I almost hate to see 2019 end–it was great for most everyone (unless you were a hedge fund)–almost everyone got to participate in one asset bubble or another.
For as long as there has been either financial TV–whether CNBC, Fox Business or previous to these FNN (Financial News Network) or the internet I would pop out of bed in the morning and check the equity futures markets to find out what has been happening in the world financial markets.
During the last 3 months (or maybe more) I seldom even check the markets until 8:30 a.m. central — the equity market opening time. I don’t remember a time when equity prices moved in only 1 direction for so long and even when prices move lower most certainly it is a prelude to a move much higher. Why even look–‘party on’—‘be happy’.
Now, for sure I am happy–double digit profits even when only 60-75% invested most of the time–what’s to be unhappy about?. Now these gains are tempered by the lousy 2018 many of us had–in my case I was down only 1-2% in 2018–which is lousy, but far from as terrible as many people performed. My devotion to higher levels of cash and ownership of almost exclusively short duration term preferreds and baby bonds served me well in 2018–but it is a 2 edged sword and devotion to these securities mean generally a lower coupon, thus providing less income.
In 2019 I swerved away from my devotion to the term preferreds and short duration baby bonds (although they still form the base positions for my investing) and have ‘tinkered’ through most of the year with ownership of some higher risk perpetual preferreds. For me to hold a small position in junky Tsakos Energy Navigation 8.875% perpetual preferred (TNP-C) through most of the year is a rare occurrence. Of course I try to minimize risk–in this case the TNP-C issue has a ‘failure to redeem’ penalty which kicks in on 10/30/2020 (so there are 4 dividend payments left at 55 cents each) and I fully expect a full redemption on 10/30.
I played a lot–at least for me–with dividend captures and flips. Virtually all of them worked providing 1 or 2 month returns of 1-4%. THIS JUST ISN’T RIGHT!!! I have never been able to be correct 90% of the time—it just isn’t possible–normally.
On the other hand I have never lived through a period in my 49 years of investing where the Fed almost instantly jumps to alleviate interest rate rises, or equity price softening–this is not fake news–but these markets are pretty ‘fake’.
$1 trillion deficits are forecast as far as the eye can see–no one really cares–just sell the bonds to the primary dealers who will then dish them off to the Fed–at some point we will have a big fire with all the paper and all will be right in the world–‘party on’!
Each day that goes by, each week, each month that goes by, brings us closer to a day of reckoning. The day when a ‘China deal’ no longer means anything (since even a true China deal is forecast to only boost GDP a few 1/10’s%) to markets, the day when the Fed gets the hell out of the way and lets interest rates rise and fall on supply and demand, the day when Deutsch Bank (or someone) fesses up that after ‘rolling’ derivatives for years they are bankrupt—and on and on.
Now as I write this I don’t really see that anything is changing–economic numbers are still OK–employment is great and no doubt the Fed is still there to make ‘everything alright’. But it is coming–the reckoning. WE JUST DON’T KNOW WHEN-next month or in 5 years. For now ‘party on‘!
For 2020 my expectations are very modest–I have always tried to earn 7%–guess I am a 7% guy, but honestly for 2020 I will be happy with a 5%-6% return. I am going to scrutinize base positions more than ever. If we don’t get a setback in share prices of preferreds and baby bonds it is likely I will hold a fair amount of cash–I simply am not going to pay $27 for a 5.25% coupon (or some such silly number).
For now ‘party on’.
31 thoughts on “2019-A Highly Profitable Year for All–What will 2020 Bring?”
Tim, I find it interesting that you were typically only 60-75% invested for the year. Are you only invested in preferreds/baby bonds, or do you have other investments. Any rationale you willing to share as to why you were sitting on so much cash in the current market.
I was typically 90-95% invested. 21% in IG preferreds, 21% BIG preferreds, 30% annuity (bought when I was working and did not have time to actively invest), 10% in CEFs, and the balance in equitys/REITS/etc. My goal is to maintain 10% in cash for possible investment opportunities.
LarryL–let’s call it chicken investing when it comes to equity investing. I always want dry powder, but have had too much all through 2019 and it costs me–I am picky and stick mostly to short dated maturities and close maturity baby bonds and they just aren’t there at the risk/reward I want.
