Backing and Filling Creating Buying Opportunities

While overall the preferred stock and baby bond arena have appeared to have leveled off this week from huge gains of last week there is a ‘backing and filling process’ occurring that is helping to create buying opportunities.

It is very seldom that stock prices move only in one direction and we have been waiting for prices to move down some in a number of issues we had on our watch list.

Last week we had hoped to add to our starter position in a number of issues, but the quick rise in prices locked us out of the bargains we were seeking.  1 of those issues was the American Homes 4 Rent 6.50% perpetual preferred (AMH-D).  The issue had come off the lows (around $22.20) 2 weeks ago and over the course of the next 10 days raced to around $24.25.  The issue then fell to $23.20 as some short term gains were taken by owners.  We were able to snag additional shares right at the low of $23.20–shares closed the day at $23.60.   Below you can see the chart.




The moral of the story is that investors still looking to buy more preferred shares and baby bonds need to keep closely watching for short term holders selling into the strong gains of the last week or two–bargains are still being created.  This is not to say that issues backing off from recent highs won’t keep falling–maybe they will so a slow ‘leg in’ to the position is sometimes best.

15 thoughts on “Backing and Filling Creating Buying Opportunities”

  1. Hi Alan, Level 2 is a sorted list of bid and ask prices and the volumes of those bids and asks. It can provide insight into the depth of buy and sell positions at any given moment. I find it more useful on lower volume issues, and especially useful when there’s a bid/ask standoff. For example, if you see a 20K share seller against a series of 1K or less bids…supply an demand should favor the buyer at a below current bid price. However, Level 2 may not show the true depth of bids/asks, as some sellers and buyers, especially of large positions, may not wish to tip their hands. I do not have an account with Schwab so am unsure if access through them though I’m sure their phone reps could point you in the right direction for access.

    1. Alpha, I agree. I watch it and movements and it helps some….But it still is mostly a head fake scam. I read Level 3 is a more true book view, but I have no access to it.

  2. Tim, I prefer working the bid/ask/level 2 during these episodes though do not always have the time available to monitor. Strategically, do you feel there’s any great disadvantage to leaving bids in place days on end?

    1. Alpha 8, is level 2 information a service that most brokers offer (I use Schwab)? I am not familiar with it. Thanks

      1. Hi Alan. I’m in the same boat, unfamiliar with level 2 and a Schwab client. Just spoke with them. Level 2 available for the asking – on Street Smart Edge only – which I haven’t previously using but will now try (there’s this thing about old dogs and new tricks though).

    2. Alpha 8 – I don’t ever leave buy orders in place overnight–probably just me, but I don’t want surprises if I am not around my computers. Sell orders I leave it for days, weeks, months.

      It has been years since I have worried about having level 2 data–I used to trade a lot of options and common stock and had all the latest and greatest software and quote systems. Now since I mostly invest longer term for income my needs are more modest. For flipping big drop preferreds and REITs like I have done a bit of the last 2 weeks doesn’t require speedy info so I simply watch the google quotes on the spreadsheets.

      I suppose I should activate some of the level 2 systems my brokers offer, but for a while anyway I was NOT doing enough transactions to get it free and I didn’t want to pay 9.95/month or whatever it was they were charging at the time.

      1. Tim – thank you for that great response. It’s a good point about surprises. I also had concerns about being a reference point to be bid against and around. My Level 2 access is via AMTD at NC. You would need to download their trading platform but it’s easy. On options – I did trade plenty last year which added about 3% to my TR. Only OTM puts against IG bond-like equities I’d be happy to own mostly for income. Of the few assignments, sold calls against them for at least 10% yield if called. Kind of like building my own short-term preferreds with call dates and yield-add that could become perpetuals. Thank you again Tim.

      2. Hi Tim,

        I’m a little bit confused by why you would not want to leave a buy order in long-term. If you have picked a price that you are happy with, wouldn’t that be a good surprise if your order triggered? I understand the issue about “being a reference point“ but, again, if you pick a price that you are happy owning the stock at, then why not leave in a standing order?

        Gridbird – do you ever leave standing buy orders in for your very illiquid issues that rarely trade? I know that you have been lucky enough to catch an active seller while you were in the ‘library,’ but one can’t always count on being that lucky so I would think that you would leave some standing active buy orders.

        1. Amy I really havent left any standing bids for the totally illiquids in a while because the standing bids not being touched are too high for me, let alone the ask prices. I generally will leave some bids for less liquids out if I see price deterioration such as a BANFP or KTN types. I generally stay close to fully invested and Vanguard usually caps my standing bid orders (without any cash fronting the trade) to about 50k each for regular and IRA accounts. So I dont like just wasting that money on issues that have little chance of hitting a trade. My other 2 brokerages wont let me trade with no cash available to cover trade.

        2. Amy, unless the market becomes unsettled again like last month, I am pretty content for now…I got 20 issues or so. And really at this point only a couple I am willing to flip out of to buy something else…If BANFP dips to around $26, I will double down there….I got back in last week for a fullish position at 26.30 and 26.40, but it has resisted dropping more for now.
          PCG has issued warning notices to employees they may file for bankruptcy. The SCE preferreds may fall in sympathy if this happens. I may look to nibble some more here if that opportunity presents itself. But those SCE trust preferreds are not illiquid. But other than that not really looking at anything as I really like some of my recent purchases and not to interested in selling any.

          1. Grid…if you are not flipping, that will leave you more time for golf but I fear that you will die of boredom!

            I found this information from your post interesting:

            “Vanguard usually caps my standing bid orders (without any cash fronting the trade) to about 50k each for regular and IRA accounts. So I dont like just wasting that money on issues that have little chance of hitting a trade. My other 2 brokerages wont let me trade with no cash available to cover trade.”

            I was wondering about the capping issue since I have more ‘buy’ orders open than I have cash to cover but Schwab as not barked at me yet. I keep expecting them to but maybe I just have not hit their threshold for ‘credit’ yet.

            1. Amy, it kind of varies…Actually I dont really know if its capped, its just usually excess trade amounts over that go to “pending” category where they have to approve that amount over whatever my limit is. I just cancel trade at that point. I have never left it open to see if they would approve or dissallow the additional trade.

            2. Add margin to the account. It will act like an overdraft. No concerns if you get unexpected or late day hits on the buy side. Just take care of any margin balance the next day, so as not to accrue margin expense.

              Just watch ex dates if you leave buy bids open. Vanguard does not adjust your buy bids based on ex dates. I don’t know if others will.

              1. Bob, I thought of that, I just dont want to start down that path. When I have a bid out, I have a plan on what I will sell to cover. If I just have margin, I might become a little more aggressive in what I do…This keeps me disciplined. I only place day orders. But I am not above fleecing fools and throwing out a sell order on exD date. It works more often than one would think.

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