January, 2020 | Innovative Income Investor

Stocks Claw Their Way Back While Interest Rates Drift

It looks like the initial selling in common stocks has ended and shares are moving slowly higher. I would think they are in a ‘wait and see’ period. Of course this wait and see could last just hours–or days. Uncertainty will last for a while–no doubt there are more undiagnosed cases of corona virus in the U.S., but if the reports come in slowly and are modest in number things will stabilize.

Interest rates, as measured by the 10 year treasury are now at 1.62%–down 6-7 basis points today. In my opinion rates were going to this level 1 way or another—I just didn’t think it would be a virus that sent them down. Recall that rates on the 10 year were down at the 1.45% in September–so the current rate is not a new low. We all know that rates could spike way up based on inflation or many others reasons–they could also drift lower and lower. So really since I could make a case for either higher or lower rates there is no reason to change anything I have been doing for months and months–probably will have to live with a high level of cash for a long, long time.

The average $25 preferred and baby bond is off 3 cents today–so we are seeing a bit of disruption–but it was long overdue anyway. I am seeing some of the energy shippers off today–Tsakos Energy Navigation (TNP) issues and Teekay Offshore preferreds (now owned by Brookfield Business Partners) as well. For those with a taste for higher risk maybe there is a bargain being created here.

Monday Morning Kickoff

Finally we see a week where stocks ended on a down note. Monday was a holiday and Tuesday, Wednesday and Thursday were fairly flat–as the S&P500 opened the week at 3321 and closed Thursday at 3326. Friday came and shares took a tumble closing the day and week at 3295–still just a measly fall of less than 1%. Whether the Corona Virus gets worse during the coming days or not appears to hold the answer as to the movement in common stocks–and potential bleed over into preferreds and baby bonds.

The 10 year treasury moved lower as it opened the week at 1.79% and closed the week at 1.68%. While a move lower by 11 basis points is substantial, it is not a giant panic–huge panics would show this move lower in a day-versus over the course of 4 days.

The Fed Balance Sheet fell by a relatively large $30 billion. This is the 3rd week in a row of moves of larger amounts–there has been no overall balance sheet growth for weeks now. It shouldn’t be assumed that the FED is withdrawing any liquidity to speak of as likely we are going to see some spring back next week.

We had a new issue sold by mREIT ARMOUR Residential REIT (ARR). The issue carries a 7.00% coupon. The company will call the ARR-B 7.875% issue in full.

The pricing term sheet can be read here.

While we saw a larger downdraft in common shares on Friday the overall $25 preferred and baby bond only moved lower by 2 cents on the week. Banks moved lower by 4 cents. We will see what this week brings as common shares look ready for a large fall.

No More 2 a.m. Posts

Early this morning I wrote the post on the new preferred issue from ARMOUR Residential. The post was not as complete as it should have been and had a couple typos. My apologies.

Last night I had a 8 pm flight out of Minneapolis–which got held up for 90 minutes so they could de-ice-why it took 90 minutes I have no idea. I ended up not getting to my Scottsdale room until about 1:30 am mountain time. I thought I could get the pricing posted in a coherent fashion–obviously not.

The good part is as usual everybody had data in the comments that completed the story. Thanks all.

The other good part is the weather in Scottsdale is beautiful–70’s and sunny–the bad part is that by Sunday night late I will be at my desk–hopefully with enough recharge for a few months.

Armour Residential REIT Prices New Preferred-Updated

Update–The OTC Grey Market symbol has been announced as ARMRP.

mREIT Armour Residential REIT (ARR) has priced their new issue of perpetual preferred stock.

The issue priced at 7.00%–once again lower than the earlier ‘yield talk’.

The issue will be cumulative, non qualified and optionally redeemable starting in January, 2025. This issue will pay a monthly dividend.

The company will be calling a portion of the ARR-B with the proceeds. Initially the company estimated calling 30% of the 6.210 million shares of the B issue, but it looks like they will be able to call as much as approximately 50% if desired as they are selling 3.45 million of the new issue.

The pricing term sheet can be read here.

Stocks and Interest Rates Tumble. What’s Next?

The 10 year treasury is tumbling some today-now off 5 basis point to trade at 1.72%. Apparently the bloom is off the rose in regards to the China trade deal and we have moved into fear of a global slowdown based on a virus. One can never, ever know where these things will take us, but more often than not it is likely we won’t see longer term damage to growth–but the knee jerk reaction is negative. We will just have to wait and see.

