When (If) Preferreds Rally

So income issues have taken quite a shellacking this week–in particular perpetual preferreds.

The temptation of conservative investors is to sell out and put the money in a mayo jar buried in the back yard–there are many investors which are already doing this–there are always folks (nervous nellies) that ‘buy high and sell low’, in particular those newer to the markets.

I would suggest that we will get a bounce of some magnitude in the income issues over the course of the next week–likely not a lasting move higher, but one which can be used to the income investors benefit.

Below you see a chart of the Arbor Realty 6.375% perpetual preferred issue (ABR-D). You see the bounce from 5/24/2022 around $20.50 to as high as almost $23 on 5/31/2022–then settling to $22 – $22.50 for the next week. This is simply a ‘relief rally’–no new news of magnitude on the immediate horizon so buyers stepped in loving the current yield of around 7.75%. Here is where the bounce provides the opportunity to reposition the portfolio if you believe you are incorrectly in too many perpetual preferreds and are uncomfortable with the potential losses ahead.

We don’t know how large a rally might be (or if one will actually come), but this is the nature of the game. The point is that an investor has to sleep at night and if you are uncomfortable you need to lighten up and maybe move into some attractive term preferreds which have a ‘date certain’ redemption date. You may give up a little current yield moving to a term preferred, but it should provide a little bit of peace of mind.

33 thoughts on “When (If) Preferreds Rally”

  1. Anybody looked at FHN/PRE? The coupon is 6.5% and trading at $24.89. First call is 10/25. FHN is being bought by TD BANK. I believe they are the second largest bank in Canada with a market cap of $120 billion. I don’t know if that is an event where they would get to call them, but they are under par and go EX on June 23rd.

    If TD bank doesn’t call them, they might get an IG rating? Above my pay grade to know that one.

    1. Watching it for a small dividend capture this week. More interested in FHN-B with more accumulated dividends.

    2. In the TD-First Horizon – OCC BMA Application for purchase of First Horizon by TD, it is stated that “At the effective time of the Parent Merger, each share of the following series of FHN preferred stock (together, the “Existing FHN Preferred Stock”) will remain issued and
      outstanding” It then goes on to specifically name the FHN Series E 6.5% issue as one of the preferred share issues which will remain outstanding. The TD backing will undoubtedly represent a credit improvement for all preferred shares outstanding at the close of the merger. Hope this helps.

  2. Any opinions on TDS-U and V? Last Monday I made one of the worst trades of the year – I bought a good-sized position in TDS-U which went ex-dividend the following day. The market carnage really ramped up last Tuesday and TDS-U hit a low of $18.20 last week and closed Friday @ $19.34. I’m down 9% in just 4 days! The issue is rated BA3 by Moody’s and now yields 8.66%. I’ve decided to put a stop loss in @ $19.00 for half the position and then add to it if it visits the low 17’s. TDS has been around “forever” and this extremely volatile issue will recover in time imo.

    1. GRjoel – Don’t panic. The company is fine. It survived a gazillion bear markets. It looks like you bought around $21. Treat it like a bond. Your 7.90% yield is good.
      In general though, you may find in the future using the opposite technique of gently wading in vs “trying to call the bottom” will let you sleep better.
      Good luck!

      1. Sage advice which I usually follow. I’ve been successfully trading TDS-U between $22 and $24 so when it hit $22 again the day before ex I jumped in figuring a net cost of $21.75 was great …
        Thanks

      2. The problem with attempting to treat TDS-U as if it’s a bond is that it’s not. Yes there are actually a handful of perpetual bonds but they’re very rare, but with that exception, bonds have a maturity… Barring economic upheaval of the issuer, if you live long enough you know with a bond that you will eventually get 100% of your principle back…. With a perpetual preferred, you can’t know that…. Granted, if you’ve been at this for only the last 10 years or so, that concept sounds completely ridiculous… But if you’ve been/ there done that as Azure and Tex have been advising, then you realize that perpetuity is a really long long time and an eventual return to “par” is never guaranteed as it is with a bond,

        1. 2WR, you are EXACTLY right my friend. If anyone here wants a (TDS) Telephone & Data Systems backed bond, but wants a real bond there is: CUSIP 911684AD0 6.7% coupon 12/15/33 last trade at 95.06 YTM 7.344%. “Too many people spend money they earned..to buy things they don’t want..to impress people that they don’t like.”, Azure

        2. 2whiteroses, GRjoel – a very valid point.
          I’ve been a corporate bond investor and trader for 35 years, I’m fully aware of the difference between maturity dates and perpetuity.
          I view my perpetual PFDs as bonds because I don’t need the funds. I buy them for income. If they go down I hold or add; if they go up I’ll take profit. And if I want term/maturity, I go to senior corp debt. My principal concern is creditworthiness.
          But GRjoel may need the funds in the next 3-6mos, 1, 5, 10 years so the fact that the instrument doesn’t have a maturity date is relevant. And you GRjoel may have entered the position as a ST trade vs holding for the income.
          I stand corrected, thanks.

