To Bondguy

or Register to post new content in the forum

40 RepliesJump to last post

 

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Feb 24, 2010 5:47 pm

Since I respect your posts and opinions I'll ask you directly (and anyone else can respond or chime in).

 
What are your thoughts on Preferred's or Utilities for income vs. Bonds.  In the past I was a bigger supporter of FI than now. I could elaborate (and will if you want) but I'm most interested in your take on the FI market vs. other income producing securities (annuities not withstanding, as I personally dislike them).
Feb 24, 2010 7:45 pm

Careful of the preferreds right now. Longest duration asset you can think of in the fixed income world. Not the place to be when big Ben starts turning the spigot off.

 
Feb 24, 2010 7:56 pm

UBS, disagree, preferred are more correlated w/hi-yield and thus are less correlated to interest rates and more correlated to economic recovery. Mos t financial preferred's had to come to market at an inopportune time and had to py way above market interest. Most are callable 5 years after issue. I think this is place to be if looking for cash flow.

Feb 24, 2010 7:59 pm

... are you interested in actually taking income, or just income securities?



Normally, I'm a huge fan of individual securities. However, qualified voices seem to agree that rates will be unchanged over the next year ... certainly until after the elections. That said, I'm using C share mutual funds in order to give me the flexibility in one year to do as I wish. And within the category, I'm heavily leaning on actively managed, total return funds with the capability to "play" the odds in between.



Feb 24, 2010 9:26 pm

It's pretty easy to find financial/insurance preferred's paying 8%+ and utility common stocks stocks paying 6.5%+ (VZ and T, for example), so I've been buying/holding those........I'm talking about ones backed by Barclays, Prudential, Wells Fargo, Bank of America etc.....The companies that I feel are out of the woods (as far as being able to survive)......


The utility preferred stocks are yielding 6% and under (for the most part), so I've been selling/avoiding those.......
 
 
 
Feb 24, 2010 9:33 pm

preferreds

most callable.



get a few hundred basis points in yield....take all the MF risk.

little upside.



rates go up-you get fukced

rates go down-call feature caps upside



check those bad boys when rates go up



like closed ends.   witch hazel garbage



(i like closed ends AFTER new offering in a high fear period {discounted})



people reaching for yield...they gonna get fukced



THERE IS NO FREE LUNCH IN THIS BIZ



Feb 24, 2010 9:41 pm
fredsac:

UBS, disagree, preferred are more correlated w/hi-yield and thus are less correlated to interest rates and more correlated to economic recovery.





Not trying to be a know-it-all but yo're 100% wrong. Look at price history of bank,util pre etc in a TRUE rising rate time frame



you get hosed

Feb 25, 2010 12:15 am

i blew-up a book using preferreds . i mostly use individual bonds now,  i like having a set maturity date. i have been using utilities funds inside VA's

Feb 25, 2010 9:04 am

I know in the SMA space preferreds where being sold in FI portfolios as "Enhanced Income."  That blew the hell up during the melt down and suddenly investors with objectives of fixed income (with matching risk tolerance) were losing big time.  That led to a rash of compliants and settlements.

Feb 25, 2010 11:56 am
iceco1d:

I'm personally not a big fan of preferreds or dividend paying stocks for income, but that's not the real reason for my post.

LSU, I'm curious as to why you dislike annuities?  And, do you dislike ALL annuities, or just fixed?  Just variable?  Etc. 


I don't like the surrender charges and costs for most annuities. They have their place if you want a 'personal pension' for some investors. What I dislike most about them is the payout ratio vs. say a typical portfolio. You pay alot of money for the 'insurance' that your income is stable. I think that 'insurance' premium you pay is too high.
 
Essentially I view any investment on what I view as the risk/reward ratio. If a CD is paying .5% it is not necessarily worse than a bond paying more IF and only IF the bond's risk / reward ratio is higher than the CD. It's pretty simple to explain to clients, but the risk/reward ratio is hard to quantify in many cases. With Annuities vs. a FI portfolio, I can run Monte Carlo scenarios to show what the cost of the 'insurance' is to meet/beat FI outcome. I feel that premium is too high.
Feb 25, 2010 12:05 pm
Wet_Blanket:

I know in the SMA space preferreds where being sold in FI portfolios as "Enhanced Income."  That blew the hell up during the melt down and suddenly investors with objectives of fixed income (with matching risk tolerance) were losing big time.  That led to a rash of compliants and settlements.


Yes, I can see where clients that bailed out on preferreds early last year would be upset. But then again, if they bought them for the income (and the issuer did not default / defer dividend payments) then they still had the monthly income had they kept them.
 
On the other hand, if they held on to them...
 
