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Wednesday, January 14, 2009

Financial Play: Long Preferreds, Short Common?

Interesting comment from the post Financials: Breakdown. Test of Panic Lows Pending:

SC: "What do you think of long PGF vs short XLF? Invest along side Uncle Sam and be prepared for common equity dilution and dividend cuts."

Since the start of the financial crisis, this would certainly have been a profitable trade. Preferreds are further up the capital structure and are therefore safer. They pay decent dividends that are also more robust. Because of where they are in the capital structure, they are less likely to be diluted. It is definitely a trade worth exploring.

The chart is a simple one. Short $1 of XLF for every $1 long of PGF. There could be a better ratio of PGF to XLF, so some backtesting is in order.


Anonymous said...

So, you have to pay the yield on XLF to get the yield on PGF.

Yesterday Obama said institutions getting financial aid will have to limit / cut dividend payments, so this may not be the best timing.

sc said...

no, it is the best timing as the dvd cuts will occur at the common level. The govt doesn't want to F themselves in the A since they hold prefs and they don't want all the other dumb banks that hold each others prefs to be F'd in the A by cutting pref dividends. The yield on PGF is looking good after today's rout.

Anonymous said...

Based on a price diff. chart, i'd be more inclined to short the spread here than go long it. But i'm a mean reversionary trader.