Incredible Finish to the Week in the Income Markets

After toying with 3% earlier in the week the 10 year treasury fell by 5 basis points today to end the week at 2.87%.

This was a welcome respite for income investors as those holding some of the higher yielding perpetual preferreds saw a couple nice bounces this week which in may cases got recent investors in shares close to break even (or even in the green).

Hardly ever do interest rates move in a straight line–they wiggle up and down, but the trend remains higher. Regardless we are happy to see a nice bounce which helps to ease the pain a bit for now.

The Fed has been a bit of a help this month as thus far they have only had about a $7 billion run off the balance sheet thus far and have made some sizable purchases during the treasury auctions in the last week. Are they going to remain on their advertised $20 billion/month of runoffs? Who knows?

The Medium Duration Income Portfolio turned ‘green’ today with the help of the silly Sotherly Hotels baby bond. We didn’t think we would see green again until mid year as we thought capital losses would outweigh dividends/interest received–always nice to get a bit of a surprise.

We are looking forward to next week–I should get a life I guess. When you are looking forward to next week in the interest rate complex with so much anticipation something is lacking in ones life.

A Limit to What One Should Pay For Shares

We just glanced at the current trading price of the new Sotherly Hotels 7.25% baby bonds and we see that 700 shares just traded at $26.60. This issue has a early call date in 1 year–this means that if it were to be called in a year a buyer at the current price would realize 15 cents for holding 1 year. This is a yield to worst of less than 1%.

While we wished we could have gotten more than the 200 shares we secured at $25.55 we aren’t so crazy that we would pay this kind of price for shares now.

Obviously someone believes that with rising interest rates that the bonds will not be called early and they may well be right–but even so do you want to accept a yield to call in 2021 of 4.9%?

Adding to the High Yield Portfolio

Today we added the Teekay LNG Partners (TGP), 9% perpetual preferred to (NYSE:TGP-A) the High Yield Income Portfolio.

Teekay and all associated companies released earnings today and generally they were very good for shipping companies.  Teekay LNG Partners is a master limited partnership with a large fleet of ships (although many of the ships are owned in partnership with others) which are typically leased for long periods of time–up to about 30 years.  LNG shipping has been a real growth business in the last 10 years as the supply of natural gas in the United States has expanded thanks to fracking.

The biggest problem we have with TGP is that there are a lot of new builds on order and historically ocean shippers get into financial trouble when they over commit to purchase of new ships.  This is not a problem now as the global economies have been strengthening, but in a recessionary time too many new builds on order can cause severe financial stress for a company.

Note that this is the 2nd LNG shipper in the portfolio as the GasLog Partners 8.20% fixed-to-floating perpetual preferred (GLOP-B) is in the portfolio as well.  Presently we have no real problem with this over exposure, but it is a situation that needs to be monitored.

Readers should be aware that personally we are much more conservative than this portfolio represents, although we do own the Spark Energy fixed-to-floating issue contained in this model.

With this purchase the model is 53% invested.  We will continue to search for a higher yield baby bond to add to the portfolio.

If You Liked Them at $27 You Should Love Them at $25

As we continue to work on this new website we are continually seeing charts of perpetual preferreds that show losses of $2-$3/shares since November/December. These are generally modest coupon issues – meaning that even if they are unrated they are likely decent quality.

Our mind always asks ourselves “how many years worth of dividends will it take to recoup lost capital?”.

Investors should plan for losses maybe equal to what have already occurred before 2018 is over  (of course who knows for absolute certainty).

My brother, who invests in a lot of preferred stocks also, and I talked in the last year or so about how we would be more than happy with a solid 7% yield–of course now that we can get a nice 7% we don’t want it as the pain of capital losses will make it unbearable.

This is the situation investors are now in. We need to be purchasing shorter maturity issues to hold for a while, but at some point in time an investor will want to lock in the nice 7, 8 or 9%. When will that time be? No one knows but it isn’t yet, but maybe it is in 6 months or a year. All we can do is wait and see.

