Housekeeping Notes

The addition of ‘Yield to Worst’ is complete on the 2 ‘Master Lists’ on the site found on this page.

We probably will be adding ‘Yield to Worst’ on some other lists as well, but we are cautious with adding this calculation intensive piece of data to too many areas as in the past we have found it will degrade site performance.

If you downloaded a copy of these sheets for personal use and want the updated information you will need to copy and save once again.

Note today that the Interstate Power and Light 5.1% preferred has changed from trading on the NYSE to now trading on the NASDAQ–we have updated ticker symbols, but quote providers have not yet caught up so it will be N/A for a couple days.  The OLD ticker was IPL-D  and the NEW ticker is IPLDP.

Monday Morning Kickoff

Maybe the holiday last week helped to diffuse some of the downward pressure in the various markets–or maybe the sellers have simply exhausted their need to sell to lock down losses for the year, but regardless the week ended on a calm note for common stocks.  Preferred and baby bond holders got a bit of cheer on Friday with sizable gains for the 1st time in weeks.

The DJIA traded in a range of 21,792 to 23,382 before ending the week at 22,062.  The 10 year treasury traded in a range of 2.73% to a high of 2.80% before closing the week at 2.74%–we still watch the 10 year treasury, but it has disconnected from its historical relationship with income issues-for now.

Last weeks economic calendar was very light with the holiday on Tuesday.  On Wednesday we had Case-Shiller home price index for October being released as forecast up 5.5% year over year, which shows a slowing of price gains-this should be of no surprise to anyone with higher interest rates and very high house prices.  Consumer confidence for December fell below last month and below expectations-this fall should have been expected since the equity markets getting pounded day after day was leading the news constantly.  Our expectation would be for confidence to fall again in January as individual investors take a look at their 401K statements etc.

For this week we have no economic news on Monday or Tuesday (New Years day), but we have the Purchasing Manager index on Wednesday.  Thursday we have ISM Manufacturing, Construction Spending and new vehicle sales.  Friday we have Employment Situation numbers which includes wage data.  It is expected that 185,000 new jobs were created in December after a surprising very soft number in November of 155,000 which was way short of expectations.  Most economic numbers have been ignored in recent months except those that are very obviously important such as the employment report–I think that this changes a bit with investors beginning to parse all of the data a bit closer.

The Fed Balance sheet fell by $9 billion last week after falling $4 billion the week before.

For the 3rd week in a row there were no new income issues announced–for good reason.  Can you imagine trying to price a new issue and then being unable to sell the shares or having to price at a very high coupon because of market volatility.

Last week the average preferred stock closed the week at $22.50.  There are 318 $25 issues trading at $25 or below–a light improvement from last week because of the bounce last Friday.

 

For the Weekend

Users of the 2 ‘Master Lists” will notice that those 2 sheets are being worked on this weekend.

We are adding a ‘Yield to Worst’ column to those sheets.  This will be the worst realized yield if the issue is called on the 1st available call date.

This means more info–and we are always about more info.  It also means we are doing thousands of more calculations each time the listing is loaded–maybe it will cause a 1/10th of a second slowdown of the page.

For those that have downloaded a copy of one of these sheets (and renamed it) for their own personal use you should download a new copy next week if you want the new added data.

A Nice Calm Day with Bounce

There must not be any catalyst in the markets today to make the computer trading worthwhile as this is as quiet as we have seen the various markets for weeks.  Of course there are a few hours left and we all know that the action can heat up fast and furiously.

It is interesting to note that only 85 issues of 635 issues on our “Near New Low” master page are within 1% of their 52 week low–this would indicate that the majority of issues are bouncing–at least 25 cents.

Preferred stocks and baby bonds are holding some decent gains today-finally.  Gladstone Capital 6.125% notes (GLADD) are up $1.15 to $23.85.  Shippers Dynagas LNG 9% preferred(DNLG-A) and various Costamare issues (CMRE-E and CMRE-D) are all up more than a dollar. The various GasLog Partners preferreds are all up 50 or 75 cents (GLOP-A, GLOP-B and GLOP-C).  Also the hated Spark Energy preferred (SPKEP) is up a buck.