The preferreds I use for examples to clients are BAC. So take BAC-L for instance. Issued at 1000.00 and pays $72 a year. 7.2% off the original issue price. At it's low, it dropped to around 200 and still pays $72 a year. 36% was the CY at that time. Now, it's since climbed to roughly 900 and yielding roughly 8%. That's better than the FI for BAC pays (obviously due to the ability to suspend divdend payments) but I find little evidence to suggest BAC will not pay on the preferreds.
 
So where I'm going with this is that a) preferred can't cut the dividend like common stock b) while they can suspend the dividend payment, they must pay in arrears if they ever do want to pay divdends on their common again c)dividend reinvestment can provide tremendous upside in a down environment for that issuer.
 
Ultimately, it sounds like the investors that sold during the lows and now want to complain/ settle (which of course the government enables, but that is a different discussion) were victims of their own investing psychology moreso than the actual investments.
Feb 25, 2010 12:10 pm
Wet_Blanket:

I know in the SMA space preferreds where being sold in FI portfolios as "Enhanced Income."  That blew the hell up during the melt down and suddenly investors with objectives of fixed income (with matching risk tolerance) were losing big time.  That led to a rash of compliants and settlements.

 
june, 2007
 
OK  Mrs Jones...you're 78 and need income.  Lets keep it safe
 
mer pr
aig pr
fnm pr
fre pr
wb pr
 
I KNOW its conservative but you need to be safe with companies THAT will be here.  
heck fnm and fre are part of teh good usa govt!!!
 
If wet and his "skullmobile" were watching in 2007
 
What would he say?    :              fine by me
Feb 25, 2010 12:16 pm
LSUAlum:
The preferreds I use for examples to clients are BAC. So take BAC-L for instance. Issued at 1000.00 and pays $72 a year. 7.2% off the original issue price. At it's low, it dropped to around 200 and still pays $72 a year. 36% was the CY at that time. Now, it's since climbed to roughly 900 and yielding roughly 8%. That's better than the FI for BAC pays (obviously due to the ability to suspend divdend payments) but I find little evidence to suggest BAC will not pay on the preferreds.
 
So where I'm going with this is that a) preferred can't cut the dividend like common stock b) while they can suspend the dividend payment, they must pay in arrears if they ever do want to pay divdends on their common again c)dividend reinvestment can provide tremendous upside in a down environment for that issuer.
 
 
This is good stuff. My books carry some par bonds (GE & HSBC), but I could expand that part of my income portfolio.
Feb 25, 2010 12:21 pm
LockEDJ:

[quote=LSUAlum]

The preferreds I use for examples to clients are BAC. So take BAC-L for instance. Issued at 1000.00 and pays $72 a year. 7.2% off the original issue price. At it's low, it dropped to around 200 and still pays $72 a year. 36% was the CY at that time. Now, it's since climbed to roughly 900 and yielding roughly 8%. That's better than the FI for BAC pays (obviously due to the ability to suspend divdend payments) but I find little evidence to suggest BAC will not pay on the preferreds.
 
So where I'm going with this is that a) preferred can't cut the dividend like common stock b) while they can suspend the dividend payment, they must pay in arrears if they ever do want to pay divdends on their common again c)dividend reinvestment can provide tremendous upside in a down environment for that issuer.
 
 
 
TNX is 3. 65%
 
What happenes to that pre if 10 year goes to 5%.
 
dont get lulled to sleep with these rate so low.
that name gets wacked 35% quickly
Feb 25, 2010 12:28 pm
Shania Twain:
Wet_Blanket:

I know in the SMA space preferreds where being sold in FI portfolios as "Enhanced Income."  That blew the hell up during the melt down and suddenly investors with objectives of fixed income (with matching risk tolerance) were losing big time.  That led to a rash of compliants and settlements.

 
june, 2007
 
OK  Mrs Jones...you're 78 and need income.  Lets keep it safe
 
mer pr
aig pr
fnm pr
fre pr
wb pr
 
I KNOW its conservative but you need to be safe with companies THAT will be here.  
heck fnm and fre are part of teh good usa govt!!!
 
If wet and his "skullmobile" were watching in 2007
 
What would he say?    :              fine by me

AVF - AIG preferred are currently yielding 10.7% but even at issue were yielding 7.7% --- 78 year old woman is just fine on income.
WB-D = yielded 7.98 on issue and today is trading at gasp a premium so it's yielding 7.65%
 
As for Fannie and Freddie - those companies are insolvent now and were garbage even during 2007(100 to 1 leverage ratios are not viable business models). Recommending them at that time was a bad recommendation based on the underlying companies not that preferred's are inherently better or worse than bonds. Hell, I could use Enron, Lehman, MCI Worldcom bonds to counter your argument. That, however, would be company specific and not security type specific.
 
