Medium Duration Income Portfolio Performs Well-Corrected

We are now about 8 1/2 months into the 1st year of the Medium Duration Portfolio which can be seen here and the model has performed almost exactly as expected.  The portfolio is up 4.13%

Recall that we have always put together model portfolios on our various websites.  These serve the primary purpose of educating newer investors to investing in preferred stocks and baby bonds, although they also serve to help us personally determine what will work for us.

In the case of this model we attempt to earn a decent return (not spectacular–just decent–say 6-7%) as compared to municipal bonds, CD’s and other lower yielding instruments.

It is required that securities held in his portfolio have maturity dates or mandatory redemption dates within 10 years–although we would prefer 5 years.

Issues within the portfolio are not traded unless there is an obvious reason to do so.  This is because most investors do not either have time or do not have the desire to trade day to day–they are happy with a fair return.  No capital gains are likely to be realized in the portfolio.

We should note that there is 1 issue, the Gabelli Go Anywhere Fund preferred–GGO-A, is a puttable preferred–without a maturity date.  We are able to hold shares in this portfolio as we may ‘put’ them to Gabelli in either 2019 or 2021 for $40/share. After 2021 the shares become perpetual.

We have just finished a quick review of this portfolio and do not see any reason to make any changes in the portfolio at this point in time.

 

 

Hartford Financial Prices New Preferred

Hartford Financials Services Group (NYSE:HIG) has priced their new preferred offering with a coupon of 6%.  While we haven’t drilled down into the financials this would seem a bit stingy for an issue that is marginally investment grade–in a rising rate environment.

The expected rating of this issue is Baa3 for Moodys and BBB- for Standard and Poors.  Both of these ratings are just 1 notch above junk.  Of course the issue is non-cumulative, but qualified for preferential tax treatment.  It has the normal optional redemption starting in about 5 years.

The pricing term sheet can be read here.

Like all marginal coupon perpetual preferreds we have no interest, but also like all of them we will keep an eye on them, because we would have an interest with a current yield of 7% (we likely are delusional on this happening anytime soon).

For all who might be interested the shares should trade on the OTC Grey Market starting tomorrow under the temporary ticker HIGJL.

Hartford Financial Offering Preferred Shares

Insurance company Hartford Financial Services Group (NYSE:HIG) will offer a new issue of non-cumulative preferred shares.

All of the terms for a financial (Insurance) company issue are typical–non-cumulative, quarterly payments and optionally redeemable in about 5 years.

The permanent ticker will be HIG-G when the shares trade.  The OTC Grey market ticker has not yet been announced.

The company has no other outstanding preferred issues, but they do have a high yield fixed-to-floating baby bond debenture (NYSE:HGH) outstanding.

The preliminary prospectus for the new issue can be found here.

Priority Income Fund Term Preferred Trading

The new issue from CEF Priority Income Fund is now trading.  The ticker is PRIF-B and the issue carries a coupon of 6.25%.

The new issue is trading at a current price of $24.22 for a current yield of 6.45% and the issue has a mandatory redemption in December, 2023.

The CEF has an older 6.375% issue (PRIF-A) trading and it is at $24.68.  This issue matures in June, 2025.

Priority Income Fund is a non traded Closed End Fund and has a history that has been fairly marginal.  The preferred shares do have to have the 200% asset coverage ratio which helps lend some safety to the issue in spite of the marginal financials.

The prospectus can be found here.

Monday Morning Kickoff

Last week was certainly very exciting as the DJIA traded in a range of 24,442 to 25,561 before closing at 24,688 for a loss of near 800 points for the week.  The 10 year treasury had plenty of movement as well over the course of the week moving between 3.06% and 3.20%, but on any given day only moved a few basis points.  The 10 year closed at 3.08%.