With some bounces today and with a heavy dividend collection on Monday we should see most of our accounts near break even for the year (now in a range of +1% to -2%)–assuming we don’t see more crazy action prior to Tuesday.

We have stayed away from temptation to buy this week and will not buy on Monday–but come Wednesday we will probably by 1 issue of some sort (there is plenty to choose from).

 

 

Up, Down, Up — Mid Day Rambling

We thought the rally in stocks yesterday was kind of a ‘fake out’ and it is turning out to be just that.  We had some gains yesterday, but 50% of those modest gains have evaporated thus far today.

As we mentioned we have been waiting to buy some bargains with nothing bought last week and none this week.  On Monday a bunch of seemingly bargains were created – then they bounced yesterday – but they have fallen again today.  There just isn’t too much of a rush to get into the marketplace.

We have plenty of dry powder laying in money markets–but earning 2.26% in the Gabelli US Treasury AAA-(GABXX) or the Fido Ready Reserves we can certainly drag our feet a bit longer.

Today we have shippers off–but by and large they are retaining some of yesterdays gains (in particular Seaspan).  It is funny today to see some of the insurance companies off quite a bit–Enstar and PartnerRE.  The 7% Landmark Infrastructure Partners fixed-to-floating preferred units are off 79 cents on 8 times normal volume and trading at $19.01 for a current yield of 9.21%.  All of the CHS preferreds (5 issues) are off today giving back some of yesterdays gains and all are trading with current yields of 7.17% to 7.80%.

So with the DJIA off 572 as I write this I sit back and watch–no real hurry is necessary.

 

 

 

Expanding $50 and $100 Preferreds Listing

As we have gone through the gyrations of the last weeks and months we again observe folks who maybe should (or would) consider buying some of the $50 and $100 preferreds out there that currently trade.  Maybe even some of the $1000 issues (and even a couple $20.75 and $25 issues) -unfortunately the $1000/share issues do not have price quotations that we can use in our listings so there is little use in trying to cover those issues.

In light of this interest in these shares we have added the 52 week trading range to the issues and we have added a credit rating column where we simply whether the issue is investment grade.  We have more work to do on the individual security pages, but wanted to remind folks that these issues are an option for the patient investor.

A fair number of the group of $50, $100 and $1000 issues fall into the category of “illiquids”, of which a number of website participants champion on a fairly regular basis.  The concept of “illiquids” is that they don’t trade often (or many shares)–in fact some may only have 1 trade in a year–so if you are fortunate enough to snag a few shares you have something for the “sock drawer” (a spot you put reasonable quality stocks and bonds that pay dividends reliably and may have been outstanding already for 50 or 75 years).  We should note that there are quite a number of issues on this list that trade a fair amount of volume – these, by definition, are not illiquids.

1 particular illiquid from Financial Institutions Inc. is a 8.48% cumulative, non callable preferred (ticker:FIISO).  This is a $100/share issue and trades so infrequently you have to dig pretty hard just to get a quote.  This is a Gridbird special.

Other illiquids aren’t even $50, $100 or $1000 issues.  There is one $20.75/share convertible issue and a $25/share issue–both from tiny Corning Natural Gas.  They trade once in a while.

In the end investors need to realize that the illiquids can be great for the investors that can put them in the ‘sock drawer’ and simply draw income BUT just because they are in the drawer doesn’t mean you can totally forget them.  Small companies like Corning Natural Gas (revenue of $34 million) and moderate sized banker Financial Institutions ($4 billion in assets) obviously have risk and are not investment grade.

Also one should know that because these shares trade so little that when they do trade it may be at a price significantly higher or lower than the previous trade.  This means if you hold an issue that you paid $100/share for may trade the week after at $95 or maybe $105 so you can get a little surprise if you are one of those that baby sit your holdings.

Additionally just because many of these issues trade in small volumes–or maybe only trade on occasion doesnt’ mean they won’t trade lower on higher interest rates–they will.

Disclosure–we personally own the following issues on this listing.