If that is your argument you would be better off telling investors which companies to avoid and not which securities. God forbid anyone do any due diligence.
Feb 25, 2010 12:36 pm
Shania Twain:
LockEDJ:

[quote=LSUAlum]

The preferreds I use for examples to clients are BAC. So take BAC-L for instance. Issued at 1000.00 and pays $72 a year. 7.2% off the original issue price. At it's low, it dropped to around 200 and still pays $72 a year. 36% was the CY at that time. Now, it's since climbed to roughly 900 and yielding roughly 8%. That's better than the FI for BAC pays (obviously due to the ability to suspend divdend payments) but I find little evidence to suggest BAC will not pay on the preferreds.
 
So where I'm going with this is that a) preferred can't cut the dividend like common stock b) while they can suspend the dividend payment, they must pay in arrears if they ever do want to pay divdends on their common again c)dividend reinvestment can provide tremendous upside in a down environment for that issuer.
 
 
 
TNX is 3. 65%
 
What happenes to that pre if 10 year goes to 5%.
 
dont get lulled to sleep with these rate so low.
that name gets wacked 35% quickly

Not to beat a dead horse here but perhaps you don't understand the concept of using a portfolio for fixed income.
 
Ok, INCOME is not predicated on the price of the preferred. So if you own it at say 100 and it's paying 8% and the price drops because rates rise (with me so far?) you still get $8 in income. You see, the 78 year old in your example needs INCOME to live on. The capital appreciation is secondary and it not a necessary nor sufficient requirement to owning for an income portfolio.
 
Tell me, are you the kind of person that thinks Bonds are the same as Bond funds (particulary in a rising rate environment?). They are VASTLY different animals. For the same reason that Bonds and other FI securities are things you buy for FI but Bond Funds you buy for CAP APP and some income. Totally different animals.
Feb 25, 2010 12:41 pm
Shania Twain:
Wet_Blanket:

I know in the SMA space preferreds where being sold in FI portfolios as "Enhanced Income."  That blew the hell up during the melt down and suddenly investors with objectives of fixed income (with matching risk tolerance) were losing big time.  That led to a rash of compliants and settlements.

 
june, 2007
 
OK  Mrs Jones...you're 78 and need income.  Lets keep it safe
 
mer pr
aig pr
fnm pr
fre pr
wb pr
 
I KNOW its conservative but you need to be safe with companies THAT will be here.  
heck fnm and fre are part of teh good usa govt!!!
 
If wet and his "skullmobile" were watching in 2007
 
What would he say?    :              fine by me
 
If it were 2007, that probably wouldn't have been on my radar at all.  Today...HELL YES!  That's how much the idea of what's "suitable" changed.  When I started, pre Financial Meltdown, the idea of an "Aggressive Investor" was 100% equity exposure with the ability to "handle" a 20% down year.  Does that stand true today?  Of course not now that we've gotten to see and experience how bad it can get.
 
Its one thing to sell preferred to a client and explain in great detail how it would benefit them, and give examples, like LSU - but my issue is when it is a "Fixed Income" SMA that holds them and calls it an "Enhanced" fixed income portfolio.
 
In that circumstance, you are taking a typically fixed income investor (who has the typical fixed income investor suitability (income w/ low capital flucuation), giving them an equity security, and selling it as FI.  Some of these investors didn't know what was in their portfolio, and lord knows what the FA told them. 
 
It doesn't have anything to do with "Investor psychology," it has to do with selling clients unsuitable investments (in hindsight).  A compliant and settlement is a business risk.  You can't right that off by saying "the client was stupid for selling at the low."
Feb 25, 2010 12:42 pm
Shania Twain:
LockEDJ:

[quote=LSUAlum]

The preferreds I use for examples to clients are BAC. So take BAC-L for instance. Issued at 1000.00 and pays $72 a year. 7.2% off the original issue price. At it's low, it dropped to around 200 and still pays $72 a year. 36% was the CY at that time. Now, it's since climbed to roughly 900 and yielding roughly 8%. That's better than the FI for BAC pays (obviously due to the ability to suspend divdend payments) but I find little evidence to suggest BAC will not pay on the preferreds.
 
So where I'm going with this is that a) preferred can't cut the dividend like common stock b) while they can suspend the dividend payment, they must pay in arrears if they ever do want to pay divdends on their common again c)dividend reinvestment can provide tremendous upside in a down environment for that issuer.
 
 
 
TNX is 3. 65%
 
What happenes to that pre if 10 year goes to 5%.
 
dont get lulled to sleep with these rate so low.
that name gets wacked 35% quickly

Sorry to comment on this post again, but this thinking just chaps my hide.
 
