May, 2020 | Innovative Income Investor

Moving Into a Downward Tilting Goldilocks Phase

Talking about common stocks it sure looks and feels like we are moving into a Goldilocks phase–with a downward tilt. No one can foresee the future and we don’t have many more ‘bailout’ programs left at this time to ‘juice’ the market.

Seems to me that folks are slowly accepting that the economy will be in rough shape for many quarters–fortunately folks are not panicking just slowly rotating their holdings.

In the arena most of us play in – preferreds and baby bonds, the deals are likely gone for now–the panic selling done. From this point I think most deals will come in reaction to individual companies having issues–many in the REIT arena and in particular mREITS, lodging REITs and I suspect in some of the triple net lease issues. These will all play out over the next 12 months.

We are now getting the reports of the damage in the collateralized loan obligation area. Oxford Lane Capital (OXLC) has released their NAV (net asset value). The company burned up almost 50% of their NAV since 12/31/2019—ouch. The company will continue to pay a couple monthly dividends already declared but then likely will suspend the common dividend there after.

It is very interesting to watch the term preferreds from Oxford Lane–they have 3 issues outstanding. They are trading with current yields of around 8.5%–not bad for junky issues. This is a test of the asset coverage rules–they have to cover preferreds by 200% and debt by 300%–my suspicion is they have broken coverage.

I have written before that Oxford Lane, Eagle Point Credit and Priority Income (all CLO holders) would have challenges in a recession. Because of their structure–no matter how poorly the common shares do, I think they will eventually be just fine–no guarantees however.

Just like the above issues we will wait to see howly poorly the financials are in the business development sector (BDC). Undoubtedly there will be significant damage—if you are making loans at 15% you have to know that there will be defaults a plenty. These announcements in the future may create some deals for us in the BDC baby bonds–only time will tell.

Today the only activity I have done is that earlier today I let go of 1/2 my SDS short hedge–still hold a little, but with panic maybe waning I think I don’t want to be too short.

Monday Morning Kickoff

Here we go!! Another week of excitement and fear and greed.

Last week the S&P500 fell off the tiniest of amounts as it opened the week at 2854 with a weekly low of 2852 and a weekly high of 2954–closing the week at 2831 which is a loss of 6 S&P points from the Friday before.

The 10 year treasury traded in a range of .58% to .66% closing the week at .64%.

The Fed Balance Sheet grew last week by $82 billion – a meager rise (on a relative basis). The Fed Balance Sheet now stands at $6.656 trillion – likely on the way to $8-$10 billion before the year is out and higher in subsequent years.

The average $25/share preferred stock and baby bond was up last week by about 2%–a healthy gain. Investment grade issues were up by 1%, while banks were up 1.5% and even Lodging REITs up almost 2%. For the time being bargains have become relatively more difficult to nail down.

We enter the week with the equity futures off 1%. Last week equities were off a very minor amount and the previous week was off about 1.3%. I suspect we may be off another percent this week—a near perfect move lower–no panic. Off course the moves lower have not been helpful to preferreds and baby bonds as they have been much stronger than common shares.

We will have a number of employment numbers this week–given that terrible numbers are expected I don’t see the confirmation of bad unemployment being meaningful to markets. The more important numbers will be in a couple months–how fast employment improves from the bottom which may be April employment. We’ll see!

A Gentle, Yet Persistent Sell-off

Todays near 3% loss on the S&P500 felt pretty darned calm. After opening lower it just kept drifting lower and lower–no panic, just lower.

All of our utility and CEF preferreds and baby bonds remained essentially flat today, while almost all of our junkier issues lost a percent or two–but we are not deep into the less than investment grade issues yet so happy to see them move lower.

I didn’t do any investing today–I hold a modest position in Proshares Ultrashort ETF (SDS) and actually had an overall tiny gain today–a few steak dinners. At this point I am only concerned with ‘hedging’ the junk issues I hold–the utes and CEF issues have been pretty rock solid.

The selloff today and yesterday were essentially what I have wrongly been looking for the last couple of weeks. I hope that there is a realization that the economic damage being done to the economy will be long lasting–no need for investors to panic–just slowly sell off.

I will continue website work this weekend–which I do to a small degree everyday–adding more data and making corrections (never ending it seems) to spreadsheets and individual security pages–not going to spend much time searching for ‘buys’–plenty of time for that during the week.