Of course I knew it was too good to last. And it was.
It’s been a few weeks since I’ve grimaced out loud and in print about the wave of shrinking preferred stock prices and dividends, but the continual slide has caused me to step up both my bitching and departure rate. The booming days of rising preferred stock prices and handsome dividends of 7%-9% are, as far as I’m concerned, officially over.
Each day for the past month or so I’ve watched the value of my PS holdings dwindle even though I’ve shored up much of the loss by day trading. Stocks like TSLA, AAPL, LNKD, LULU and others have been making daily moves so large you practically have to be brain dead to lose money.
While that’s helped to reduce the carnage, it’s still disconcerting to watch the hemorrhaging of preferreds which are (or were, anyway), the bulk of my long-term investments.
CTY is one of my biggest losers. For the uninitiated, that’s Qwest, the phone folks and this note is not to be confused with their other preferreds: CTW, CTX, CTU, and CTQ.
Although this hot-shot issue came recommended by an online subscription service that specializes in touting preferreds, this turkey has slumped to less than $21 from its par value of $25 when it IPO’d in mid-May. If you’re doing the math, you plainly see that CTY has paid one lousy dividend of around 39-cents (6.25%) while the value of the stock declined more than $4 during the same quarter. Hanging on to this stock makes as much sense as continuing to pay for this kind of fishy subscription advice. (More about that walleye on the right, later).
Yeah, yeah, I know this note may someday be redeemed at $25, but we’ll elect a half-dozen new presidents before that fateful day arrives since it comes due in 2051. Quite honestly, I’ll be dead by then and, perhaps, so too will my heirs.
I guess I shouldn’t be surprised. Not about shuffling from the mortal coil but about this painful decline in stock price. After all, I was one of the anointed who, along with hundreds of thousands of others, abandoned their landlines when smartphones took over the universe. How could I not expect this issue to suffer?
Digital Realty Trust (DLR-F) is another of my big losers, falling from $25 to today’s close at $22.92. But there have been others losers, ARR-B, TDI, NRF-D, among them. I dumped all of these losers but the current selling prices of at least half of my holdings are still under water, offset only by the intervening dividends which rarely make up the deficit.
And get this. All the while, Fed Chairman Ben Bernanke and his minions have yet to actually raise interest rates or cut back QE. They’ll meet again (Sept. 17-18 and Oct. 29-30) and I fully expect they’ll drop the I-bomb at one of those confabs. And if just the hint of rising rates wreaks this kind of economic turmoil, just think of what an actual interest rate increase might do. I want no part of it.
Bring on the Sell Stops
So, just as I did back in May when the winds of higher interest rates began to roil the market, I’ve set sell stops on virtually all my PS stocks—dividends be damned. Yes, I know these stocks might return to loftier levels in a couple of years, but I’m not convinced even though some readers suggest there are ways to protect yourself from the downdraft.
For example, Dominic wrote me recently to say:
“You’re presuming the stocks will be able to weather the down turn instead of actually going to zero. If the market believed preferred stocks would always bounce back they wouldn’t ever crash in the first place.
“I would suggest you take a look at what happened to Long Term Capital Management in the late 90?s Their highly leveraged fixed income strategies resulted in 40% returns for a few years and then – bankruptcy. The reason these preferred pay so well is because there is substantial risk involved.
“I think a safer strategy would be to buy the preferred buy also buy puts on the common stock of the same company. Since the preferred have higher priority on company assets than the common stock, the common stock will most likely wipe out before the preferred does. A way out of the money put on the common with enough between strike price and zero to compensate for the entire price of the preferred.”
I thank Dominic for his well-reasoned theory, but I’d rather keep my money out of this market until it decides where it is going. I’m looking for a correction. A big one. And I’m looking at worse days ahead for preferred stocks, bonds, and anything else negatively tied to high interest rates.
In the meantime, I’ve continue placing well-timed daytime-only bets on stocks I know and can trust—at least for the length of a trading day. No more. No less. And I’ll continue to whittle away at these preferred stocks I own, vowing not to return until the interest rate, and by extension, the preferred stock price/dividends, stabilize.
And when I’m not trading, I’ll be fishing, or idling away my retirement life in some equally benign pastime. My most recent runaway was to the Boundary Waters Canoe Area Wilderness north of Ely, Minn. I haven’t paddled the backwaters of this pristine forest and lake area for more than 10 years. And it’s been some 25 years or more since both me and my #1 son were there. That’s Marty on the right.
When you’ve got a few free days or a week, you owe it to yourself to make this trip. Absolute peace and quiet. Nothing but you, forest and lake critters like that nice walleye pike (above) that I caught, and enough solitude to hurl your life onto a whole new track. It’s almost enough to make you forget about the money those stocks have been losing. But not quite.