping...You did even better..Some bot programmer is gonna get his arse fired when they figure out what went wrong, ha.

 

[bobandsherry]

Bob, I am going to try to ignore mine and let things play out. I kept it small so I wont panic, ha... The preferreds are money good IF IF IF they can get this bankruptcy exit done...The market tanking is making it a bit difficult as part of the exit plan is recapitalizing with common and that is a bit dreary right now...That being said I bet there will be trading opportunities here as it could ne volatile a while. Im not looking as I am afraid I would get too deep in it all...

I'm not getting in deeper, just trading issue for overall improvement in the return. The other issues held pretty good, even made a few bucks by selling what I had bought and now buying PCG-A on it's dip. Price rebounded somewhat after that so going to guess someone's portfolio was stressed and had to unload quickly.

 

[Mulligan]

Definitely prudent on your part. I just need to ignore it so I dont get greedy and pay for it, ha.

 

[bobandsherry]

Definitely prudent on your part. I just need to ignore it so I dont get greedy and pay for it, ha.

Definitely not my plan to invest more. By swapping issues I will have converted the same dollars from about a 7.1% dividend return to 8.5% return. And put a few bucks in my pocket for a small gain on selling the other issues. And honestly, since several other issues were up today no idea why this suddenly turned from an early pop this morning to a sell off. It already recovered about half the drop. The June deadline is what I'm counting on for company to get this done, that has a pretty significant benefit to them. But market not making this easy as common will see more dilution than originally planned. Share any news you hear, I'll do the same. But you seem to be more plugged directly in on most things.

 

[copyright1997reloaded]

See red answers

I am upping my purchases of precious metals. Just nibbling, because I want physical but the premiums over spot are outrageous (also did do a IAU ETF purchase but I consider that less secure as a hedge as it is "paper" gold). My total purchases are relatively meaningless in terms of overall net worth, but considering buying a bit more substantially (e.g. shifting 1-2% of my net worth there).

 

[bmcgonig]

I am upping my purchases of precious metals. Just nibbling, because I want physical but the premiums over spot are outrageous (also did do a IAU ETF purchase but I consider that less secure as a hedge as it is "paper" gold). My total purchases are relatively meaningless in terms of overall net worth, but considering buying a bit more substantially (e.g. shifting 1-2% of my net worth there).

Question: I understand in an apocalyptic situation where physical is obviously preferred. But in an inflationary situation wouldn't the ETF be ok? Thanks.

 

[pb4uski]

Definitely not my plan to invest more. By swapping issues I will have converted the same dollars from about a 7.1% dividend return to 8.5% return. ....

Isn't this increase in return from 7.15 to 8.5% a false positive though? Is it really the same dollars since prices have been crushed?

Let's say that you started out with $100,000 with a 7.1% return... and after your swapping you have $83,529 earning a 8.5% return... but in both cases your annual interest is $7,100.

 

[bobandsherry]

Isn't this increase in return from 7.15 to 8.5% a false positive though? Is it really the same dollars since prices have been crushed?

Let's say that you started out with $100,000 with a 7.1% return... and after your swapping you have $83,529 earning a 8.5% return... but in both cases your annual interest is $7,100.

Not at all. Here's the details:

PCG-A is a 6% coupon ($1.50/yr div). Div arrears is $4.12. With drop I bought for $21.81. So doing the math, $21.81 - $4.12 div collected at BK exit is $17.67 invested, will then collect the $1.50 div/yr and is then ~8.5% go forward return.

PCG-H is a 4.5% coupon ($1.125/yr div). Div arrears is $3.10. I bought for $18.68. So doing the math, $18.68 - $3.10 div collected at BK exit is $15.86 invested, will then collect the $1.12 div/yr and is then ~7.2% (I had thought it was 7.1% in my previous post) go forward return.

Another benefit I saw, with the drop PCG-A is 10% off the low and 29% off the high. PCG-H is 13% off it's low and 19% off it's high. So looking at the 52 week low/high, PCG-A may have less downside and more upside potential. And PCG-A is more liquid, about 7x the volume of PCG-H.

Here's section of my spreadsheet with calc's, let me know if you see something wrong.

 

[pb4uski]

I thought you were speaking generally and referring to the increase in returns accompanying the reductions in fair values... my bad.

I see PG&E as a very special and unique situation with special and unique risks.

I can see those cash flows IF PG&E emerges from bankruptcy, but if it doesn't then the 8/15/2020 and subsequent cash flows are zero and a totally different story.

Since I'm not sure how to handicap that situation I think I'll stay away. Good luck though... it'll probably work out ok.

... Finally, the deal lays the groundwork for PG&E to be forced to sell the company to the state if it cannot win approval of its plan by the bankruptcy court and the California Public Utilities Commission by June 30, or if it fails to put its financing into place by the end of September. ...

 

[bobandsherry]

I thought you were speaking generally and referring to the increase in returns accompanying the redductions in fair values... my bad.

I see PG&E as a very special and unique situation with special and unique risks.

