Prefered (sp?) Stock

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ezmoney's picture
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Joined: 2004-11-30

What do you guys think about prefered stock ($25 par) for fixed income solution? I tend to like them. Good rates.

skeedaddy's picture
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Joined: 2005-06-16

I like them also, but I'll wait until the FED is done raising rates. Since many
do not have a maturity date, they are most sensitive to higher rates. Also,
remember where they fall in cpaital structures...behind bonds and before
stocks.

Indyone's picture
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Joined: 2005-05-31

Don't like 'em in a rising rate environment.  Maybe we'll see rising rates for long-term stuff, maybe not, but eventually, I think yes, and when that happens, these things suck unless there is a good conversion to common strike price (most have no conversion feature).
BTW, two R's in preferred.

tjc45's picture
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Joined: 2005-05-06

ezmoney wrote:What do you guys think about prefered stock ($25 par) for fixed income solution? I tend to like them. Good rates.
 
I wouldn't use the word solution, but clients love these things. A rookie in our office has opened 10 new accounts this month cold calling with new issue pfd. Keeping mind that they may go down in value IF rates increase go for it.

ezmoney's picture
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Joined: 2004-11-30

I think for long term money they offer very competitive rates. Beats the 30 year long term Gov average.

BankFC's picture
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Joined: 2005-05-27

OK, so this might be a good time to share my current dilemma.
I am constantly being asked for "a good rate."  A consistent, stated rate. 
I am tired of doing brokered CD's that pay next to nothing, plus explaining how they can fluctaute in price until maturity as they are on the secondary market (a painful and annoying discussion).
So...I am left with individual bonds, which, in a rising interest environment, will potentially lose principle, or
fixed annuities, which are becoming more attractive, yet tie up folks money for 5,6, or 7 years.
VA's with GMIB's are OK for MINORITY (such as AXA's product) but if you are really going to tell the whole story aren't suitable for most fixed income folks IMHO.
SO...where do we get income!?!  Right now I am looking at First Trust UIT's, specifically Income Opportunity and Balanced Income...
I've also considered using Franklin Income in a C share...
What preferreds are you guys using??  Is the principle value inversely related to interest rates like bonds?
I appreciate the help!

ezmoney's picture
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Joined: 2004-11-30

Don't use Franklin if you don't want principal loss. I have and it's sunk like  rock lately.

tjc45's picture
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Joined: 2005-05-06

BankFC wrote:
What preferreds are you guys using??  Is the principle value inversely related to interest rates like bonds?
I appreciate the help!

We are using new issue preferreds. If you don't have access to the new issue market look for secondaries trading on the NYSE. Try to find issues trading under par value, if possible, and watch out for call provisions. Buying a high coupon preferred at a premium and then getting called out of it in short order is a big no no. You don't want your clients to get wacked by the educational learning curved. Some premuims with short call dates can be excellent alternatives to other fixed income investments. It takes work, and market conditions to find them.
Yes, preferreds do move inverse to rates, long term rates. However they may not move in lockstep with LT bonds.

blarmston's picture
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Joined: 2005-02-26

This is a dilemma I am sure we are all facing. How do we generate income in a rising rate environment, while trying to reduce the potnetial for principal loss..... An option other than the Franklin Income is the Delaware Diversified Income fund. Its a diversified bond fund that has had a great track record. This year, it hasnt fared well ( to put it mildly) due to the fact that its exposure to international bonds was below that of its peer group, but its performed well on a risk adjusted basis. Just a thought.

PowPow's picture
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Joined: 2004-11-30

Ther'es always floating-rate (senior/bank-loan) funds.  Use a C share, the yield goes up as rates rise, low NAV risk if I understand correctly.  Decent credit-risk.

Mike Damone's picture
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Joined: 2004-12-01

Unfortunately, if the prospect’s criteria is absolutely no risk to principal and needs income, I think a CD is the only option.  I wouldn’t be selling fixed annuities in this low interest rate environment due to mva and the fixed annuity rates pay less than the CDs now.<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
 
You may want to take a look at SPIAs if they are comfortable with annuitization.
 
Last thought, I wouldn't waste my time on rate shoppers.  These people are typically only comfortable with CDs.  I would rather spend my time marketing to those who want to invest for total return.
 
 

blarmston's picture
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Joined: 2005-02-26

"Last thought, I wouldn't waste my time on rate shoppers.  These people are typically only comfortable with CDs.  I would rather spend my time marketing to those who want to invest for total return."
 
