March, 2020 | Innovative Income Investor

Everyday–Get Up and Plan

Yesterday was a most restful market day for investors–and while common shares were up our holdings were up just a small amount–a very small amount.

Each day I get up, earlier than I normally get up, around 5 a.m.–it takes me a couple large coffees and an hour to get overnight news reviewed.

Yesterday I did no buying or selling–in some ways being out of the office and not fixating on news was refreshing.

My plan today. We know markets will open weak so I will simply watch. Odds are that an early weak bounce will come, but if trends are to be followed we could see a close down 10% again by the end of the day.

If we get a bounce of any magnitude I will sell a little more in the perpetual arena–I don’t hold much, but I may convert more to cash awaiting the bottom (I have no idea when this will happen). Nothing pisses me off more than selling losers–but a loss is a loss and I am not holding to watch a 25% loss go to a 50% loss.

I don’t think I will do any buying–I have so little visibility in anything regarding the economy it is getting harder and harder to pull the trigger BUT I will–sometime in the future.

As I have said many times–if you can not sleep you need to sell a little more. If the money you have is essential to your retirement or lifestyle you need to keep more dry powder. The time will come when this can be redeployed in a very profitable way, but that time is not now and no one can predict whether that time will occur tomorrow, next week, next month or even further out.

Section 18 of Investment Company Act of 1940

I note many questions, comments etc on coverage ratios of closed end funds (CEFs).

I am in the office for only minutes but am posting Sec 18 here at this link–

Capital Structure of Investment Companies

This lays out dates etc relative to coverage ratios–and what happens if the company break coverage rules.

Practically speaking – I wrote on how this was handled back in 2009, 2010 and 2011 by the Gabelli companies on Seeking Alpha.

The article is here–but the links are old and no longer work.

A Bit of Gyration

Everyone needs to remember that as we get calmer markets (hopefully soon) it will take plenty of time for income securities to move much higher.

It is true that the fall is much more rapid than the rise will be–maybe you are down a $1 or $2 on some issues (or more)–it may take most of the year to recoup this loss.

Looking at my accounts this morning–obviously early–they are up maybe 3/10%–I would be glad for any gains whatsoever at this point, plus we can continually analyze and nibble if appropriate.

End of the Panic? Start of Fundamental Declines?

I thought maybe we saw the end of panic market declines–but yesterday proved I was wrong on that. So with a little market bounce today in the futures maybe we will begin to get a little footing while continuing a general market decline.

To me with dividends starting to be cut and earnings evaporating the equity market will see further erosion. The key here is ‘erosion’—erosion is a long term process–in this case 3-9 months. We can deal with ‘erosion’–not so well with ‘plunges’.

Once I think we are just eroding–instead of plunging I will buy a few high yield preferreds–i.e. VER-F and AMH issues and potentially an Annaly issue.

I know today I will not be buying or selling as I have to be out of the office for most of the day–but bargains will remain to be available for many weeks-if not months.

Another Painful Day

I nibbled just a tiny bit as the utility issues fell off today–but it was just a couple teeny, tiny nibbles.

I also have low ball orders in for some of the Gabelli CEF preferreds–last I looked none had triggered–but my lowball orders are $1 or more below the most recent trades–just to take advantage of any potential dump.

As those that have been in preferreds and baby bonds for many years know–you think you have a safe issue as it trades firm for a few days–then one day out of the blue the issue is taken out and shot!

Today I think I am down 2% or so–actually 2-3%–definitely painful, but not as bad as it could be. I did notice the Gladstone Capital Corp 6.125% baby bonds (GLADD) took a huge drop earlier today–I own this one. It fell as low as the $20/share area on some sizable block dumps–but it is now back to $22.32.

Of course as I mentioned earlier we are seeing dividend cuts and suspensions–get used to it, as it will be the norm in the months to come, and any prudent company would suspend, because survival should be top of mind for them.

I assume folks out there are positioned where they want to be as we have had days to get things either bought, sold or simply sold.

I realize that income investors come in all types–some folks have more money than they will ever need and are happy to ‘ride out the storm’. Others need money to generate future income streams to live their normal lives–preserving capital is of the utmost. So maybe one group is a net buyer while the other is a seller–do what you have to do–capital preservation is a key.

For all income investors the time will come–I have no idea when that will be, that you will need to buy. If you have had to raise cash to sleep at night you must have an idea where you would redeploy when the time is right.

There will be no whistles or bells at the bottom, so have that list ready.

Here Come the Dividend Cuts

As some have probably noticed lodging REITs Pebblebrook (PEB) and Park Hotels and Resorts (PK) have already announced dividend suspensions on future payments for their commons shares (after some which have already been declared are paid).