Stocks have tumbled as many as 200 Dow points–a non event really–less than 1%. As I have mentioned before I don’t give serious attention to equity moves until we see at least daily moves of say 1.5% or more and then my attention is too watch for more panic moves by nervous nellies bailing out of their income securities.

As mentioned by many in comments today all of the shipping companies are giving up ground–both preferreds and common shares. By far and away they are the biggest and most wide spread losers in the preferred arena.

I do see 1 ‘silliness’ move in the CEF preferreds as someone paid $27.85 for Gabelli Utility Trust 5.625% (GUT-A). This issue is up $1.30 from earlier in the month. The issue has been redeemable since 2008–folks are looking for a bruising as they could call this any minute–no doubt they could garner a 5% coupon (or better). I owned this issue last year and while it was a base holding I exited because of valuation (coupled with call risk).

The average $25 preferred and baby bond is off 3 cents today–no doubt being driven by some of the shippers as most sectors are plus and minus a penny. The only line on our chart moving lower is the 10 year treasury–and I expect that move will continue–slowly.

Costamare Preferreds Falling

Just a note that the 4 preferred issues from container ship owner Costamare (CMRE) are tumbling.

Shares went ex-dividend ex dividend on the 13th–and have just continued to move lower. The high yield issues are now $1 lower since ex date.

A quick scan and I don’t see real news out there (although there may be some), but I think it is more likely simply a sell off on valuation.

Their 4 issues can be seen here.

For those with risk tolerance there may be opportunity here.

mREIT ARMOUR Residential REIT to Sell New Preferred

mREIT ARMOUR Residential REIT (ARR) will be selling a new perpetual preferred in a refinancing transaction.

The company has 1 outstanding issue of monthly paying preferred, the ARR-B 7.875% issue which will be at least partially called. It has been redeemable since 2/2018. The ARR-B issue has been trading right around $25 for many months, but moved higher 5-6 days ago and is now at $25.34.

The new issue will carry on the tradition of paying monthly dividends and will be cumulative, but non qualified.

The preliminary prospectus can be found here.

Thanks to EarlyBird and Ptrader for being on the ball this morning and spotting this new issue only minutes after it was posted.

Potential Market Disruption Ahead

Early next week (Monday the 27th) we will see ‘rebalancing’ announcements being made by Wells Fargo on a number of Indexes. Below is a list of mostly preferred stock indexes that will announce rebalancing.

As you can see the announcement will be made Monday with actual rebalancing occuring on the next Monday (2/3).

Many ETFs track these indexes and I randomly checked a few of them and there is sizable potential volume that could occur in many issues–whether it is orderly or not is anyone’s guess. There may be issues “dumped” that would allow a few issues to be picked up at more bargain prices. We will wait and see what happens.

NOTE–the ETFs tracking these indexes are not the mega sized ETFs, but as a group they are sizable.

More Quiet Markets

With no China news-except for the virus which looks to have already played out (as far as markets are concerned) we are having a quiet day everywhere.

The 10 year treasury is at 1.765% which is less than 1 basis point (1/100% of a percent) changed from yesterdays close.

The DJIA and S&P500 are up a tiny amount–a rounding error.

$25 preferreds and baby bonds are moving by a penny here and a penny there. Again only banking issues moving much–off a couple cents. There was little ex-dividend action today so no movement because of ex issue. So since the 1st of the year we have seen almost no action in these issues–we actually like that–quiet is good.

Complacency is definitely high in these markets–and black or grey swans at this point in time could be really, really painful.

An Article–A Warning

Today ChuckP posted an article that is currently on Barrons. It is not unlike many we have seen in the past and most of us that have been investing in baby bonds and preferred stocks are well aware of the risk that is out there.

We are posting this because it is a reminder that markets are dangerous and even if you own bonds and preferred stocks there is danger. Newer investors in these areas need to know that it isn’t just about earning an easy (although modest) return by collecting interest and dividends.

Essentially it is reminding investors that chasing yield is getting a bit carried away—of course most of us know that, but it has been going on for years–when does the music stop?

Here is the article “Ponzi Market”. I believe Barrons will allow you to read this once only before the paywall comes up.