Special

BAD modified

Two weeks ago the high-priced economists at Scotiabank sent this message to clients:

“The country is not in recession in any meaningful or broadly defined way at this point, and we believe that the BoC should not and will not cut next week. A dovish bias has merit, but it is likely premature to give up on the rebound story and court the substantial risks associated with further rate cuts. Whether a cut happens or not, we’re likely to see higher short-term market rates emerge…”

Since then, the geniuses who run our national interest rate policy dropped the cost of money. You know the rest. The dollar tanked. Realtors went woody. And many observers worried we’re just suckering in consumers for a big debt-punch to come in a year or so, as rates in both the US and Canada swell.

But there was one other casualty to mention. Preferred shares sank in value along with bond yields and the central bank rate. This raised a chorus of moaning and gnashing among those confused people who own preferreds and believe everything in their portfolio should always go up. So let’s discuss this for a moment.

Preferred shares are not really shares in the sense of common stock, or equity. Instead they’re a hybrid between stock and bonds. Like equities (and unlike bonds) they pay dividends. But like bonds (and unlike equities) the dividends are fixed. Preferreds are also considered safer and more stable than common stock because they exhibit less volatility in price, and the dividends must be paid first. Hence the name ‘preferred.’ Special. Just like your mom called you.

So investors who own preferreds get a steady stream of predictable dividend income which flows regardless of the current price of the asset. They enjoy less volatility than with the common stock of the same company (issuer). They have a safer income stream because even in a crisis (like 2008-9) preferred dividends are usually untouched (that was the case with every major bank). Income flows to you from preferreds every 90 days. And you can claim the dividend tax credit when you file your return, boosting the effective yield – which currently sits in the 5% range for a basket of Canadian prefs.

All good. But what about this decline recently in the capital value of preferreds? Should some of the pantywaists and tim’rous beasties who read this pathetic blog really be stressed out over the dip? Why has the preferred share index on the TSX lost 14% this year? Should you throw yourself under a bus?

Hardly. Just the opposite. This has the scent of a giant buying opportunity.

Most preferreds today are called ‘rate-reset,’ which means investors gain protection from rising interest rates since the dividend is reset periodically, based on the Government of Canada five-year bond yield, plus a premium. And if rates soar, the issuers have the ability to recall the shares, giving investors a capital gain. This is reasonable in a world in which it’s a no-brainer that the cost of money will rise over time.

But, as you know, rates have not risen as everyone expected. They’ve fallen. Temporarily. So preferreds have dropped in price along with bond yields, while continuing to churn out their dividends. Not quite understanding what they bought, or why, lots of retail investors have bailed out of preferreds, since they confuse them with common stock and are dumping an asset with a double-digit ‘loss.’

Big mistake.

The preferred share market is now oversold, and looks cheap. Sellers should be buying, then holding between 15% and 18% of their balanced portfolio in these puppies. Here’s why:

First, as Scotiabank (and this blog) believes, rates will inevitably be rising. The US Fed will move later this year, and once it starts the momentum will continue for at least a couple of years. Since the Bank of Canada has followed the Fed lead 90% of the time over the last quarter century (and since our dollar’s getting killed) our rates will follow. Preferreds will feast on this.

Second, preferreds currently offer a huge spread over corporate bonds, are under-valued and destined to be gobbled by investors as the above scenario unfolds. If you are unlike everybody else in your family and actually believe in guying things when they are low, this is low.

Third, this compelling value in the preferred market, combined with the fear retail investors are feeling, is exactly what professional investors feed on. Given that prefs have less liquidity than common stocks, you might not have this buying opportunity in the near future.

So, there you go. Use a cheap loan to buy real estate that will drop in value when rates rise. Or buy cheap financial assets that will swell with the cost of money.

Was that so hard?

165 comments ↓

#1 waiting on the westcoast on 07.19.15 at 2:36 pm

15-18% prefs…. All Canadian or a mix of US/int’l/Cdn?

#2 Josh on 07.19.15 at 2:41 pm

Any recommendations for ETF’s that basket Canadian preferreds well?

#3 Smoking Man on 07.19.15 at 2:45 pm

What the hell does Scotia Bank know. Idiots.

Look at that lame commercial they keep playing over and over.

Where granny is on face time, and talks to grandson about a girl he’s talking to a dance.

It’s stupid and annoying, no wonder they can’t call the market…

How was this ever allowed to be released.

#4 sam on 07.19.15 at 2:46 pm

These are the 4 Preferred shares ETFs that I’ve shortlisted. I’m not sure which is ideal though… perhaps others can comment.

CPD / ZPR / HPR / XPF

I also have read that it’s better to keep preferred shares in non-registered accounts because they’re already quite tax efficient.

#5 North Burnaby on 07.19.15 at 2:52 pm

Garth, do downtown condos tend to appreciate faster than condos outside of downtown? Where can I get the stats on this?

#6 Frugal on 07.19.15 at 3:05 pm

“So preferreds have dropped in price along with bond yields …”

I don’t quite understand this statement? I’ve always though that for both preferreds and bonds, prices and yields move in opposite directions.

#7 yeg_guy on 07.19.15 at 3:08 pm

I’m confused by this article on the G&M stating the dividends aren’t safe?

“Most people consider preferred shares to be relatively safe. Their market prices bounce around with interest rates, but their dividends are generally thought to be steady and reliable, which is precisely why incomeoriented investors buy them.

Well, don’t look now but a whole whack of preferred shares – specifically rate-reset preferreds that have come to dominate the market – could soon take a hatchet to their payments.

Some of these dividend cuts will be “absolutely massive,” said preferred share expert James Hymas, president of Hymas Investment Management in Toronto.

This will come as a surprise to investors who depend on the predictable cash flow of preferreds, but Mr. Hymas has done the calculations and they paint a grim picture. In the next year or so, he expects many rate-reset preferreds to slash their dividends by 25 to 45 per cent. Depending on what happens to bond yields, many more rate-reset preferreds will likely reduce their dividends in coming years.”

Link http://tinyurl.com/ozexne4

He’s wrong. Rate-resets will track higher. — Garth

#8 not 1st on 07.19.15 at 3:13 pm

Less volatile, and less liquid too which is probably the reason why. Some of these individual preferreds trade under 5,000 shares a day.

#9 Marco on 07.19.15 at 3:16 pm

Thanks Garth,

Fixed-rate or floating, in this interest rate environment?

Cheers.

#10 Rick Stamosa on 07.19.15 at 3:24 pm

I don’t know if this currently accurate but I was told that the Canadian preferred shares market in Canada is only around $100 billion.

Is this true and why is this a much smaller market than other equities and bonds, REIT’s etc.?

#11 rampant inflation on 07.19.15 at 3:30 pm

preferred shares are collapsing because their PAYOUTS are collapsing. fixed resets are, in many cases, renewing at HALF the dividend from 5 years ago.

Categorically incorrect. — Garth

#12 DGA on 07.19.15 at 3:30 pm

Preferreds in a TFSA?

#13 Lurker on 07.19.15 at 3:33 pm

ZPR is an ETF that tracks rate reset preferreds.

#14 Retired Boomer - WI on 07.19.15 at 3:34 pm

Will the US really raise rates in 2015? She says yes, but when?? (Ah, the eternal question, maybe??)

I frankly don’t believe it. I will take a look at US prefereds this week, as I have some money is short term commercial that has been idling too long).

Also, have a slug in utilities that has been underperforming so far in 2015.

Either buy more of them for the dividend, or perhaps some preferred.

Maybe I’ll just ‘stew’ a while until -if- Janet makes a move.

Bankers, who can you trust there?

#15 Irent on 07.19.15 at 3:37 pm

Hi Garth,

Since preferred are hybrid of Bonds and Equity, should we just buy preferred ETF instead of Bond, or in.rising interest rate environment Bonds will give still better returns.

Thanks to you always for informative posts.

– Ashish

#16 Scooter on 07.19.15 at 3:38 pm

Third!

@Josh: iShares plus other ETF issuers offer Preferred funds. I recommend you use the google to research. It’s easy to do.

#17 Ben Bur on 07.19.15 at 3:45 pm

Not so easy . . . there’s still the problem of dividends being reset lower.

#18 LEE on 07.19.15 at 3:58 pm

Does your advise hold true for Canadian pref etfs?

#19 Victor V on 07.19.15 at 4:12 pm

http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/rob-carricks-etf-buyers-guide-vol-4-income-paying-etfs/article16743674/

Link above has info on CPD, ZPR and XPF.

#20 espressobob on 07.19.15 at 4:14 pm

Prefs are steady eddies in a non registered account. Keeping in mind the dividend tax credit sweetens the deal with way lower taxation than say bonds or GICs.

Simple interest is fully taxable at ones marginal rate. How much yield would they have to provide to keep up?

T3s win “hands down” over T5s.

That’s not a good reason to load up?

#21 Freedom First on 07.19.15 at 4:15 pm

Thanks Garth. You were reading my mind. I have been doing some re-balancing as I recently stated I was overweight cash, right from when oil was at it’s highest. I mentioned last week I just bought the energy ETF ZEO, and I was just debating which Preferred to get, and if it was time to pull the trigger. I just did, and bought the ETF ZPR. My horizon is always long. Re-balancing is key.

