Canadian Preferred shares near support

June 27, 20136 Comments

I normally focus on common stocks in this blog, but this week I’d like to take a look at an often overlooked segment of the fixed income markets. Preferred shares have priority over common stock on earnings and assets in the event of liquidation and often, although not always, have a fixed dividend. Further, they do not offer the voting rights a common stock does. As such, they are best classified as fixed income securities. While they do have some relationship to the movement of common stock prices and the stock markets, preferreds are generally lower in volatility than their common stock counterparts, higher yielding, and quicker to recover after a market correction. Case in point, the Canadian preferred share market bottomed in late 2008 during the financial crises, and recovered to their full 2007 highs by 2010. Conversely, the TSX has yet to fully recover to its 2008 highs, and even the US stock markets did not revisit their 2007 high price levels until this year (6 years!). So, preferreds are not without volatility, but certainly can be viewed as reasonably stable if held with a timeframe of a few years.

 

Right now, preferred shares, as illustrated by the iShares S&P TSX index Preferred Share Index ETF are approaching a zone of support—note the box I’ve drawn on the weekly chart. The 3-year trendline has been broken, suggesting that there is not much capital gain left in preferreds – but most buyers of these securities are generally using them to diversify a portion of their fixed income portfolios, not to realize capital gains.

The daily chart illustrates a break in the moving averages which support the trendline break noted above. Stochastics and RSI are oversold and hooking up—a positive sign. On the bearish side, MACD is not hooking up at this time. For fixed income investors looking for a reasonable entry point into preferred shares, that time appears to be approaching.

ValueTrend Bear-O-Meter reading

The Bear-O-Meter, which I introduced in late May to readers of this blog (https://www.valuetrend.ca/?p=2178) was reading bearish-neutral a month ago. As noted in May, risk was increasing and the environment was becoming “moderately bearish”. The reading proved to be accurate, as things did deteriorate shortly thereafter. Currently, the reading is an even more bearish 2, indicating further caution towards US markets. While seasonally you will often see a rally in the first couple of weeks in July, one should keep in mind that the mid-termed indicators that comprise the Bear-O-Meter are signaling caution for the months ahead.

As a reminder, the Bear-O-meter was not designed to provide precise timing signals. Instead, it is a tool for indications of the risk/reward profile of the markets. The indicator is a compilation of weekly breadth, trend, sentiment, value and seasonal patterns that I have been using over the years, combined into one easy to read market health gauge.

 

6 Comments

  • Good afternoon Keith,

    Your timing to write your blog on preferred shares is right in line with what I am looking for for my portfolio. I just bought yours books and I just finnish reading the Action step two ”acheive the right balance”. I am retired and naturally looking for Fixed income. Per your book I think it is the time to look for Floating rate preferred since the interest rarte will on the rise. Where can we find listing of preferred shares with the above-mentioned rate?
    Thank you.

    Reply
    • Hi Paul
      I beleive that your brokerage firm should have some research on preferred shares that you could obtain to get your list of floating rate preferred’s.

      Reply
  • Hi Keith,

    I wanted to get your analysis on BB. It got slammed hard after a poor earnings release. I remember you had an outlined a breakout of the neckline many months ago, and that proved to be a great observation. Would you consider getting interested in BB at a retest of the neckline where it broke out?

    Thank you,
    Parm

    Reply
    • Hi Parm
      Now that BB has broken out of its triangle formation, it looks ugly as sin. I wouldnt touch it.

      Reply
  • Hi Keith,

    I’m not writing this letter to be posted on the blog, but as a suggestion for a possible blog article in the future.

    Do you think it would be interesting to do an article reviewing some of the ETF websites that you use for general research?

    Trying to research, analyze, and compare Canadian ETFs can be a daunting task for many of us retail investors. While going to the websites of the individual providers is an option, independent sites that offer an overview of the entire landscape can often be much more helpful. This is especially true when trying to compare like-minded offerings.

    Personally, I now have 3 sites that I use for such research :

    – ETFInsight provides informative ETF factsheets. The searching interface is very good, as is the database screening filters. The numerical search info (eg. Yield percentage) sometimes seems a little wacky, and this can lead to difficulty when trying to limit by dividend yield for example.

    – TMX ETF Screener doesn’t give much in the way of background info on ETFs, and I find searching it to be clumsy. However, the financial info seems quite trustworthy and current. I often use it to verify the numbers for ETFs of interest that I’ve found elsewhere.

    – Morningstar.ca is best known for mutual fund research, but it also has an ETF section which provides free articles of great interest to investors. Unfortunately, the best feature it offers (analyst reports) requires a subscription. Also, I find the screening filters considerably less user-friendly compared to ETFInsight when simply trying to browse comparable funds. If you already have a fund in mind, the factsheets it provides offer a good breadth of info.

    I’m sure that I’m not the only blog-reader who would welcome input on some of your preferred internet tools that could help us make more educated investing decisions. In any case, it’s a suggestion.

    Andy Bolduc

    Reply
    • Hi Andy
      Thanks for the comment and enquiry
      Actually, I dont use any ETF screener or site. As a technical guy–I look at sectors or positions for trend, cycle and pattern then choose the ETF that best fits the sector.

      Reply

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