Tri-Continental (TY-) 5% preferred,  Corning Natural Gas 6% (CNIGO) and Connecticut Light and Power 4.96% preferred (CNTHN).  We have owned these for a few years.

The listing can be found here.

 

Mid Day Rambling

After a day off and time to let emotions settle down a bit stock prices have moved strongly higher (probably too strong).  We suspect this is a 1 day gain and we will see much more calm trading after today.

The never ending selling in the income issues appears to subsided and many issues are now going through some ‘backing and filling’–although there are a few laggards that didn’t get hit enough early this week and last week and they have been smacked.  For instance the newer Gladstone Investment 6.125% baby bonds (GLADD) opened the day up 35 cents to $24.95 which must have set off a bunch of small sellers as numerous small trades of 100-400 shares came through and took the price all the way down to $23.10–would think that ‘limit’ orders should have been used?  Buyers have come into the issue and it is now at $24.

Some of the shippers have seen strong buying in their preferreds–Seaspan, Hoegh LNG and Tsakos issues are all up over a buck.  Additionally MLP Nustar Energy preferreds are all bouncing over a dollar.

We checked the CHSCN 7.10% reset preferreds from CHS and the shares are trading at $24.35 (from a low last week of $22.95)–up 67 cents for a current yield of 7.30%–wish we would have bought on the low last week.  This is on our buy list, but we are doing our best to hold off a few days.  We have a number of starter positions in some decent perpetuals, as we mentioned last week, and want to add shares, but this ‘reflex’ rally today in many issues will likely back off a bit later this week or next.

For the time being we are barely watching the 10 year treasury–historically we kept an ‘eagle eye’ on rates, but income issues are not trading based on interest rates right now (rates down, prices up) and other than watching as to whether it is forecasting a recession it is not of immediate concern.

A Lump of Coal for Christmas

Even though we had gains overall today in our accounts as we got some bounce in some of the term preferreds overall preferreds were off another 15 cents (on average).

It will be good to have a day off tomorrow–let some of the rhetoric settle down.  While we do not want to get into political discussions on this website I think most of us can agree that the stupid commentary coming out of Washington is of no help at all.  The ‘beatings’ will continue until this stuff resolves.

We want to wish everyone a Merry Christmas and/or happy holiday.  We always have our 16 kids/grand kids over on Christmas eve so am battening down the hatches a bit.  For us this is the time for the stuff that is important–family.  The poor stock markets will be put aside for the next 40 hours.

Probably No Buying This Week for Us

This selloff has been deeper and longer (in terms of the number of days) than I could have/would have thought it would be–that is obvious as I wouldn’t be holding a full position in GasLog Partners preferred (GLOP-C) if I would have known a downdraft was coming.  While we have 7-8 perpetual preferreds they remain a small portion of our holdings–maybe 10%.

The good thing is that most of our holdings remain in short duration term preferreds, with a good chunk remaining in cash type investments (money markets) although term preferreds have begun to take ‘hits’ as well.  Even the Kayne Anderson 3.50% term preferred (KYN-F) is trading under $25 at $24.86–we hold a massive number of shares in KYN-F, which will be redeemed 4/2020.

3 of our 4 investment accounts are now in the red–one is off 2%, and 2 others are off about 1%–we have 1 account which is up about 1%–disappointing, but not disastrous.

This is a good time (actually it was a good time a few weeks ago) for income investors to take inventory of their risk tolerance in these markets–as well as goals and needs.  If you are a newer preferred stock or baby bond investor you likely have lost a chunk of money and as Bill Clinton said “I feel your pain”–we have all been there.  Evaluate your needs in terms of returns, income etc. and invest accordingly.  If you lay awake nights you need to lighten up a bit–at least now we have money market funds paying 2.25% (heading to 2.50%)-these options weren’t available 2 years ago when we had money markets paying .01%.

Our plan now is to hold what we have and probably NOT add anything new this week.  We have our eyes on a number of issues in which we have begun some starter positions that we would like to add to, but we really need a bit of stability to add further–these issues are from CHS and American Homes 4 Rent issues (decent quality in mid 7% current yields) as well as some of the AAA rated AllianzGI issues for their safety–remember that in a rising rate environment these ultra safe issues will get hammered lower–but you will have the safety (from bankruptcy etc.) and income stream–this means you need to understand you ability to have net asset value erosion while maintaining an income stream.

