Adding a Baby Bond to the High Yield Portfolio

We have added the B. Riley 7.50% baby bond (NASDAQ:RILYZ) to the High Yield Portfolio.

This is the last item we are adding for a week or two as the portfolio is 74% invested and we are looking for a Fed Funds rate hike on March 21st of 1/4%.  While the movement of short term rates doesn’t directly affect long rates we are still cautious.

We added the B Riley issue noted above to add another bit of diversity to the portfolio.  RILY has generally performed well, but they have undertaken a couple of large acquisitions in the last year and ‘digestion’ is still taking place.

This particular issue doesn’t mature until 2027 which is further away than we would prefer, but the other 7.50% B Riley issue was trading at a higher price with a lower current yield so this was slightly preferred–although an investor could flip a coin between the issues.  It is noted that the RILYL issue (the other 7.50% issue) does become optionally callable in October of this year–but we don’t believe there is high likelihood of a call.

 

 

Adding Shares to the High Yield Portfolio

Today we purchased a full position in the High Yield Portfolio of the mREIT Chimera Investment Corp 8% Fixed-to-Floating rate preferred.




This issue was issued about a year ago and does not enter its floating rate period until 2024. We had to pay more than we really would like to pay ($25.69), but the issue goes ex-dividend tomorrow so we will pick up a quick dividend.

This issue was chosen for a few reasons. Being fixed to floating rate is helpful in the potential face of rising interest rates. Additionally Chimera is a moderately sized mREIT with good management–financial performance in the last couple of years has been reasonably good. The REIT is internally managed which is almost always a positive versus being externally managed. The spread when the floating rate period arrives is 5.791% which is a decent spread.

Be aware that while this is a fixed-to-floating rate issue the floating period being 6 years out will provide only very modest volatility protection for the next few years–thus the issue is susceptible to capital losses if (when) interest rates move higher.

With this purchase the model moves to 64% invested and we will be adding a baby bond in the next couple of days to take us to near 75% invested where we will take a pause before determining the next move.

Markets Tumble as Rates Rise

Geez what a difference 1 day makes. The talking heads were pondering the plateauing of interest rates just yesterday. So of course rates jump and the Fed chair says they probably will move forward with 3-4 interest rates hikes in the coming months barring soft economic data–gee what a surprise–NOT. This is what they have been saying for 6 months. Whether we agree or not that is their plan.

No surprise to us and no damage was done to our holdings by the tick up in interest rates–they closed at 2.91% today. Fed Chair Powell will testify at the Senate on Thursday.

We made 1 purchase today and we will write further at length tonight on our thoughts on the purchase.

These Markets (and investors) are Dazed and Confused

I seldom watch CNBC because all they do is make up shit to talk about–no substance just a lot of time to fill I guess.

As I flipped by the channel today they were discussing whether the 10 year treasury had ‘peaked’. What the hell are they talking about? Peaked for the month of February maybe, but talk of peaking interest rates is pure silliness. Sure the numbers move around but you would have to be a fool to believe that rates have peaked. We know that in March short rates are going to get bumped 1/4% higher. We also know that the Fed still claims they are tapering $20 billion a month right now and that the treasury has to raise about $75 billion in new money for the balance of 2018–how the hell are rates going to fall when $95 billion a month is needed through May and then more than that going forward. It is no wonder investors are continually confused.

Today the 10 year treasury did fall down to 2.84% before closing at 2.87%. Soft new home sales numbers were the culprit of the day–maybe this is what set off the silly talk on CNBC. Analysts seemed surprised about the soft numbers–but as I have watched prices of new construction rise it is no surprise to me. In rural Minnesota you have to spend $350,000 to $400,000 to build a modest house on 5 acres and in town the bare bones starter house is $225,000. While this doesn’t seem like a steep price to folks in California in this area where most folks make $20/hour it is a bunch of money–no wonder sales are soft.

Today we didn’t make any purchases in the model portfolios as we have been working on getting the floating rates and fixed to floating rate preferred table completed. Maybe we will make a buy tomorrow–we will be buying a higher yielding mREIT preferred for the the High Yield Portfolio which will give a new sector representation in the portfolio.

I want to watch Fed chair Powell as he testifies before the House and Senate Tuesday and Thursday to see if his tone is any different from Yellen. Certainly this is as important as any economic data that will be released this week. He could easily send rates to the low 2.80’s or back over 2.90% – we shall see.

Monday Morning Kickoff

After a strong finish last week to the income security markets what will the week ahead bring us?

Last week was a shortened trading week because of Presidents day, but when the week did get underway on Tuesday it looked like interest rates would hold fairly firm in the 2.90% area. Wednesday brought the release of the FED minutes from January which sent the 10 year rate higher–to the mid 2.90’s based upon nothing new at all—no information that was not already known or believed. Thursday rates held firm in the lower 2.90’s. Friday saw rates fall into the 2.85% area before finally closing at 2.87%. All of this 10 basis point range movement was based on no new economic information, but rates (and traders) will drive prices around anytime it suits them.

This week we see the 2nd estimate of 4th quarter GDP on Wednesday and this is not likely to be a market mover as it is likely to be just a tiny bit plus or minus from the previous estimate and barring a total screw-up this won’t be a mover. On Tuesday the Durable Goods Order report is released, Wednesday is the Chicago Purchasing Managers index (PMI) and on Thursday we have Personal Income and Outlays report and the ISM Manufacturing Index. None of these items has historically moved markets–but who knows.

Fed Chair Jerome Powell will be testifying to the house and senate this week on Tuesday and Thursday and this has some potential to move markets if he testifies to congress in a manner that conveys information that is contrary to popular belief.

With the fall in the 10 year treasury yield on Friday of last week prices bounced in the income market. The average price of a preferred share moved up by 12 cents to $24.99/share and there are now 204 issues priced under $25/share compared to 212 last week. REITs moved higher the end of the week and the beaten down issues, such as KIMCO (NYSE:KMI) move nicely higher off of very low levels.

We only had 1 new issue last week and that was from tiny, newer insurance company 1347 Property Insurance Holdings (NASDAQ:PIH). The new 8% cumulative preferred is supposed to be trading now but we can find no evidence of actual trades taking place. This is one which much be checked very closely by potential investors before deciding to take a position as PIH is a very small company with limited operating history.

We made purchases in both the High Yield Income Portfolio as well as the Medium Duration Income Portfolio last week.  The High Yield Portfolio is at 54% invested while the Medium Duration Portfolio is at 77% invested.We will add to the High Yield Model this week, but likely will hold off on the Medium Duration Portfolio.  We will begin earning some dividends and interest in these portfolios in March which will help to alleviate losses caused by higher interest rates.

Also this week we will have our fixed-to-floating rate preferred table posted.  In conjunction with short/medium maturity securities, fixed-to-floating rate issues are where we think the best values lie–or at least where investors need to look to combat rising interest rates.

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.