I can see those cash flows IF PG&E emerges from bankruptcy, but if it doesn't then the 8/15/2020 and subsequent cash flows are zero and a totally different story.

Since I'm not sure how to handicap that situation I think I'll stay away. Good luck though... it'll probably work out ok.

Quote:
... Finally, the deal lays the groundwork for PG&E to be forced to sell the company to the state if it cannot win approval of its plan by the bankruptcy court and the California Public Utilities Commission by June 30, or if it fails to put its financing into place by the end of September. ...

There's many other details to the article that you pulled that from. It starts with this:

Pacific Gas & Electric reached a deal with California Gov. Gavin Newsom that could allow it to emerge from bankruptcy by a critical June 30 deadline, in exchange for concessions including a revamped board, forgoing shareholder dividends for three years, and measures that could lead to a state takeover if the utility fails to meet key safety and accountability milestones.

https://www.greentechmedia.com/arti...deal-with-calif-gov-to-emerge-from-bankruptcy

That said, I don't think the state wants to run a power company. And it also doesn't state what the terms of sale would be. All that said, I'm not betting the farm on this and keeping an eye on news and the market.

Here is link to the re-org plan that was filed after the article was published.

https://restructuring.primeclerk.com/pge/Home-DownloadPDF?id1=MzQxOTYx&id2=0

 

[copyright1997reloaded]

Question: I understand in an apocalyptic situation where physical is obviously preferred. But in an inflationary situation wouldn't the ETF be ok? Thanks.

In theory, but I worry about:
1) Counter party risk
2) Easily confiscated assets

How "apocalyptic" things need to get to have 1) or 2)? I dunno, but there is a reason that the physical to paper values are elevated. Some of it is being attributed to supply disruptions in terms of physical delivery, and some of it might just be a great arbitrage opportunity. (But just remember that the market can go against you longer than you can remain solvent.)

From Investopedia, regarding Comex Gold futures:

With futures, you don't need to actually hold physical metal and you can leverage your purchasing power.

source: https://www.investopedia.com/articles/optioninvestor/06/goldsilverfutures.asp


Here's a really old (circa 2008) article from Seeking Alpha poo pooing the idea of counter party risk on gold futures contracts: https://seekingalpha.com/article/111852-will-comex-default-on-gold-and-silver. Note however the discussion on "force majeure" which MAY be more applicable in the current scenario (COVID19 impact on distribution and gold production). Also spend some time looking at the comments where the author has to backtrack (a bit) and discusses "warehouse depository receipt" as a mechanism to satisfy the contract.

I am certainly not the expert on this, just going on the old adage of "A bird in hand is better than two in the bush".

 

[bmcgonig]

In theory, but I worry about:
1) Counter party risk
2) Easily confiscated assets

How "apocalyptic" things need to get to have 1) or 2)? I dunno, but there is a reason that the physical to paper values are elevated. Some of it is being attributed to supply disruptions in terms of physical delivery, and some of it might just be a great arbitrage opportunity. (But just remember that the market can go against you longer than you can remain solvent.)

From Investopedia, regarding Comex Gold futures: source: https://www.investopedia.com/articles/optioninvestor/06/goldsilverfutures.asp


Here's a really old (circa 2008) article from Seeking Alpha poo pooing the idea of counter party risk on gold futures contracts: https://seekingalpha.com/article/111852-will-comex-default-on-gold-and-silver. Note however the discussion on "force majeure" which MAY be more applicable in the current scenario (COVID19 impact on distribution and gold production). Also spend some time looking at the comments where the author has to backtrack (a bit) and discusses "warehouse depository receipt" as a mechanism to satisfy the contract.

I am certainly not the expert on this, just going on the old adage of "A bird in hand is better than two in the bush".

I had forgotten about these guys. Supposedly no counterparty risk. Backed by the full faith and credit of a gold bar [emoji4]

https://sprott.com/investment-strategies/physical-bullion-trusts/why-consider-sprott-trusts/

 

[bobandsherry]

Someone wanted to unload PCG-A today, I saw a drop from $26.19 to $21.801, would then have div % after arrears payment (hopeful) at 8.5%. So I snapped up shares and unloaded my PCG-C and some of the PCG-H for slight profit to trade for a better overall return. PCG-A last trade $22.36.

Good news for PCG from bankruptcy judge, the preferreds moved up today. PCG-A hit $27.91, now at $27.37. Unloaded my holdings since I had already picked up the div in arrears and over a year in dividends. I've been flipping through various issues as they bounced around, picked up almost 3 months of div's there. Still hold D and H issues with gains, may hold as these would have 7.1% and 7.5% QDI yield. Will watch for another play. Thanks Mulli for sharing the opportunity on PCG.

 

[thepalmersinking]

In a 70/30 portfolio, with 70% being stocks and 30% being Bonds. Which bucket does preferred’s fit into?

 

[Freedom56]

Preferred stocks fit into my short term trading and cash allocation in my portfolio. Investment grade preferred stocks recover much faster than regular equities which I won't touch.