August, 2020 | Innovative Income Investor

Monday Morning Kickoff

The S&P500 moved higher again last week as bad news is good news and good news is great news. The index moved in a range of 3285 to 3353 closing right near the high of 3351—the index gained around 2.5%–another week like this and we will have a new record high. With the liquidity in the system and the Fed at the ready to make sure asset prices move higher there is no doubt in my mind we will see record highs soon.

The 10 year treasury traded in a range of .51% (a record low) and .57% and closed at .56%.

The 5 year treasury (the base rate for the newer Fixed-Rate Reset issues) closed last week at .23%.

The Federal Reserve Balance Sheet fell by $4 billion last week–the second time in a row assets have fallen–assets fell by $15 billion last week.

Finally the average $25/share preferred and baby bond slowed their weekly increase in pricing. The average share rose 9 cents last week, with just lodging (plus 43 cents) and mREIT preferreds (plus 26 cents) contributing much to the small gain. Investment grade rose a penny, banks were off 5 cents and utilities showed a little softness being off 2 cents.

Last week we had just 1 new income issue announced as West Virginia banker WesBanco (WSBC) announced a new fixed rate issue.

The issue is trading under OTC temporary ticker WSBKL right now and opened strong when trading commenced last week with the low around $25.40 with a high on the week at $26.17, before closing at $25.98. Disclosure–I bought a 1/2 position at $25.50.

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You Snooze You Lose!!

Up until last week I held the Entergy New Orleans 5.50% baby bonds (ENO) in my portfolio–you snooze you lose on this one. Obviously I sold it–I wan’t snoozing, but I might have been dozing a bit.

Everyone wants safety—everyone–plus a decent coupon. But someone is asleep at the wheel on this one.

This issue becomes redeemable on 4/1/2021–just a short 7 months from now. Al things being equal to today this issue has huge call risk.

The issue is trading at $27.12—a yield to call of around MINUS 7%.

As mentioned by Bob-in-DE (and others) there is a lot of silly pricing out there right now.

Investors in this issue should exit immediately–there is no telling when the Rip Van Winkle investors will awake.

The Selling Decision is the Most Difficult

Normally when an investor buys a preferred stock or baby bond the decision to buy is pretty easy.

For me right now it would be a utility or closed end fund preferred or baby bond I would be most interested in as I am sticking primarily to the quality issues–although I have deviated a bit by buying a couple REIT preferreds that are investment grade.

Right now this is my preferred shopping area.

In the age of low coupons I am interested in a potential buy if issues are at or near their $25 liquidation preference–which means I’m not doing much buying now–still in the 65% area invested.

My current problem is more one of selling than buying–everything is priced to perfection—way above liquidation preference. Of course when I execute the sell I have no where to go with the proceeds–at least no where in the investment grade arena.

Right now I am grappling with the potential sale of 2 issues–both utility baby bonds which have moved 4-5 interest payments above of where I bought them

The 2 issues are the DTE 5.25% baby bond (DTW) and the Sempra Energy 5.75% baby bond (SREA).

Now that I am writing about these issues I just checked the yield to worst–the DTW issue is 1.99% and the SREA issue is 3.70%. With this info in hand I know I will sell the DTW issues today–the Sempra Energy issue, which most certainly will be called in 2024 can remain in hand for a bit longer.

So when determining what to sell one has to look at a number of factors–in particular in this time of irrational exuberence. By stepping through paces while writing here the answer became clear.

Amerco (Uhaul) Announces Earnings

For those that are invested in the Uhaul Investors Club Amerco (UHAL)has announced earnings for the quarter ending 6/30/2020.

While earnings were off a fair amount from the year ago quarter the balance sheet remains very strong.

Earnings available to common holders was $87 million as compared to $132 a year ago as revenues fell about 10% from $1.079 billion to $987 million because of Covid 19.

While earnings fell the company grew their cash balance from 1 year ago from $494 million to $825 million as they slashed their investment in new equipment. I note that the company has huge, non cash, depreciation expenses (last quarter $165 million) so for the quarter the cash flow was quite strong.

Amerco spends dramatic amounts on equipment–the year ago quarter they spent $847 million in the quarter as compared to just $249 million this year–wise cash management in times of uncertainty.

I do note that the company shows $2.3 billion in investments on the balance sheet. These investment are for the benefit of their insurance divisions and generally is not available to the other businesses.

The SEC 10 Q can be read here.

Disclosure–I started investing new IRA money in the Uhaul Investors Club about 2 1/2 years ago and currently have around $35,000 in their notes.

WesBanco Prices New Preferred–(Update) Ticker Announced

The OTC ticker has been announced as WSBKL.

