I am certain most of you have gains beyond mine being the ultra conservative investor that I am—but certainly the gains have been better than my expectations. The last week alone has been super profitable.
As most of you have noticed we started with some of the higher coupon preferreds moving higher way back 15-18 months ago and now bargain hunters are moving down the ladder to invest in the more low-midrange coupons (5.5% to 7%) helping to drive those share prices higher. 1 issue in which I have an overweight position is the RiverNorth Opportunities Fund 6% perpetual preferred (RIV-A). Today it is trading strongly higher–44 cents on higher than average volume.
Now those that are worried the move higher in baby bonds and preferred stocks has no further room to run after 18 months just remember that these trends tend to always run longer than one believes they will. Additionally, we are running into a time frame where ‘reinvestment risk’ is becoming a factor–how do you improve your yield? My bigger worry is that common shares move lower and drag the income issues with them–but no one can predict tomorrow let alone next week and next year so I won’t lay awake worrying about what I can’t control.
Yes, my portfolios of preferred, BBs, bonds, treasuries and CDs are up a total of 12.2% collectively so far this year. I also have a smaller trading account where I mainly trade options (selling premium) that is up 26.8% YTD.
The former has already out-done my whole year returns for the past four years – pleasantly surprised. The latter I target 30% for the year and it has varied from a 5% loss to a 105% gain over the last your years.
As most here, now it is getting tougher to figure out where to roll into things! Coincidentally, I actually bought some more RIV-A yesterday morning (only 100 shares to add to the 1050 I already owned) at 23.91 – my basis now being 23.21.
JPM has called another CD early which will pay out Monday so will have more $$$ to roll somewhere. Good times…
Last few months have been great to bring my large muni portfolio closer to original cost. I’m not so sure that’s good as the reinvestment risk on newer purchases (last few years as rates rose) is getting higher.
I still have a couple losers from last year for my tax loss selling. Now i can’t sell anything else I don’t want to pay the capital gains tax. This making money thing isn’t for sissies.
Personally, while I hate paying taxes, I try not to let taxes get in the way of a good deal. If its time to sell, I try to just sell (and take the gain) because I can usually find something later in the year that I can sell for a loss.
In our practice, we tell clients not to fall victim to tax paralysis. We can find ways to minimize taxes, but good deals don’t come around every day. Of course, it has to be a good deal to begin with….
However, (a) that is just me, and (b) there isn’t always a good path forward. You have to do what works for you.
Sorry to pontificate – I am stuck in a waiting room filling time while I wait (and wait).
.Rant: it seems that the medical profession has gotten a lot worse about wasting patient time. They seem to have discovered that it is free to them and almost infinite, so they waste it and waste it. We have been sitting here since 7:10 for an 7:30 radiation appointment (Dr. insists we arrive 15 min early!). Its now 9:30 and here we sit. I am not happy to have my time wasted, but the poor guy who is going to get the treatment was nervous to begin with, and the wait is hard on his mental health…
.EndRant:
Not paralysis but it’s always a relevant factor. I have a lot of QDI and don’t want to bump up to the next tax bracket, that would be a double whammy on anything I sell at a profit. Each year is different. For example I want to withdraw my low rate ibonds but it makes tax sense to wait until January.
Still holding the old SI-A could take the loss but I keep hearing it will be worth something if they ever close it out.
Year to date asset class returns. I was surprised at the leader at the ¾ pole: precious metals at 25.8% I would have guessed the broad market, SP500, would be ahead powered by Nvidia but it is 2nd at 18.2%. In III land, the Justin Bank Preferred Portfolio (JBPP), real money account total return is ahead with 15.4%. All credit to Justin for the idea.
The JBPP return includes dividends, where as all other asset classes are price only. So maybe you add 4% dividends to the broad preferred return of 5.9% to get to 9.9%. Pretty darned good year for preferreds, less so for baby bonds/terms.
12/31/23 through 9/13/24 returns
Precious metals 25.8%
SP500 ETF 18.2%
Justin Bank Preferred Portfolio 15.4% Note: Total return including dividends
CEF’s: 15.3%
MLP’s 12.4%
Equity Reits: 9.9%
High quality, low coupon preferreds: 7.8%
All preferreds 5.9%
Preferred ETF PFF: 5.8%
Baby/terms: 2.6%
Muni bonds: 1.3%
Mreits: 0.4%
BDC: round to ZER0%
Please explain JBPP.
LarryL said: “Please explain JBPP.”
