Preferred stock is one of those areas of the market that is not very well understood.  Preferreds are stocks that  behave more like a bond because they have a fixed interest rate.  Holders of straight preferred stock are entitled to their payment of dividends after bond holders but before common shareholders.  Also, preferred shareholders have rights behind bond holders but ahead of common stock holders as to liquidation of assets due to bankruptcy.  Preferred shares can also be illiquid depending on which company and how many shares you hold.  At any rate, I did not intend for this to become a college level course on preferred stock, I just wanted to give some background.

What is interesting is that there has been a definite pull back from preferred shares over the last few weeks.  This means that either traders and investors do not have the same confidence level in these same corporations going forward, or they are anticipating higher interest rates, which will adversely affect the share price of preferreds.  

Today I will take a look at PGX, which is the Powershares Preferred Portfolio.  Below is a list of the top holdings for PGX as of June 30 from etfconnect.com

Sector and Holdings Summary	top

As of 06/30/2009
Holding	Dollar Value	% of Total Portfolio
JP Morgan Chase Capital X	$40,264,000.00	7.62
ING Groep NV	$31,933,000.00	6.04
Barclays Bank PLC	$30,040,000.00	5.68
HSBC Holdings PLC	$28,049,000.00	5.31
Wells Fargo Capital IV	$25,716,000.00	4.86
Morgan Stanley Capital Trust VII	$23,296,000.00	4.41
General Electric Capital Corp	$19,723,000.00	3.73
Wachovia Capital Trust IV	$18,565,000.00	3.51
USB Capital XI	$18,149,000.00	3.43
Public Storage	$18,082,000.00	3.42

As you can see, the top holdings are dominated by financial companies.  If PGX is beginning to lag as the chart below shows, that means that the debt of these companies is not as attractive as it once was, probably for one or both of the reasons given above.  In the chart below, I have plotted PGX (black line) along with the S&P 500 (red dashed line) as a reference.  Notice how PGX was very strong off of the March low through early August as the SPX powered higher.  During the month of August, however, PGX is faltering while SPX made one more push higher.  This means that confidence in financial companies could be faltering here.  It does not mean that we are to panic and abandon equities, but it is a warning sign and great care should be taken before committing new capital to this market.  If confidence in financials begins to wane, a serious correction could be just around the corner.