Last week we had a mixed bag of economic news, which has been typical of late, but the important news was contained in the ‘beige book‘ from the Fed being released on Wednesday and the 1st look at GDP was released on Friday.  The beige book described most economic issues as being moderately strong–instead of any items being described as very strong or overheating–to read this report one would say that the ground work may be being set for slower rate hikes after December–I believe December is pretty well baked in but after that point we could see a pause or only rate hikes as demanded by very strong data.  The 1st look at the GDP data was pretty much as expected being up 3.5%.  There were bunches of Fed presidents that spoke last week so as usual we had all sorts of conflicts in points of views–nothing new here.

This week we have Personal Income and Expenditures released on Monday – and they were released at levels expected with wages moderate and spending outpacing wages.  Tuesday we have an important long term indicator being released from the Conference Board — Consumer Confidence.  This number was last released at the 138 level and is expected at 136 for October.  Remember the consumer drives the economy and weak numbers here are meaningful–longer term.  The question is if the soft housing market and gyrating stock market are hurting confidence.  Wednesday we have the ADP employment report and on Friday the ‘official’ government Employment Situation report.  190,000 jobs are expected to have been created, but of course we have hurricanes to deal with so we wouldn’t be surprised if the projections are more off the mark than normal.  The Employment Situation report contains a hourly wage number of some importance as we have waited years for wages to move sharply higher–we likely will be waiting more time.

The Fed balance sheet moved lower by a measly 2 billion last week.  That makes 3 weeks in a row that there has been little movement in the balance sheet.  This likely means we will get a larger drop this week or next, but one would have to analyze the Feds holdings to know what is maturing soon.  But what we do know is these small run offs are helping the longer term interest rates remain low.

We had no new income issues announced last week at all.  It has been a long time since we have had now new issues announced.

The average $25 preferred stock fell in price to $24.20 from $24.27 the week before.  There are 242 issues trading at $25 or below compared to 234 issues the week before.

Hersha Hospitality Preferreds and Common Tank

Lodging REIT Hersha Hospitality (NYSE:HT) turned into quite a disaster this past week and the tumbling commons shares took the preferreds with them.

The company released earnings on 10/23 and while a quick review didn’t find too much to worry about, obviously the marketplace didn’t like them as the common shares opened the week at $19.57 and closed the week at $17.43.  The company pays a common distribution of $1.16/share so has a nice yield of 6.7%.

Here is a chart of the common shares, which are very unloved–and of course caught in the market tumble.





Additionally there are 3 perpetual preferred outstanding and they are as unloved as the common shares. Here are charts of the C, D and E series preferreds. The have coupons of 6.875, 6.5 and 6.5% respectively. Current yield are all in the 7.5% area. For a well run lodging REIT these are pretty decent current yields.

At this time we are not interested as we are trying to stay away from perptuals until at least January because of what we believe is some interest rate risk–but for folks looking for a decent yield maybe these are of interest.










CHS to Restate Earnings Because of Fraud

Cenex Harvest States (CHS) will be restating their earnings for the last number of years as well as net assets because an employee intentionally messed with the cooperatives financials.  Seems a bit strange that a singular person could tamper with financials to this extent (overstatement of earnings by $100-$190 million for years 2014-2018) without it being caught in an audit.

This was announced via a SEC filing today.  As a cooperative they have no common stock trading, but as almost all of us know they have 5 issues of preferred stock trading which you can see on the Master List.

We post this information because there is a slight chance of a over reaction by investors come Monday and for those with an interest there may be a quick ‘sale’ held.  Personally we believe this is a somewhat non-event, but the cooperative has been rather poorly managed in the last couple of years.

The SEC filing can be read here.

The article from the Minneapolis paper can be seen here.

Goldilocks GDP, But Alphabet and Amazon Rule the Markets

Even though we were anxiously awaiting todays GDP report it is Amazon and Alphabet ruling the markets today.

The GDP report came in near expectations at 3.5% and the markets are reacting very little to this particular report.

Amazon and Alphabet (Google) are ruling the equity markets today as AMZN is off $135 and Alphabet is off $52 as I write.  With revenues and earnings announced after the market close yesterday both companies disappointed, primarily with their perceived soft revenues.  We don’t follow these companies so we won’t/can’t really comment much on their results,  although last night after results were announced the shares immediately plunged dragging interest rates with them.