Verbatim from update posted on 5/22/24
*****************************************************************************
Update on the Justin Bank Preferred Portfolio- (JBPP). One year ago on 5/22/23, I started the JBPP portfolio based on the excellent suggestion from Justin. Banks and their preferreds/babys were beaten down in part due to the failure of Silicon Valley Bank. Several other banks were viewed as being on the ropes and headed for imminent failure. I used a methodology to buy one preferred share/baby bond from each of 48 banks. The thought was that one or more might fail, hence go to zero, but overall the survivors would bounce back and outperform the broader preferred sector.
Happy to report that the JBPP DID outperform the broad preferred ETF index, PFF, which holds ~ 440 issues. Zero of the original 48 JBPP holdings went to zero, aka bankrupt. The JBPP one year total return was 22.8% compared to PFF at 11.4%, which is significant. JDPP outperformed PFF on 8/12 months, 75%, which is significant, but the tide might be turning. Long story short with a broad brush, bank preferreds are generally higher quality which means generally lower coupon yields which generally means they will fall further IF, long term interest rates like the 10 year US Treasury rise.
JBPP was intended to be a Ron Popeil, “set it and forget it” portfolio without ever making a trade. Issuers had a different opinion and have called several issues, forcing additional purposes in order to stay fully invested. Here are the changes to date:
PACWP became BANC-F when PacWest was purchased on 12/1/23
C-K was called on 11/15/23 (IRR= 8.56%) and replaced with WFC-R
FNB-E was called on 2/15/24 (IRR= 22.33%) and replaced with SYF-B
WFC-R was called on 3/15/24 (IRR= 5.85%) and replaced with NYCB-A on 3/18/24
FGBIP was bought with excess cash on 3/19/24
The addition of NYCB-A might seem controversial considering all of the negative stories about NYCB. Since the original thought was the entire bank preferred sector was beaten down and would eventually return to full value, the NYCB buy is consistent. Also important to note that the original picks were “quant based” and no personal judgement about default/bankruptcy likelihood was used. Yes, it risks a loss of $18.17 which is about 1.75% of JBPP, so it will not be fatal if it does not make it. OTOH, if it does make it the upside would be significant. Note that out of the current 49 holdings, NYCB-A is the only one with a loss, being -2.49%.
Since inception, the portfolio has received ~ $65.29 in dividends/interest which is 7.49% based on the original purchase price. The brokerage currently allows automatic dividend reinvestment on 40/49 issues. The largest gainer is TFINP which has 1.0904 shares for a 9.04% increase. In that sense, this is a dividend growth portfolio through an unconventional way. This is something you cannot do with conventional bonds and/or CD’s which is particularly important when you are receiving 20 to 50 cent payouts. You would need to have about a $50k portfolio to receive $1k payouts per quarter to buy 1 CD per quarter, all with some hassle compared to DRIPing.
BOTTOM LINE QUESTION is whether JBPP is still investable today? I think it depends on your macro forecast for long term, aka UST 10 year rates. If you think they are going higher, I would not buy this portfolio OR any other broad based preferred one. If you think long term rates are headed lower, I WOULD buy the JBPP today over a broad based PFF type. Two reasons: lower rates help these lower coupon issues PLUS, they also help the survivability of banks. This might lead to more bank issues heading towards fair value.
There are two other scenarios where JBPP might suffer if multiple banks go belly up.
1. Long term rates go higher, commercial real estate gets marked down further resulting in more commercial loans defaulting. In additional the banks that hold a lot of low coupon yield bonds on their books have to mark them down further. My personal opinion is that the Fed/Treasury is hades bent on NOT letting this happen.
2. Long term rates go at LOT lower, due to the country entering a severe recession. In that case, all kinds of bank loans default at a higher rate, causing more small bank failures. Recall that Too Big to Fail banks will be just that and not allowed to fail, but as we have seen, smaller banks are not protected. My personal opinion is that the Fed/Treasury also is hades bent on NOT letting this happen.
Obviously we hold all of these issues since this is a real money portfolio. We do not plan to sell any issues come hades or high water. If that changes I will make a post. PS, we were literally in the middle of Hurricane Harvey and did NOT sell anything, but that is a story for a different time.
This does prompt the question: What would cause us to sell JBPP? Worth some thought, but defer for the sake of brevity.