I like: cash, income streams, cash flow, as wide as possible asset diversification in every possible way, balance, liquidity, and 0 debt.

#22 Buckfutter on 07.19.15 at 4:19 pm

#1 waiting on the westcoast on 07.19.15 at 2:36 pm
15-18% prefs…. All Canadian or a mix of US/int’l/Cdn?

There is no right or wrong percentage at this point – only will be in retrospect a few years from now. Grow a pair and pick a percentage. Not that difficult. I like 0% preferred and 100% common shares.

#23 Rainmaker on 07.19.15 at 4:24 pm

Thanks for this post today. I own preferred shares through BMO’s ZPR ETF. Couldn’t have timed it much worse, as I took a significant position in 2014.

Was thinking to pick up some more this week after the BoC rate cut, but didn’t have the stomach for it, even though I thought it made sense.

The downside risk has to be pretty low at this point. May just add a few this week if the prices stabilize, but I will not chase them higher.

#24 NoName on 07.19.15 at 4:32 pm

#216 SWL1976 on 07.19.15 at 2:30 pm

The spraying of populations with unknown toxins is not a choice.

That was funny!
http://i.imgur.com/Vh5y9d8.jpg

#25 SWL1976 on 07.19.15 at 4:34 pm

Sweet.

Just so happens I have a little extra cash I am looking to invest and now I know where it’s going.

Thanks Garth

#26 espressobob on 07.19.15 at 4:48 pm

#7 Rainmaker

Buying into “fear” is how you make profit over the long haul. Embrace it.

And hope for more downside!

#27 waiting on the westcoast on 07.19.15 at 5:02 pm

#6 Buckfutter on 07.19.15 at 4:19 pm
“There is no right or wrong percentage at this point – only will be in retrospect a few years from now. Grow a pair and pick a percentage. Not that difficult. I like 0% preferred and 100% common shares.”

My question was whether to go all CDN or a global mix on the perf shares.

I have found that using my head (especially ears) rather than my balls have given me better results… ;-)

#28 JSS on 07.19.15 at 5:05 pm

Good deal right now with CPD.
for those who don’t know this is a pref shares etf, yielding around 5.2 %.

I will wait until yield is around 6% before buying.

#29 MSM-Free Zone on 07.19.15 at 5:05 pm

Excellent lesson today. Answers a lot of my own questions.

#30 George on 07.19.15 at 5:09 pm

Hi Garth
Don’t Preferreds decline when interest rate rise? Like bonds. What about the 5 year resets?

#31 Karma on 07.19.15 at 5:35 pm

Interesting idea to get millennials talking about their finances:

“Brunch and Budget”

http://www.bloomberg.com/news/articles/2015-07-16/can-one-brunch-date-force-you-to-face-your-budget-

#32 Sad Sack Willy on 07.19.15 at 5:40 pm

Yes Prefs are prime for a rally……I see 20% all in plus divs…..that’s real money.

I recently bought AGU, QSR and CP…..all up $5 bucks a share since last week on a raging RSI recovery. Super macro I am buying TCK.B on dips. Laser vision baby….not puking all over the map….that’s how real money is made.

#33 triplenet on 07.19.15 at 5:55 pm

#5 N. Burnaby

There are capable real estate advisors in your geographical area that will comment and advise you on your specific investment criteria.
Typically you may be looking at a fee structure of $1,500 to $5,000 – depending on the detailed information required.
Condo investment….are you serious?

#34 Time is #1 on 07.19.15 at 6:10 pm

When CPD(70% rate reset prefer reds) hit 15 I doubled down. When they hit 14.6 I doubled down again. Needless to say I bought a swack and I’m overweight. Now I will enjoy the dividend until the capital gain payday. One year or 5 years doesn’t matter as they pay over 5% to own them.
Best sale ever!!! Thanks for taking your time Garth to set people’s minds at ease and also to give them some solid direction.

#35 Victoria Real Estate Update on 07.19.15 at 6:20 pm

Garth’s investment advice is simple. Does it make a lot more sense than investing in Canadian real estate over the next number of years? Of course it does.

Canadian real estate values will fall as rates rise. Canadian 5-year fixed mortgage rates will begin moving higher this fall (at a rate of approx. 1% per year).

Buying a house in Canada as an investment right now is a bad idea. There is simply no way to justify doing so, knowing which direction Canadian house prices will travel over the next number of years.

Many Canadians have a negative attitude toward the stock market and investing in anything other than real estate at this time. This is due Canada’s debt-induced real estate price run-up (since 2000) that resulted from the powerful, price-boosting stimulus of lax lending standards and record-low interest rates.

It’s inevitable, Canada’s housing bubble will deflate. Unlike the US experience where rates were suddenly dropped from near-normal to emergency levels, limiting the depth of the American price correction, Canada’s (bigger) bubble will deflate in an environment of rising rates.

Wolf Richter (Wall Street) knows a few things about housing bubbles:

“Bubbles don’t land softly. They implode. It’s a brutal process. The longer bubbles are maintained, the more brutal their implosion.”

As home values inevitable fall, Canadians will change their attitude from thinking that real estate is the only way to invest to thinking that real estate is just plain risky. The whole (housing industry kool-aid) idea that real estate debt is good debt will simply disappear.

This is what happened in the US as their bubble deflated. Now 20 million US families could buy homes, but don’t.

Is the smart money buying Canadian real estate right now? Probably not.

#36 Nagraj on 07.19.15 at 6:20 pm

GT: “rates have not risen as everyone expected”
It would’ve been more exact to say: rates have not risen as I and many others expected.

GT: “what about this decline recently in the capital value of preferreds?”
Well, age and temperament also matter . . .

GT’s straightforward investing advice is not to be dismissed (I fired off a note to my broker asking for his opinion on GT’s opinion) – but I also presume to understand BUCKFUTTER at 4:19PM, “I like 0% preferred and 100% common shares.”

There’s a lotta cooks in the preferred kitchen.

Fast on the draw YEG-GUY at 4:08PM quotes one Mr. Hymas expecting many rate reset preferreds to slash their dividends by 25% to 45%, and GT responds: “He’s wrong.”

Is you is or is you aint my baby

#37 Joe Shack on 07.19.15 at 6:44 pm

Preferreds to soar tomorrow! All the readers here will be piling in..glad I have been averaging down in this environment for a long term holding, heck I might even add more tomorrow. Thanks for the bump Garth!

#38 kommykim on 07.19.15 at 6:59 pm

RE: #4 sam on 07.19.15 at 2:46 pm
I also have read that it’s better to keep preferred shares in non-registered accounts because they’re already quite tax efficient.

Only if your tax sheltered registered accounts are already FULL. Why pay ANY tax at all if you don’t have to?

#39 John on 07.19.15 at 7:05 pm

If your time horizon is long why would you ever buy preferred shares? They clearly under-perform. You are better off buying a dividend ETF like CDZ for income.

#40 kommykim on 07.19.15 at 7:10 pm

RE: #7 yeg_guy on 07.19.15 at 3:08 pm
In the next year or so, he expects many rate-reset preferreds to slash their dividends by 25 to 45 per cent.

Well, yes, some of them will. The 5 year GOC yield was apx 2.44% in 2010 and is now sitting at apx 0.70%. So if your prefs had a 4% spread they started out at 6.44% in 2010 and now will reset at 4.7% which is a 27% drop in the dividend payout. Hence the drop in price on many prefs. But they will most likely reset much higher in 5 years.

#41 Eleanor--- on 07.19.15 at 7:10 pm

Hey Garth,

Could you pls explain your thinking that rate reset preferreds won’t be re-setting to a lower dividend? Is it that you are talking about the preferreds that have already reset to a lower rate (eg, see below) and so it’s the next 5year reset investors should be thinking about now?

——–

Hey Garth,

Could you pls explain your thinking that rate reset preferreds won’t be re-setting to a lower dividend, eg see below*, but will be tracking higher.

Is it that you are talking about the preferreds which have already reset to a lower rate and so it’s the next 5-year reset investors should be thinking about now?

*”Investors clearly bought them with the expectation that the reset would help them tap into a higher yield down the line. Today, however, some of these shares are headed to a reset at a time when rates are at unexpectedly low levels. (…)

You can see the result of this rate decline in Fortis Inc.’s Series H five-year fixed rate reset shares (FTS.PR.H). They currently pay a dividend that yielded 4.25 per cent when issued at a value of $25 per share.
The dividend on these shares will be reset on June 1 to produce a dividend yield of 1.45 percentage points above the five-year Canada bond yield. Based on recent bond yields, these shares would, after reset, have a yield of about 2.2 per cent based on the $25 issue price. In dollar terms, the dividend would fall to 55 cents from the current $1.06.”
excerpt from
http://www.theglobeandmail.com/globe-investor/investment-ideas/interest-rates-provide-answers-about-plunging-preferred-shares/article24013205/

#42 Llewelyn on 07.19.15 at 7:15 pm

One thing that is difficult to miss is that since 2009 the average yield from preferred stocks is trending down not up.