  3. There was an Industry source that ran a headline…”Don’t hold your breath” for a bond recovery. Credit Source or somebody. Just as the sell off was picking up steam. Its really hard to say how far this will go….Seeing we have lived thru QE 1-infinty and the money is still in the M money supply the future is uncertain at best. I have started buying the 6’s and floater.

  4. Bloomberg article today entitled: “In Prevalence of Selling, This Is a Market Rout Without Equal”
    “Sweeping losses hit S&P 500 at a frequency never seen before
    Nowhere to hide with major assets suffering concerted declines”

    The article calls the current bear ‘the most rapid destruction of investment wealth ever.’

    A couple thoughts:

    Read an article that if you buy in when the market hits the bear -20% (currently at -23.5%), you’re usually in profit on those positions within 2 years, regardless of the total market decline.

    It’s unclear, but likely, that the senior ST IG debt market has priced in the prospective ~3.25% end-year overnight lending rate. My 5.186% on BBB-/Baa3/Columbia HCA ’24 purchased this week felt that way, but I may be mistaken.

    We’re almost half-way to the bottom if this is 50% bear drop. Hang on, pace your buys so you can close strong with the S&P around 2,400.

    If it drops below 2,400, invest in diapers.

    1. Hi Fredson – would you please tell me the cusip # of Columbia HCA ’24 bond. I searched Fidelity and Quantum and could not get any info.
      Thanks.
      Joel

      1. GR, you may be looking for CUSIP 197677AC1 8.36% due 4/15/24 last trade $106.10 to YTM 4.80%

  5. https://schrts.co/nYTeDKXH

    Yield curve update. Inversion is inevitable IMHO. The fed can’t control supply so they are going to destroy demand. The boom and bust cycle continues. We would probably be better off abolishing the fed and letting the bond market set rates. Lol. ATB

  6. As always, I learn a lot from the more experienced investors here but I still don’t grasp the “hand wringing” over current share prices. I own over a 20 IG Preferreds. Everyone one of them: JPM, Key, USB, Truist, BofA, Public Storage, Wells Fargo, Morgan Stanley and Capital One all continued to pay out dividends even during the financial crises (or what I think of as the never ending financial crises).
    So at least in my mind, current share prices for a buy and hold income investor are totally irrelevant.
    Am I missing something important?

    1. They’re better than buying an annuity, that’s for sure. Unless they get into trouble and become a bankruptcy risk. Some complain that you can’t trade them because of the loss but that’s not true, you can sell to buy something that’s become an even bigger bargain I do it all the time.

    2. Richard, you arent missing anything if you are in tune with your own personal goals and expectations. The major thing you have to fear is if you arent worried about losing capital focusing on the income, then realizing too late it you are bothered by it, if it would happened. It has happened to some, but that doesnt mean it would you.
      Besides some invest in a lot of other things such as common stocks or whatever, and designate X amount to preferreds and just extract the income and focus on parts of their investments.
      There are worse things than collecting the safe income and suffering unrealized capital losses. Such as chasing wrong high yield stuff that not only drops, but quits paying the income be it by suspension or insolvency.
      Im largely fully invested, but I am within a month or two likely getting a lot back in issues being called. So I consider that cash earning something. I hope the process of getting my cash takes long enough that I can buy good issues at lower prices. Who knows what will happen…
      I have been restocking some old HQ illiquids that are priced back to 10-12 years ago. And really arent much higher than they were priced back in late 90s. They are still are sub 6% so not wealth generators, but I needed to start rebuilding my core base. The rest I will figure out once they get redeemed.

    3. Lehman Brothers was the fourth largest investment bank in the US when it filed for bankruptcy in 2008, after over 150 years of existence.

      Could bankruptcy happen to Capital One in a financial crisis?
      Sure.
      Unilkely, but the price and price action of their preferreds do show some nervousness.
      That being said, I don’t see the hand-wringing you have noted on this site. Seems pretty calm to me.

      1. Donocash, I am not seeing that the market is pricing COF preferreds any substantially worse than BAC and/or MS preferreds. I would interpret that to mean that investors do NOT have a heightened risk about COF going BK.

        Ticker, Coupon Yield, Year to date% change
        BAC-O 4.375% -28.6%
        BAC-P 4.125% -30.3%
        BAC-Q 4.25% -29.9%
        COF-L 4.375% -32.7%
        COF-N 4.25% -33.6%
        MS-O 4.25% -30.3%

      2. I agree with the other poster here. I don’t see the risk for Capital One as anywhere near the danger zone at this time or materially worse than other large banks. (Its TR is above the US average, which average is itself well below the danger zone.)