When you look at the detailed individual holdings, something really stands out IMO. It is pretty obvious in hindsight, but I did not highlight it BEFORE the original purchases. The best performers were the issues most likely to go BK at the time, whereas the worst performers, i.e. lowest gain were least likely to go BK. Poster children for this are PACWP which became BANC-F is up 129.9% and at the opposite extreme is JPM-M which is only up +4.9%. Stated differently, investors forecast ~ 0% probability of JP Morgan-Chase going belly up while assigning much higher probability ~ 50-70% for PacWest Bancorp and Valley National to go BK.
PS, I am working on a different, non-bank, real money diversified 1 share each portfolio which I will post/track if there is any interest.
Current holdings in a “CSV” format for ease of importing into a Google Sheet or Excel Spreadsheet. (I previously posted detailed instructions on how to do each of those imports.)
Header row:
Ticker, buy date, # of shares, pref/baby, type, coupon yield, total return, comment
BANC-F, 5/22/23, 1.07, Pref, Reset, 7.75%, 129.9%, Changed from PACWP on 12/1/23
VLYPP, 5/22/23, 1.082, Pref, FixFloat, 6.25%, 48.7%, FF effective 6/30/25
DCOMP, 5/22/23, 1.085, Pref, Fixed, 5.5%, 42.6%,
ASB-F, 5/22/23, 1.082, Pref, Fixed, 5.63%, 39.5%,
EFSCP, 5/22/23, 1, Pref, Fixed, 5%, 39.2%,
CNOBP, 5/22/23, 1.054, Pref, Reset, 5.25%, 39.1%, R effective 9/1/26
TFINP, 5/22/23, 1.09, Pref, Fixed, 7.13%, 37.2%,
UCBIO, 5/22/23, 1.079, Pref, Fixed, 6.88%, 35.8%,
SNV-E, 5/22/23, 1.067, Pref, Reset, 5.88%, 33.1%, R effective 7/1/24
ZIONP, 5/22/23, 1.059, Pref, Variable, 5.51%, 32.8%, V effective now
WAL-A, 5/22/23, 1.067, Pref, Fixed, 4.25%, 32.2%,
FHN-F, 5/22/23, 1.077, Pref, Fixed, 4.7%, 29.7%,
MBINN, 5/22/23, 1, Pref, Fixed, 6%, 27.5%,
FULTP, 5/22/23, 1.079, Pref, Fixed, 5.13%, 26.4%,
GS-A, 5/22/23, 1.074, Pref, Variable, 5.55%, 25.7%, V effective now
KEY-K, 5/22/23, 1.074, Pref, Fixed, 5.63%, 25%,
HWCPZ, 5/22/23, 1, Baby, Fixed, 6.25%, 24.5%,
WSBCP, 5/22/23, 1.074, Pref, Reset, 6.75%, 23.4%, R effective 11/25/25
HTLFP, 5/22/23, 1.074, Pref, Reset, 7%, 23.3%, R effective 7/25/25
MSBIP, 5/22/23, 1.082, Pref, Reset, 7.75%, 22.9%, R effective 9/30/27
TFC-I, 5/22/23, 1.055, Pref, Variable, 6.22%, 22.2%, V effective now
WTFCM, 5/22/23, 1.074, Pref, FixFloat, 6.5%, 21.9%, FF effective 7/15/25
AUB-A, 5/22/23, 1.06, Pref, Fixed, 6.88%, 21.9%,
CCNEP, 5/22/23, 1.06, Pref, Fixed, 7.13%, 20.5%,
ONBPP, 5/22/23, 1, Pref, Fixed, 7%, 19.8%,
CUBB, 5/22/23, 1, Baby, Fixed, 5.38%, 19%,
FCNCP, 5/22/23, 1.048, Pref, Fixed, 5.38%, 18.9%,
OZKAP, 5/22/23, 1.073, Pref, Fixed, 4.63%, 18.7%,
RF-E, 5/22/23, 1.066, Pref, Fixed, 4.45%, 18.1%,
WAFDP, 5/22/23, 1, Pref, Fixed, 4.88%, 17.4%,
WBS-F, 5/22/23, 1.052, Pref, Fixed, 5.25%, 17%,
TCBIO, 5/22/23, 1.078, Pref, Fixed, 5.75%, 16.5%,
WFC-D, 5/22/23, 1.045, Pref, Fixed, 4.25%, 16%,
SYF-A, 5/22/23, 1.084, Pref, Fixed, 5.63%, 15.7%,
FITBO, 5/22/23, 1.057, Pref, Fixed, 4.95%, 15.4%,
HBANP, 5/22/23, 1, Pref, Fixed, 4.5%, 13.8%,
CFG-E, 5/22/23, 1.066, Pref, Fixed, 5%, 12.7%,
MS-O, 5/22/23, 1.06, Pref, Fixed, 4.25%, 12.2%,
COF-N, 5/22/23, 1.049, Pref, Fixed, 4.25%, 10.8%,
CFR-B, 5/22/23, 1.063, Pref, Fixed, 4.45%, 10.7%,
FGBIP, 3/19/24, 1, Pref, Fixed, 6.75%, 10.7%,
MTB-H, 5/22/23, 1.045, Pref, FixFloat, 5.63%, 10.4%, FF effective 12/15/26
BOH-A, 5/22/23, 1, Pref, Fixed, 4.38%, 10%,
USB-Q, 5/22/23, 1.062, Pref, Fixed, 3.75%, 8.3%,
STT-G, 5/22/23, 1.043, Pref, FixFloat, 5.35%, 7.9%, FF effective 3/15/26
BAC-P, 5/22/23, 1.059, Pref, Fixed, 4.13%, 7.8%,
JPM-M, 5/22/23, 1.042, Pref, Fixed, 4.2%, 4.9%,
SYF-B, 2/20/24, 1.019, Pref, Reset, 8.25%, 2.1%, FF effective 5/15/29
