January, 2020 | Innovative Income Investor

Sliding Into the Weekend

Employment numbers were within the expected range so we are not seeing much action today in any particular market–that’s good–I like quiet.

Interest rates have moved a bit lower on the tepid wage growth of .1% in the employment report so it is being extrapolated to mean no inflationary pressures. The 10 year treasury is off 3 basis points to the 1.83% area.

Last week the Fed Balance Sheet tumbled by a healthy $24 billion. Given that the balance sheet grew by $108 billion during December it is reasonable for there to be some reductions simply based on timing–I am 100% sure that the FED will continue QE (I say BS to the Fed claim this is not QE) in the next week or two. The plan remains for $60 billion a month in balance sheet growth–that would be $720 billion for the year if it continued–wow–all I can say is WOW!! With trillion dollar deficits as far as the eye can see this will not end well, but we have no way of knowing, or predicting, when bad stuff will happen so we simply have to labor on–it could be years before the ‘piper is paid’.

Today the Fed did a $41 billion overnight repo (actually 3 days because of the weekend). Nothing abnormal there–at least if we define ‘normal’ as what has occurred since September. I continue to watch for a new Fed statement on REPO plans for the next few months–I am not certain I need their statement–liquidity needs will continue and so will Fed REPO’s.

Lastly as of noon (central time) the average $25 preferred and baby bond is UP 2 cents since yesterday. We see common stocks go higher and higher, but no doubt that income issues are pushing the upper end of reality as well.

Plenty of Irrational Behavior In Preferred Arena

Almost daily I look at many preferred stock issues that I might want to own–some are for ‘flips’ but some are for long term holding.

My own searches and comments made by folks on the site usually lead to some preferreds with really interesting behavior — most of it appears to be ‘herd mentality‘ related.

This morning I was looking at the SL Green 6.50% perpetual (SLG-I) preferred as shown below.

The issue went ex dividend on 12/31 and was marked down by the dividend amount–in the $25.40 area–6 days later the issue is trading in the $26.40 area–$1 higher.

This pricing is crazy–at least if you are a rational investor. This issue has been callable since 8/2017.

I hope that those on this site that had owned the issue are now exiting–my guess is that some readers have nice profits on this issue on short term trades–that’s great, but now is time to exit. This is but 1 example of irrational behavior by buyers at $26.40–there are lots more.

Waiting on A Big Economic Number

We all know that tomorrow the monthly employment report for December will be released.

Is it likely to be meaningful to markets? No, I don’t think within a reasonable range it will be meaningful for longer than 2 hours–then the stock market will move higher.

But really–the expectation is for 160,000 new jobs being created in December. ADP showed over 202,000 new jobs in their report on Wednesday–of course no one really pays much attention to ADP. Just the official government report has power to move markets–occasionally.

Of course I have no idea what the number will be, but any huge outlier number could move markets. By huge outlier I mean something like 50,000 on the low end or 300,000 on the high end. When the number has missed by a fairly large margin (20,000-50,000) recently there have been almost no reaction after an hour or two of digestion So tomorrow if the number is 50,000 nervous nellies will yell ‘recession’. If the number is 300,000 interest rates would move up by a few basis points and folks would yell ‘higher interest rates coming’.

In the end it is highly likely the stock market will end higher Friday and interest rates (measured by the 10 year treasury) will move in a tight range of plus or minus 2 basis points (from the current 1.86%).

“Party On”–Everyday!!

Well the stock market is flying today as the “China deal” is the gift that just keeps on giving. Seems like this deal has given the stock market 10% of its gains this year.

Interest rates are just a tic or two higher–as high as 1.90% to now at 1.89%–maybe back in the previous trading range before the Iranian event.

Preferreds and baby bonds ($25 issues) are trading off 2 pennies today–for all practical purposes flat.

I have noticed a lot of activity lately on the “Canadian Chat” page. Seems there is more interest in Canadian preferreds now that we have fewer reasonable choices in the U.S. markets. Maybe I will need to bone up on this market–and maybe others should as well.

We had a pretty sizable REPO today by the FED. They took $49 billion in the overnight (1 day) market and $34 billion in a 14 day deal–a total of $82 billion. I believe there are some large treasury auctions this week so it will be interesting if the Fed has to do bigger deals in days ahead to provide more liquidity to the primary dealers–we’ll see.

This morning I bought a modest position in Brookfield Property REIT 6.375% perpetual preferred (BPRAP) for $25.33. Issue is now callable (since 2/2018). The most recent dividend was paid 1/1/2020 so now it is accruing for the next payment–assuming typical 30 day notice before a call there is about 15 cents at risk in event of a call (calculated off the top of my head for those checking with a calculator). My intention is to simply hold this issue–not flip–I need cash deployment.

The new MetLife 4.75% perpetual issue is now trading at $25.24 on the OTC under ticker METFL. Folks obvious are scratching hard for a little yield.

$25 Issues @ or Near Early Redemption-Replay

This is simply a replay of the note I posted on 11/23/2019 and previous to that in September.

The number of opportunities in the investment grade arena has fallen since that time–i.e. issues are trading TOO HIGH.

I will work on a new listing for the next week and will include non-investment grade issues as well.

This is from 11/23/2019

About 2 weeks ago I posted this spreadsheet which is Investment Grade Preferreds and Baby Bonds Now Callable.

I am reposting–I did not update the dates as little changes over a 2 week period (although since the original post 6 issues have been called for redemption), BUT prices do change and I see a couple I don’t own that are in the list which I may pick up.

Currently I own the following off the list–

Axis 5.50% preferred (AXS-D)

WR Berkley 5.625% baby bond (WRB-B).

Vornado Realty Trust 5.40% Preferred (VNO-L)

So I now see a couple others that I will look closer at for potential purchase.