I agree, those people will transfer their assets to the next firm that has a rate 5 BPS higher. After s[pending the time to get them as clients, you dont want to see that effort wasted when they pull the account after 6 months...

tjc45's picture
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blarmston wrote:This is a dilemma I am sure we are all facing. How do we generate income in a rising rate environment, while trying to reduce the potnetial for principal loss.....
Not for the faint of heart, two year GMAC paper is yielding about 7%. Three year is at about 7.5%. Even with all the BS this morning, these bonds are yielding less than they were two weeks ago. Yields are up today in a sloppy market. GMAC has 24 billion in cash, is earning money and may be on the auction block. All positives. They are seriously tatooed with GM's problems. Opportunity or trap? Just a thought for aggressive investors.
Another suggestion is to not worry about rates. If you're a fund buyer, look at a fund's history through interest rate cycles and pick one with a positive track record whose current management owns that record. As long as management shows a history of regaining value when rates move lower, no worries.

BankFC's picture
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Joined: 2005-05-27

uh...don't worry about rates?  yeah, if your income was based on what rate you were getting...you'd probably notice rates.
I think I might really start promoting UITs for income clients...no stigma like fixed annuities, less hold time too. 
They have high yields (6% to 7% for the debt portfolios, around 5.5% to 6% for the debt/preferred/high div common).
Also...any good senior floating rate funds out there?

Indyone's picture
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Joined: 2005-05-31

I like the short-term GMAC paper better than perpetual preferred stocks.  You all put those preferreds in a bunch of portfolios and watch what happens when long-term rates start up again...it's a good test of client loyalty.
...and loan funds have their own issues...the one I was familiar with (Franklin) could only be redeemed four times a year...

doberman's picture
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Joined: 2005-02-22

If your client is only a principal guarantee-type client, another income alternative would be to ladder CD's and/or high quality corp's and/or high quality muni's.
Personally, I wouldn't recommend any income investment starting with the letters "GM". It remains to be seen if GMAC will indeed be separated from GM, when the next "chapter" of GM's life occurs - "Chapter 11" that is.
Better to be thought of as a broker offering high quality invesments, than speculative, low quality investments.

tjc45's picture
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Joined: 2005-05-06

doberman wrote:
If your client is only a principal guarantee-type client, another income alternative would be to ladder CD's and/or high quality corp's and/or high quality muni's.
Personally, I wouldn't recommend any income investment starting with the letters "GM". It remains to be seen if GMAC will indeed be separated from GM, when the next "chapter" of GM's life occurs - "Chapter 11" that is.
Better to be thought of as a broker offering high quality invesments, than speculative, low quality investments.

One investor's speculative investment is anothers opportunity.
That many agree with you creates the opportunity for those who don't.
Better to be thought of as an advisor who can think beyond the cookie cutter as well as the talking head mentality of the 24 hour news cycle. 

BankFC's picture
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Joined: 2005-05-27

Clients don't like making and losing money proportionately!
Typically, if I make my retiree 6% on his money...he is fairly pleased.
Typically, if I were to LOSE him 6% on his money...he would be livid and ready to go through the roof.
 
I'd rather swing for base hits than home runs...far fewer strike outs that way!

doberman's picture
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Joined: 2005-02-22

A previous poster mentioned that GM has $29 billion in cash and that fact was a major reason for their liking GM. However, that's only half the story. Because Delphi is in bankruptcy and because GM is obligated to Delphi for almost half of that $29 billion (for retirement and health benefits), GM stands to lose a good chunk of that "green cushion". (For those who don't know, Delphi used to be part of GM.)The bankruptcy court is to rule on the exact amount GM is obligated to provide Delphi. 
Earning an extra 3-4% in annual income, with a strong possibility of losing the entire investment, is not a risk myself or my clients are willing to take.
Let's face it, GM is on life support and is getting worse. I know it and you know it. It's one thing for a blue chip to tank overnight, but it's quite another thing to knowingly bet on a dying company that is losing market share, has an underfunded pension, has a cash cushion that will likely be cut in half, and is also burdened with increasing health care costs for employees and retirees.
When you present your clients or prospects with these facts, I will assure you that 90% of them will not want to risk their entire investment on an extra 3-4% per year.
However, let's assume I'm wrong and the government steps in to bail out GM just before they are forced into bankruptcy. All's well, right? Not exactly. A government plan to bail out GM could involve wiping out shareholders and giving unsecured creditors pennies on the dollar for their holdings and/or an equity stake in the "new" GM. (In either case, the income your client enjoyed would be severely reduced or wiped out. This result would only occur after a couple of years of negotiations, during which time your client would get zilch.)
Still want to bet your client's money and, most importantly, your reputation on a dying company? Do you want another broker presenting everything I've mentioned, to your client, after you've invested their money in GM?
 

