Is it Safe to Start Buying Preferred Stocks Again?

Not unless you’re willing to brave another Bernanke-Induced Market Meltdown, anyway

Some months back I warned that when interest rates start climbing, prices of preferred stocks (PS) would start falling. But who would have thunk that a mere hint of a pullback in QE would send these otherwise stable stocks tumbling.

Were you caught in the maelstrom? Many of my fellow PS buyers were given anNo dinero egregious haircut, some losing up to 2 points and more on their shares. Obviously, the halcyon days of low interest rates and high PS stock prices (and dividends) seemed to be over. Witness it was not at all unusual for stocks that had risen to more than $27 from their par value at $25 to suddenly get whacked to $24, even $23 or less.

That’s fine, I guess, if you’re holding for the long haul, say, 5 years, and have no intention of pulling your cash out of the market to cover short-term financial emergencies. After all, PS stocks for the most part are eventually redeemable at their par value. But if you ever need your cash, you’ll take a hit when you sell prematurely in a market like this.

Worse, while prices of preferred stocks softened, dividend rates on investment-graded preferred stocks also retreated. Stocks that regularly were paying dividends of 7%-8% now were being offered with rates less than 6%, some even dropping to less than 5%.

Dodging the FOMC Bullet

Me? I had set sell stops on virtually all of my preferred stocks, in an attempt to lock in as much of that appreciation as possible. My hunch was that rising interest rates would slowly erode my capital gains and, since my portfolio included more than 20 perferreds, the erosion of individual stocks might go unnoticed.

In hindsight, that was a smart move because nearly every stock in my portfolio abruptly stopped out, leaving me with some healthy capital gains. In fact, the gains I locked in were worth about a year’s worth of dividends, maybe more.

But my prescience ended there. Mistakenly I bought a couple of the so-called “bargain” preferreds (stocks that were selling at below par value), only to discover that they have not finished their punishing decline. Example: I bought PSB-V at $23.55 and you can buy shares today at $22.45. I also bought DLR-F after it was hammered to its par value, only to sheepishly discover the stock shaved another .98-cents from its value.

Uh-Oh, The FOMC Meets This Week

Bernanke and the rest of his financial marauders will meet Tuesday and Wednesday of this coming week, but I’m not really worried about a repeat performance. I don’t expect they’ll raise interest rates or pullback on QE.

Still, I’m not going to rejoin the PS buyers until the ground becomes stable again. For the past two months, the route to solid gains has been more like a primrose lane laced with financial liquefaction that makes the game too dicey for me.

Back to Day Trading

Did I say “dicey.” Well, one man’s tea is another’s poison. I’ve been making much more money by returning to day trading, my erstwhile market diversion. There’s been a lot of good action there, including some almost “can’t-miss” trades like Tesla (TSLA), Amazon (AMZN), Netflix (NFLX) and my all-time favorite of day trading stocks, Apple (AAPL).

I’ve got my eye on a number of stocks that report earnings this week, including SOHU, WYNN, and ESPX. But the really big winner might be TSLA when it reports August 7. Yes, I know this stock is way overpriced, and one of these days, soon, it’s going to fall like a boulder on Saturn. But in the meantime, it’s a good play that offers profits of $1000 to $4000 a day, if you’ve got the appetite for such high-test fun.

I’m Outta Here Again

Speaking of fun, I should mention I recently ran away to Canada for some outdoorsy RunawayTraderamusement, including Winnipeg and Thunder Bay. Then I followed Bob Dylan’s Highway 61 down the Lake Superior north shore for some camping. Here’s a shot I took along the way.

In a couple of weeks, I’m returning to the Boundary Waters Canoe Area Wilderness. I haven’t been up there since my son was a kid. He turned 40 last week. Time is fleeting. See you on the trail.

Charlie, the RT

 

 

Share

Comments are closed.