Monday Morning Kickoff

Stock markets will close at noon (central time) on Monday and reopen at normal times on Wednesday.

Well not much can be said about last weeks stock market action except that it pretty well sucked for everyone.  Whether you owned common shares, preferred shares or baby bonds you likely took a good spanking.  Folks like to compare this particular market to other historical markets–BUT there is no comparison-we have never had a $4 trillion dollar balance sheet being unwound, coupled with a falling 10 year treasury and rising Fed Funds rates.  So it is new–without precedence, and it can be pretty damned scary.

Last week the DJIA traveled in a range of 22,396 to 24,088–a range of around 1,700 points before closing the week near the low at 22,445.  The 10 year treasury, which has had little meaning for income investors, moved in a range of 2.75% to 2.89% closing at the 2.79% level.  There is not much doubt that the bond market is signaling a slower economy ahead.  Additionally there is a rush to ‘safety’ in treasuries—why would I want 2.79% on a 10 year treasury when I can hide in money market funds paying me 2.25% on their way to 2.40%?

Last week was totally dominated by news on the Fed Funds rate hike which was 1/4% as we expected.  What was not expected by us was the somewhat hawkish tone set by Jay Powell.  From a market perspective he screwed up big time–why the hell would you toss fuel on the fire when you could simply convey to the markets that you are data dependant without preconceived notions of rate hikes ahead.  What is done is done.  Last week we had the Home Builders Index released on Monday and it was softer than expected.  Housing starts were announced slightly better than expected and Existing Home Sales were above forecast.  Housing numbers overall were pretty flattish.  The 3rd quarter GDP revision came in .1% light–no big deal.  Durable goods orders came in on forecast.  Consumer spending was right on forecast and surprising to us was that Consumer Sentiment was better than forecast–this will fall like a rock next month.

For the coming week we will have a light economic release calendar with nothing of consequence being released until Wednesday when Case-Shiller home prices being announced.  On Thursday we have Consumer Confidence being released for December–we will be interested in how this one shakes out with the market turbulence.  We also have New Home sales being released Thursday.  On Friday we have the Chicago purchasing managers index and pending home sales.

The Fed Balance sheet had a runoff of $4 billion last week.  It is funny to hear so much discussion by the ‘talking heads’ on TV about the runoff.  We have been discussing this on site for the entire year–we all knew this was going to be meaningful at some point in time.  We started putting a note in the Monday Morning Kickoff each week in April because we knew it was meaningful then.

Last week, once again, we had no new income issues announced–who the heck wants to sell a new issue into chaos.  OFS Credit did file an updated prospectus for a new term preferred issue which they had originally announced a month or more before–but nothing final here.

It was a very bloody week for $25/share preferreds with the average share off 63 cents–we do not recall a weekly loss of this magnitude for many years.  Additionally we have 329 issues trading at $25 and below.  Just for reference we had around 147 issues trading at $25 or below as recent as September.

 

 

Worn Out for the Week

After a really busy week we are really worn out (of course at my age that isn’t too unusual).  Earlier today I was doing some deep due diligence on one of my new favorites REITs—American Homes 4 Rent (AMH).  No I am NOT talking the common shares–I am talking the preferred issues–all 5 of them.

With the fall in income issues in the last month or two we are looking for safety that is consistent with our own risk/reward targets.  We always are looking for that security that will provide us with +7% with a bunch of safety.  That is a tall order–still.

We want to own some of the max safety issues–i.e. CEF preferreds, but we also want to ‘blend’ them with some issues with the +7% issues.

We had noted a week or two ago that we tiptoed into the AMH-D 6.50% issue, which now has a current yield of 7.25%.  There are also 4 other issues with current yields in the 7.23% to 7.40% yields.

