Comments on: Too Bad for Preferred Stock http://alephblog.com/2008/09/11/too-bad-for-preferred-stock/ Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control Sun, 12 Feb 2012 22:02:53 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: learning the hard wayhttp://alephblog.com/2008/09/11/too-bad-for-preferred-stock/comment-page-1/#comment-18761 learning the hard way Sat, 13 Sep 2008 06:01:03 +0000 http://alephblog.com/?p=905#comment-18761 I wish I would have read your article in January before buying some preferreds of MER, CIT, AEG, and RBS. I got them all at around 80% of par and they rallied a bit but now they've all declined by about 40%. I was considering swapping them out for the common since the worst-case downside is the same, but the common offers a higher upside, although I feel like the likelihood of the common dropping, say 30%, is higher than for the preferred. Since the preferred market is so much smaller than the equity market, and there have been so many high coupon preferreds issued in the past year, does it make sense to expect lower coupon issues to remain discounted for a while? I wish I would have read your article in January before buying some preferreds of MER, CIT, AEG, and RBS. I got them all at around 80% of par and they rallied a bit but now they’ve all declined by about 40%.

I was considering swapping them out for the common since the worst-case downside is the same, but the common offers a higher upside, although I feel like the likelihood of the common dropping, say 30%, is higher than for the preferred.

Since the preferred market is so much smaller than the equity market, and there have been so many high coupon preferreds issued in the past year, does it make sense to expect lower coupon issues to remain discounted for a while?

]]> By: Bond investorhttp://alephblog.com/2008/09/11/too-bad-for-preferred-stock/comment-page-1/#comment-18750 Bond investor Fri, 12 Sep 2008 02:57:49 +0000 http://alephblog.com/?p=905#comment-18750 David, excellent points. All of my investing is in my IRA and taxable account, so I also think it's a big deal that corporations can deduct a significant amount of the value of preferred dividends from the tax bill. So the after-tax yield on preferreds will *always* be higher for a multibillion-dollar corporation than little old me. Therefore there will always be millions of dollars willing to pay more for the preferred than I should pay for it. Also, I have been looking at "synthetic preferreds" where I use a preferred issuer's common and senior debt to try to create a mix of those two securities with the same base-case expected return. For the financials that are still paying dividends, it's not hard. Then, as you wisely note in your article, the equity you hold as the potential for unlimited upside. David, excellent points. All of my investing is in my IRA and taxable account, so I also think it’s a big deal that corporations can deduct a significant amount of the value of preferred dividends from the tax bill. So the after-tax yield on preferreds will *always* be higher for a multibillion-dollar corporation than little old me. Therefore there will always be millions of dollars willing to pay more for the preferred than I should pay for it.

Also, I have been looking at “synthetic preferreds” where I use a preferred issuer’s common and senior debt to try to create a mix of those two securities with the same base-case expected return. For the financials that are still paying dividends, it’s not hard. Then, as you wisely note in your article, the equity you hold as the potential for unlimited upside.

]]> By: james gosshttp://alephblog.com/2008/09/11/too-bad-for-preferred-stock/comment-page-1/#comment-18744 james goss Thu, 11 Sep 2008 20:04:17 +0000 http://alephblog.com/?p=905#comment-18744 Well, what you may say is true in today's markets or the 2000-03 period, but I made a lot of money for my company in the 80's on preferreds because of one thing that I was able to do with them. Remember for corporations you got 91.5% tax free income and I was able to get in the private placements, (demanded it) non callable for life. Thus as interest rates came down the portfolio ( mainly very good credits, never had one default) got a very good total rate of return. Always beat the index because of it. Well, what you may say is true in today’s markets or the 2000-03 period, but I made a lot of money for my company in the 80′s on preferreds because of one thing that I was able to do with them. Remember for corporations you got 91.5% tax free income and I was able to get in the private placements, (demanded it) non callable for life. Thus as interest rates came down the portfolio ( mainly very good credits, never had one default) got a very good total rate of return. Always beat the index because of it.

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