It is very possible the issues below will all be trading at $20-$22/share before the year is over.

Here is a sample of charts where the current yields are .4 to .6% better than they were just 3 short months ago.













Silliness in Markets Continues

Silliness is the best way to describe the reaction of the stock markets to any news out there on interest rates.  Nothing at all has been said or written that changes one damn thing that we didn’t already know.

When we left the office for 90 minutes yesterday the DJIA was up around 200 point while the 10 year treasury was in the 2.93-2.94% and I would describe markets as quiet.  When we came back near market close the DJIA had fallen 400 points from the high and interest rates had fallen as well.  All on the release of Fed minutes from last month–what a damned joke.

Now as long time readers know silly movements like this don’t change anything we do–we can’t change on a dime–and won’t.  We are looking for short/medium maturity securities—period!  We aren’t traders–we don’t have the time to hang around watching for wiggles in markets–and if we did have time we wouldn’t do it–our mind is a more buy and hold–not trading.  Kudos to those that can grab an extra quarter here and there by flipping income issues.

Yesterday when we mentioned we bought some Atlas Financial Holdings 6.625% baby bonds we neglected to mention that we purchased some shares for our personal accounts–anyway we did.

We hope to add 1 issue today in the High Yield Model--maybe even 2.  We will write on these tonight.

Website – In Testing Stages

FEEL FREE TO SIGN UP FOR NOTIFICATIONS.  THIS IS A SMALL NOTICE THAT A NEW POSTING IS UP–IT WORKS GREAT FOR NEW ISSUES, TICKERS ETC.  WE DO NOT RESEND NOTICES WHEN WE EDIT ARTICLES ETC.

Currently working on

2/7/2018

Most data entered–now proofreading and adding missed securities.

We are now linking pages from listings to detail pages.  Massive job.

To Do

Add more search criteria to security search page

This website is in a testing phase. Additionally there is a continuation of database loading occurring–needless to say loading data into a database is a massive project.

Also we continue to tweak items such as font sizes, search attributes and page layouts–from our experience none of these items will EVER be complete. It is our hope to present information in a manner that is most pleasing to the most number of users which means that as feedback is received changes will be made.

In the past we have not ever charged for our website access and for the time being that will still be the case, but at some point we will move to a modest charge. Building and maintaining websites with information that is useful is seldom free of cost. In our previous website we invested fairly substantial resources, primarily in professional services, to launch and operate the site. Since our last website it has become more and more difficult to secure data that is reliable and free (such as the recent shutdown of the Yahoo quote API) and while Google data remains free it is not a complete database of information and we would not be surprised if that free resource goes away in the months ahead.

It is our hope to have the site up and fully operational sometime during the month of February/March, 2018.

Feel free to leave any comments below if you would like.

New Purchases in Medium Duration Income Portfolio

Today we made 2 new purchases in the Medium Duration Income Portfolio. These purchases bring the model portfolio to about 76% invested. Our original target was to get to 90% by March 1st, but we are going to pause. As we look at share price losses occurring through income markets it seems silly to go further — for now.

Today we added the 7.35% Cowen Sr Notes (NASDAQ:COWNZ) which was issued in December. Of course we had to pay $25.42 because of the relatively high coupon. This is the longest dated maturity (2027) we have purchased in this portfolio. Honestly we are shooting for most in the 2021-2022 area which will minimize the volatility–the Cowen issue could exhibit quite alot of movement because it is 9 years until maturity.

Additionally we added the more modest coupon of the Atlas Financial Holdings 6.625% Notes (NASDAQ:AFHBL) which mature in 2022. We paid $25.45 for the shares. We were quite surprised when doing our due diligence on AFH to find this is a nicely profitable, but small, insurance company. AFH specializes in insurance for small commercial vehicles–taxis, buses etc. This particular issue of 1,000,000 shares (bonds) is all of the debt the company has outstanding which leaves the company in a fairly stable financial condition. The common shares trade in the $18/share area, but unfortunately no dividend is paid on the common. Just the same we believe this to be one of the best short maturity issues available at this time.

