A Little Index Rebalancing Only Excitement We See

On a day with 50 mph winds and 12″ of new snow in Minnesota we are getting antsy to make a trade or two in the portfolios. I call them ‘boredom trades’. Got to be careful with boredom trades so I don’t do something stupid.

We had locked down nice profits in March in many of the newer securities we bought upon issuance and right now we have just a few of the shorter term flip type securities left. These are securities outside of our “base positions” which we specifically bought to hold only a short time and then take a profit when they avail themselves (at least we hope to do that–it doesn’t always work).

Right now we hold these positions that we hope to sell soon–

  • Affiliated Managers 5.875% (NYSE:MGR) baby bonds bought at $24.78 a week or so ago when it first began trading. Today at $25.28–actually could be sold for a nice 2% gain
  • Fidus Investment 6% notes (NASDAQ:FDUSZ) bought Tuesday for $25.45. Now trading at $25.68. This is dividend (interest) related as it goes ex 4/30. We are looking for another nickel or dime.
  • Global Partners 9.75% preferred (NYSE:GLP-A) bought 4/3 for $25.38 and now at $25.50. Again dividend related as it should go ex on 4/30 (for a tasty 60 cents/share) so hoping for a lift in the next 10 days or so.

So 2 of 3 of these could be sold soon–today or tomorrow maybe as we are just looking for quick 1-2% gains.

The other item of note is that S&P Global announced a rebalance of the S&P U.S. Preferred Stock Index effective 4/22.

We know that many of you are aware of this already so it is not new news, but the rebalancing is adding 23 issues while eliminating just 3 (one of which is a $100 issue and another is a $50 issue).

The only $25 issue being eliminated is the GLIBP perpetual preferred issue from GCI Liberty. This is a 7% issue (was previously a 5% issue) and it is trading at $25.45. Haven’t seen downward price pressure on this yet–but maybe it will come.

Here is the full list.

29 thoughts on “A Little Index Rebalancing Only Excitement We See”

  1. Looking at this RLJ / PRA. Reviewed the investor presentation from March.
    Opportunistic Deleveraging
    • Longer term opportunities exist to retire higher cost
    debt and preferred equity
    – FelCor 6.0% Sr. Unsecured Notes
    (callable June 2020)
    – FelCor 7.8% Convertible Preferred
    PDF page 16 on the investor relations page

    So, I guess they think they can retire it?


    1. Concerning the preferred, no….Not unless they make a tender to entice owners to sell Or they can of course try to reduce outstanding share count by buying in the open market.

      1. Hey Grid, I’m long rlj-a. Do you think they survive a nasty recession? Thanks for your reply.

        1. Tim, I can only give historical reference examples. AHT which is considerably more leveraged survived the deep recession without ever suspending the preferred dividend, though the common was suspended for 2 years.
          FCH-A which is RLJ-A was suspended for 2 years during the same crisis. However it in a lot better financial position under RLJ than it was on its own.
          But your worry is a valid concern, as being hospitality reits are more prone to volatility in economic downturns. And most suffered serious blows during 08-09. Market always seems to view this sector with suspicion, and probably deservedly so.
          I am not a fan of this sector personally, and this is the only issue in the sector I will own (though I have successfully flipped AHT-D several times in the past). RLJ was formed after Great Recession so no specific reference can be made to 08-09. Just me, but I personally will never own enough hospitality reits to cause me any stress.

  2. PFF was an etf not a cef- as far as i know there arent any other funds that follow the s&p methodology so at this point its moot.

    1. Affinity–they issue what they call “internotes” on almost a weekly basis. These are $1000 semi-annual interest payment short term notes and they file 497 for each issue–I see them come across my RSS feed all the time.

      1. I have always wondered what internotes were and if they were practical for individual investors to purchase.

        That might be a good subject for a post sometime Tim.

        I would also be interested to know what your RSS feed is for these sorts of things if you would be so kind as to let us know.

  3. Tim,
    You mentioned GLIBP .
    Interesting that it was trading in the 24.30th just one month ago with x-div on March 29.
    It seems it was a massive dump with a volume around 120k for a couple of days.
    I took advantage of the low price (relative). Low 24th was in December selloff. I didn’t noticed high volume until couple days later. Now, I am already out plus divvys. Couple things though.
    1. I am wandering if there was an inside knowledge available about index re-balancing beforehand and fund was liquidating positions.
    2. If there is nothing changed fundamentally (neither business nor economy) selling like that may present a buying opportunity. At least, it was a classic case with GLIBP.