What one might gather from this trend is that the yield of preferred shares, particularly those reset based on the Government of Canada bonds, followed the decline of the overnight rate.

Is it a usual occurrence for both the yield and the price of preferred shares to decline together?

If the overnight rate eventually begins to increase as predicted I would anticipate that the price of preferred shares, like the price of bonds, might decline.

I am scratching my head over the price decline in preferred shares as the overnight rate was falling.

What am I missing?

#43 will on 07.19.15 at 7:20 pm

Thanx Garth for the common sense on preferreds. I needed that.

#44 Financial Freedom at 40 on 07.19.15 at 7:25 pm

Most preferreds today are called ‘rate-reset’…
… but don’t trip over the perpetuals which is still around 1/3 (?) of the preferred market (CPD et al) if you think interest rates will go up.

Personally haven’t been keen on passive indexes for preferreds, one of the few things in my portfolio not in ETF form, although my floating rate fund has been sideways YTD.

Will take a bit from something that hit its 52-week high this month and participate a bit in ZPR to run with the dog pack and learn a new trick.

#45 Mark on 07.19.15 at 7:25 pm

Anyone who lives in the real economy, versus the fantasy economy (in which RE prices are still going up, businesses growing, etc.) could have told you that the BoC needed to cut, and will need to continue to cut as the recession deepens.

I just wonder if Scotia is actually implementing trades based on their own nonsensical view of the Canadian economy, versus that of reality (upon which, the BoC acted appropriately by lowering the policy rate).

#46 SQuirrel meat on 07.19.15 at 7:28 pm

#24 NoName on 07.19.15 at 4:32 pm

#216 SWL1976 on 07.19.15 at 2:30 pm

The spraying of populations with unknown toxins is not a choice.

That was funny!
http://i.imgur.com/Vh5y9d8.jpg
—————————————
Buy gold for the coming apocalypse…. Widespread spraying has commenced for jade helm and the NWO.

https://www.youtube.com/watch?v=VrUm0KY8dJA

#47 JB on 07.19.15 at 7:39 pm

@ Mark #45

You are in no position to tell people what “is” and what “isn’t” reality. Stop trolling.

#48 Financial Freedom at 40 on 07.19.15 at 7:45 pm

Adding link to discussion at Canadian Money Forum:
http://canadianmoneyforum.com/showthread.php/40706-preffered-shares

#49 kommykim on 07.19.15 at 7:53 pm

For those of you interested in buying preferred shares directly or want to know why ETFs such as ZPR and CPD have dropped:
http://www.cibcwg.com/c/document_library/get_file?uuid=823ffb68-e59e-45f0-817f-dcfc349fbdd6&groupId=92706

#50 Hawkeye on 07.19.15 at 8:09 pm

Is there a Preferred Share Index ETF that re-invests dividends rather than pays a cash distribution? Thanks.

#51 Tim on 07.19.15 at 8:23 pm

Stick with blue chip, dividend paying stocks, spread your wealth among finance, manufacturing, consumer, utilities, a bit in resources, 30% in the US and stay out of preferreds and bonds and you will do fine.

#52 Mark on 07.19.15 at 8:27 pm

DELETED

#53 Smoking Man on 07.19.15 at 8:28 pm

Dear Mark.

Isn’t it funny, your writing is technically perfect, appropriate use of ten dollar words. Nicely constructed sentence structure.

Yet everyone hates your posts.

Look at me, I murder the English laungage, say the dumbest shit, lie my ass off and brag about it.

Yet, I am loved….

Go figure..

At any rate, I hope, Mark is a character you invented to help you write Fiction.. And if it isn’t, lie and say it is.

Dr Smoking Man.

#54 Henry on 07.19.15 at 8:28 pm

The FED might raise interest rates a basis point or two for a short time, but there is never going to be a serious rate increase. Once they started ZERP, they can never go back. Of course the BOC can only follow the FED’s lead. The interest rates we have now are the new norm. Accept it!

#55 Slimer on 07.19.15 at 8:45 pm

My 40% “safe stuff” is all in VAB. It seems there’s not much upside in allocating the whole portion at this point(or for years to come) to VAB/XBB.
Does anybody see anything wrong with switching to this instead?
15% VAB
15% VSB
10% XPF
This is a forever portfolio that I wish to “set and forget” and rebalance semi-annually. I have a portion of my bonds in a non-registered account and would benefit from being able to swap that to more tax-friendly preferreds.

CanadianCouchP has a model portfolio with the full 40% VAB.
http://www.canadianportfoliomanagerblog.com has one with 40%VAB and another one using 40% VSB.

Because I follow G Turner, CCP and CPM, I’m looking to incorporate a blend of all three.

Opinions from anybody would be very welcomed.
eg. VAB 30% XPF 10%
VAB 13.3%
VSB 13.3%
XPF 13.3%

Or leave it alone altogether and stop trying to time the markets?

#56 lee on 07.19.15 at 8:47 pm

#34,

Why is holding CPD such a good idea over time to catch CG. The rebound will be 12 percent. The yield is 5 percent. If it takes two years to rebound you have averaged 11 a year, and 9 if it takes three years. Then each year after that the average total return on that money keeps dropping because th CG has been made. It’s a good idea if it is 15 percent of your portfolio. Once you are beyond that the yield over time on average drops because the CG has been accounted for. Just stick to your balance and forget the swings. Except if equities drop like 30 per cent. Then you can pile into stocks for the rebound. The longer rebound takes for fixed the closer you get to just being better off investing that money in a balanced way. I don’t think picking your right time to invest in a position works over time.

#57 Interstellar Old Yeller on 07.19.15 at 8:54 pm

Should you throw yourself under a bus?

LOL!

I’ve been buying lately. Thanks for the lesson and the reassurance that this is a good opportunity.

#58 Big Sexy on 07.19.15 at 8:58 pm

Garth,

Why do you think the BoC would follow suit when Yellen raises interest rates? After all, didn’t Poloz cut the rate to boost the economy and devalue the Loonie to increase exports?
If Yellen raises rates, isn’t it the same as if Poloz reduces them, but without the bubble-inducing mortgage rate cut? Yellen raises, Poloz keeps the rates where they’re at, everybody wins except the CDN population…

Is my logic flawed?

#59 Estrella on 07.19.15 at 9:00 pm

http://canadiancouchpotato.com/2012/11/19/four-new-etfs-and-an-invitation/

Thank you garth. Your information is much appreciated.
It appears ZPR has an advantage over CPD as dis cussed by mr.potato . I already own XPF.

#60 joe calgary on 07.19.15 at 9:03 pm

Garth recommended XPF about 6 months ago. I am down 4.36% on the ETF, still paying a dividend and looking at the 5 year chart looks like a buy at todays levels. Bought 1000 more shares tonight.

#61 BS on 07.19.15 at 9:05 pm

Garth, do downtown condos tend to appreciate faster than condos outside of downtown? Where can I get the stats on this?

I think you meant depreciate? Ever heard of the depreciation report for stratas? They call it a depreciation report for a reason. Because condos depreciate, not appreciate. Those condo values are 90% building which does not appreciate. Buildings get old, start to leak, need maintenance and become outdated. Eventually they go to zero.

To answer your question both downtown condos and condos outside of downtown will be depreciating in coming years. Places like Burnaby will depreciate faster because the land is a smaller portion of the overall cost base.

#62 New Babblemaster on 07.19.15 at 9:10 pm

“And many observers worried we’re just suckering in consumers for a big debt-punch to come in a year or so, as rates in both the US and Canada swell.” – Garth

——————————————————

Come on Garth. It isn’t going to happen. The banking system world-wide is nothing but a big con game. It depends on low rates to suck ever more people into the life-time debt game. If rates were to rise significantly, there would be financial armageddon and that’s why it’s not going to happen.

#63 Investorz on 07.19.15 at 9:11 pm

Started buying ZPR ETF by BMO when it fell 5% from peak. Then it fell more, and more, and more. Like many people out there, I was surprised to see this kind of move. I bought more but now at I’m my allocation limit. Lucky are those that can start buying here.

CPD is an ETF that tracks perpetual preferred shares. If interest rates go up, it’s price will go down. Similar to long-term bonds. If you believe rates will move up, even slighly, go with ZPR.

#64 Doug in London on 07.19.15 at 9:23 pm

Yup, just as I thought, preferred share ETFs are on sale now and it’s a buying opportunity. You are supposed to buy assets when they are on sale, isn’t that right?

@Time is #1, post #34:
My thoughts exactly, as I’ve also been increasing my exposure to CPD and XPF. It seems like a ridiculously simple no brainer.

#65 Vanecdotal on 07.19.15 at 9:36 pm

#5 North Burnaby

Handy link to your own Board’s REBGV’s HPI stats: http://www.rebgv.org/home-price-index?region=all&type=all&date=2015-06-01

Adjusted for inflation, 5-year trend: condos flat or declining (some major haircuts) across ALL areas tracked, (every single one), including downtown and Greater Van ‘burbs. Best performer by far: Van Westside up a whopping 14.2 % over last 5 years. At @3% annual inflation those buyers are underwater 5 YEARS LATER. Townhomes only faring slightly better.

