Plenty of Irrational Behavior In Preferred Arena

Almost daily I look at many preferred stock issues that I might want to own–some are for ‘flips’ but some are for long term holding.

My own searches and comments made by folks on the site usually lead to some preferreds with really interesting behavior — most of it appears to be ‘herd mentality‘ related.

This morning I was looking at the SL Green 6.50% perpetual (SLG-I) preferred as shown below.

The issue went ex dividend on 12/31 and was marked down by the dividend amount–in the $25.40 area–6 days later the issue is trading in the $26.40 area–$1 higher.

This pricing is crazy–at least if you are a rational investor. This issue has been callable since 8/2017.

I hope that those on this site that had owned the issue are now exiting–my guess is that some readers have nice profits on this issue on short term trades–that’s great, but now is time to exit. This is but 1 example of irrational behavior by buyers at $26.40–there are lots more.

35 thoughts on “Plenty of Irrational Behavior In Preferred Arena”

  1. Tim,
    Agree with your headline comments. For the first time in quite awhile, I felt compelled to sell a 3000 share posiiton in SSW-I at an avg. price of $27.63.

    For some reason, it went parabolic in relation to the other outstanding preferreds (many of which I also own). My avg cost is $24.91, but gain is short term unfortunately. Can’t complain though!

    Fully invested and levered as always, but now feel it necessary to watch my holdings for sudden large drops or spikes.

    Anyone claiming markets are “efficient” has never traded preferred stocks!

    Quickmoney

    1. For sure Quickmoney–that is why I don’t post a ‘stripped yield’ that seems to be of some importance to some–with the lack of volume and most time lack of efficiencies stripped yield means little.

  2. This is the sole reason I starting buying Canadian preferred’s last year.

    Do not get wrong. In the US the price we pay for preferreds is way too high. In Canada, the price we pay for fixed-rate resets (a large part of the preferred market) is too low. Just look at ERRAF. A low IG rated utility company (it’s reset rate fixed for the next 3.5 years is 4.72%). It’s current yield is 6.3% because it is trading at $14.38 and Par is $19.12 (all in US dollars).

    Just like the US market, you don’t want to load up on high priced preferreds. In Canada, loading up on lower priced could be as bad or worse. So, in some ways, just as insane but in other ways a way to hedge or balance some risks.

    I do plan on getting OTC symbols for every IG company that has FIXED RATE only for their highest coupon issue in the next few weeks. There are not that many but I like the value better.

    1. Are there some different tax implications for US taxable investors buying such Canadian Preferreds?

      Also as they are likely priced in CDN $s, would the currency play an additional risk/hedge for US$ investor?

      1. Msquare, your going to have to file on tax returns a claim to that 15% withholding to get it back as a tax credit. I dont think everyone here who invests in these issues are versed enough to know that not everyone will get that full credit back. There are variables based on ones circumstances that determine full credit recovery eligibility.
        As far as currency goes, yes it can help or hurt based on the movements of the currency. Though there are a few such as Enbridge Series 5, J, and L issues that are priced and paid in USD, thus eliminating the currency issue.

      2. As Gridbird points out, most US taxpayers can claim most/all of the 15% withholding tax on their US tax returns, if the securities are held in a taxable account.

        The biggest tax headache (IMHO) is if you hold Canadian shares in a tax exempt account (like an IRA).
        In theory, if you own Canadian shares in an IRA and receive dividends, you can be exempted from Canadian withholding tax (otherwise, its a 15% tax that you can’t recover on your US tax return). To claim the exemption, you have to file a form (usually through your broker). HOWEVER, it is up to the Canadian securities custodian to handle this correctly, and a lot of the securities custodians in Canada don’t play by the rules. So, even if you file the form, they may hit you with the withholding tax anyway.

        FWIW, I haven’t done the research in a couple of years, so my info may be out of date.

  3. Certain preferreds like the GLOP C are still a couple of bucks lower than what I would expect in today’s extra bullish environment. One of the few I am comfortable to own.

    1. Agree with your take on valuation.

      Added more GLOP-C today to multiple taxable and margin accounts. Similar sector preferreds are trading well over par – even those with K-1s.

      Quickmoney

    1. Martin G–you’re right and honestly they have served most of us well in the last year or two–but you may be more active in that arena than most.

  4. Seriously, I have been buying both bonds and preferreds now for decades. In particular the last 6 or 7 years have had to go to more preferreds because of the coupons. Anyway, there is “virtually” nothing out there “decent” to buy at a civilized price. You can either “chase” these newly issued really Low Coupons or pay way Too Much for items that have good coupons but trading at $26.50 all the way to almost $28. We live in a yield starved world with nothing out there available. Iam not going to chase some 4.75% paper that when the tide finally turns (Think Powell) will eventually fall to $20 or even less. This is one of those movies that is going to have a “VERY BAD ENDING”. Many people have NO CLUE what can happen when rates finally start to get raised. I’ve been at this game for over 45 years now and this will truly end badly.