    1. LYR,
      I understand your questions/frustrations. I found the rebalancing link last night and posted it here ASAP. For us little guys, it looks like the best we can hope for is to look for this rebalancing notice about 2 weeks prior to when the rebalancing actually occurs. Gives us time to make some moves – but your hunch is likely right – that they are dumping holdings much earlier than they are willing to post the announcement of the actual changes. Guess that’s how they rig it in their favor and keep their performance metrics up to snuff.

      1. Wrt GLIBP, I have owned it for awhile now and although it is the only one on the list being dropped that I own, I’ll hold it thru the rebalancing. 7% and QDI is fine with me and I may add as/if it dips – similar to how you and I both did when it dipped recently.

        I own 7 others on the list that are being added in the rebalancing.

      1. Tim I studied pretty hard last fall when I was flipping it a lot when it first became understood it was going from a 5% preferred to a 7% par issue. Very complicated finances for me to understand and I believe credit rating was around B. The QDI is alluring, but I have been out of it for quite a while now so havent stayed up with it. Not generally a huge fan of telecoms in general. Though as I speak out one side of the mouth, I did buy 200 shares of KTBA at $26.55 (couldnt get anymore at that price) today.

  4. Looks like wholesale buying across the Utility issues today, buying at ask all over prefs and BBs. Did nort look at volumes. JA

    1. Joel, I took advantage of that and dumped my NI-B for the umpteenth time after just recently repurchasing in 26.30s. Then reverse flipped back into PPX. A little over a month ago I bought under 25.30 and sold at 25.70. Back in at 25.47. MBINP spiked this morning a bit so I sold rest of it off. Added a bit more of RLJ-A also today.

        1. A4I, yes Tim is correct it is a hospitality reit and is non QDI. The company has been deleveraging and lowering interest costs. In fact cost this month they refinished to adjustable debt issues and lowered this Libor plus from 2.25% to 1.55% and extended the maturity out.
          So the market is valuing their credit quality. In fact had a discussion with a couple people including Arbitrage Trader who I respect and they deem the preferred to now be BB to possibly near BB+. Just tremendously less risk than the AHT preferreds though yield is of course lower. The issue is an old Felcor preferred but RLJ bought them and merged it into another subsidiary. I used to trade it several times when it was Felcor and have done it a few times being RLJ. Bought first lot at par ish, and collected a divi already. Doubled down today, though still am not going crazy here. The allure here of course is it is essentially a non callable preferred due to the busted convertible mechanism of the issue.
          Hospitality reits are more recession exposed so it is good to have one with decent credit quality.

          1. “busted convertible” is so true… The common has been a train wreck! It’s been cut almost in 1/2 just over the past 4 years. Not sure how sustainable this track will be if they can’t right the ship in this booming/improving economy. Definitely something to be said for how well RLJ-A held up in the December swoon. Dipping to just 24 1/2ish was pretty darned well considering what many other pfd’s did during that period.

            1. A4I, It really was busted from the terms when it was Felcor. The terms had to adjust to RLJ which put it in the same impossible conversion boat. That is what happened to WFC-L. Its terms made it “busted” from the Wachovia provisions. Those got transferred to Wells which made it impossible to be within earshot of a conversion with Wells either.
              Old illiquid venerable ute preferred IPWLK has had a controlled dumped late yesterday and this morning with several thousand shares becoming available which is rare. I bought 200 shares just below par $100. Been wanting to get back in this one for safe harbor stash for awhile again. This issue barely brushed $70 during financial crisis and quickly rebounded.

  5. I bought recent financials AIG (up 2.7%) and MGR (up 2.6%) also bought the recent utes NEE (up1.7%) and DUK (up 2%). The utes lag on capital gain due to less favorable purchase prices. My guess is all these issues will have little price reaction to first ex divvy. I probably will hold and find out because everything similar looks pricier (why I think little ex divvy reaction).

    1. P–Held them all except the AIG issue–had the NEE issue twice, but out except for a sock drawer amount. DUK and NGR are also gone with steak dinner profits.

    1. Just went ahead and flipped out today Gary. I think it has more upside but I had about 45 cents to the good.

  6. Well I sure got MGR wrong but I did get a couple of steak dinners out of it. So, whenever you walk away with more, it’s not a bad day

    1. SteveA–nothing ever wrong with a few steak dinners. I know I earned a ton of them in March.

    1. mcg–I wouldn’t say that it is not longer relevant. I know the biggest preferred cef doesn’t use it any longer (pff), but others may well pay attention and drive their buys/sells off the index action.

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