tjc45's picture
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doberman wrote:
A previous poster mentioned that GM has $29 billion in cash and that fact was a major reason for their liking GM. However, that's only half the story. Because Delphi is in bankruptcy and because GM is obligated to Delphi for almost half of that $29 billion (for retirement and health benefits), GM stands to lose a good chunk of that "green cushion". (For those who don't know, Delphi used to be part of GM.)The bankruptcy court is to rule on the exact amount GM is obligated to provide Delphi. 
Earning an extra 3-4% in annual income, with a strong possibility of losing the entire investment, is not a risk myself or my clients are willing to take.
Let's face it, GM is on life support and is getting worse. I know it and you know it. It's one thing for a blue chip to tank overnight, but it's quite another thing to knowingly bet on a dying company that is losing market share, has an underfunded pension, has a cash cushion that will likely be cut in half, and is also burdened with increasing health care costs for employees and retirees.
When you present your clients or prospects with these facts, I will assure you that 90% of them will not want to risk their entire investment on an extra 3-4% per year.
However, let's assume I'm wrong and the government steps in to bail out GM just before they are forced into bankruptcy. All's well, right? Not exactly. A government plan to bail out GM could involve wiping out shareholders and giving unsecured creditors pennies on the dollar for their holdings and/or an equity stake in the "new" GM. (In either case, the income your client enjoyed would be severely reduced or wiped out. This result would only occur after a couple of years of negotiations, during which time your client would get zilch.)
Still want to bet your client's money and, most importantly, your reputation on a dying company? Do you want another broker presenting everything I've mentioned, to your client, after you've invested their money in GM?
The way you put it I wouldn't want to put any clients into GM. However,  several of your bullet points need tweeking. GM/GMAC has over 40 billion in cash, not 29 billion. Additionally, they have borrowing covenents in place, in the current market that exceed 100 billion. Their pension liability IS fully funded. We're talking about a company that will lose about 2 billion here. That's not something that will sink them. GM is far from a dying company. It's just at a low end of a very cyclical business cycle. One thing about cycles is that they cycle.  GMAC has liquidity through out its maturity range. That is offsetting income that pays off it's liabilies for each year bonds are coming due. GMAC is on the block, it's just a matter of when and where.
GM's problems are considerable, no doubt. Not as bad as 1990/1992 when they were down to less than 360 days of cash, but bad enough. Like I said it's the law of cycles. In 13 years they've come full circle.
My yard stick doesn't go far enough out to want to think beyond two years. Only for aggresive investors, not the faint of heart or the widows and orphans fund. Just an idea.
 

Indyone's picture
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Joined: 2005-05-31

It's not like you have to dump grandma's entire savings in GM bonds either...D-I-V-E-R-S-I-F-I-C-A-T-I-O-N!!!
...and to think someone actually thinks the COMMON STOCK of GM is worth $27.40 per share!!!  What a bunch of crazy speculators!!!
I'm using short-term GM paper (two years or less) for up to 10% of my clients' bond portfolios...all investing involves some degree of risk...explain it and let the client decide...

tjc45's picture
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Indyone wrote:
It's not like you have to dump grandma's entire savings in GM bonds either...D-I-V-E-R-S-I-F-I-C-A-T-I-O-N!!!
...and to think someone actually thinks the COMMON STOCK of GM is worth $27.40 per share!!!  What a bunch of crazy speculators!!!
I'm using short-term GM paper (two years or less) for up to 10% of my clients' bond portfolios...all investing involves some degree of risk...explain it and let the client decide...

 
Moody downgraded GM again. Liquidity assured through end of 07, GMAC on the block and not part of downgrade, all the usual suspects as to reasoning for downgrade.
GM at B1, has the final shoe dropped? I'm still buying short GMAC paper to add value.

doberman's picture
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Joined: 2005-02-22

A viable GM still around in 2 years? I don't know. They've suffered multiple downgrades within the last few months. I'd say things are deteriorating fairly rapidly for GM.
Diversification? There are plenty of junk bonds paying a high rate of interest from companies that are small, but whose financial future is on the upswing. Contrast those with GM's situation.
Investing in anything that starts with "GM" is like picking from a carcass that's still twitching.
 

