In Trying Times, Think Preferred Stocks

Well before the market's dramatic plunge Monday, a liquidity crisis existed in preferred stocks.

Right now, a liquidity crisis is evident all over the bond market (for instance, GE (GE Quote) 12-month commercial paper is yielding 7%). We do not have a sufficient number of buyers to absorb the sellers' supply of securities.

It's a vicious circle. After the price declines 10%, or even 20%, more sellers emerge, and without market makers at investment banks providing a bid, the stocks drop like rocks -- in irrational fashion. The reason we know it is irrational, is that these preferred stocks have declined 20% and even 30%, while the common stocks of the same company fell less than 10%. ...