Author: Tim McPartland

Well it has been a somewhat decent week–for common stocks and for income issues. Of course we had important economic news with the FOMC meeting and Jay Powell presser which markets decided was somewhat dovish–all news was good news I guess.

Interest rates as represented by the 10 year treasury have fallen a bit through the week—but the reduction was minimal given the rise in the S&P500. The 10 year treasury is at 4.27%–down a measly 3 basis point from last Friday–with the dovish Fed news one could have expected a 10 basis point reduction in yields.

The S&P500 is up almost 2% on the week and equity futures are up a bit this morning. One has to feel like equities are overvalued–but honestly compared to valuations we have seen in the past–huge price/earnings ratios–40, 50 and 60 times this market is just a bit overvalued and those traders who go short the ‘market’ may see bunches of pain ahead. Of course something could ‘break’ at any time, but as always one who invests in preferreds and baby bonds doesn’t want to see a huge equity tumble–it is not helpful to anyone. When one looks at the amount of ‘dry powder’ available that could move into the equity markets I think there is a higher odds of a ‘melt up’ than a ‘melt down’.

I see Brookfield BRP priced a new issue of perpetual subordinated notes last night–7.25%. The pricing term sheet is here. These are investment grade, but being a Canadian company interest payments are subject to 15% withholding in some acccounts.

Also last night JPMorgan put out a redemption notice on a bunch of $1,000/share fixed to floating preferreds–the press release is here.

I am back in the office after 6 days out and will do a little buying today–not sure which issue–we will see–lots of near cash on hand (money market). Accounts continue to hit almost daily new highs as giant sized CD maturities hit–most of which pay interest only at maturity

While we know there will be no Fed Funds rate cut today we don’t know what will happen at the press conference which will happen at 1:30 p.m (central). Are markets ready for some ‘I told you so’ from Powell. At each press conference on previous FOMC days Powell has warned of reigniting inflation so now he can thumb his nose at the so called financial reporters at the press conference. We know that there will be no promises of rate cuts–the only question I have is how much of a hawkish tone he will set. We’ll see-no one knows.

This morning markets are eerily quiet–when the DJIA, S&P500 and NASDAQ all are trading with less than a 1/10% movement you know markets are prepping for big news. I would be shocked if interest rates moved more than a couple basis points lower today–but not surprised if it moved higher. I have no illusions great bargains being created anytime soon in the income issue arena–no visible catalyst.

Lots of cash, in particular in the Fidelity Government Cash Reserves (FDRXX) @ 5.02% today–waiting for a more permanent home. That 5.02% certainly removes the urgency to invest quickly–no all bad taking time to ponder moves.

Interest rates are pretty steady this morning–the 10 year treasury is hanging out around 4.31%. I suspect they will remain in a pretty tight range until Fed Chair Powell speaks tomorrow.

Of course I didn’t buy anything yesterday–and there is a lot of money now residing in money markets waiting for a more permanent home—certainly some heading back into CDs, but some into higher yielding preferred issues. I am finding myself being kind of lazy when it comes to reinvestment of maturing CD funds – it is so easy to just take a 3 month non callable CD at 5.35%.

So one question I find myself asking is what if we have seen the low in interest rates? I know that sounds silly, but what if we see a weaker economy in the next year and the Fed cuts rates so short term rates fall, but the 10 year remains elevated–it could happen. If the treasury continues to need to raise money in massive ways we all know there is trouble ahead–exactly when trouble arrives is anyone’s guess.

Equity markets are a bit soft right now so it looks like we will reverse yesterdays gains. The average $25 preferred and/or baby bond moved 3 cents higher yesterday–likely will see just a penny or two move today. Then we will see the ‘tone’ of Powell tomorrow and that will maybe move markets–although there shouldn’t be many (if any) surprises from the chair.

For this week I will not be publishing ‘headlines of interest’. I am on the road this week and thus am working only on my chromebook which leaves me with very limited capabilities compared to my windows desktop which I generally use for almost all of my postings.

I am taking a few days off which are the first I have taken since last August, but will be back to normal next week.

Always waiting on something–this time the producer price index (PPI)–interest rates are already up and trading around 4.2% based on the hotter consumer price index announced on Tuesday. So far no real damage done to income issues, but who knows when markets will react. We also have retail sales announced today–a measure of consumer health of sorts–whether equity markets care about any of this is anyone’s guess–‘all news is good news’ seemingly and futures are up decently this morning.

Yesterday I bought additional shares in General American Investors 5.95% perpetual preferred (GAM-B) @ $25.06. This is adding to the safety side of the portfolio–a CEF preferred with over 700% asset coverage. GAM is a plain vanilla CEF owning level 1 assets (level 1 assets are securities where prices are directly observable i.e. stocks and bonds). The portfolio is balanced between high quality issues at 6% or so (on cost) and more marginal issues in the 8% area—all in all 7% more or less. Of course this is just the stocks and baby bonds we own–bunches of the portfolio is CDs etc in the 5-5.6% area.

I mentioned yesterday (or was it Tuesday?) that the current market has been most pleasing to me. I can buy investment grade issues in the 6 or even 7% area, I can get junkier (but decent) issues in the 8% area or I can choose to be in money markets or CDs at 5-5.6% area. For a conservative investor this is the best selection of yielding investments we have seen in years and years. This doesn’t mean I am a super bullish person–like of all of you I see the challenges in the economy and certainly in the government. The last time I didn’t worry about markets was on the Thursday before black Monday in 1987—and then Monday came and all of us were ‘educated’ to what ‘could’ happen. I have found that you can worry–but at the same time understand that burying your money in the backyard is not a viable option.

So I am looking for more issues to buy. I a pondering a taste of one of the Priority Income Fund term preferreds and also 1 more BDC baby bond–I looked at Whitehorse Finance baby bonds–they are OK, but their net asset values have been falling at a rate higher than many competing company’s – we’ll see. Many, many CDs maturing tomorrow and then again on the 22nd–some $$ will get ‘rolled’, but some will need a new home.