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.
This may look like a pure ‘yield chase’, but it part of my plan–lower yielding, safe issues balanced with higher yielding issues. This term preferred issue with a mandatory redemption in 2028 is perfect for me. Folks worry about collaterallized loan obligations (CLOs), but on a historical basis going back to 1994 less than 1% of the loans held has defaulted–the reward pays for the risk in my opinion. This issue is superior to all of the Eagle Point Credit (ECC) term preferreds as well as the Oxford Lane Capital (OXCL) term preferreds. Carlyle is a newer and smaller company, but the sponsor (Carlyle Company) is a giant company and the largest CLO manager in existence (1 list has them at $38 billion while another says around $50 billion)–if they can’t successfully launch a CLO closed end fund I don’t know who can.
NOTE that I expect no capital gain on this issue–simply will collect a nice dividend. Term preferreds with mandatory redemptions will generally move in a fairly tight range over their lifetime–and that is my hope with this issue.
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.
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.
Well once again it is time to get a new week off to a start–of course virtually every week has important new events that are scrutinized to no end–this week the most important event will be the release of the consumer price index (CPI) on Wednesday, but we will follow this up with the producer price index (PPI) on Thursday. We know that are the ‘smart’ people will pick the numbers apart to no end–but the real smart people–those on this website, know that putting much faith in singular numbers is a fools errand.
Last week we had some giant swings in the S&P500 before the index finally closed the week down around 1% on the week. It is unfortunate that these swings were at least partially driven by a bunch of Fed folks shooting off their mouths. The same folks who were the most dovish when interest rates were at zero and helped set up raging inflation now are the most hawkish–investors (traders) listening to them much are really searching hard for reasons to buy or sell.
Interest rates closed last week at 4.38% (although now, this morning, zooming to 4.45%) which was an increase of a whopping 18 basis points from the close the previous Friday. The week ended with a giant sized increase in new jobs created–over 300,000 versus a forecast of 200,000–what a blow out number. In my mind this is a critical number–but only 1 in a bunch of important numbers of course. With the CPI and PPI being released this week we have more ‘data’ to chew on–in my mind thus far there has been little data that would indicate a rate cut is needed–we’ll see.
Last week the Fed balance sheet fell by a giant sized $45 billion. The pace of the reduction in assets continues at the announced rate of about $95 billion/month.
Last week, surprisingly, we had the average $25/share preferred stock and baby bond close the week flat–in spite of interest rates moving 18 basis points higher. For 2024 YTD we have had the average share move higher by 42 cents–although interest rates have moved higher by about 50 basis points (yes 1/2%) during the same time frame.
The average share was flat for the week while investment grade issues were 8 cents lower, banking issues were 2 cents higher, mREIT issues were 12 cents higher and shipping issues were 6 cents higher.
I’ve been looking to buy something with a 8% yield–or yield to maturity of around 8% and the best idea I have for now is to enter an order for the Hennessy Advisors 4.875% Note due 2026 (HNNAZ) at a buy price of $23.30 which would give me about 8% yield to maturity. I entered this order yesterday–shares had hit this price level on Tuesday (of course I had no order in then). I will simply let this order sit for 60 days and see if someone want to give me a deal. The issue matures on 12/31/2026.
Recall I owned lots of these shares previously and sold most of them for $24.37–I kept 94 shares which I still own. I would look for this one to go back over $24 before the year is out at which time I could sell for a nice gain (interest plus a capital gain) or hold to maturity. Details of these transactions are on the ‘laundry list of holdings’ page.
I chose this one to buy (or try to buy) because I have a comfort level with this little money manager–they have enough cash on hand to call of their debt plus with the short maturity the price movements are not huge.
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.
The S&P500 which was quite green turned 1% red in the last few minutes.
Since I am not a ‘trader’ I plan to do nothing–no selling or hedging of any type and know I may take a hit to accounts. It has been my experience that trying to react to events like these ends up with poorer results than simply riding the event out. I have cash so I would buy if major bargains presented themselves.
Let’s see what happens overnight – if we see an attack.
Anyone interested in the CTO Realty 6.375% perpetual preferred (CTO-A) it is now trading at $20.12 for a current yield of just shy of 8%. The company sold another 1.5 million shares of this issue last night (with another 225,000 available for overallotment) at $20/share.
This is a follow on issuance — originally the issue was sold in June, 2021.
Thanks to Grid for posting the Pricing Term Sheet this morning--it is here.
