Author: Tim McPartland

We have just 30 minutes until the release of important inflation data with the consumer price index (CPI). The reason this should be considered important is because the Fed ‘claims’ they need to see a number of good data points before they cut rates. Since we are looking at June at the earliest and more likely July or later before we see a rate cut we need to see good data points starting now.

Now do I want to see rate cuts? I have mixed feelings–I am really liking that folks that want my investment dollars are forced to pay me to use it. We went through a period of 10 years where we were lending money to banks etc and they didn’t even have to pay us (much). On the other hand the longer rates stay at elevated levels the deeper the hole the government is digging for itself as cheap treasuries mature and high coupon debt is sold to replace it–and we all know this will come home to roost at some point in time.

So the forecast for the headline inflation number is 3.4% (year over year) which would be up from 3.2% last month. The core rate is forecast at 3.7% versus 3.8%. Obviously we need numbers within a 1/10th or so on these to keep markets stable–if we are off by a number of 1/10th it is possible we see some fireworks in equities and/or interest rates.

My personal take on inflation is it is not slowing much (if any)–this is based on almost nothing. I do almost nothing when it comes to paying the household bills–I seldom ‘shop’–seldom buy groceries–my wife runs everything around this house. What do I do—work, work, work. But even though I do little shopping etc I do see some signs of continuing inflation–today what caught my eye was the cost of a 1st class stamp is likely going from 68 to 73 cents. Honestly I was shocked–I thought stamps were around 50 cents–talk about out of touch. I do buy fuel for my vehicle–and that is way up in the last number of months as west Texas intermediate trades up in the mid 80’s. I have completed a number of new construction house appraisals lately and I can guarantee prices remain sky high – you don’t get much for $500,000 anymore at least in Minnesota. Well we will see what happens shortly.

As noted I purchased a add on position to my Carlyle Credit Income Fund 8.75% term preferred (CCIA). No other purchases are contemplated this week–always subject to change of course.

The 10 year treasury is steady right now at 4.36%–obviously awaiting news. Equities are also little changed–we’ll see if this remains the case in a few hours.

Yesterday we had a spirited back and forth in the ‘Sandbox’–I fully understand the strong feelings folks have about things like student debt forgiveness etc. You can’t believe (or maybe you can) how hard it is to write each day without bringing politics into my writing—BUT I just have to avoid it—our website won’t survive if we go down the political path.

Please refrain from going down the political path–I know it is difficult, but we will all have a better, more peaceful place to hang out. Thank you for your restraint.

The obvious answer to my question is that we have no idea–although I spend plenty of time pondering the question. Everyday I look for ‘bargains’ in the preferred stock and baby bond arena and I simply don’t find issues that I want to buy very badly—when interest rates move higher most of the time we are going to start losing capital so what is the point of buying when we have solid competing alternatives.

When we have rates at a relatively high rate and threatening to go higher we will have to do what we have done in the past–buy term preferreds and short dated baby bonds. This is the best solution to higher returns when starring at potential loss of capital because of high interest rates. By and large going this route fits my plan pretty well. This necessarily means that purchases of safe (but low coupon) longer dated baby bonds and of course perpetual preferreds have to be minimized (for the time being), which hurts my balanced approach, but with 5.3% CDs right now one can have the ‘safe’ investments in money markets or CDs and forego about 1/2% of coupon.

Right now I have the Hennessy Advisor 4.875% baby bond issue (HNNAZ) with a 2026 maturity on my list and have the prior mentioned good til cancelled order in for some shares. Today I will add an order to buy more 9I already have a position) of the Carlyle Credit Income Fund 8.75% term preferred (CCIA). Shares are now at $25.40–an ok price to buy right here—this is a monthly paying preferred.

This morning the 10 year treasury is at 4.39% which is lower from the close of 4.42% yesterday. Tomorrow and Thursday we have important inflation news with the CPI and PPI–will interest rates plunge or skyrocket after the release of the numbers? Who knows!! I stick to my thoughts that this coming fall (or winter) we will have long rates going higher–regardless of what the Fed does to the Fed Funds rate–there will be a moment in time when buyers of long debt ‘demand’ a higher payment from an insolvent government–seems logical to me as I demand a much higher reward from a junk company than from an investment grade company.

Yesterday saw a giant dump in equities when the combination of war talk in the middle east and big mouthed Fed yakkers took the S&P500 from a gain of 1% to a loss of over 1% in about an hour.

I am tired of Fed folks talking–if I was king these folks would be gagged. Investors (or at least traders) just can’t seem to help themselves in reacting to the drivel these folks spew. Yesterday Kashkari spewed the most hawkish crap and when rates were at zero he was the most dovish–the most wrong of anyone–why pay attention to this clown?

Regardless of the Fed yakkers yesterday did not bring losses to income issues although today once again we have numerous talkers so who knows what kind of silliness will prevail.

Of course the big news of the day is the jobs numbers for March which will be released in 45 minutes. The forecast is for 200,000 new jobs and an unemployment rate of 3.8%–and we will also see revisions to numbers from February which showed gains of 275,000 jobs. This is a key number (at least in my opinion).

The other big news we have out there–or at least will have out there is a spread in the middle east war–there is no doubt in my mind that we will see Iran attack Israel–the only question is when and how? As some noted yesterday this will likely send interest rates lower as global investors move to the safe haven of U.S. debt—but this doesn’t mean equities will react in the same manner. We’ll see.

I continue to execute my plan. I have lots of CDs maturing most months and I am rolling dollars over as long as I can attain 5.2 or 5.3% on a 3 month issue. BUT I am holding some cash back to be available for purchases of preferreds or baby bond bargains. Portfolios remain almost evenly split between CDs (and money market) and preferreds and baby bonds. I remain targeting 7% overall–likely a little shy of this target, but will get there as I add higher yielding income issues in the next number of months.