    1. Chuck – It’s also possible that rates stay low or even go lower and stay that way for an extended period of time, right? I agree that it isn’t wise to back up the truck on fixed rate issues at the moment. However, I try to have a mix of fixed and floaters to hedge against the risk. I’m relatively young so I don’t feel comfortable earning 2% in an online savings account for an extended period of time. I think a blended portfolio of fixed/floaters helps to alleviate some of the interest rate risk.

    2. On the flip side, Chuck, if interest rates aren’t higher in the current boom environment, they may never move higher. They certainly won’t be raised when the bust finally comes, which will most definitely follow the boom. So perhaps interest rates will not be significantly higher again in our lifetime. It’s a new world.

      1. None of us know how interest rates will play out over the next 20-30 years.
        Makes me think about how SLMNP is such a gift. Thanks again Gridbird!

    3. Chuck P–I think you echo the sentiment of most–on the other hand some of us feel a bit compelled to own something–at least generate some income. My money market on etrade is down to 1.55% which is better than a few years ago, but is still a modest income.

    4. But the key question is when interest rates will rise? Is this low rate environment the new normal? Right now, what is the catalysis for rates to rise significantly in the next several years? Do you see it. I sure don’t.

      I do agree nothing to really buy unless you go with the low coupon new issues. That said, for me this is why I am not anxious to sell some of the higher yielding issues that have run up like some folks here. Yes, I can book capital gains equivalent to a year or two of dividends. But then where do I invest that money.

      I ask myself, why did I buy this issue. Was it flip or was it because I wanted to generate income over the next 5 years or more?

      No easy answers

      1. Personally, I think Canada may be a place to look. If you’re holding past call US issues that are currently trading well above par, you may want to sell those and move into Canadian issues. Up north, you can get fixed rate issues under par with much better yields than those available in the US. Yes, there is currency rate risk among other things but I like the landscape there a lot better. It’s definitely a challenging environment.

      2. Not everything is high priced Maverick…Look at UEPEO. It was trading past call at $115 in the early 1950s. You can pay straight up ask today at $104.48 for it today, its a fire sale, ha. Just a bit of humor injected to reinforce your comment…Are preferred yields low today? Well it depends on what date you are comparing to. Historically as a collective answer yes they are high, but there have been times in the past when they have been lower still. One can play on both sides of the fence for balance. About half my money for now is in adjustables, resets, and term dated issues.

    5. Chuck, Many people DO have a clue when rates are raised. 2018 was not that long ago. However the fed does not put in the thumbscrews in all at once. The shift to raising environment will cause some declines if it comes.

      It’s a pending credit/liquidity event that worries me more than the fed.

  5. Great catch, Tim, thank you! Now I have more cash for buying, but still the problem is what to buy.
    What are you think about Amtrust baby bonds ( OTC: AFFS AFFT), is it a buying opportunity?

    1. Yuriy, that is a relative term as clearly the buy opportunity was when they delisted a year ago. I have flipped this several times for decent buck gains on upswing. Would have been better just holding but was too skittish.
      But clearly there are anecdotal signs that the now private company is holding its own. Another public insurance company that is a part owner has been extracting dividends, so that means an ability to pay.
      The Amtrust senior unsecured 2023 6.125% bond is now trading at $104 with a 4.89% YTM. Clearly a sign of owner comfort. I own these in my higher risk bucket funds so I dont bet the farm here. But at about $12k its my biggest high risk bucket hold. Like I said I have traded it a few times with some quick profits, but my current purchase price cost is around 20.75 for AFFT and 20 for AFFS. Plan on just holding these shares. Keep in mind I am referring to the baby bonds. No interest in the preferreds.

      1. Gridbird, yes I’m talk only about BB too. Their prefs are out of my to-buy list because I never deal with non-cumulative issues.
        What do you think is the likelihood that these BBs will be redeemed?
        I think 7,5% is expensive for them now, when the rates are so low.

        1. Yurly, these are subordinated notes. So they are lower on cap stack than the senior unsecured 2023 bonds that trade well over par (and went even higher over par today). I suspect they will stay outstanding for some time. But when I bought the last time they were well over 9%. So I am holding long term. The chart clearly shows this was just “delisting fear”. They have been crawling towards par ever since delistment occurred. And they were around par, prior to the announcement. Im not much on high yield, but I am glad I own these.

  6. The discouraging thing is it seems all the irrational behavior is in the same direction. That is, inflated asset prices. Good for people holding these particular issues but not for the ‘bargain hunters’ looking to invest.

  7. i’ve been trading this one and there is a strong algo pushing the price on this. i’m pretty sure its passive money

      1. the book is very empty on the bid side. as soon as the buyer finishes this will go down to reasonable levels pretty quickly on virtually no volume.

        Our friend EZT is similar… now back above $28 even reaching for $29.

      2. Tim, I loaded up big on this in the $25.30’s range as a nowhere to go trade looking for yield. I am already long gone at $26. Should have held longer, ha. But, I think I held 2 or 3 days. I will hold issues well above par and past call if I have a definable explanation for it staying outstanding. But not with issues like these as there is none I can find.

          1. I had no idea if would jump that quickly, and totally irrational. Within days it was trading higher than it was the day before it went exD.

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