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A Little Giveback Should Be Expected

Any time we get strong runs up-or even down it is totally normal to have a day or 2 of backing and filling. Yesterday we had a tiny amount of giveback in preferreds and baby bonds as prices fell by a nickel or a dime. After the run up we have had in prices the last 5 weeks I am more than happy to have falls of only nickels and dimes.

While common stocks fell yesterday and look pretty soft this morning I think it is a struggle going on—is the economy going to continue strong going forward and thus these high equity prices are justified—or are we going to finally see the recession that everyone has continued to predict and thus equity prices are too high? The S&P500 is not all that far away from all time highs–is this justified if we are on the edge of recession?

Today the 10 year treasury is trading at 4.23% which is 5 basis points lower than yesterdays close. With employment numbers this week we could see interest rates move sharply–up or down-who knows? Tomorrow we have the ADP employment report–job creation report. While ADP ‘got no respect’ from investors last year, we are now seeing more respect for their numbers-folks are thinking maybe their data is pretty damned good. Forecasts for ADP job creation is for 128,000 new jobs in November–Octobers number was 113,000. Friday we have the ‘official’ report on employment with forecast for 190,000 new jobs (versus 150,000 last month).

Yesterday I did nothing at all investment wise–I have a little cash from some sales last week so part of my decision is on allocation given my personal belief that interest rates will drift lower until debt issuance by the Treasury forces rates higher later in the year (2024). I am thinking in need to add more short duration term preferreds or baby bonds – if interest rates move as I think they will the share price of short duration issues will not move much – a steep rise in rates late in 2024 will slaughter perpetuals.

8 thoughts on “A Little Giveback Should Be Expected”

  1. I had dividends posted to one account on Friday from EBBNF and EBBGF thought I would post as a few have been talking about this.
    As for the rest of the year, we have been talking about this at work. The economy is still doing ok which means people will feel good about taking time off for the week of X-mas. so expect a slow week and the market to be flat or be controlled the whole week by a up draft or down draft depending on the market trend.
    Here is a reminder of something I forgot that I read about yesterday and I need to keep in mind and we all should.
    Congress is still working on trying to pass the budget one pc at a time. They kicked the can down the road on some of it until the end of Jan. and first week of Feb. They also will be taking time off around the holidays.
    This feels like a Freddie Kruger horror movie. The suspense grows until you can’t take it anymore then something happens. This goes on so much you become numb to it.
    We have had a good run for 4 or 5 weeks, I would be surprised to see it last. When everyone is celebrating and talking about how good things have been it’s time to quit following the herd. There might be a lot of people thinking like me and if so, expect the market to be doing some selling. I sold a little last week and booked some profit but it cut into my income. I will not be selling anything I might take a loss on, but I might sell some more to lock in a profit. I thought I had culled the fatted calves earlier in Nov. but I need to go back and look again.

    1. Charles, We’re running a remarkably similar playbook. Sharing your thoughts about what could be around the next bend – we do know there will eventually be “something”. Had been relentlessly averaging-down for at least a year. It got painful to maintain course as positions bloated about to about 2x, so wasted no time selling heavily into the rally locking down cap gains in about half of holds until positions were right-sized. Did buy a few items when spreads to 10-year somewhat normalized, though not feeling that buy-conviction at these higher prices and may pause for the rest of the year.

      Best holiday wishes to all.

        1. 100% agree Grid. For a small corner of holdings, that risk-adjusted, short-term yield is looking stellar, and long-term that 1.3% spread to inflation is a keeper. A hybrid of a traditional IRA and a Roth IRA via use of after-tax funds for accrual of tax-deferred income, also ultra-safe, zero-drama income with 100% protection of capital.

          A less recognized yield-kicker: unlike traditional taxable bond distributions at issued-price, I-Bonds posted “yield” understates the APR as a result of the compounding of 1)“tax-deferred” interest distributions being 2) “added to pricincipal” at the end of each six-month period.

          Not for yield-chasing, but an inexorable force through all markets and buoyant + spread through inflation events.

  2. Tim, thank you for your feedback. If I may say so, EFC is a good place to start. Ellington has been managing mortgages and credit for a long time – they do an excellent job protecting BV. Management also owns approximately 6% of the REIT. My take is the A’s should trade to $25 plus/minus $.50 when they float in October 24 (assuming markets are not blowing up), the B’s are about $1 cheap to the C’s, although the C’s have a higher current yield. Regards

  3. I posted this at the end of the day yesterday, probably too late to receive comments. Hi Tim, I am curious why you stay away from mreit preferred’s. Specifically EFC and RITH are well managed and protect book value very well. Their 3 month floating rate and five year reset preferred’s are pretty compelling. When they float they should have nice capital appreciation (based on NLY and AGNC) in addition to coupon. I am selective with the mreits I invest with, and personally I stay away from leveraged agency players. Let me know your thoughts and anyone else please contribute.

    1. Goldshoe–can’t say why–just a bias I have had for many, many years. mREITs and shippers. Most certainly the bias costs me some returns–the shippers for instance have been stellar the last 2-3 years. I have recently been trying to get by some of these biases and may look closer at the mREIT preferreds. Thanks for your suggestion–this old dog needs a ‘shove’ on occasion.

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