This morning the 10 year treasury is trading around 3.09-3.10% and moved little on the GDP report.  While stocks may move a bunch up and down today it is likely that interest rates will trade in a range of just a couple basis points.

Thus far we have not seen the soft stock market pull preferred prices lower we could see that happen soon if we get a DJIA ‘flush’ of 1000 points anytime soon.  For now we maintain a steady course of investing.

Party Like It Is 1999—At Least for Today

1 day after falling off a cliff the DJIA is in party mode–of course we know that tomorrow brings an important economic number that could send the Dow even higher or it could send interest rates much higher and the Dow much lower.

Tomorrow we have the 1st look at 3rd quarter GDP with a range of 2.6 to 3.8% expected by the smart folks  (hell we can all throw a dart) with an average of 3.3%.  If the number is 4% does that send the Dow higher or lower?  Almost certainly it would send interest rates higher as it would give the Fed an arrow in their quiver for a December rate hike.  If it comes in weak–say 2.5% does it send the Dow higher or lower?  A weak number would likely send interest rates somewhat lower-for now.  Likely something around 3% would probably be met with a yawn.

The other item being released tomorrow is consumer sentiment.  The expected number is 99 which would equal last month.  The range of guesses is 98-100–so pretty tight.  The question is whether the stock market moves and the higher interest rates are putting a dent in confidence–remember that consumers drive the economy so large surprises here are important.

We have been mainly just sitting tight–from an investment perspective.  We have messed with a couple quick flips with REITs Ashford Hospitality (NYSE:AHT) and Independence Realty Trust (NYSE:IRT) both of which we flipped once each for $150 profits–I call these boredom moves.  We do 1000 share positions in these low priced shares when values are hammered lower.  We don’t write about these as they are not investments really—but just like going to Las Vegas with max exposure of $10,000.

Relative to income issues–the real investing–we have pondered a continuing very minor move into super quality issues (think CEF preferreds).  We think over time as rates rise and near a peak we would love to own a pot load of these preferreds, but right now the max current yield is in the neighborhood of 5.80% and we really want 7% (likely wishful thinking).  We do already hold a couple of super quality issues like the AllianzGI preferreds which have come to market lately at 5.50% and 5.625% respectively.   When we do this we are well aware of the interest rate risk, but over time a minor capital loss is covered by dividends received.  Readers know (I think) that I am extremely conservative and I like the safety of CEF preferreds–even with the likely capital losses.  I don’t mind the capital loss–as long as it remains minor.

For now we are pretty loaded with our term preferreds and baby bonds and honestly believe that it will be January before we get serious about any large scale portfolio moves–as they say it is ‘data dependent’.

Another Exciting Day for Investors

Well that was one heck of a close on the DJIA–a couple hours ago one would have thought it was a ho-hum day so going from ho-hum to down 600 is quite a wake up call for common stock owners.

It appears that investors are now taking negative economic number seriously for a change.  Just Tuesday (I think) some readers and I were speculating a bit on whether GDP on Friday would boost interest rates higher–I commented whether a strong number would boost the 10 year over 3.2%.  Lo and behold the 10 year fell a bunch today to as low as 3.11% today and now is right at 3.12%.

Today we have very soft new home sales numbers–that is not a surprise to us as we have commented many times recently.  Higher rates and in particular crazy high prices are starting to bite pretty good.  A few weeks (or months) ago this number would have been shrugged off by the markets.  In a market where marijuana stocks such as Canopy Growth (NASDAQ:CGC) command market caps of $8 billion on revenue that equals 3% of the market cap–what could go wrong?

Well we can’t really forecast the future of common stock prices, but this market looks pretty sickly.  As long as it doesn’t ‘bleed’ into the preferred arena I am more than happy.