tjc45's picture
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doberman wrote:
A viable GM still around in 2 years? I don't know. They've suffered multiple downgrades within the last few months. I'd say things are deteriorating fairly rapidly for GM.
Diversification? There are plenty of junk bonds paying a high rate of interest from companies that are small, but whose financial future is on the upswing. Contrast those with GM's situation.
Really, how about some names?
Offering AAA rated investments,CDs and cookie cutter asset management doesn't add value. Which explains why there is so much pressure on fees. Doberman, I'm not addressing this to you directly, but the inability to think out of the box to bring value to clients is going to cause fees to get squeezed to zero. Which is what much of the advise being offered these days is worth. Experienced advisors who use that experience to add value can step beyond the "me too" mold governing most firms these days. Brokers doing research, like the old days, to fully understand a situation is a lost art. However, those who use that research to make a carefully crafted recommendations can not only justify their fee, but add real value to client portfolios.
GMAC is an example of this. The majority opinion to stay away from GM is what creates the opportunity for those of who are comforable with our decision to own the bonds and offer them to clients who understand what they're buying. The bonds mature or are sold at a profit, which we've already done in many cases, and value is added. Meanwhile down at cookie cutter investments the clients are scratching their heads trying to figure out why they're paying a fee for flat performance year to date to an advisor who answers that on a risk adjusted basis they're ahead of their peer group and bench mark index. HUH?
I
 

doberman's picture
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Investing in GM is not what I would call "adding" value to a client's portfolio. And just because the "majority" say to avoid GM, you're going to buy it because you see that (in itself), as an opportunity? Sometimes, the majority is right.
I think you'll find that most of the affluent are more concerned with preserving their wealth, than growing it. By "preserving", I mean saving it from the ravages of taxes, inflation, and excessive investment fees. I choose to preserve my clients' wealth by looking for opportunities in quality investments and/or investing with money managers who do the same.
Brokers who shoot for high investment returns, regardless of the risk borne by their clients' portfolios, will experience 1999 all over again.

tjc45's picture
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doberman wrote:
Investing in GM is not what I would call "adding" value to a client's portfolio. And just because the "majority" say to avoid GM, you're going to buy it because you see that (in itself), as an opportunity? Sometimes, the majority is right.
 
That isn't what I said, and you know that. The majority lumping all of GM together, long term, short term GM ,GMAC, is the mistake that the majority is making. And with that mistake the baby gets thrown out with the bath water. The talking heads are trying to make a case for bankruptcy, while many wall street analysts are projecting profitability for GM as early as next year. Personally, I think earnings visability isn't clear enough to make that call. The street is spilt on sell-buy/hold recommendations for GM's stock. Our own analysis shows no liquidity problems at GMAC for as long as our yard stick extends. Now, with all the negative press churned up by the 24 hour news cycle combined with well meaning advisors like you who are telling their client not to touch it with a ten foot pole the price of these bonds has been driven into the ground. Two year GMAC paper yields more than 30 year investment grade paper. That's over done. Which is also a typical market trait. For like minded clients who understand this scenario this is an opportunity to add value.
 
I think you'll find that most of the affluent are more concerned with preserving their wealth, than growing it. By "preserving", I mean saving it from the ravages of taxes, inflation, and excessive investment fees. I choose to preserve my clients' wealth by looking for opportunities in quality investments and/or investing with money managers who do the same.
 
You're absolutely right but yawn: Broker interviewee 143, what have you got? If you don't show them something different, you're just another heffer in the herd. "Me too" is the battle cry of the mediocre. Again, not directed at you.
 
Brokers who shoot for high investment returns, regardless of the risk borne by their clients' portfolios, will experience 1999 all over again.
 
Agree and disagree. Isn't opportunity finding discrepancies in the market and exploiting them? Isn't the misappropriation of risk one of those discrepancies? Kinda like when Delta airlines has a bad quarter and Southwest Airlines stock gets whacked because of it. Fixed income is one of the best areas of the market to find these opportunities. Whether it's loading up on MBS in a 1994 bond market meltdown, taking advantage of the rating lag from Moody's and S&P, or buying bonds in a stubbed toe situation, understanding what the market doesn't is what adds value. Sure there is risk involved. We could be wrong. It just doesn't stop us from making the investment.
There is a mutual fund that I use from time to time that is managed using this philosophy. It's the Rochester National Municipal Fund. It's also managed to maximize income so it's suffered somewhat in the last month or so, but check it out. You'll find that those of us who do this are not dice throwing fools looking to bet our clients well being on the pass line.
Shooting for high investment returns WITHOUT regard for risk will doom the hapless to repeat history.
 

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