This before considering additional ownership costs, condo fees, interest, lost opportunity cost of down payment, maintenance, and transaction costs of buying and selling.

More $ could have been made by a potential condo buyer in the last 5 years by instead parking their down payment in a comatose GIC, with less risk and no debt.

#66 David W 2 on 07.19.15 at 9:46 pm

Are there and any good pref ETFs that hold U.S. companies and pay in U.S. dollars?

#67 Slimer on 07.19.15 at 9:49 pm

Or even 20%VAB/10%VSB/10%(XPF or ZPD)?

#68 gut check on 07.19.15 at 9:49 pm

#57 Big Sexy on 07.19.15 at 8:58 pm
Garth,

Why do you think the BoC would follow suit when Yellen raises interest rates? After all, didn’t Poloz cut the rate to boost the economy and devalue the Loonie to increase exports?
If Yellen raises rates, isn’t it the same as if Poloz reduces them, but without the bubble-inducing mortgage rate cut? Yellen raises, Poloz keeps the rates where they’re at, everybody wins except the CDN population…

Is my logic flawed?
——————————————-

seems logical to me, but I’m sure logic has nothing to do with the whole central bank thing.

#69 Slimer on 07.19.15 at 9:57 pm

Sorry *zpr* not zpf.

#70 Slimer on 07.19.15 at 9:58 pm

omg. ZPR not zpf or zpd.

#71 Dean Monahan on 07.19.15 at 10:04 pm

Garth, can Steve Poloz cut one more time before he has to raise it with Janet? One final rate cut to get us to .25% just cause he can and then time to blast off upward?

#72 Time is #1 on 07.19.15 at 10:27 pm

#55 lee
Thanks for commenting on my post. What is CG?

#62 Investorz
Why do you think CPD doesn’t consist of any rate resets? My info tells me 70ish %.

Thanks in advance

#73 Leo Trollstoy on 07.19.15 at 10:27 pm

#45 Mark

Stop trolling pls.

#74 Spectacle on 07.19.15 at 10:31 pm

Regarding::
40 kommykim on 07.19.15 at 7:10 pm
RE: #7 yeg_guy on 07.19.15 at 3:08 pm
In the next year or so,

— Among other posts here —

Well, yes, some of them will. The 5 year GOC yield was apx 2.44% in 2010 and is now sitting at apx 0.70%. So if your prefs had a 4% spread they started out at 6.44% in 2010 and now will reset at 4.7% which is a 27% drop in the dividend payout…….
—-
Starting To Impress there kommykim!

Thanks

#75 Ronaldo on 07.19.15 at 10:45 pm

#4 Sam – If you are looking for an ETF that is low volatilty but provides a steady monthly income of over 6% take a look at XTR. A solid performer, extremely diversified and far better than the 4 that you shortlisted. It is off only 6.3% from its 52 week high and was only off 7.7% at its highest point. Compare to CPD which was off 15.6%, ZPR 21%, HPR 13% and XPF 8.3% from the 52 week high. It’s basically an ETF of ETF’s. Dollar cost average into this on a regular basis and sit back and collect your dividends each month and I fully expect it to give you a 7% or greater capital gain by year end.

#76 Spectacle on 07.19.15 at 10:46 pm

And on a lighter note…

Re:
#46 SQuirrel meat on 07.19.15 at 7:28 pm
#24 NoName on 07.19.15 at 4:32 pm
#216 SWL1976 on 07.19.15 at 2:30 pm

The spraying of populations with unknown toxins is not a choice.

That was funny!
—————————————
Buy gold for the coming apocalypse…. Widespread spraying has commenced for jade helm and the NWO.
———————–

Response:
Wonder if anyone can recommend a good preferred for the company that makes up all that Bulk Spray they use? Major buy opportunity coming…….no

: )

#77 Leo Trollstoy on 07.19.15 at 11:16 pm

Gold getting nuked.

http://www.businessinsider.com/gold-just-got-destroyed-2015-7

As I predicted.

#78 Lee on 07.19.15 at 11:30 pm

#72

CG is capital gain.

#79 Westcdn on 07.20.15 at 12:04 am

I have been buying reset preferred shares recently. Some of them have taken quite a beating. The way I look at it is even if they reset at 3.75% from 5%, I am still ahead by buying at a 50% discount. Mind you, the future of the company matters. I am not into bank preferred shares because the discount is tiny. However they have more security – it is hard to make back a 30% capital loss on a 5% yield…

#80 Vundo on 07.20.15 at 12:15 am

Can somebody please explain to me why people, our gracious host included, hate Mark so much? Even if I was to assume he’s an idiot who is always wrong, he expresses himself politely and on topic. That is a lot more than can be said about the various racist trolls and raving doomers. I understand being irate about them. But a guy you believe is stupid and/or wrong? I don’t get it.

Now, speaking of being on topic, thank you for explaining preferred shares in detail and in language that even someone like me can understand. I honestly don’t care about how cheap/expensive anything is at any give time; for me it is about understanding why I would want something like this in my portfolio at an appropriate weighting. Garth recommends preferred share index ETF in the “millenial portfolio”(May 2014) and now I can see why. Thanks again.

#81 Carlito on 07.20.15 at 12:17 am

Garth and/or Forum guys,

Should one be going XPF or ZPR? Which is the better option at this time?

Thanks,

#82 Nagraj on 07.20.15 at 12:22 am

In other news:
“Epic Glut of Office Space Crushes Hope in Canadian Oil Patch”, Wolf Richter, 19/7/’15

Caveat: This latest Richter research summary is about a place called Calvary which is somewhere north of Montana. They have something there called The Calvary Stumpede where horses die for no good reason and men wrestle with baby cows, yee haw.
They also have Chickwagon races which are popular cuz it’s a nice break from worrying about junk bonds specially when the wagons tip over and all the the chicks come atumblin out, yee haw.

Back to our headline story:
IF you do do do decide to invest in XLPYXLZPFTZIFFLPIFFLWALLAWALLADINGDONG.TO which is a preset referrated ExtraTerrestrialFickup of other such ETFs of other such ETFs of more such ETFs (all of ’em made right here at home by very clever and highly responsible Canadians on bucolic Bay Street) you will in 78.3 years’ time have harvested $0.000210056 on average every other non-statutary holiday Wednesday. yee haw.

Personal note: I’ve never been to Calvary (or Saskatchaswan or Borneo) and why would I go there now that hope there has been crushed and the place is hopeless.

Don’t bury me/ on the lone Prairee

#83 It's all in the details on 07.20.15 at 12:23 am

Key quote:

“Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy. But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step.”

Let’s take this apart.

>I expect

First conditional statement. She expects something. There’s no certainty.

>it will be appropriate

Second conditional statement. So if things don’t go as she expects it will not be appropriate.

>at some point later this year

So she sort of expects that it could be appropriate to act at some point later this year. Very wishy-washy language.

>the course of the economy and inflation remains highly uncertain

Pretty much key statement here: they wanted to raise rates back in June, but the economy wasn’t doing so hot and there’s no guarantee that anything will improve by the end of ’15.

>unanticipated developments could delay or accelerate this first step

This is just an admission that all this talk about rate liftoff is just talk. The way her message is worded it can be interpreted as confidence-inspiring, but in reality it’s just a con to convince the markets that the rate liftoff is coming. However it seems to work on certain mediocre provincial-tier politicians turned provincial-tier financial advisors…

#84 Llewelyn on 07.20.15 at 12:34 am

If preferred shares are similar to bonds as Garth indicated an increase in the price of a preferred share would reduce the effective yield since the yield is based on equity invested.

Logic would indicate that when the price of a preferred share decreased the net yield on equity invested would increase.

I assume that the issuer of a preferred share with a rate reset monitors the market price and adusts the dividend portion of the reset to maintain a rate of return that is desireable to them and still attractive to investors.

I asked why the average yield of preferred shares and the average market value of preferred shares appeared to have declined in lockstep.

I am assuming that an average return of 5.0% per annum has become the new norm for the issuers of preferred shares with a rate reset and that this rate of return might continue to fall.

Please correct me if this assumption is wrong.

Some comments are incorrect. Average yields have not fallen with capital values. Dividends are fixed, and not arbitrarily adjusted by the issuer. — Garth

#85 Looned out on 07.20.15 at 12:39 am

Garth

A couple of questions…

1. You regularly mention getting into USD assets….that was good advice about 2-3 years ago. At what point does it make sense to jump back into CAD based assets.

2. Most of your advice seems to ignore currency hedging. Shouldn’t a retiree who plans to spend time in the US at some time in the future, hedge positions to protect them whether the loonie rises or falls. Otherwise, I foresee a few snowbirds wintering beside a frozen lake in the Canadian tundra.

3. What is your own actual retirement plan? It might make for an interesting blog entry, and let the great unwashed see behind the financial magician’s mask!