Next week (or sometime in the next week) we are going to write in depth on AMH and why we love these preferreds.  Remember that AMH was co-founded by billionaire B Wayne Hughes who founded cash machine REITs Public Storage (PSA) and PS Business Parks (PSB).  I have studied the balance sheet of AMH twice in the last month and quite honestly am pretty delighted with the strength of it and the amount of free cash flow that AMH tosses off.  Very similar to the PSA and PSB balance sheets.

Look for some indepth writing on AMH next week.

Added Asset Coverage Data to CEF Preferred Page

We have added asset coverage to the listing of CEF Preferreds found here.  CEFs are required to have asset coverage ratios of 200% or more for preferred stock sold to be used as leverage by the funds.

This data is only published a few times a year (although with some effort one could make a good daily guess at it) so the data is not right up to date, but is as of the semi-annual or annual report.

Obviously with the beatings that stocks have taken recently most of these coverage ratios will be lower when they are next published.  Interestingly there are a couple of Gabelli managed funds which had ratios of 248% as of 6/30/2018 so we will see how they react as they approach the 200% level.

NOTE–common shares may have been sold by some of these funds since the last asset coverage was published.  ALSO some funds may have sold preferred shares since last publication.  These activities either raise or lower the asset coverage.  We will publish asset coverages and update them from time to time but for those wanting up to the minute knowledge one will have to look up whether the fund has sold preferreds, debt or common shares since the last update.

The Tale of 2 Portfolios

As most of you know for years (more than 10 years) I have always had ‘Model Portfolios’.  These are not ‘real’ portfolios, but typically they mirror my personal investments.

Our intention is to not ‘trade’ the issues in the portfolios – of course sometimes an issue gets redeemed or called and you have to make small changes to replace the issue.

These models are meant to be ‘teaching’ or ‘learning’ portfolios–they are long term ‘what ifs’.

10 months ago we started the “Enhanced High Yield Fixed Income Portfolio“.  In general this model contains only issues that would be considered by conservative investors to be pretty aggressive with higher risk.  The portfolio was doing just fine until recently, but now is down 4.61% since 1/25/2018.

Newer investors can look at it and see what would have happened if you were to play only in the high yield arena.

In February of 2018 we started the “Medium Duration Income Portfolio“.  This model is composed of term preferreds and baby bonds with maturities in the next few years.  There are a few other miscellaneous issues in the portfolio.  Issues in the model are not investment grade, but with maturities in the next few years it is less volatile and prices generally hold up fairly well.  The model has taken some hits in the last month, but now is up 1.74% since 2/8/2018.

So you can see that the more conservative portfolio is 6.35% better than the aggressive portfolio.

While I had invested like the more conservative portfolio until a few months ago when I purchased some perpetual preferreds.  With the benefit of 20/20 hindsight we would have been much better off staying with all the short dated maturity issues.

Rotational Sell Off Continues

What seems like a rotational sell off continues in the preferred stock and baby bonds arena.

Today the Callon Petroleum 10% perpetual (CPE-A) jumps off the page at us.  This issue held up pretty well until today, but is off a giant $3.29/share right now (this is a $50 issue).

You can see the big dump here.  The issue went ex-dividend last week and as such was ‘marked down’ by $1.25, but the sell off continues.

We had held this issue until a month or so ago when we reviewed their financials, in light of the falling oil prices, and thought it looked a bit dicey.

It is amazing what a few misplaced words from the Fed Chair can do to markets–kind of silly in our opinion, but just the same we have to ‘mark to market’ each day and of our 4 investment accounts 3 will likely end the year in the red by 1% or so.  We have 1 account which is still up by 1%–so far.

Reviewing Leverage Rules of CEFs (Closed End Funds)

There are times that I make the assumption readers are aware of the various nuances of the preferred stock world, when in fact there are many newer readers of the website that are sometimes lost in the ‘banter’ that more seasoned investors toss about in the comments section–or that I do in a post I make.

With this in mind we should review why often we say that preferred stocks of CEFs (closed end funds) are the safest preferred stocks available to us income investors.

Closed End Funds are simply funds (mutual funds)  that most often own shares of companies in particular market segments–for instance Gabelli Utility Fund (GUT) owns shares in public utility companies.  CEFs are able to use leverage which open end mutual funds can not use.  GUT uses leverage to attempt to increase their returns.  Leverage is added money (either borrowed or preferred stock) used to increase investment purchases.  The idea being that the investments will earn MORE than the cost of the leverage.  Leverage is a wonderful thing when markets are rising–and tortuous when markets are falling.

