The Art And Science Of Trading Preferreds

by: Norman Roberts


Recently, I've grown increasingly concerned with a market exuberance I can't quite explain.

Fortunately I have profited handsomely as a result.

Consequently, I believe, I was able to take full advantage of these fortuitous conditions.

And I am preparing to take advantage as conditions change, which they most certainly will.

For the past month or so I have been doing what I never thought I would, I've been selling, shrinking the size of my preferred portfolio while virtually eliminating the amount of money I owe on margin. Frankly, I don't understand the recent market exuberance. Our American economy appears to be doing okay, however we are still a part of the global economy, which in my opinion, is not doing very well at all. Europe is a mess, the Brexit might metastasize into the eventual breakup of the European Union; China is faring little better; Brazil is an expanding mess; and although the ISIS footprint appears to be shrinking, terrorist events are increasing in number and frequency. In short, I don't understand the February market turnaround; however, I'm prepared to, and have been, taking advantage of it.

As I've often stated, I am not the world's best trader, in fact, I'm pretty bad, especially when it comes to selling. Another reason I gave up on commons, I honestly could not determine when and why to sell a position I held. However, as a preferred investor, I have mitigated this problem, which is the object of this article: How to successfully trade preferreds.

Notice, I mentioned taking advantageous of the recent market exuberance. Let's examine how I have and will continue to take advantage of these present and future circumstances:

  • A month ago I was highly leveraged and became increasingly concerned by a market exuberance I didn't quite understand.
  • Fortunately, my portfolio was profiting nicely and many of my preferreds were now trading above par, which meant: The price ceiling of a number of my preferreds had been breached and was close to about as high as it would go. Furthermore, with each move above par their effective yields were being proportionately reduced.
  • The perfect opportunity to sell and take some of my chips off of the table, which I did:
  1. Recently my 2000 shares HTS-A had become Annaly Capital Management's (NYSE:NLY) NLY-E as a result of the merger. I sold them @25.409/share
  2. Ashford Hospitality (NYSE:AHT) AHT-D sold 2000 shares @25.25
  3. AHT-E sold 2000 shares @25.42-.50
  4. Newcastle Investment Corp. (NCT) NCT-B sold 1500 shares @25.48
  5. Lexington Realty Trust (NYSE:LXP) LXP-C sold 204 shares @51.21
  6. NorthStar Realty Trust (NRF) NRF-C sold 1500 shares @25.30
  7. Invesco Mortgage Capital (NYSE:IVR) IVR-A sold 1000 shares @25.25
  8. After writing my AdCare Health Systems (NYSEMKT:ADK) update, I sold the A Series for a loss @21.00.

Will I miss the dividends they distributed? Absolutely, but given the opportunity to deleverage with the added benefit of reducing my exposure to a market I am no longer comfortable with, I had little difficulty making the trading decisions I had. The obvious par value ceilings and reduced dividend yields made my decision relatively easy and painless. No such sign-posts would have been available to me had I been invested in the commons of these companies. And being the acknowledged terrible trader that I am, I have little idea of the way I would have reacted had I been.

Also, as an important side note: Shortly after I sold those 3000 shares of AHT-E, Ashford issued a press release that they would be calling the entire E series, which means another 7000 AHT-E would be removed from my portfolio. I guess you must realize that I really like this company.

Okay, now that I have substantially reduced the amount of leverage I am carrying along with the total amount of yearly dividends I receive, what are my future plans? Good question. At the moment I'm in a wait and watch mode, yet I still have several above par preferreds on the market hoping to sell them opportunistically.

My expectations are that some event or non-event will trigger an end of this current market exuberance, which as is normal, turn into a period of contraction, and this bargain basement shopper will return with a vengeance. Of course, I will be mindful of the prevailing global economic conditions, which will most certainly temper the amount of leverage I will employ and the sectors in which I will concentrate my purchases. And, I fully expect to buy back some of the preferreds I have recently sold, only at a much lower price and effectively proportionate higher yield.

At least that's my plan, the universe might have other ideas. Time will tell.

Disclosure: I am/we are long LXP-C, AHT-D, AHT-E, NRF-B, NRF-D, NCT-D.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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