        However, I don’t rely on Mr Market to predict that risk for me. (Not since the all-wise, all-things-always-considered-and-always-priced-in, Mr. Efficient Market fell off his high wire in October 1987 and broke his crystal ball.)

        From time to time, I look at something that got a lot of press during the last banking crisis – the ratio of bad stuff to good stuff on the balance sheet, best below 1.0. You can find that in the bank filings or on sites that mention Texas Ratios or similar. You do need to check .that the data is up to date. Some sites are not updated regularly.

        1. BearNJ,
          Which sites do you find to be reliable in terms of tracking and updating Texas Ratios?

          Thanks

          1. I can’t vouch for reliability these days, DYODD, but I like a few sites for info provided or ease of use. Google around, there are lots more.
            0
            Bank Reg Data is my favorite. They have pages for TR and Tier One for the 100 largest banks at once, which makes comparisons easy. It is a paid site, but they have limited free previews. I bookmark their Tier 1 and Texas Ratio pages and visit when they forget me. (No need to visit daily. Bank data changes quarterly.) Some free reports on their home page.
            Texas Ratio -maybe
            https://www.bankregdata.com//allAQmet.asp?met=TXR

            Deposit Accounts is easy to use, but it takes 2-3 clicks. Find your Bank. Look for its letter grade. Click on Health Rating / View Health Report. Look for Health Grade Components. Click on the drop down for Texas Ratio. It has what you need. Data is current and it says so. I like this.
            https://www.depositaccounts.com/banks/capital-one-360.html

            Best Cash Cow offers a clean page on each bank with the TR about 1/4 way down. Nice feature: it compares your bank with US averages. Data appears to be 1Q behind
            https://www.bestcashcow.com/banks/capital-one-bank-usa-national-association-33954

            Bank Tracker used to be my favorite. Plug the bank name in the search box. It will bring up the name and the TR. Click on the name for details. A respected site, but info not current, ~2Q old. I would avoid for now.
            https://banktracker.investigativereportingworkshop.org/banks/

            Mostly a bank office locator, no TR, but also has bank rankings by assets, liabilities, ROE, etc.
            https://www.usbanklocations.com/

            You can down load the official bank reports for free at official government sites like
            https://cdr.ffiec.gov/public/ManageFacsimiles.aspx
            (One report I pulled down ran 77 pages. I’ll stick with the summaries.)
            Or
            https://www.fdic.gov/resources/data-tools/
            Deposit market share is handy if you invest in regionals.

            Hope this helps.

            1. Bear – You’re making me feel as though I’ve never had a clue where to find valuable bank DD information……. To me, these are very eye-opening data sites that I had never heard of….. Thank you so much for posting.

          2. I can’t say what is reliable and current anymore, I can just tell you what I have been clicking lately.

            Bank Reg Data.
            Paid, with very limited free previews. Bookmark if you can get to it the free preview page with Texas Ratios for 100 banks listed by size. Makes bank-to-bank comparisons easy. My fav. Also, has a 100 bank Tier One page. (OT – Has some useful reports on main page, including a mention of a bank doing interest rate arbitrage by buying Treasuries. You might have even bought a brokered CD from them.)

            Deposit Accounts
            Free. Click the bank letter grade for Health Rating / Health Report. Look for TR and click the drop down menu. Current data here. Good.

            Best Cash Cow
            Free. Has a rating sheet on each bank. TR half way down, with comparison to avg US rates. Data is 1Q old

            Bank Tracker
            Free. One of the oldest and most respected TR sites, now serving up 2Q old data. Avoid.

            You can get bank reports free from The Feds, if you like reading 77 page reports. OT but the FDIC has a page with detailed market share. IMHO, useful for regional and community common stock bank investors.

            Apologies for seeming cryptic. I did reply in detail with links. My original reply got deleted as spam. So no links here, no nuances and complete caveat emptor. Maybe I will survive the spam filter this time.

            Just my opinion.

            1. The markets have shifted on the banks. From optimistic—that higher rates would help their margins, to pessimistic—-that a recession would cause bad loan/charge offs to hurt margins. Its the old loan loss reserve nightmares resurfacing. Which they always eventually will.

              So the CC banks are under the gun. And the custodian banks are holding up the best. COF like SYF are centers of attention. I don’t think any amount of balance sheet analysis will tell us how well the reserved for a recession.

              I’ve always respected cap one. And that’s it’s not a NYC money center seems to help. But it’s a second or third tiered company. Not priced up the with the likes of Public Storage…

        1. Azureblue,
          Thanks for the link. If I understand correctly, shorts have increased but hedge funds are buying more. Conclusion?

        2. Thanks for the article on QRTEP. I never liked their business model and never held any shares. I know this preferred stock was recommended a number of times in the past year, but can’t remember the name of the “investor” that was touting their shares. Clearly a poor investment recommendation. However, we all live and learn . Happy trails to everyone in the fixed income area. Lots of great opportunities out there now.

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