1st is the DTE Energy 5.25% baby bond (DTQ).

2ndly is the Kimco Realty 5.50% preferred (KIM-J)

The idea is that if interest rates don’t move too violently up or down these issues should stay relatively closely tied to liquidation preference ($25) while providing high levels of safety. I don’t really want to deal with any issues under 5%, because the redemption likelihood is small thus exposing the issue to bigger share price moves (down).

Here is the list again.

Note that the yield to worst DOES NOT include accrued dividends so the actual yield to worst is slightly better than that listed.

For those wanting the full investment grade list of baby bonds and preferred stocks you can click here. You can toggle on the bottom for investment grade.

Putting This Day to Rest

So stocks ‘partied on’ and interest rates spiked up to as high as 1.88% before settling a bit lower.

I though when I tallied the numbers today I might see a little give back in income issue prices–but NO. The average price of all preferreds and baby bonds moved 4 cents higher today.

The new MetLife 4.75% closed at $25.10–goes to show that investors are getting almost desperate to buy a little yield.

Even the Uhaul Investors Club has cut their short term coupon issue to 2.50% (2 year term). For the last year the 2 year term issues paid 3%.

For me I guess this all means that I am going to have to ‘reload’ on issues that are in the redemption period and are pegged to $25 because of the call risk. Right now it is the most reasonable place for my cash.

Ag Coop CHS Reports Softening Earnings

While personally I am not worried about the longer term performance of giant Ag Coop CHS (untraded), but the short term outlook remains dicey.

CHS has just filed their earnings for the quarter ending 11/30/2019 and there isn’t a sector that they operate in that is showing strength.

Obviously the agriculture sector has been hammered pretty good and to derive a hefty chunk of revenue from this area makes for dicey earnings. The coop reported a pretax loss in the ag segment of $13.9 million compared to the year ago report of a pretax profit of $80.3 million.

The coop has been propped up in recent quarters with stellar energy segment earnings, but these are now softening with pretax earnings of $162 compared to a year ago pretax profit of $232 million.

Earnings in their smaller segments of grain milling and nitrogen production also fell.

With all the above in mind I note that the company had a total net profit for the quarter of $177 million–which is a decent chunk of change, but it pales as compared to the year ago number of $347 million.

I like to look at depreciation (a non cash charge against earnings) to see what type of free cash they generate and they show $136 million in depreciation which when added to $177 million means they had free cash generation of $310 million (just a quicky look at cash generation and not meant to be a total look at cash flows).

As you all know CHS has 5 issues of perpetual preferreds outstanding which can be seen here. Quarterly dividends on the preferreds are about $42 million–so dividends are not now–and won’t likely be affected by the downward trend in earnings.

The preferred stock issue have not reacted whatsoever to the earnings which is no surprise as they seem to always trade strongly.

The earnings release from the company can be read here.

The SEC 10Q can be read here.

Thanks to Affinity4Investing for being right on top of this earnings release.

Midday “This and That”

The President gives a reasonably moderate talk to the nation and traders declare “party on”-seems kind of early to me to be celebrating, but what do I know?

With the S&P500 up about 7/10% interest rates have got on board and the 10 year treasury is up 3-4 basis point to 1.86%–probably heading to where we were a week ago before the middle east situation. The previous trading range on the 10 year was 1.87% to 1.94%.

Ptrader noted earlier today that Saratoga Investment (SAR) is calling the balance of their 6.75% baby bonds (SAB) on 2/7/2020. They had called most of the issue on 12/21 and now just 2 weeks later call the balance of just under 1 million shares (bonds). Looks like holders are going to take a 2% hit (more or less) on their holdings as shares last traded at $25.62.

The call notice is here.

Todays overnight repo by the Fed was a non event. Primary dealers submitted $47 billion in offers and the Fed accepted all of the securities offered.

The new METLIFE 4.75% perpetual is now trading and is pricing around $25.03 right now after opening the morning in the $24.96 area. The issue is trading OTC Grey market under ticker METFL.

I have noted some readers have bought some of the new issue of Southern Company 4.95% Jr Subordinated Notes. I assume they are buying off the bond desk as I see no OTC trading. This is a tricky one as there was a OTC Grey market ticker assigned, but later withdrawn. For those interested you might want to call the bond desk with the CUSIP.

Relative Calm Prevails in All Markets

It is strange how we can go from a fairly large drop in the futures markets overnight because of Iranian missile attacks to a market that is acting remarkably calm.

With the killing of the Iranian general last week I thought that we would see some short term market weakness, followed by a nervous flat market. With missiles flying last night from Iran I thought ‘oh no’ this could get much worse than I expected.

Last night I did take a peek at the futures markets and saw they were down a couple hundred down points–all things considered not a big deal-and by market opening today we were flat and interest rates remained flat in the 1.81% area.

So, for now, we are back to semi-normal conditions. Of course this will be hanging over our heads for another week and it will temper moves in stocks and interest rates.

We do have the employment report being released on Friday . The forecast is for a modest 160,000 new jobs being created–certainly if this number is close we won’t see interest rate reactions–but we shall see.

MetLife Prices Perpetual Preferred

MetLife (MET) has priced their new non-cumulative perpetual preferred with a rock bottom coupon.

The issue priced at 4.75%.

The issue is not the lowest we have seen in recent months, but at 4.75% I am not a likely buyer. Recently 2 recent issues from Public Storage (PSA) came at 4.70% and 4.75% and are trading in the high $25’s and the 4.70% issue from Northern Trust (NTRS) is trading at $25.93.

The issue is investment grade at Baa2 from Moodys, BBB from Standard and Poor’s and Fitch.

The pricing term sheet can be found here.

Thanks to Steve A for being on top of the pricing release and mcg for forecasting the coupon at midday today.