Now that this portfolio is 76% invested we will get the dividend table laid out on the portfolio page and see how we look in terms of current yields etc and distribution timing (we wish they were laid out evenly month to month, but this was not a factor for choosing and issue).  Dividends and interest will begin to roll into the portfolio in March–with luck (and a little skill) we will see if we can get into the black as we are already down $250 (2/10ths of 1%) in February and we fully anticipate a difficult year for income investors of any sort.

1347 Property Insurance Holdings Sells a New Preferred

Newer, small property and casualty insurance company 1347 Property Insurance Holdings (NASDAQ:PIH) has sold a issue of preferred stock with a 8% coupon.

The new issue has a 5 year optional redemption period starting in 2023 and terms are the normal terms EXCEPT the issue is cumulative which is unusual for an insurance company as most insurance companies are issuing non cumulative shares so they can be counted as tier 1 capital.

1347 does business around the gulf coast and primarily in Louisiana, Texas and Florida. Obviously this is a lucrative market when there are few storms around–of course a great business can turn into a disaster pretty quickly and this little company specializes in homeowners insurance, wind/hail insurance and manufactured home insurance–all areas that can be dicey in the markets they serve. They have 50,000 policies in effect.

Make sure to do plenty of due diligence on this one prior to purchase.

Details of the issue are here.

Shares start trading on the OTC Grey market today under the temporary ticker PPNSP.

Sotherly Hotels Baby Bond Purchase

Last week when we wrote about the new Sotherly Hotels new 7.25% baby bonds being issued with a 3 year maturity we stated we planned to purchase shares as it is not often you get a decent issue with such a short maturity date.

We did purchase 200 shares on Friday at $25.55.  We had an order in for 500 shares at $25-$25.10, but with little volume trading we moved (2) 100 share orders up to $25.55 to see if there were actually shares available–there were a few and we filled the 2 orders.  We did not re-enter orders for another 300 as we thought they might be available today at a better price.

Today shares are trading at $25.70–around 4 or 5,000 shares this far.  Honestly we don’t think these will be trading much cheaper in the days ahead–the issue is too good–underpriced.

Note that the issue has an optional redemption period in 1 year so they could be redeemed at that time–thus it has a immediate call risk–BUT the early call would be at 101% plus accrued interest so at this moment the call risk is 45 cents.  This means the yield to worst would be in the 5.5% area if early called.

We will lay back for a few days and see if we can garner a better price, although as mentioned above we don’t think it will get too much better.

Monday Morning Kickoff (on Tuesday)

Last week was a bit of a quieter week that previous weeks with equity prices moves somewhat less violently and interest rates moving above 2.90% but were unable to close the week at the high, instead closing in the 2.88% area. Part of the reduction in pressure on the rates may have been that the FED was a net purchaser of assets by $14 billion and for the month of February. This means that the plan of reducing the balance sheet by $20 billion a month is off just a bit so far–like $35 billion for the month as the month was a net $15 increase in the first 2 weeks. We will just have to wait and see what transpires in the weeks ahead.

For the shortened week ahead there is no really important economic data to be released. On Wednesday we have the Purchasing Manager Index (PMI) being released and the Leading Indicators on Thursday and we would be shocked if anyone attached much immediate importance to these items.

Even as interest rates stabilized, more or less, preferreds and baby bonds were off 3 cents but the number of issues trading under $25/share actually was at 212 versus 223 the week before. We use these numbers only to highly any large moves in shares – more minor moves simply show that averages are just that averages.

There was just 1 new issue which began trading last and that was the Sotherly Hotels 7.25% baby bond (NASDAQ:SOHOK) which traded a measly 652 shares on Friday, of which 200 were shares we bought (more on that purchase under a separate story). Until we see some trading tomorrow (Tuesday) we are not sure of what to make of this issue, but we highly suspect that the issue is mispriced and the supply/demand will keep the price high. Really a decent baby bond with a 3 year maturity and a 101% early redemption premium should have priced in the low to mid 6’s–oh well we shall see.