NYCB-A, 3/18/24, 1, Pref, Fixed, 6.38%, -2.5%,
Tex, The other “I am working on a different, non-bank, real money diversified 1 share each portfolio which I will post/track if there is any interest.”
I would be interested in hearing if it is also going to be preferred stocks, in a market segment that is also beaten down and a mix of companies from the highest risk to the least risk of default.
Also want to thank you for the detailed response to Larry’s question. This helps everyone here on the board.
Tex, Thanks. In simple terms those that took a risk have been rewarded. Bank securities, HY Bonds, have done well. I don’t think any of us can forecast future economic conditions. I have high risk portfolio which I never put additional funds in. Thus far, I have great returns which to reinvest. My equities are what I consider non negotiable. I will never sell. My estate can use step up basis. I will also be interested in your new portfolio.
Thanks Tex good summations.
I’ve been in/out at least half of those names though not the particular lower coupon discounted pfds. …such as….LNC D JXN A FGN MTB J what is it CFG H(?) RF B now F, etc
Much depends on the markets but if rates do drop as predicted this year, then more next year, real money will be made in those 4% coupon type pfds now trading under 20…….
Nice work Tex the 2nd.
I am up >20% on the year and haven’t owned any of the top 5 categories on your list.
It has been a good year for flipping and finding hidden gems.
A rising tide lifts all boats, so the old saying goes. We are seeing higher risk investments going up in share price as investors chase yield. Tim has calculated the risk behind NLY-F and is expecting it to stay anchored close to par until it is called.
I am agreeing with Tim that this trend of chasing yield and rising preferred stock prices has probably more room to run which is why I cancelled a sell order today. I had considered ALL B to be a sell as I thought I should lock in capitol gains and I could always circle around in the future over the next 30 years. My concern has been the losses All State has been having and their efforts to stem those losses. I set a limit sell order and happened to look and see it was a 1/2 cent from executing so I decided if people want it that bad I need to see about resetting the sell higher. This trend of people chasing yield has been discussed over on the illiquid page with the price of SOCGM But as it has been pointed out, if you do sell what do you replace it with to keep the income? This is the trap I could fall into if I look for a higher return and I have to take on higher risk.
It’s been a stellar 6 weeks for my sub $20 perpetuals. With money becoming available from maturing treasuries, it’s killing me to average up :->O
Out of curiosity, how does one evaluate floating issues now? With rates dropping, they should rise. But in opposition, the dividend is going to drop. Any idea who wins and when?
Agree a treatise on evaluating floaters going forward would be useful. Falling SOFR rates will bring down coupons but perpetual rates tend to follow the 10YT rate that may stay flat or rise. That suggests falling prices for floaters unless spreads widen. Lots of moving parts.
Any other views?
There’s plenty of literature on this topic:
https://rodneywhitecenter.wharton.upenn.edu/wp-content/uploads/2014/03/8521.pdf
https://fimmda.org/Uploads/general/Valuation-Methodology-of-Floating-Rate-Bonds-as-at-1st-March-2014.pdf
https://www.anderson.ucla.edu/documents/areas/fac/finance/22-93.pdf
https://core.ac.uk/download/534868185.pdf
For a less quantitative answer, here are some thoughts.