#86 My Life is a Pile of Shit on 07.20.15 at 12:40 am

Of the four all-Canadian preferred share ETFs — ZPR, CPD, PPS, & HPR — all carry a loss today if purchased at any time in the last three years (dividends included). That’s right, they have one, two, and three-year negative returns. If they can’t do better than cash despite a 5% yield, what good are they? Maybe you don’t mind if they under-perform cash for one year, but for three years? Come on! If it doesn’t go up, don’t buy it!

#87 TRT on 07.20.15 at 12:45 am

“Since the Bank of Canada has followed the Fed lead 90% of the time over the last quarter century (and since our dollar’s getting killed) our rates will follow. Preferreds will feast on this.”

Not going to happen with Harper and Poloz who is a ‘brown paper bag’ friend of the exporters. Look at the track record thus far.

Loonie going to 65 cents.

#88 TB on 07.20.15 at 1:13 am

I loved this article, thought it nailed it perfectly.
Particularly the part about the impact of foreign ownership is not about share of units bought but share of capital.

http://www.theglobeandmail.com/report-on-business/rob-commentary/vancouver-is-mortgaging-its-future-for-a-market-thats-anything-but-free/article25558615/

#89 Westcdn on 07.20.15 at 1:14 am

I have been buying reset preferred shares. Some of them have taken quite a beating. The way I look at it is even if they reset at 3.75% from 5%, I am still ahead by buying at a 50% discount. Mind you, the future of the company matters. I am not into bank preferred shares because the discount is tiny. However they have more security – it is hard to make back a 30% capital loss on a 5% yield

#90 Time is #1 on 07.20.15 at 1:58 am

#55 Lee
I got it. (CG). A little slow today:). The answer to your question is that I used Heloc money. I don’t like to use that on any asset that is too risky.

It feels safer to buy something that is on sale that pays me to own it and still has double digit CG potential. I will definitely start selling down once I’m in positive territory.

#91 Kreditanstalt on 07.20.15 at 2:14 am

#77 Leo

Gold is not “getting nuked”. Paper derivatives, used to inflate the supply of “metal”, are being sold at a nominal loss, in order to suppress the “gold price”.

This system, whereby paper playpens such as COMEX are given the power to control the “price” of the real metal, is expressly supported by GOVERNMENTS.

#92 observer on 07.20.15 at 2:28 am

Interesting how the news is saying unforeseen… blah blah.

Hate to say it this has all been foreseen. Only thing new it the IRAN deal which is basically a done deal, just political postering now.

Oil is going to be oversupply for a some time and will remain cheap. By golly even the invincibile Aussy economy looks like it about to crack. If the Chinese money did flow into austraiia and Canada, they better be thing twice because the last thing I notice the Loonie is down 30 percent from its high.

And still on a downhill trend.
Greece id dead, just giving away all its assets to their masters

How about Canada, yeah when its all said and done, we will be giving all our resourses and probably water to our masters

#93 VanMan on 07.20.15 at 2:52 am

Interesting POV…

http://www.theglobeandmail.com/report-on-business/rob-commentary/vancouver-is-mortgaging-its-future-for-a-market-thats-anything-but-free/article25558615/?service=mobile

#94 Ronaldo on 07.20.15 at 3:19 am

#77 Leo Trollstoy on 07.19.15 at 11:16 pm

It may be so in USD but in CAD, not so much.

#95 Leo Trollstoy on 07.20.15 at 3:26 am

Fed will hike. Exact timing irrelevant.

Hike destroys CAD and gold.

http://www.cnbc.com/2015/07/19/gold-hits-5-year-low-as-bets-mount-on-fed-hike.html

Obvious is obvious.

#96 Southeast Asian Expat on 07.20.15 at 4:07 am

“Realtors went woody”… hehehe

#97 Tony on 07.20.15 at 5:49 am

We’ve heard the same line about rising interest rates out of America every year for the last 5 years and each year interest rates fell. Next year will be no different, soon interest rates will turn negative to reflect the worst depression the country is in since the great depression.

Rates have not fallen in the U.S. for five years. They have been unchanged, and now that changes. — Garth

#98 Londoner on 07.20.15 at 6:38 am

The preferred share market is now oversold, and looks cheap.

And many of these preferreds with near term reset dates be resetting at a rates that are considerably lower then the initial fixed rate. In the short term, at least, yields on rate resets are expected to fall in comparison to the historical yield based on fixed rates, hence the recent sell-off. If you believe that rates will be going up to the point where the reset dividend is higher then the current rate then these are indeed on sale. If, on the other hand, you believe that rates will remain suppressed to the point where the spread on the 5yrs is below the current fixed rate, then expect your return to be lower.

And if rates soar, the issuers have the ability to recall the shares, giving investors a capital gain.

And don’t forget about the convertibility clauses.

On potentially lower dividends: of the roughly 165 rate-resets in the market, only 8 (or about 5% of the market) face resets over the remainder of 2015. So even if these preferreds are reset with lower dividends, the impact on yields overall will be minimal. The misinformation being spewed in today’s comments section is breathtaking. No wonder most DIY investors fail. — Garth

#99 family beagle on 07.20.15 at 6:59 am

#77 gold
Expected. Meanwhile, the commodity doings of JPMorgan, Citibank, and China are interesting. $1000 au and $15 ag was my call among pals a year ago. I’m not holding gold, except for two teeth. However, I am long silver based on function and horror movies. Ratio players might convert to Ag from Au if they haven’t yet, but that’s a game unto itself.
http://www.euromoney.com/Article/3467901/Category/766/ChannelPage/0/Commodities-Precious-metals-lack-lustre.html
Barclays seems longishish.

And to the host, I preferred utilities at this juncture. Boring, but they’re utilities. The last thing on earth will be a cockroach turning out the lights.

#100 pbrasseur on 07.20.15 at 7:48 am

Don’t care about preferred, never did never will.

Regular shares of great companies are good enough for me.

#101 Reddy on 07.20.15 at 8:02 am

The way I see it, mark was the ONY one who called the rate cut. Guess he’s not always wrong…

Many people called it, and economists were 50/50 split. Mark just called it wrong – blaming deflation, There is none. — Garth

#102 Steve French on 07.20.15 at 8:12 am

Just in case you blawg dags including my 17 fans are wondering from where I get my fantastic name….

http://trailerpark.wikia.com/wiki/Steve_French

#103 Steve French on 07.20.15 at 8:16 am

Dang I didn’t know Steve French was also the name of a gay porn star!!

Ummm…

Gulp…..

#104 Londoner on 07.20.15 at 8:42 am

On potentially lower dividends: of the roughly 165 rate-resets in the market, only 8 (or about 5% of the market) face resets over the remainder of 2015. So even if these preferreds are reset with lower dividends, the impact on yields overall will be minimal. The misinformation being spewed in today’s comments section is breathtaking. No wonder most DIY investors fail. — Garth

I already said that if you expect rates to remain suppressed (i.e. longer then 2015) to the point where the spread on the 5yrs is below the current fixed rate, then expect your return to be lower.

The outlook is dependent on the investor’s view of where bond yields will be in the future, and my comments reflected both possibilities. There is no misinformation here.

Stick to the facts: (a) there is virtually no overall reduction in dividends taking place, (b) the Fed has made it clear rates are biased higher, not lower. — Garth

#105 Halifax Observer on 07.20.15 at 8:51 am

#102 Steve French

LOL!

#106 lee on 07.20.15 at 8:54 am

When dealing with prefs you should stick with the etfs. I am sure the guys who run them know what is resetting when and how to ladder and select them to maximize yield and long-term price preservation. Do your research to find out whether the etfs will eventually rebound or not. I think researching which ones to buy and when takes a lot of work.

#107 Londoner on 07.20.15 at 9:01 am

#84 Llewelyn

The reset rate is stipulated by the issuer at the time the preferred share series is offered (have a look in the prospectus). You already know what the reset rate will be and the issuer can’t change it. They do have a few clauses in the prospectus that allow them to redeem the shares or convert them to common stock.

I don’t know which specific prefs you’re looking at but the price drop could reflect the YTC on the fixed rate.

#108 Llewelyn on 07.20.15 at 9:26 am

Thank you for clarifying that the issuer portion of the reset rate is determined at the time of issue. Having never purchased a preferred share I was trying to use logic to understand what was going on in the market.

I now understand that if you bought a preferred share at the issue price of $25 in 2010 and received a dividend of $1.00 you expected to receive a 4.0% annual return on equity. This dividend was based on the 5 year bond rate plus a defined percentage set at the time of issue.

I now understand that when the 5 year bond rate declined significantly between 2010 and 2015, the market value of the preferred share would decline because the dividend received after reset would be significantly lower than at the time of issue. The only way a preferred share could achieve 4.0% yield after the dividend was reset would be to purchase it at a lower price in the secondary market.

Logic would dictate that the actual dividend paid to the original purchaser of preferred share after reset will be significantly lower than the 4.0% offered at the time of issue.

A number of charts tracking the yield of preferred shares between 2009 and 2015 reported a decline in the average yield realized by the owners of preferred shares. As a neophyte I was confused as to how a decline in average yield and a decline in the issue price of preferred shares represented a logical investment.

If the 5 year bond rate was to substantially increase over the next five years, as many experts are predicting, the rate of return at the time of reset could, in theory at least, be significantly higher.