This week we will be looking for a purchase in each of the 2 models portfolios. In the High Yield Model we will be considering a mortgage REIT preferred–which one we don’t know and while we will have to buy a perpetual we hope that the reward will help compensate for the risk.

We will also look for a purchase in the Short/Medium Duration Income Portfolio after adding a couple issues last week.

Stock futures are off a bit tonight–totally meaningless with the multi hundred point swings we are likely to see all through the coming week.  The 10 year treasury is trading about 1 basis point above last weeks close at 2.89%.  Key for this week will be seeing if the 10 year trades firmly above 2.90% and closes in the 2.93-2.95% are which signals we are going to stay above 2.90% with the next move set to be 3%.

We Have Added a Short/Medium Maturity Income Issues Page

We have added a page which we call the Short/Medium Maturity Income Issues page. This is an important page to us because this is where we spend our time. It is where we invest–for the most part.

This page includes term preferreds and baby bonds maturing within a 10 year time frame. The closer the maturity date the less volatility the issue should exhibit. It should be noted that companies with financial issues, such as the REIT RAIT Financial Trust (NYSE:RAS) the baby bonds will trade based on the financial fortunes of the company.

The majority of what we own personally are issues that are contained on this page.

 

BDC Newtek Business Services Prices Baby Bond

Newtek Business Services (NASDAQ:NEWT), a BDC (business development company) has priced a new baby bond issue with a coupon of 6.25%.

The 2 million notes will have a maturity date on 3/1/2023 with an early call available starting 3/1/2020.

At this time we have not had time to review the issue in full so we don’t know if we will be a buyer.  In general the coupon is a tad bit meager for us.

Further details are here.

We note that the company will be partially or fully calling the 7% notes outstanding (NASDAQ:NEWTL).  These notes have been callable since 4/2017 and mature in 2021.

Sotherly Hotels Baby Bonds to Trade Today

The new 7.25% baby bonds of lodging REIT Sotherly Hotels have been loaded into the brokerages quote system so we expect they will begin to trade today.

Note that there is a chance that some online systems may not recognize the ticker (SOHOK) today and you have to wait until Monday.

Our intention is to buy for models as well as personal accounts.  The issue has a 3 year maturity and this short maturity date and reasonably good 7.25% coupon makes this one a strong buy for us.

 

Adding a New Issue to the Medium Duration Income Portfolio

We have added a new issue to the Medium Duration Income Portfolio.

We added a full position of Saratoga Investment (NYSE:SAR) 6.75% notes due 2023.  Of course building a portfolio at this time one ends up having to pay over $25 for the shares, but given the parameters of this portfolio we are better off making timely investments instead of waiting for a better price, which may or may not ever come.

These notes (NYSE:SAB) have a early call date of 12/21/2019 with maturity on 12/30/2023

We chose this note because a quick review of SAR shows that the majority of the loans they make are senior liens and have floating rate interest rates (84% are floating rate) attached to them.  The company has had fairly good financials in the last year or two.

With this purchase we are just over 50% invested, but with the soon to trade Sotherly Hotels baby bond (at least we hope it trades soon) we will be 60% invested in this model.

Interest Rates Back Below 2.90%

After breaching the 2.90% ceiling yesterday and trading up to 2.92% the 10 year treasury is trading at 2.88%.  Kind of a surprise, but just wait–it will change.

Utilities and REITs are up a tiny amount, while preferreds and baby bonds are treading water–guess that is better than lower, but we are relatively convinced (in our minds) that rates will move higher any second.  As we have conveyed before we don’t believe it matters at all what the FED does as the runoff of balance sheet assets will put a floor under the 10 year treasury.

We are taking the time today to identify a purchase for the Medium Duration Model Portfolio–maybe even 2 purchases.  We will post these before midnight (we do most of our work in the evening).

We are impatiently waiting for the new Sotherly Baby Bonds (NASDAQ:SOHOK) to start trading–should be anytime now, but we are not showing it on Fidelity or eTrade at this time.