1. If the security has no risk and the reset is frequent (quarterly should do) then the stripped price should roughly be at par if markets are in equilibrium. This assumes no spread over the risk-free rate since the security is just giving you the risk-free rate.
2. The riskier the security was at the time of issue, the higher the spread would have needed to be to initially sell it at par. So, if the fundamental risk of the security hasn’t changed since issue, its stripped price should be near par. If the company’s financial situation has improved, it should trade above that level, and if the company’s financial situation has worsened it should trade at a discount.
3. If the floating security has a sister issue that is fixed rate, you can use that as a proxy to figure out how risky the market thinks it is.
4. Carefully read the prospectus to see if there’s a floor on the interest rate. Here’s one example: ACR-C floats at a spread of 5.927%, but it also has a floor of 8.625%. Obviously this kind of a floor will lead to a higher price, other factors being equal.
Evergreen comment: don’t take financial advice from retired sailors!
Back in 2021 and 2022 I was losing sleep with how quickly the value of my preferred portfolio was reducing. This year, as Tim says, it has been increasing (I believe at even a faster rate). Rather than being happy and getting a good night’s sleep, I now worry about not being able to find good preferreds to invest in given the recent run up. I guess some people just can’t ever be happy.
I hear that, Steve.
I must say though – in retrospect, I’m less upset with the current “reinvestment” conundrum than when I had my “my portfolio’s going to zero!” days and nights.
Yes very good year.
Am new here. Was wondering if on ongoing thread available for all us investors who like preferreds and baby bonds, to post our buys and sells??? A thread entitled Buys and Sells and ongoing vs. e.g. the Investment Idea thread which has specific topics.
Is that something others might like? Few sites available for preferred and bb investing so was curious. Thanks.
If I posted all of my trades it would fill up the board. I only mention those that fit a discussion or those that may be of interest because of an outlying opportunity that others may want to know about. New issues get a lot of interest and typically have their own heading, Others I’ll posts under whichever forum fits, or in the Sandbox.
Tactius some of the preferred have low volume and prices could get distorted if all of the III’s were to jump on a posting.
This is a wonderful site, and I hope it stays this way.
There has been mention of that other site and how articles over there will move the market. They have actually promoted this fact telling people you need to sign up and pay a subscription to get early alerts. Tim’s site runs on donations and he and others have been kind enough to post about possible opportunities on here but these are not a recommendation to buy.
Yes and I was one of them on the Fidelity board. I have different handle there. I emphasized on Fido that attractive individual bond purchases have been drying up and individual preferreds, especially those that qualify for the tax qualified status, if placed in taxable account, another great alternative often overlooked. Mentioned this site more than once with links.
Of course other ways to seek yield too, especially in current rate environment, but individual preferreds are a good niche to know. Have invested in individual preferreds well over a decade or so. Think LeDu had a service but subscription required, some others perhaps. Free is best imo. Best benefit for me from a blog or forum is to become aware of a new prospective investment to investigate for possible purchase. And then be able to ask challenging questions, even play ‘devils advocate’. So an investors’ buys/sells thread for me would be of interest though seems not of much interest here. That is okay, to each their own, like the lists of preferreds and baby bonds.
Anyhow best of luck to all. Was nice briefly exploring this blog.
Well of course don’t have to post all your trades.
Ok nevermind. Am moving on from the blog. But do appreciate the list of preferreds.
Tacitus
Not sure setting up a Buys & Sells is a good idea.
Too close to a “pump and dump” possible interpretation
We all may put our Buys on the site after they’re made – we believe in our purchase and know/hope that others will see our logic and also buy, raising the price.
But
Every smart writer emphasizes DYODD – protecting against the possible semblance of a recommendation.
I personally like the discussion. Look at the history of the KRP, MXERT (sic) and other similar discussions. They feature to and fro – proponents and dissenters – the discussion increases information and knowledge.
THAT is the benefit of III.
A Buy and Sell would take readers away from understanding, towards impulsive copycat moves.
I figured out how to turn on the like button!
Thanks Tim, for your post. Always good food for thought.
I keep finding myself pondering your thoughts (usually while I am driving), so thank you.
Private–stay out of the ditch (which I find harder and harder the older I get).
Private – if it’s in my hands to turn the Like button on for all previous posts, please do share how…