This raises a new question!

Can all preferred shares based on a rate reset feature be recalled if the issuer feels the promised rate of return after reset will be out of line with the market? If so preferred shares with a reset provision do not appear to have a great deal of up side to me.

I apologize in advance if this question exposes my unfamiliarity with preferred shares.

Incorrect. Only 5% of all outstanding rate-reset preferreds stand to have a lower dividend established by the end of 2015. Therefore 95% do not. Rate resets happen periodically, not continuously. In any case, solve the problem by owning a basket of preferreds in an ETF. As interest rates will, of course, be rising and not falling in the years ahead, rate-resets will benefit. In the meantime the dividend payment you initially signed up for continues – 95% of the time. If rates spike, issuers can typically recall. Investors then have enjoyed the dividend, and will harvest a capital gain, especially if the asset were to be purchased at current values. Like I said, an opportunity. — Garth

#109 Londoner on 07.20.15 at 9:27 am

Stick to the facts: (a) there is virtually no overall reduction in dividends taking place, (b) the Fed has made it clear rates are biased higher, not lower. — Garth

I never said that there are any reductions currently taking place. I said that the expectation of lower rates has caused a sell-off and that in the short term the more immediate resets would offer a lower yield then the historical fixed rates.

I am not advocating that anyone dump their preferred shares. I’m just providing a bit more detail. Sheesh!

#110 Herb on 07.20.15 at 9:32 am

I share Vundo’s puzzlement at #80 about the collective hate-on for Mark. Sometimes I wonder who the real trolls are, Mark, or the dogs attacking him.

Mark does not push himself, does not push any political or ideological line, and comments on topic and making sense. He may be wrong, but when you are talking economics or prognostications, it’s almost inevitable to argue about the time of day without being a troll.

The poster in question impersonates a financial advisor without being qualified as one. He does not support his misinformation or overtly misleading and incorrect advice. This has been tolerated long enough. — Garth

#111 Doug in London on 07.20.15 at 10:09 am

@My Life is a Pile of Shit, post #86:
No wonder your life is a pile of shit. The cheaper these preferred share ETFs get, the better deal they are. Why would you buy something that’s going up, so some of the run up has already passed you by when instead you can buy something that’s DIRT CHEAP (with far more upward potential) right now? Come on, it’s an idiot no brainer, what’s so hard about that?

#112 Llewelyn on 07.20.15 at 10:19 am

Garth thank you and your followers for clarifying how preferred shares function. I think the reason why many people over 65 like myself have focussed on investments with guaranteed returns is that you don’t have to read all that fine print to sleep at night.

Hopefully you have a lot of money. If you depend only on fully-taxable and low-return interest, you need a pile. — Garth

#113 LowRent of Arabia on 07.20.15 at 10:35 am

I am addicted to this blog. I am as bad as SMking Man.

I am out of the sand box for a while in Bangkok, up to my ears in tropical cocktails, beautiful girls and snake shows…and what am I reading while waiting for the King Cobra to show up? Da Greater Fool.

Don’t forget blog dogs…you have to spend some of that money and enjoy life or your life is about greater returns only.

Gotta run exchange some indebted US petro dollar Middle East currencies into a wheelbarrow of Thai baht…fun isn’t free.

#114 The American on 07.20.15 at 10:40 am

At #97: Tony, you just sit around all day and make shit up. I’ve yet to read a single post of yours founded in truth. Rated have not fallen in the U.S. For five years. Rates are indeed going up. Sorry you haven’t been able to afford to picked up a newspaper since 2008… Times must be harder for you than even I imagined.

#115 Investx on 07.20.15 at 10:46 am

What is the best and cost effective way to buy these ETFs?

Is going through a broker (e.g. Questrade) cheapest?

I was thinking about using an advisor, but they have a 1% asset fee, meaning a 5% return is reduced by 20%! Ouch.

Sure, stumble along with free advice given by anonymous people on a blog rather than seeking professional, targeted help. Good call. BTW, advisory fees are tax-deductible. Nobody pays 1%. — Garth

#116 Llewelyn on 07.20.15 at 11:11 am

I certainly appreciate your concern.

However my house is paid for, I receive OAS, CPP, income from a private pension plan and investment income.

I live a relatively modest lifestyle and if my health declines I have instructed my sister as Power of Attorney to secure the most affordable accomodation possible.

Your advice is invaluable to those under 40 years of age but many old souls like me are content with protecting the value of what we worked so hard to obtain.

#117 Ronaldo on 07.20.15 at 11:15 am

#95 Leo Trollstoy on 07.20.15 at 3:26 am

”Fed will hike. Exact timing irrelevant.

Hike destroys CAD and gold”

That’s why if you’re CDN, you buy USD when they hit 1.06. You’d be up over 35% now. Did you? I only own .75 oz. of gold so don’t much care what it does but the shares of the gold producers are getting into bargain territory. Most are down over 80% from their highs. ABX for example is down 10% this morning and 82% from its high at the peak of that market in 2011.

#118 Derwood on 07.20.15 at 11:28 am

What’s a tim’rous beasty?

#119 gut check on 07.20.15 at 11:46 am

@ #103 Steve French on 07.20.15 at 8:16 am
Dang I didn’t know Steve French was also the name of a gay porn star!!

Ummm…

Gulp…..

**********************************

that’s what he said.

Knock it off. This is a family and canine site. — Garth

#120 gut check on 07.20.15 at 11:56 am

I bow to the supremacy of the editor. :)

#121 kommykim on 07.20.15 at 12:13 pm

RE#108 Llewelyn on 07.20.15 at 9:26 am
Can all preferred shares based on a rate reset feature be recalled if the issuer feels the promised rate of return after reset will be out of line with the market?

Pretty much all of them can be called on their reset date at the issuer’s discretion. However, it costs the company money to do this (recall and issue new shares) so it is only done if they can sell new shares at a much lower spread than what is already issued.

#122 Derek R on 07.20.15 at 12:14 pm

#118 Derwood on 07.20.15 at 11:28 am asked:
What’s a tim’rous beasty?

It’s a mouse (or any other fearful individual).

From the poem addressed “To a Mouse” by Robert Burns
Wee, sleekit, cowrin, tim’rous beastie,
O, what a panic’s in thy breastie!
Thou needna start awa sae hasty,
Wi’ bickering brattle!
I wad be laith to rin an’ chase thee
Wi’ murd’ring pattle!

A poem which could easily be addressed to the average retail investor.

#123 Seymour Rapaport on 07.20.15 at 12:20 pm

Hiya Garth,

Just a heads up – traffic here on Greater Fool is likely to be down quite a bit today and this week.

Lots of your regular readers are busy with damage control right now since Ashley Madison was hacked.
(Too bad so many of the fellows here had to resort to such a site, rather than being skilled in picking up the nonverbal cues that signal a woman’s consent in the real world)

#124 Leo Trollstoy on 07.20.15 at 12:20 pm

Not surprisingly gold miners are getting nuked.

http://www.businessinsider.com/gold-mining-stocks-july-20-2015-7

As I said before, gold and gold miners are dead money.

#125 Willdaman on 07.20.15 at 12:29 pm

Incorrect. Only 5% of all outstanding rate-reset preferreds stand to have a lower dividend established by the end of 2015. Therefore 95% do not. Rate resets happen periodically, not continuously.
————

The rout on rate reset prfs is not limited to those resetting in 2015…while your statement may be factually correct to say that only 5% of prefs are in danger of resetting at the end of 2015 at a lower rate, the risk of prefs resetting lower extends to much more than that.
Prefs resetting next year and 2017 are also getting their share prices killed, the reason being that the market believes interest rates will continue to be low (at least lower than when they were issued) when those reset as well. Share prices will continue to move on these as more clarity is obtained on where interest rates go from here.
That said, to the extent low interest rates are factored in, it seems to me that now is a good time to buy, particularly those that will be resetting a couple years out.
A better bet would be buying floating resets that actually reset their rate every quarter rather than every five years.

#126 BS on 07.20.15 at 12:44 pm

Of the four all-Canadian preferred share ETFs — ZPR, CPD, PPS, & HPR — all carry a loss today if purchased at any time in the last three years (dividends included). That’s right, they have one, two, and three-year negative returns. If they can’t do better than cash despite a 5% yield, what good are they? Maybe you don’t mind if they under-perform cash for one year, but for three years? Come on! If it doesn’t go up, don’t buy it!

As they say the trend is your friend. Don’t fight it. Right now prefs are trending down and have been for a while. Madani is forecasting another rate cut in October by the BoC which means more pain for prefs if it happens. Little upside lots of downside for prefs IMO.

Hilarious how everyone wants to buy low and sell high, and nobody does. — Garth

#127 My Life is a Pile of Shit on 07.20.15 at 1:29 pm

#111 Doug in London:
No one knows what the bottom of preferred shares looks like. They may have 7% yield. It may still be a long drop in price to get there.

