Monday Morning Kickoff
This is the 1st of what we hope is a regular feature each week as we look back on the week just past and into the week ahead.
Last week the 10 year treasury opened the week at 2.66% while closing the week at the same level. During the week rates wiggled in a 2.61% to 2.68% range. This is about what we expected given that the 2.67/2.68% level is where technicians peg resistance and we would claim that the run off of securities by the Fed will put a floor under rates. While we generally don’t pay attention to technical analysis it does pay to understand what they are saying about various levels of resistance as rates move higher. While technicians are claiming that a move above 2.67/2.68% is likely to propel rates into the 2.80% area, investors apparently think this is rubbish as retail investors have plowed $36 billion into bond funds thus far in January according to Trimtabs. Doesn’t quite seem to make sense to us as we have advocated short duration securities be bought in the face of increasing interest rates and we are not generally going to change that point of view in the next number of months. Maybe individual investors are willing to take slightly higher rates to increase their income stream at the risk of capital loss.
GDP for Q4 2017 was released at 2.6%, which seems kind of Goldilockish–not too hot and not too cold. On the face of it I guess it could be argued that this kind of growth doesn’t warrant Fed Funds rate hikes but this is just the first ‘cut’ on this number and it will be revised a couple more times. Additionally the price index contained in the GDP report showed an increase of 2.5% annualized which is ‘hotter’ than previous quarters and is watched by the Fed. This report was released at 8:30 a.m. on Friday so the bond market had a chance to digest the report and obviously didn’t react too much to the report. The report press release is here.
Last week we had a few new (or reopened) income issues announced or priced.
On Monday Jernigan Capital (NYSE:JCAP) announced pricing on a new 7% cumulative redeemable preferred stock. Being a REIT distributions are not qualified distributions. JCAP is somewhat of a specialty mortgage REIT, as they take equity positions in the self storage projects they finance. Charting of the initial action in shares can be found here. Shares are trading on the OTC grey market under the ticker JERCP at $24.85/share.
Electricity and natural gas retailer Spark Energy (NASDAQ:SPKE) reopened their Series A issue with 2,000,000 new shares. The SPKEP issue, which is a fixed to floating rate issue has an initial coupon of 8.75% and had traded as high as $27.25 in late December but has fallen to a close Friday of $24.60/share. High yield hunters may want to take a look at the shares now. Details are here. Distributions are qualified for the lower preferential tax rate
Late in the week container ship owner Costamare Inc. (NYSE:CMRE) announced and priced a new 8.875% cumulative, redeemable preferred stock. Shares should have begun trading on the OTC grey market on Friday under the temporary ticker of CTMMF, but we were not showing it on eTrade or Fidelity when we looked late Friday. Trading should get under way in earnest on Monday. We are looking to a possible buy, for either a modest ‘flip’ or maybe a longer term holding on Monday if we can get the shares around $25/share on the OTC market. Costamare has 3 other preferreds outstanding with coupons of 7.625%, 8.50% and 8.75% which are trading at $24.49, $25.18 and $25.48 respectively.
Very late Friday Hoegh LNG Partners (NYSE:HMLP) announced an ‘at-the-money’ offering of common units and preferred stock units totaling $120 million. The preferred units will be units of HMLP-A which is currently outstanding and which has a coupon of 8.75% and which is trading strongly at $27.15/share at Fridays close. No specific number of shares of the preferred are alloted to be sold, but we will watch to see if the share price gets knocked down Monday. If shares take a good hit we will be buyers as the shares go ex-dividend on 2/7 with the payment of an outsized initial dividend of 79 cents paid 2/15.
To recap, specialty finance mortgage REIT, Jernigan Capital sold a reasonable 7% redeemable preferred, Costamare is selling a high yield preferred, Spark Energy reopened a high yield fixed to floating rate issue which cratered the preferred stock price and Hoegh announced an ‘at-the-money’ offering of preferred stock units which may not be well received. Investors open to the higher risk these issues carry may have some potential buys in the coming days.
The average preferred stock price ($25/share issues) moved lower by 2 cents last week. We realize that there are individual issues that moved up or down by 1%, but in general share prices were near flat. Big moves either up or down by large preferred issuers such as beleagured AmTrust Financial (NYSE:AFSI) can move the average share price by a penny or two.
Of the 438 $25 preferred stocks that we follow 162 are trading under $25/share. This is down by 8-10 issues in the last week.
Of course this week we have the FOMC meeting ending on Wednesday and while no interest rate hike is expected (per the CME Fedwatch tool there is a 4% chance of a hike) the statement made on Wednesday at 1 pm central will be closely watched for hints as to the FEDS future plans. Additionally we will be watching Friday for any more substantial quantitative tightening through balance sheet ‘runoff’. We watch the balance sheet of the Fed here–chart is updated each Friday. Thus far the ‘runoff’ of the balance sheet has progressed at a very mild pace–about $10 billion/month since the high point in October. The Fed is now supposed to move up to about $20 billion/month starting next month–that is quite a bit of buying power leaving the marketplace and will minimally serve to keep a floor under interest rates.
On Friday we have the somewhat important employment report for January and the consensus numbers for non farm payroll growth is modest with no change to the unemployment rate. Only major deviations from the consensus will move markets.
Tonight, Sunday, we see that the 10 year treasury has bumped up to 2.69% before moving to a firm position at 2.68% where it is at midnight. We are watching this closely for any movement higher than this area.