As a almost strictly income investor it kind of feels good to watch the common stocks get spanked—us income investors have had our turn at spankings so this starts to even the score a bit.

Uhaul Investors Club Increasing Coupons

For those that are participating in the UHaul Investors Club coupons are moving higher.

Amerco (NYSE:UHAL), who is the parent of UHaul, has filed a new prospectus that includes issues with coupons that are around 20 basis points higher than those currently offered.  It is likely to be a month or so before the new notes become available.

The prospectus is here.

For those not familiar with the UHaul Investors Club it simply is a secured note sold by Amerco.  The notes are sold right off of the company website linked above and investors can have IRA or cash accounts.  At this time coupons range from 3% to 7.75% with maturities from 2 to 30 years.  Investors receive payments quarterly from the company for their notes and the payment includes interest and principal–unlike a typical bond with interest only payments and the balance at maturity.

Disclosure–we currently have $6,000 in our UHaul IRA’s as we became aware of this vehicle from kaptain lou earlier this year so we began to fund our IRA for 2018 in UHaul.  So far we have been very pleased with our investment and are happy to see them increase coupons.

Minimum note purchases are $100 so as payments are received one can turn right around and reinvest if so desired.

Like all investments potential investors should do due diligence on Amerco prior to purchasing these notes.

Of course we do not recommend purchases to anyone, but we find it a convenient form or diversifying our holdings.

 

Stocks Set to Move Sharply Lower

The DJIA is off about 400 points as we write. This is a continuation of the move lower from last week.  It is interesting that no particular reason is seen for the move–no real catalyst.  A few Dow stocks are moving sharply lower–3M and Caterpillar helping to drag the average lower, but beyond that no singular items appears to be responsible for the fall.

Interest rates are moving a bit lower – the 10 year is in the 3.15% range, but it is moving grudgingly – no wholesale movement.

While no one can really pinpoint exact reasons for movements in stocks and bonds on a day to day basis, I believe that higher interest rates are the culprit behind stock weakness.  It only makes sense that investors like us are much more likely to hold cash (i.e. CD’s, money markets etc) when we are able to garner returns of over 2%.  While it still seems like a low interest rate we all know that earning 50 cents a month on cash holdings of $50,000 (or some such number) was down right depressing.

At this point in time we are not concerned with our preferred stock and baby bond holdings as the equity selloffs have not been strong enough to drag all issues down, BUT if we get a 1000 point Dow selloff on a given day we are likely to see some damage to income issues as the nervous nellies exit the markets and are satisfied to sit on the sidelines to earn 2-2.5% on their cash holdings.

As we mentioned 2 weeks ago if an income investor is selling anything at this time it would be good to gather a bit more dry powder simply to have available if we get that 1000 point Dow down days which creates some bargains in the income arena.

Don’t forget that an easy way to watch damage to preferred stocks is on this page which lists issues from highest daily loss to highest daily gain.  This page has turned out to be one of the most popular pages on the site.  When looking at this page one would be wise to not the volume traded as some move sharply on maybe 100 shares traded.  A better indicator of the move lower is higher volume.

Monday Morning Kickoff

Last week stock investors had another somewhat wild ride as the DJIA traded in a range of 25,244 to 25,818 before finally closing at 25,444.  The 10 year treasury traded in a range of 3.14 to 3.21% before closing the week at 3.20%.  The 10 year is acting like it wants to close above 3.20% and there is no reason to think that it will drift down too much this week.

Last week we had mixed economic signals–although tending more toward strength.  Retail sales for September were weak with a gain of .1% against consensus of plus .6%.  The Empire State Manufacturing report was a fair amount above consensus and Industrial Production for September was also fairly strong. The Housing Market Index was up a tic after being weak in recent months.  The strongest indicator of the week was the JOLTS report (job openings and labor turnover) which showed a very solid 7.1 million job openings with just 6.2 million job seekers available to fill the positions–this should scream wage inflation, but we haven’t seen it yet.  Housing starts remain fairly tepid and mortgage applications continue to fall–as I would expect as interest rates of mortgages rise.  Also on Wednesday last week the FOMC minutes for last months meeting were released and struck a hawkish tone as there is discussion of higher rates above the neutral level (whatever one believes this level to be).  Lastly Existing Home sales were released on Friday and were weaker than consensus.  I don’t think anyone should believe that housing will be overly helpful in keeping the economy afloat–interest rates and in particular crazy high prices are really going to pinch the markets over the winter and as we enter next spring we may be looking at some pretty soft numbers.