#128 Investx on 07.20.15 at 1:31 pm

“Sure, stumble along with free advice given by anonymous people on a blog rather than seeking professional, targeted help. Good call. BTW, advisory fees are tax-deductible. Nobody pays 1%. — Garth”

Thanks, Garth. I’m open to the DIY approach OR the paid advisory approach – if it’s worth it. In fact, I’d rather do the latter! But so many of the advisory services are not worth the premium charged, unfortunately. The MER’s and fees are not negligible.

#129 OXI in GREECE !! on 07.20.15 at 1:43 pm

#97 Tony on 07.20.15 at 5:49 am
We’ve heard the same line about rising interest rates out of America every year for the last 5 years and each year interest rates fell. Next year will be no different, soon interest rates will turn negative to reflect the worst depression the country is in since the great depression.

Rates have not fallen in the U.S. for five years. They have been unchanged, and now that changes. — Garth

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7 years by October actually. Which makes a 0.25% rate hike a snoozer especially if they do 1/4 once a year for 5 years.

The Fed has indicated rates will likely start rising this year, then increase 1% in each of the next two years. Hardly snoozeworthy. — Garth

#130 Sheane Wallace on 07.20.15 at 1:48 pm

gold getting creamed today. Somebody sold 100 tons in 1 minute on the Chinese market, equal to the official average yearly amount bought by Bank of China.

That is worth of 3.5 billions and somebody lost 150 millions on the sale.

If big institutional investors are selling gold is going down, soon bellow 1000. It seems Mark is wrong again, at least temporarily…

#131 Toronto_CA on 07.20.15 at 2:02 pm

Oil and gold getting clobbered (and taking the CAD down with them, to a lesser extent).

I increased my pref weighting today, Garth. Thanks for the advice. A few weeks ago I converted $50k CAD into USD (when it was in the low 80 cent range) to cover the next few years of USD vacations I plan to take. I can see the currency in the low 70s for the foreseeable future, and if not, I’ve locked in a rate I can live with.

If the CAD goes back down to the mid 60 cent US range (as it did in the early 2000s) I’m going to look at employment in Bermuda or some jurisdiction where they pay in a real currency.

#132 cmj6662 on 07.20.15 at 2:06 pm

Hi Garth,
Many of us are listening and finally understanding preferred ETFs. They are on sale and I purchased additional ZPR and EPF today to balance my portfolio.
Your financial education is priceless. It is given in simple terms and makes sense.
Many bloggers wonder why we have diverted from the real estate slant. These postings are connected because once you sell your home for huge $$ what do you do with it???? DIY is not really the answer but it gives a direction and info of what to discuss with a financial advisor.
Again, appreciate all you have done to help me create a diverse balanced portfolio

#133 Mark in Guelph on 07.20.15 at 2:10 pm

The Fed has indicated rates will likely start rising this year, then increase 1% in each of the next two years. Hardly snoozeworthy. — Garth

And everything the Fed indicates has come to pass?

The world is loosening, commodities are tanking, inflation according to the Fed is nowhere near their target. Worst labor participation rate in 30 years, not a result of baby boomers retiring as Garth has claimed, 55+ are working in greater numbers, look it up. And now crazy strong dollar because rates may be going up a quarter point after 7 years of ZIRP, which is certainly hurting American corporate profits.

Yup, rate hike is a lock.

Believe what you wish, but it’s coming. BTW, when the Fed said it would end its monthly bond-buying program, a year before it happened, this blog teemed with the same ‘can-never-happen’ comments. It did. Of course. — Garth

#134 family beagle on 07.20.15 at 2:12 pm

#130 Sheane re gold dump

I’d be curious who bought it. And in what form. And why?

#135 BS on 07.20.15 at 2:19 pm

Hilarious how everyone wants to buy low and sell high, and nobody does. — Garth

That’s true. The questions is are prefs “low”? Or are they at fair market value at best and heading lower as the next BoC rate cut gets priced in? For diversification I can see why you would want to hold some prefs. I do. I just wouldn’t be backing up the truck right now.

In a balanced portfolio where 15% or so are preferreds, you don’t need a big truck. They pay 5% with a dividend tax credit. Why do you care if you hit the absolute bottom? Amateur mistake. — Garth

#136 jess on 07.20.15 at 2:24 pm

digitalized portfolio management of so-called robo-advisers vs human
(marketwatch) can you tell the difference ?

=====
altered blue sheets…”did not characterize sales as long or short based on how they were marked when they were sent to the market but filtered them based on other factors, such as the relevant fund’s position in the stock at the prime broker. As a result, the way trades were identified sometimes changed, causing some long sales to be erroneously shown as short sales
http://www.sec.gov/news/pressrelease/2015-145.html
========
SEC Charges Oil Company and CEO in Scheme Targeting Chinese-Americans and EB-5 Investors

…”According to the SEC’s complaint filed in federal court in San Francisco, Luca International conducted seminars for investors at the company’s offices and hotel conference rooms in California. Besides targeting investors in the Chinese-American community through advertisements in Chinese-language television, radio, and newspaper outlets, Yang and Luca International allegedly zeroed in on Chinese citizens who sought permanent U.S. residence through the EB-5 program, which provides a way for foreign investors to obtain a green card by meeting certain U.S. investment requirements. ”
http://www.sec.gov/news/pressrelease/2015-141.html

#137 Mark in Guelph on 07.20.15 at 2:28 pm

Believe what you wish, but it’s coming. BTW, when the Fed said it would end its monthly bond-buying program, a year before it happened, this blog teemed with the same ‘can-never-happen’ comments. It did. Of course. — Garth

After how many rounds of QE? Are you sure it’s not coming back?

We have heard the “rates are rising this year” song for a few years now, it never happens. Will they rise at some point, sure, but since your willing to respond to me Garth, tell me why they didn’t hike in June? Either we’ve recovered or not.

What difference can 3 months make over a period of 7 years? What’s the Fed worried about that you’re not?

Don’t think they are worried about anything, and nobody really expected a June move. The Fed will go when they feel there’s a clear runway for at least two years of gradual increases. Hope you are not betting against it. — Garth

#138 OXI in GREECE !! on 07.20.15 at 2:35 pm

7 years by October actually. Which makes a 0.25% rate hike a snoozer especially if they do 1/4 once a year for 5 years.

The Fed has indicated rates will likely start rising this year, then increase 1% in each of the next two years. Hardly snoozeworthy. — Garth

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We've also been hearing for three years the fed will raise rates "next year". I'm going back to sleep zzzzzzzzzzzz

#139 Squirrel meat on 07.20.15 at 2:37 pm

Way to go Ontario! Fill up the debt tank.

http://business.financialpost.com/news/economy/with-twice-the-debt-of-california-ontario-is-now-the-worlds-most-indebted-sub-sovereign-borrower

#140 Squirrel meat on 07.20.15 at 2:39 pm

Yeah Oilberta….. let’s catch up to Ontario.

http://calgaryherald.com/news/politics/albertas-debt-tops-11-9b-with-annual-debt-service-cost-of-714m-report

#141 Craig Wright on 07.20.15 at 2:40 pm

To #97 Tony

If you are comparing Canada, U.S. bond yields then this is true, they have fallen quite alot.

I remember in 2010, U.S. 10 year bonds were 4.00% and 4.8% in around March-April 2015.

Canada was around 3.25% and 3.81% for 10, 30 year bond yields. All others fell too, 2, 5, 7, 20 years.

However, in the U.S, the Fed has not cut rates or changed rates sine 2010. People need to distinguish between short term, intermediate, long term bond yields and central bank rates of Canada, U.S., Europe etc.

Yes, most bond yields worldwide are way down sine 2010.

#142 OXI in GREECE !! on 07.20.15 at 2:40 pm

http://www.wsj.com/articles/fed-signals-rate-moves-before-years-end-1434564343

SLOW RATE RISE……right from Yellen….

And she has spelled that out at an expectation of 1% per year in 2016 and 2017. Just wait and see. — Garth

#143 Craig Wright on 07.20.15 at 2:41 pm

Just an additional information I forgot to state in my above post, 4.80% U.S 30 year bond yields were back in 2010.

#144 Mark in Guelph on 07.20.15 at 2:41 pm

Don’t think they are worried about anything, and nobody really expected a June move. The Fed will go when they feel there’s a clear runway for at least two years of gradual increases. Hope you are not betting against it. — Garth

Last post on this from me Garth, thanks for the responses. Now I seem to remember you, along with the cheerleaders at CNBC, thought it would be June, after March failed to materialize. And March was a sure bet once it didn’t happen in 2014.

How do you know you’re not mistaking a bubble for a recovery? Dot-com in 2000, housing in 2008 and now stocks in 2016.

#145 Chris in Nanaimo on 07.20.15 at 2:47 pm

#115

“BTW, advisory fees are tax-deductible. Nobody pays 1%. — Garth”

Garth can you confirm the tax deduction only applies on non-registered accounts, or registered accounts as well? Thanks.