This is a smart move–anyone who tries to be a hero on their common dividends will pay the price–in particular in the REIT segment where dividends are high (relatively speaking). If there are lodging REITs that have not suspended–they are fools.

Of course there are many preferreds in the lodging REIT arena and they have been ‘creamed’. I would not yet try to be a ‘hero’ in this segment at this point in time–maybe in the future.

Additionally companies in all segments in the U.S. will probably cut their dividends–they will never miss an excuse to cut dividends–and this may be prudent.

Updated Gabelli Asset Coverage Ratios

We did update the Gabelli CEF coverage ratios last week–through 12/31/2019.

Most of them are in good shape–coverage ratios of near 300% to 856%. There are a couple that likely will break the 200% ratio, but they will have time to raise more equity.

Obviously the higher the coverage the better so folks may want to consider the coverage ratio into any possible buys they do.

We love the Tri-Continental TY-P 5% shares with over a 4000% coverage ratio, but it is trading at $56 and the call price is $55 so there is some call risk. I do own some of this issue.

CEF Preferreds

On the other hand I would be careful with the specialty finance companies–Oxford Lane, OFS Credit, Eagle Point, Priority Income and Highland Income. These are all unrated and with the CLOs they hold they are likely to face significant stress.

Here We Go–Another Wild Week

We know that equity trading will be suspended this morning after the open as the 7% circuit beaker trading halt will kick in after a few minutes. I fully expect that we may close down 10% today–may even hit the second circuit breaker which is 13% during the day.

Personally I have done most of what I can do as far as ‘positioning’ is concerned, but I do continue to hold some perpetual preferreds of less than investment grade (for instance VER-F and AMH-F and others). I may or may not continue to trim some shares, although my intention is to primarily hold at this point.

I have all the ‘starter’ positions I bought last week and am prepared to add to those positions–the only question is when and at what price? The Covid 19 issue is still a huge unknown and I want to be invested when we start to see some daylight on the issue, BUT I don’t know if we are in the 1st or 5th inning–just don’t know. I continue to have adequate dry powder.

For those looking for starter positions I would probably look in the CEF preferreds and the utility issues. It is too early to buy bunches–spread out anything you do.

Monday Morning Kickoff

Well I think we are through the medical panic phase of this selloff, BUT now to deal with the massive losses that will occur domestically and globally by pretty much all companies. Now we will have a giant equity loss on todays open as folks come to grips with ‘who remains solvent’?

Last week we had the S&P500 move in a range 2478 to 2882 before closing the week at 2711. Of course it took a giant gain Friday to get to the 2711 level–and we will give some (or all) of it back today.

The 10 year treasury traded in a wild range of .4% to .99% before closing the week at .95%. Normally I like to watch the treasury markets for signs of economic softness–but their usefulness now – for the short term, is fairly limited.

The Fed balance sheet grew by $70 billion last week–no surprise. Of course it is going to grow massively in the weeks just ahead–and in my opinion the years ahead. With the FED already announcing at least $700 billion in QE (quantitative easing) there is only one way to go and that is up.

Last week we had no new issues sold as far as I know–I have suspended my continuous monitoring of my SEC RSS feeds as markets have kept me quite busy.

Last week was one of the most devastating weeks in recent memory as $25/share preferreds and baby bonds fell, on average, $2.95/share. CEF preferreds were off $1.35/share while utilities (not on the chart) were off $1.24/share. Shippers were off about $5.30/share and mREITs $4.23/share. The only item up last week was the 10 year treasury as it climbed .24%

Finished our Buying For The Week

I picked up the CMS Energy 5.875% baby bonds (CMSC) and also the Spire 5.90% perpetual (SR-A) this morning–I had to pay more than I hoped, but I guess given where they were at yesterday it should have been expected that prices would bounce.

The DJIA gains are fading now-up just 189 which is a long way from the plus 1,300 gain on the open. That is fine–we got a good deal of issues purchased yesterday (although just in starter position quantities) so now we can be patient.

Right now I am up around 1/2% on the day–things go lower much faster than they head back up–pretty normal.

Over the weekend I am going to start looking for perpetuals that are of mid to high level quality.

I am thinking (without study this morning) of mREITs (probably Annaly, AGNC or Two Harbors), maybe American Homes 4 Rent (AMH) issues–just don’t know until I go through the list with fine tooth comb.

So for now I am hoping we are by the ‘crash’ type markets falls and will start to move into the slower moves lower (in stocks) as companies in the weeks and months ahead start to fess up to the damage being done by Covid-19. Given that I think we will likely move into a recession later this year I believe common stocks may be too high yet–but who really knows (they why I don’t buy many common stocks).