Friday, November 28, 2008

Maturity Dates: Bonds, Perpetual Preferred Stocks/INZ, CUSPRB, GRT, FRPRJ, METPRA

I mentioned in a post earlier today that I will not buy a bond with a maturity date after 2038.Continued Discussion on Trust Certificates & Forbes Article/DKR  I may forget that rule being an old man but will correct any mistake once I realize that made it. I would like to emphasize that I underweight long bonds due to inflation and credit risk concerns.  I am also more likely to trade them, while holding onto my short individual bond positions until maturity. My main risk with short bonds, less than five years until maturity, is credit risk.  I also mix individual bond positions with ETFs.  My most severe underweight in the bond portion of my portfolio is in perpetual preferred issues.  An accountant might say that a preferred stock is equity which is true if you look at the balance sheet (under shareholder's equity).  It is not included in debt.  But I have never viewed it as such, since the bond characteristics of a preferred stock dominant over any equity aspect to me as an investor.   It is in my view as an investor in, rather than an issuer of preferred stock, a very junior form of debt. Many of these issues have no maturity date. This is a negative feature of them. The lack of maturity places them on the same footing for me as that Motorola bond maturing in 2097.  The Motorola bond maturing in 2097 is effect a bond with no maturity for me.  The lack of a maturity date will cause me to severely underweight preferred stocks as an asset class in the bond part of my portfolio.  For them, I am looking for opportunities to receive current yield with the potential to trade any purchase at a higher price.  So, I have to be an opportunistic buyer and seller of such securities.

  An example is the ING perpetual preferred stock bought a few weeks ago in very small increments, two 50 share lots.    I have already realized a profit on the first 50 share lot, using FIFO accounting, and I will hold the second purchased at less than 8 for the dividend plus a potential long term capital gain.  It just went ex dividend. So as described in the following posts, I took a small position in this perpetual preferred on an opportunistic basis after a severe price decline, sold the first 50 shares bought at around 10 at close to 14.5 for over a  200 dollar profit, and I am currently holding 50 bought purchased at less than 8 which will give me close to a 23% annual dividend.   
One way to look at this is that I am trying to make a profit in two ways, but one way is not holding to maturity to capture the spread between cost and par value since there is no maturity.  Instead, I have to buy at distressed levels, hope for a rebound, choose my entry points carefully, and trade part of the position when presented with a profit opportunity on the appreciation in share price.  For INZ, in the parlance of a gambler, I am playing with the house's money considering all of the buys and sells made in ING preferred issues. 

 The same is basically true for the REIT preferred stocks that I have bought.  I am buying for the current yield and I am alert for a trade at a profit.  This is shown by the dumping of CUZPRB on a price spike just recently, having already traded one or the other preferred issues of Cousins at a profit several times, and  I have received as well some dividends.    REITS: FIRST INDUSTRIAL AND COUSINS PROPERTIES
I basically decide how much risk to take with these issues by the amount of money allocated to buy the shares, which is always an insignificant amount to me.  So, for something like GRTPRF which is extremely risky but still paying dividends as of today, I would risk about $300 in exchange for the 75% annualized yield at my cost of $2.9.   For FRPRJ, I risked about $400. Hard to Get Excited  This goes without saying but the only reason that this issues yield so much is a fear of bankruptcy or a deferral of the dividend for these cumulative preferred issues due to a solvency event.  If that fear is overblown, the potential upside on the price side of the equation is potentially significant.  Only time will tell. So, even though they do not have a maturity date, the potential for share appreciation is present when the market participants believe the storm has passed and the dividend is safe again, for no one would pass up a 75% annualized yield that looked reasonably secure (no absolutes even under the best of circumstances and economic conditions-this is not treasury debt)  When the prevailing view is too the contrary, as now, then that creates the opportunity and highlights the substantial risk involved in fishing in these treacherous waters where on one or more issues I expect to be eaten by a shark.   

The floating rate preferreds are also perpetual so that automatically means a far lower allocation to them.  I discussed earlier why I would buy METPRA.  I allocate some funds to them because of two considerations. The first has to with the guarantee of 4% which is not interesting until the price of the security plummets, currently around 9 bucks with a $25 par value. It just went ex dividend.    The guarantee doubles to 8% at 12.5 and increases to 14.3% at my last buy at 7.  But I would not touch them just for that reason.  This floater pays the greater of 4% or 1% over 3 month LIBOR.  The float provision gives me protection, as I explained earlier, in the event short rates move up.   LIBOR AND THE MET LIFE FLOATING RATE PREFERRED STOCK
Another one is the Aegon floating rate preferred. AEB AND JQC

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