As an example below is a list of Bank of America prefs and their approximate return potential during the next 12 months or so...
Obviously, this is my opinion of their potential only, and thus is not a recommendation in any way, but it does appear as if some of prefs of companies BofA acquired over the last several years (Countrywide, MBNA and Fleet) are currently mispriced and offer an additional return when compared to the regular BAC prefs...
The idea behind the whole arbitrage opportunity, is that at the time were default probabilities are roughly evenly distributed and were individual issues are unlikely to get called out, all of the prefs would trade based on several main components- current yield, tax deductibility and cummulative feature... So one can see that not all prefs of the same issuer are equally mispriced and some could now actually be overvalued on the relative basis...
I also have developed a similar self updating list for several other big financial names (Citi, HSBC, DB, JPM,WFC, STI etc) I am following, and might post a few more if it appears that readers have interest in them... I would encourage all the blog readers to ask questions in the comment section and post any of your thoughts or ideas there as well...
Archive Comments (7)
Q&A- from the e-mail:
"Do I need any special software to have a spreadsheet of the B of A preferreds automatically update? I have office 2003 but don't know where or how to get the data. I already own one of the B of A you listed. I could not understand how one morning the opening trade was $3.01 and thereafter traded all day day above $16. Do you think a specialist sucked in 50,000 shares at $3.01 and then spent the day selling it out at around $16 ?? This was BAC-W. I was able to see the opening volume that day and it was right at 50,000 shares. Thank you."
Posted by VY October 28, 2008 8:37 PM
Answer:
I've been able to pick up several thousands of shares of for example BAC-B for $3 below the normal price intraday several days ago... Saw same thing happen with others... Sometimes when a fund dumps a large chunk of shares market makers don't step in fast enough...
As far as the software- the answer is a yes- I use a simple msn add-into my excel 2007 and best of all it's free...The function is something like ("last price", symbol)- I don't recall of top of my head- you can also pull virtually any info from MSN including intraday highs and lows...
Links:
http://office.microsoft.com/en-us/excel/HA010346101033.aspx
http://www.vertex42.com/ExcelTemplates/excel-stock-quotes.html
Posted by VY October 28, 2008 8:40 PM
Confused as to what happens to preferreds when a Company is bought out. Do the preferreds transfer to the purchaser or is that optional. On Fannie I noticed that the preferreds were destroyed. If Citi and Goldman were to merge what happens to the preferreds of each. I own a lot of preferreds but have avoided the banks for that reason. I own most of the utility preferreds like EMO, FGE, ABA, XCJ, AEPPRA.
Posted by exide October 28, 2008 9:31 PM
What happens to preferreds depends on several factors:
1. If the transaction is an outright purchase like that of BofA of MBNA or CFC or WFC/WM transaction, purchaser takes on both assets and liabilities which implies the purchaser becomes an owner and guarantor of all prefs... The only thing the purchaser could do that would change the value of the prefs potentially assuming they trade at a premium would be redeeming the prefs in cash at nominal value assuming they carry a high coupon...
2. If, however, company fails before the transaction like in the case of WaMu- prefs are pretty much worthless just like a common stock
3. Same thing in the case of receivership like in the case of AIG and FNM/FRE- government chose not to pay dividends for now- hence prefs aren't worth much... However, given the fact that common stock of all three still carries value, don't be surprised if their prefs retain some of the value at some point...
4. In the case of the Citi/GS deal the prefs of the company being taken over would become a part of the purchaser and would thus trade at similar yields...
5. Transfer is thus not optional as long as common shares of the entity being taken over actually carry value at the time of the transaction
Posted by VY October 28, 2008 10:01 PM
Could you please explain the last 4 columns of the table. Cannot understand the "Norm Price".
Posted by exide October 29, 2008 8:28 PM
Norm Price is what I believe the real value of the stock today should be given the normalized yield and coupon...
Posted by VY October 29, 2008 9:21 PM
Now that money are being moved to the banks from the Fed what is your recommendation for best bank stocks for the next six weeks. Also, any comments on semi-conductors stocks.
Thanks
Posted by pmcs1234 October 30, 2008 11:51 PM