To all who are concerned about interest rates eroding the value of bonds and/or things like Preferred stocks:
 
YES, if rates rise the market value of those securities will fall. However, you can rest assured that 1) Rates will eventually come down so that those issues go back up in value from that reduced figure in the future. 2) Market fluctuations are NOT THE SAME as losses, you still own the security and it still pays you income based on the face value. 3) You do not buy bonds / preferreds in a low rate environment for SHORT TERM gains. You buy them to hold onto to get the risk adjusted return you are comfortable with based on the INCOME they kick off not the Cap App. Bank Preferred were a bit of an exception to this based on the hammering they got in the markets and the overcorrection they had and should have going forward.
Feb 25, 2010 12:43 pm
LSUAlum:
Shania Twain:
LockEDJ:

[quote=LSUAlum]

The preferreds I use for examples to clients are BAC. So take BAC-L for instance. Issued at 1000.00 and pays $72 a year. 7.2% off the original issue price. At it's low, it dropped to around 200 and still pays $72 a year. 36% was the CY at that time. Now, it's since climbed to roughly 900 and yielding roughly 8%. That's better than the FI for BAC pays (obviously due to the ability to suspend divdend payments) but I find little evidence to suggest BAC will not pay on the preferreds.
 
So where I'm going with this is that a) preferred can't cut the dividend like common stock b) while they can suspend the dividend payment, they must pay in arrears if they ever do want to pay divdends on their common again c)dividend reinvestment can provide tremendous upside in a down environment for that issuer.
 
 
 
TNX is 3. 65%
 
What happenes to that pre if 10 year goes to 5%.
 
dont get lulled to sleep with these rate so low.
that name gets wacked 35% quickly

Not to beat a dead horse here but perhaps you don't understand the concept of using a portfolio for fixed income.
 
Ok, INCOME is not predicated on the price of the preferred. So if you own it at say 100 and it's paying 8% and the price drops because rates rise (with me so far?) you still get $8 in income. You see, the 78 year old in your example needs INCOME to live on. The capital appreciation is secondary and it not a necessary nor sufficient requirement to owning for an income portfolio.
 
Tell me, are you the kind of person that thinks Bonds are the same as Bond funds (particulary in a rising rate environment?). They are VASTLY different animals. For the same reason that Bonds and other FI securities are things you buy for FI but Bond Funds you buy for CAP APP and some income. Totally different animals.
 
When would the investor get their principle back?
Feb 25, 2010 12:51 pm
Wet_Blanket:
Shania Twain:
Wet_Blanket:

I know in the SMA space preferreds where being sold in FI portfolios as "Enhanced Income."  That blew the hell up during the melt down and suddenly investors with objectives of fixed income (with matching risk tolerance) were losing big time.  That led to a rash of compliants and settlements.

 
june, 2007
 
OK  Mrs Jones...you're 78 and need income.  Lets keep it safe
 
mer pr
aig pr
fnm pr
fre pr
wb pr
 
I KNOW its conservative but you need to be safe with companies THAT will be here.  
heck fnm and fre are part of teh good usa govt!!!
 
If wet and his "skullmobile" were watching in 2007
 
What would he say?    :              fine by me
 
If it were 2007, that probably wouldn't have been on my radar at all.  Today...HELL YES!  That's how much the idea of what's "suitable" changed.  When I started, pre Financial Meltdown, the idea of an "Aggressive Investor" was 100% equity exposure with the ability to "handle" a 20% down year.  Does that stand true today?  Of course not now that we've gotten to see and experience how bad it can get.
 
Its one thing to sell preferred to a client and explain in great detail how it would benefit them, and give examples, like LSU - but my issue is when it is a "Fixed Income" SMA that holds them and calls it an "Enhanced" fixed income portfolio.
 
In that circumstance, you are taking a typically fixed income investor (who has the typical fixed income investor suitability (income w/ low capital flucuation), giving them an equity security, and selling it as FI.  Some of these investors didn't know what was in their portfolio, and lord knows what the FA told them. 
 
It doesn't have anything to do with "Investor psychology," it has to do with selling clients unsuitable investments (in hindsight).  A compliant and settlement is a business risk.  You can't right that off by saying "the client was stupid for selling at the low."

Ok then, explain to me how holding onto BAC, JPM, ING, WB, WFC, C, AIG (financial meltdown culprits) hurt that investor who was in a FI portfolio. The income they kicked off did not change. So I stand by my statement that it was a failure on the the investor's part by panicking and selling early. Will they complain and will the company settle on the basis of 'suitability'? Sure. Is it right, no. But that is another discussion on the obligations of the investor vs. our fiduciary duty to them. I think the consumer (investments, home loans, car purchases, etc.) has a higher degree of culpability to know the risks and rewards of their actions than the mainstream media does.