Leverage by a closed end fund is considered a senior security–whether it is debt or a preferred stock it is senior to common shares of the fund.

As income investors we know that GUT has 2 outstanding preferred stock issues (GUT-A and GUT-C) with coupons of 5.625% and 5.375% respectively, which they use as leverage.  They also have some Auction Rate Preferred outstanding as of 9/30/2018 which is not available to us individual investors.

As of 9/30/2018 GUT held $367 million in utility stocks and U.S. Treasury investments.  GUT had $101 million in preferred stock outstanding (leverage).  So the fund had a coverage of the ‘senior securities’ of over 300%.

From the Gabelli Utility Fund annual report effective 12/31/2017 you can see the funds coverage ratio over the years below–

So who regulates the leverage a company uses and why can’t a fund us massive leverage to try to ‘goose’ performance?

The Investment Act of 1940 (section 18) regulates the use of leverage by a closed end fund.  I guess they anticipated the misuse of leverage by ‘gamblers’ and we are thankful for the law.  In general it says that the CEF will have an asset coverage ratio of 200% immediately after a preferred stock offering.  It also says that the CEF will have 300% coverage if the leverage used is debt.  So for our example company above (GUT) they must have $2 of stock holdings for each $1 of preferred stock outstanding.

NOTE that while most business development companies (BDCs) are closed end funds they are covered by other segments of law and while covered by a less restrictive leverage law they are NOT nearly the quality of common stock CEFs.

Why are BDCs less safe than stock CEFs?  Simply put the value of the holdings of a BDC are NOT observable–they are what we call ‘Level 3’ assets.  BDC assets are mostly not publicly traded and thus you simply have to ‘trust’ the managers to let you know their opinion of value of the assets.  Do you want all you investment eggs with these guys–just ‘trust me’?  We do invest in BDC baby bonds and term preferreds, but believe me they are mostly a long way aways from investment grade.

On the other hand stock CEFs hold assets (shares of stocks or bonds) that we term ‘Level 1’–we can open our web browser and look on the stock exchange which will tell us what the individual stocks held by the fund are worth.  It is highly unlikely that a ‘rogue’ manager can manipulate the fund when transparency is high.

Let’s look at an example of how this protects us, as owners of the senior securities.

In 2007 Gabelli Global Gold (GGN) had a coverage ratio of over 600%–after the market crashes in 2008-2009 the company had a coverage ratio of between 200-300% because their holdings had tumbled so far.  If you are a manager of a closed end fund it literally scares you to death to go near the leverage cut-off.  Why?  A closed end fund is NOT allowed to pay distributions when they are break the leverage ‘rules’.  If you are a closed end fund paying income to holders you sure the hell don’t want to have to suspend your distribution.  So what do you do?  You start selling new shares of common as fast as you can—and Gabelli did just that–over the next 3 years the company sold over $1 billion in common shares taking the coverage ratio to over 1,000%–now that is safety to a senior security holder.

We wrote an article with more detail in 2011 on Seeking Alpha which you can see here.

You can see the limited number of preferred stocks of CEFs on this page.

As you can see most are rated A1, A2 or Aa3 by Fitch–with the AllianzGI issues being rated AAA.  As we have said these are the safest preferred stocks available to retail investors like us.

While the coupons are always lower than other perpetual issues you are buying safety.  Shares prices move down as interest rates rise–normal movement, but at the end of the day your shares are very safe (of course nothing in life is guaranteed).

We note that shares of Oxford Capital and Priority Income are NOT investment grade and while they are covered by the leverage rules their holdings are higher risk Collateralized Loan Obligations (CLOs).

The examples we use above are simplified examples and there really are more detailed rules that have to be followed.  For instance regulations dictate what happens when leverage rules are broken–how much time is allowed to get back to compliance etc.  We have not seen a CEF break the rules in the last 12 years–if it has happened we are not aware of it.