Between the wife and I we have about 75% of funds in IRAs, another 10-15% in an account with an insurance company @4.50%. Then we have the Uhaul Investors Club–which is new money which is just 22k right–just started those accounts in 2017 and it is only new money for IRAs. I also keep a healthy (too healthy) chunk of money in our local accounts – mostly because it makes me feel good.
In the IRAs we hold only preferred stocks and baby bonds.
I always sacrifice income for safety–I mentioned the Tsakos issue I hold now–way out of my normal hold type of preferred.
I suppose that I am not highly motivated to hold risk–I don’t have a need for risk and my wife in particular doesn’t understand risk/reward–and she does watch the accounts on occasion–she only wants up–no losers allowed (hah)
We have 2 pensions from General Mills, I draw my social security and I hope my wife will also do so in July–she reneged on an intent to start her social security last year. We also both work fulltime–since I am full retirement age my earned income is not limited. My wife who will only be 63 this year is limited in earned income–but that is not a problem as after years of corporate stuff she now works at the local Catholic school–and believe me the pay is meager.
Tim – I didn’t realize just how alike we are in style and holdings, right down to the 4.50% account with an insurance company. That’s good to know as sometimes it can feel lonely in our world in this environment. We’ve had an insurance account that allowed us to max out an amount we could put in that was well above the minimum requirement to pay insurance costs and since the account is so old, it has a 4.5% fixed floor return possibility as a choice to invest the additional along with choices of a zillion mutual fund alternatives. We maxed out on that fixed return long ago…. Now we’re forced to take a set amount out of it each year (sort of like an RMD I suppose) in order to stay inside of Fed regs I think. And the interesting thing is it’s a 4.50% tax fee return… I don’t quite understand why, but I’ll take it… of course, it doesn’t net 4.50% because we pay our life insurance thru the mechanism but it’s still far better than money market returns and good enough to prevent me from looking into these sell your life insurance policy schemes… lol BTW, I sold WRB-B today at 25.57 – one of your suggestions…
2WR—this is kind of scary–you mentioned WRB-B and I had a good til cancelled sell order in for 25.55–so I looked and lo and behold it executed. I like that issue and want it again – maybe after ex-div.
It is amazing how fast the 4.5% insurance account builds up (of course it is just simple math)–we were putting 10,000/year in that account for many years and it has grown to be a fairly giant account.
So the scary part of this conversation would be if you had a stack of 3″ stack of ‘savings bonds’ in your safe–which I forgot to mention in my earlier reply–I need to remember those since some are on the verge of no longer accumulating interest.
Tim – I hate to admit it, but that’s how I found out I sold WRB-B today as well. had a standing sell in I hadn’t paid attention to and whee! out it went today. No stack of savings bonds but I do have a stack of CDs that I hide away from my brokerage accounts just to insure there’s something always earning a positive return in any environment (at least any non-inflationary environment). No UHaul Investors Club though.
Fairly new to preferred stocks seems that many companies are refinancing the old debt with new lower interest issues. Sounds like many people are preferred stock traders. Is it a fools game to buy these new lower interest rate issues with the idea of buying and holding? I am considering buying about 10 issues with some new money in January. Thanks.
If treasury rates go back up to 3% a lot of the new issues in the 4-5% range should get clobbered.
I try to avoid buying anything in the 4-5% range as a long term holding unless it has a fixed maturity date.
Your guess is as good as mine. If you’re a conservative income investor you could try a laddered approach. Buy a few preferreds including some with shorter maturity dates, and hold some money in fixed income to buy more preferreds at a later date. Average the rates over time.
Preferreds are intended for buy & hold investor. Myself and others here trade them but we’re not the typical investors.
Be very careful with the new 5% and 4% issues. If the 10 year heads back to 3%, they will get slammed. Aim to buy 6% and above. Tread carefully with anything below.
As noted above there is real risk about a rising yileds so try to hedge yourself also with floated-rate prefs (or canadian resets e.g.)
Doug–no one can say for sure which is what makes this a more difficult game than it first appears. IF you buy the low coupon issues it is likely you will get hammered if rates rise–but will they rises? We waited for years for them to rise and when the Fed started taking short rates higher the market had tantrums–and the Fed backed off.
While I can’t tell you what to buy, if you are new to preferrds etc you may want to do your homework and leg in slowly–1 new buy every week or so. Depending on your risk profile you can get some decent REIT preferreds in the 5.75-6.25% area.
Optionally you can watch the Sandbox Page here for ideas.
You can toss out your ideas and someone will give their opinion.