For the coming week all eyes are focused on GDP for the 3rd quarter.  This number will be released Friday morning and consensus pegs it at a plus 3.3%.  The range of ‘guesstimates’ is pretty wide with the low end being at 2.6% with an upper limit of 3.8%–of course a release out of this range will move markets.  Beyond this economic release the stock market will be watching earning releases as there is a very earnings calendar this week.  Interest rates should remain fairly tame, but there are 10 Fed presidents giving speeches and markets will be somewhat sensitive to the baloney any one of them may spew.

The Fed balance sheet fell by just $1.5 billion last week which is the 2nd week in a row that there has been no (or little) run off.  We expect that the run off will in turn show some larger run offs in the weeks ahead adding a little pressure to interest rates.

The new issue offerings last week were fairly sparse with CEF Priority Income Fund offering a new term preferred with a maturity date in 2025 and a coupon of 6.25%–we find no OTC temporary ticker for this issue yet.  LNG ship owner Dynagas (NASDAQ:DLNG) offered a fixed to floating preferred with an initial coupon of 8.75% and a floating rate of 3 month Libor plus 5.59% starting in 2023.  Both of these coupons seem a bit low to us (every issue is low to us).  This new issue is trading with a OTC temporary ticker of DGAGF and is trading at $24.67 at this time.

The average $25 preferred share rose last week to $24.27 and there are now 234 issues trading at $25 or below.  This is a pretty typical price pattern after sharp selloffs.  1st comes the sharp selloff and then a week later shares tend to stabilize and move slightly higher as calmer heads prevail and investors way for further news on the economic front.

 

Rates Pushing a Bit Higher

Interest rates have pushed up a little in the last 24 hours as the FED FOMC minutes show they are likely to push rates higher in the months ahead.  Rates creeping higher is fine with us–but lets skip the 20 basis point jumps in a few days—let’s do 1 basis point a day for a week.

With the strong JOLTS (job openings and labor turnover) on Tuesday we think that one vote for higher rates is in for a December rate increase.  From our perspective absent a black swan the December Fed Funds rate hike is going to happen.  Anything after that is totally data dependent.   

In spite of the non stop trashing of the Fed by the talking heads I don’t believe that any sane person will push rates to the point of causing a recession–we will have a recession, but it is not the fault of this Fed–the punch bowl has to be removed sooner or later and it should have been removed years ago (or alternately the balance sheet run-off should have started years ago).

We will be on the road most of the day so will miss any potential fun today–oh well there will be plenty more ahead.

Conifer Holdings Baby Bonds Trading

Our sleuth Eugene has noted that the Conifer Holdings (NASDAQ:CNFR) 6.75% baby bonds are now trading (or will be shortly).

We have checked eTrade and the symbol (NASDAQ:CNFRL) is active, but it is not showing trading–Fidelity it not showing it active yet.

CNFR is a small specialty insurance company which we could compare in size to Atlas Holdings, which also sold a baby bond this year.  Both have just around $100 million in revenue.  Atlas sells insurance into the specialty auto sector, while Conifer sells to ‘mom and pop’ in the ‘main street’ businesses.

At this time Conifer is incurring small losses in their businesses, but experience shows that they will be able to get to break even or better in the next year or so.  We have not done a deep dive on the companies financials at this time–just a quick skim.

Our interest is the 2023 maturity–but we would only be interested if it trade down a buck from $25 bringing our yield to 7%ish or more.

Further details and prospectus link are here.