Banker WesBanco (WSBC) has priced the previously announced Fixed-Rate Reset preferred stock.

The issue is priced with an initial coupon of 6.75% which will remain in effect until 11/14/2025. On 11/15/2025 the coupon will reset to the 5 year treasury, plus a fixed spread of 6.557%.

The issue is non-cumulative, but qualified. It is rated BBB- by Kroll Bond Rating Service.

The OTC temporary ticker has not yet been posted–we will be watching for it.

The pricing term sheet can be seen here.

Small Michigan Banker Level One Bancorp to Sell New Preferred

Level One Bancorp (LEVL) will be selling a new issue of fixed rate, non-cumulative preferred stock.

Level One is a relatively small Michigan banker with assets of just $2.5 billion.

Shares will be unrated by the large national ratings agencies, but are rated BB+ by Kroll Bond Rating Agency.

The preliminary prospectus can be read here.

Eugene was right on top of this one

Banker WesBanco to Sell New Preferred

West Virginia banker WesBanco (WSBC) , which is a a bank holding company with $17 billion in consolidated assets, has announced that they will sell a new issue of non cumulative preferred.

The issue will be a fixed-rate reset issue. The issue will be sold with a fixed coupon for which will remain until 11/15/2025 after which the rate will be reset every 5 years at the 5 year treasury (now around .2%), plus a stated ‘spread’.

The issue will be unrated by the big 3 ratings agencies.

It is noted that a banker of similar size–Heartland Financial (HTLF) sold a fixed-rate reset recently which has traded very strongly–now at $26.98. The issue has an initial coupon of 7% with a spread of 6.675%.

The preliminary prospectus can be read here.

mcg was on top of this one. EarlyBird chimed in with ‘yield talk’ in the 6.875%-7.00% on the new issue.

Franklin Resources to Delist Legg Mason Baby Bonds

Pointed out by mcg this morning.

Legg Mason which is an investment grade financial firm has been bought by ‘A’ rated giant investment manager Franklin Resources (BEN). The deal was closed last Friday.

BEN has announced that they will be ‘delisting’ 2 issues of baby bonds that Legg Mason has outstanding. Investors are not fond of delisted securities. The last trading day will be 8/20/2020

While Legg Mason was split investment grade, Franklin Resources has been rated A+ by Standard and Poors until recently being lowered to A. Obviously a very strong company.

The 2 Legg Mason baby bonds outstanding can be see here.

I note that Legg Mason has an older 6.375% baby bond which tumbled on the delisting news–from $26.08 down to $24.88, but now at $25.25. This baby bond is callable beginning 3/15/2021–IT HIGHLY LIKELY WILL BE CALLED AT THAT TIME.

The other baby bond outstanding with a coupon of 5.45% may well be called when 9/15/2021 (1st call date) rolls around.

I purchased a small position in the 6.375% baby bonds and may add to the position in the next 2 weeks–depending on whether folks drive the price down with selling.

Monday Morning Kickoff

Well we are in a new month and I really look forward to seeing what kind of government silliness unfolds this week. Friday we have the employment report–the big news for the week–will we see some improvement?? Markets say we will see nice improvement from last month–BUT weekly new claims say otherwise. Forecasts are for 1.36 million new jobs added–after 4.8 million added in June. Unemployment is forecast to fall to 10.7% from 11.1% the month before, but some forecast are much more negative instead calling for a stall out in employment. We shall see–and will it even matter to markets that are floating continually on liquidity.

Last week the S&P500 traded in a range 3214 to 3272 before closing the week near the high at 3271–up almost 2% on the week.

The 10 year treasury traded in a range of .528% to a high of .609% closing the week near the low at .536%.

Last week the Federal Reserve balance sheet fell by $15 billion. It appears that the huge U.S. savings rate (near 20% now as liquidity floods the system) is bailing out the Fed – for now. The current savings rate reminds me of the Japanese consumer savings rate which has provided ready funds for buying their debt for years.

The average $25/share preferred stock and baby bond last week rose by 21 cents–just shy of 1%. mREITs were strong and were up about 1%. Investment grade issues were up 1% as were the shipping issues. The losing segment was lodging REITS off about 1/2% as the Ashford Hospitality (AHT) issues got hammered

Last week we had 1 new issue come to market as banker Truist Financial priced a new issue of non-cumulative preferred at a coupon of 4.75%.

The issue which is trading under OTC temporary ticker TSTFL closed last week at $25.20.

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Website Down

As no doubt many readers noticed the website was down for a long period of time today–not sure how long, but at least 7 hours–I first noticed it at noon today.

Apparently there was a problem with an ‘array’ on the server and the website had to be migrated to a new server. What does that mean?? Hell if I know–to me it was just broke and now they have it fixed.