Thanks everyone I appreciate the feedback.
Doug in OK
Here’s a list of 2019 returns from the Novel Investor website:
Lg Cap: 31.5%
Sm Cap: 25.5%
Int’l Stock: 22.7%
Emerging Mkt: 18.9%
Junk Bond: 14.4%
IG Bond: 8.7%
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A good way to start the New Year, Nomad
Hoping that “stocks” includes preferred, exchange traded debt, and CEFs, but we shall see.
Good morning Tim…there is another interesting dynamic at play in Europe with the French attempting to dislodge the German’s leadership role there. If the French are successful, as the installation of Christine LaGarde as European Central Bank chief suggests and a Jan 31 EU Brexit deal will confirm, then the period of austerity for Europe under German leadership is over, and the ECB will expand their balance sheet in ways never thought possible before. Its gonna be hard for the Americans to keep up once the Europeans get started (imho).
Well, it’s will be interesting what Fed will do when H.4.1. reach his highs which was about 4,5 trln $. Another one alarm sign is a Real Estate market, where we have a flatinnes of household’s equity value for Q1-Q3 2019. Just like before the Great Recession https://fred.stlouisfed.org/graph/fredgraph.png?g=pPzl
Well the year is off to a good start already. Put my sell bid on CBB-B at 47.45 before market on last weeks $42 purchase and some eager beaver paid $48. Too bad it wasnt this easy every trade.
We need higher interest rates forsure. New issues with 6% yields, otherwise, I will have to pay down my mortgage instead!
I’ve given up trying to predict the future. Stay nimble enough to react to a move in any direction. Find patterns and follow them until they stop working. I’ll lose some money when the wind changes direction but it usually pales in comparison to what I can make waiting for the shift.
If not for the election, I think we would be set for another great year, but to me the BIG wild card that could cause a panic type sell off is if the market thinks there is a chance a socialist will be elected president. Even if the chances are low, there may be a point (maybe in just a couple months) where big guys will want to take their money to the sidelines and see how things play out.
Good point Derek–probably more than ever this could be a big factor.
Fascinating article in today’s WSJ on just how fast the capitalistic poster child Chile has unraveled.
Options activity already indicates a lot of puts have been purchased for Nov 2020. At least some of the big guys have already hedged some political risk.
What’s interesting is what this has done to the VIX futures curve. Normally, it slopes upward smoothly. However, Oct VIX futures (Oct VIX reflects puts expiring the third Friday of Nov) are significantly higher than Sept and Nov. Of course, this makes no sense so I actually put on a calendar spread going long Nov VIX and shorting Oct VIX.
I see more volatility this year. Rising Vol. with a rising Spx never has a good outcome. I also think that when the fed stops the Not- QE it will be a catalyst for a correction. If Europe starts to unwind the negative interest rates, we may be in trouble with our preferreds as our interest rates will probably rise. Hopefully we will all have a healthy and prosperous year, ATB.
No politics, please. Though historically, the stock market has performed better under a Democratic president.
I happen to think presidents are overrated. They have some impact but much of the economy is driven by the Fed and other factors that have nothing to do with who is president.
Martin – I would not go as far as you do. In general, a President who has business friendly policies, tax reduction policies and Pro-US policies on trade should have a positive influence on the economy vs. ones who push lots of regulations and governmental control. Yes, the Fed and others factors influence things too. But it all starts at the top.
And I agree with Derek that this year in particular, it could be a bigger factor than normal impacting the market given the stark differences in options
Tim, as you know, as long as liquidity rules, credit spreads tight, and long end yields with a lid on them, its Party on Garth!
My tilt recently is back to the higher yields more anchored to par. Buy and sell on modest bounces, and occasionally quick flip in the dirty laundry section of the preferred market.
The one unappealing sector to me is that 5.25% $27 ish area you referred to. No thanks. I would rather play in the ALLY-A at $26, LANDP I recently bought around 25.60, and the SLG-I at $25.35 and stare them down and dare them to call….And of course flip at a predetermined price point to wait for another opportunity. 🙂
Grid–no doubt for the most part we are investing in sync. The old adage ‘you can’t fight the Fed’ never has been more true.
Tim, we need some more junky 8% IPO QDI preferreds like MBNKP, to hit and run on. People will buy these up like a dog takes to a bone. I jettisoned roughly 3/5 of what I bought after it hit my prices. But still got about 800 seeing if there is a second leg to price ascension.