100% of advisory or management fees on non-registered accounts are deductible from income. For RRSPs, RRIFs, LIRAs and RESPs fees come out without being considered a taxable withdrawal, therefore they are also on a tax-advantaged gross (not net) basis. — Garth

#146 Squirrel meat on 07.20.15 at 3:15 pm

Not a good graph…. CDN peso on the way.

http://www.theglobeandmail.com/report-on-business/economy/canadas-eroding-share-of-us-imports/article25591843/

#147 Leo Trollstoy on 07.20.15 at 3:18 pm

Whether you believe the Fed will hike or not, you will get what you deserve.

I’m pro-U.S. and have a ton of U.S. property spinning off USD.

No offense to the diversified, balanced, preferred guys. I just don’t have any familiarity or success with stocks. This blog post made that even more clear to me.

People need to stop bitching about whether the Fed will hike or not. Believe what you want. Your finances will reflect it. Just don’t complain if you’re poor. You’re poor because you make poor decisions.

#148 Amanda Stendonis on 07.20.15 at 3:29 pm

To #139, 140 Squirrel meat

I always keep hearing about people bringing up government deficits and debts but what about the borrowing binge by all types of corporations, banks, energy companies, real estate companies etc.

They are on a huge borrowing binge too. The junk bond, high yield sector is borrowing like there is no tomorrow.

#149 Drill Baby Drill on 07.20.15 at 3:48 pm

Very interesting article today in the G&M on the Vancouver housing market and international real estate investors. I think it is worthy of discussion.

http://www.theglobeandmail.com/report-on-business/rob-commentary/vancouver-is-mortgaging-its-future-for-a-market-thats-anything-but-free/article25558615/

#150 Squirrel meat on 07.20.15 at 4:04 pm

#148 Amanda Stendonis on 07.20.15 at 3:29 pm

To #139, 140 Squirrel meat

I always keep hearing about people bringing up government deficits and debts but what about the borrowing binge by all types of corporations, banks, energy companies, real estate companies etc.

They are on a huge borrowing binge too. The junk bond, high yield sector is borrowing like there is no tomorrow.

———————
They don’t tax us!.. well at least not directly, yet.

#151 Leo Trollstoy on 07.20.15 at 4:12 pm

#146 Squirrel meat

This is why the theory that the U.S. boom will save the Canadian economy is flawed.

#152 Nagraj on 07.20.15 at 4:14 pm

My best friend’s girlfriend was the daughter of X, the renowned Chair of the – Dep’t, and the X’s used to have our clique over for dinner in their impressive Westmount home.
I starved thru university. As I invariably ate everything in sight, it occurred to the good professor to ask just how bare my cupboard was. I pointed out to him that I didn’t have a fridge in the rented hovel I lived in.
Shortly thereafter there’s a knock on my door, there’s Mrs. Professor and two guys in overalls AND a fridge! Free of charge.

Going back further, to the early 1960’s, I went to a one room country school. The teacher was Mrs. Y (who went on to live to be 101). I was learning English at the time. Mrs. Y remains the foundation of everything good about Canada.

To X and Y add Z for Garth Turner. Canadian bedrock. He may be wrong about this and that (and probably is) and he’s a tad behind the times on women’s rights and gay rights BUT so what.

I post this because some of the flak he’s gettin’ in this blog are the product of a very angry impatience; even as that impatience may be justified – consider that an interest rate prediction, for example, is no reflection of character.

#153 John Delonghi on 07.20.15 at 4:30 pm

I am in charge of my family’s finances, investments and sold my gold when it was around 1,825 U.S. dollars per ounce. I bought it at 300 U.S. dollars per ounce which was almost at the bottom of 250 U.S. dollars per ounce.

I took the proceeds and bought various long term compound interest bonds at 4.6% to 4.90%.

Since 2002, I have made total 625%. This was a ounce in a lifetime move and I never thought I would make that much but a 200% return was what I thought I would of made.

Now, at 50 years old and our family with 6 million dollars, it is at set from here.

I thank the U.S. Federal Reserve and world central banks for their panic, emergency policies and their ultra low interest rates policies as well. They pushed up gold and bond prices.

Gold is now down about 43% and no 26% interest earned in 5 years. I personally see gold going down to 875 to 900 U.S. dollars per ounce in the next 4 to 15 months and then gradually rising with ups and downs along the way until 2020 to 2021, in which it will be around 1,800 to 1,950 U.S. dollars per ounce.

I would not be surprised that by 2025 to 2026, gold will be 2,500 to 2,800 U.S. dollars per ounce. It may reached 3,000 U.S. dollars but I would not count too much on that by 2026.

#154 Karma on 07.20.15 at 4:31 pm

Lol, bit hyperbolic…

http://www.telegraph.co.uk/finance/newsbysector/industry/mining/11749706/Commodities-crash-could-turn-Australia-into-a-new-Greece.html

#155 S.Bby on 07.20.15 at 4:45 pm

Just got over $1,100 deposit from the Feds today for my two kids. Bribing me with my own money.

#156 Gold Bugs splat on sidewalk on 07.20.15 at 4:46 pm

Splat, gold bugs jumping off balconies everywhere… can’t wait to hear those gold pumpers yap this saturday on that am640 radio show about how good a price entry this is ….LOL

Sub $1000 any day now suckers….buy the GLD puts tomorrow with september expiry and you’re laughing all the way!!

#157 waiting on the westcoast on 07.20.15 at 4:49 pm

#147 Leo Trollstoy on 07.20.15 at 3:18 pm
“People need to stop bitching about whether the Fed will hike or not. Believe what you want. Your finances will reflect it. Just don’t complain if you’re poor. You’re poor because you make poor decisions.”

I always thought it was because you married poor-ly. ;-)

I also have a lot of business assets in the US so I am pretty happy personally with the spread…

But I remember feeling pretty cocky in 2007 and watched my world come tumbling down hence my contrary spidey sense… How much longer can the US keep the party going? I hope at least two more years.

I know many of you think the growth has been tepid in the US… But it has not been for my businesses which are highly sensitive to consumer confidence. 25%+ growth annually for the past 3 years.

#158 Smoking Man on 07.20.15 at 5:07 pm

I can never emphasize enough the use of short term rentals.

Show of hands, who’s dumb enough to be on the Ashley Madison data base.

#159 Financial Freedom at 40 on 07.20.15 at 5:10 pm

81 Carlito on 07.20.15 at 12:17 am
Should one be going XPF or ZPR? Which is the better option at this time?
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XPF is $Cdn hedged, I prefer unhedged as the loonie has not been rising nor do I expect it to in the near-term, and the US dividend portion doesn’t get the attractive tax treatment – they come through as income.

#160 Ronaldo on 07.20.15 at 7:29 pm

#137 Mark in Guelph

”What difference can 3 months make over a period of 7 years? What’s the Fed worried about that you’re not?”

They are deathly afraid of crashing the markets since the recovery was built on ZERP. So, they kick the can down the road. Just as no one can predict when the market hits the high point or low point. No one can accurately predict when interest rates will go up or down. Sometimes people get lucky but you can’t rely on luck to get you through. Too many variables. Stay diversified with your investments, invest regularly and you’ll do just fine and disregard the noise.

#161 Jake Bilson on 07.20.15 at 7:55 pm

To #150 Squirrel meat

Companies, corporations don’t tax us but like banks, credit card companies do increase our cost of living through banking, lending, investments, RRSP’s, RESP’s, RRIF’s, TFSA’s, LIRA’s etc.

We pay higher costs from food to cars, T.V.’s, clothes, electricity, heating costs etc. either through profit, markups and due to inflation and others costs rising from other corporations, companies in the whole trade and sales.

So they do have a big cost impact on our lives so if they have more debt, expenses incurred, we do pay for it through higher prices and costs to us.

#162 Doug in London on 07.20.15 at 10:16 pm

@My Life is a Pile of Shit, post #127:
Yes, of course no one knows what the bottom of the preferred shares market looks like, but my personal psychic prediction is it will look like CPD just slightly under $14.00 and XPF slightly under $18.40. Oh, did that already happen while I was away from the computer enjoying the great summertime outdoors?

#163 Doug in London on 07.21.15 at 10:15 am

As I read all this negativity about preferred shares, the time tunnel sucked me in again and shot me back to 2013, when there was all the bellyaching here about the drop in REIT prices. Wow, I’m reliving the experience of doing the CN Tower Edgewalk (I got the idea from Rick Mercer) in late August of 2013, what a great view up here! It cost about $200 for this great experience, but luckily I can afford it because of the money I saved by scooping up REITs when they were DIRT CHEAP!!!!!!!!

#164 Sid on 07.21.15 at 12:37 pm

Garth…I am a long time follower of your blog, but I also follow Peter Schiff. He is one of the few that predicted US bubble and you are certainly familiar with his views about US economy. How would you respond to his recent claim in video below?

http://reason.com/reasontv/2015/07/20/peter-schiff-on-fed-rand-paul-and-the

#165 Doug in London on 07.22.15 at 10:31 pm

The preferred share market is now oversold, you say? At these recent dirt cheap prices, you’d thing they would be frantically overbought, with at least 1000 buy orders for every sell order!

After a recent rally, the prices of those preferred share ETFs has dropped slightly. Well, what are you waiting for? Get that buy order in NOW before that 1000 mile lineup of buyers becomes a 25,000 mile long lineup, going all the way around the world!