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Batten Down the Hatches

Interest rates have been flattish all week long–unusual to go 3 days with the 10 year treasury yield trading in a range of 4.24% to 4.32%.

Today that will change–at least a 75% chance we will trade out of this range with the release of the personal consumption expenditures (PCE) data. The PCE will give us a good hint on consumer spending–i.e. the health of a huge percentage of the economy. Additionally the price index component will provide some inflation data.

The forecast of PCE and the price index is for numbers to come in ‘hot’–the question is how hot? Are interest rates pricing in ‘hot’ numbers? Any actual number more than .1% deviation from forecast will likely move the markets. The 10 year is at 4.31% right now–it won’t take much to move this out of the weekly range–in fact it is possible we could see a 10 basis point move today (or no move at all). We’ll see in an hour.

Also today we have initial jobless claims as we do every Thursday–this takes a backseat to the PCE today, but just the same will be closely watched. This afternoon we have a bunch of Fed yakkers–no doubt some of them will use the opportunity to highlight the PCE data–hot or cold.

Irrespective of the PCE data today and movement of interest rates I never buy or sell thinking I am a smart person before or after the numbers. Markets will do what they will do and individuals (or anyone) can not foretell the movements of markets. So obviously I will not buy or sell anything at all today–business as usual.

I am working on a ‘deep dive’ on CHS–the deeper I dig, the deeper I dig. Really interesting. I will publish it in a few days–I think. I am looking for actionable data–for buying or selling. With the CHSCP 8% issue trading at $31.50 and currently redeemable are holders fools? Maybe. Or if they are not fools they are simply poor investors.

Well it is 60 minutes until data–equity indexes are red premarket by .3%–certainly of all days this is not meaningful.

31 thoughts on “Batten Down the Hatches”

  1. Batten down the hatches. Good idea. Been selling some of my flippers for a small profit and some preferred that seem to be stuck in a rut.
    The SAZ that just paid and some that are pre-ex dividend date like CLCO and my KRP that I have the dividend locked in for what I paid.
    Just not enthused about the market right now. Maybe the stormy weather we are getting here in Ca. getting me down.

    1. Same here Charles. Credit spreads are inadequate. Have not been interestd enough to buy any preferreds for months now and have been slowly rolling them off. Last week let the whole boat of PSA-Q go with a $3+ per share gain.

      Will take an “event” or at least an adjustment to get me buying again.

      1. Alpha first time in ages I have been looking at growth stocks that are also paying a dividend. Picked up a little BMY, WHR, did a quick flip of ADM, and been eyeing CAG but haven’t made up my mind yet. All these are beaten down stocks that were higher and should recover. I get a decent dividend to hold while I wait

        1. Re “Batten Down The Hatches”
          The following is not political.
          Please do not go there.

          Just consider the impact on the markets if it were to happen…………

          “Donald Trump said he will impose tit-for-tat tariffs if he is reelected president, reiterating one of his isolationist policy goals that has already raised concern at home and overseas.

          “I will pass the Trump Reciprocal Trade Act,” Trump said Saturday at a rally in Greensboro, North Carolina. “If China or any country makes us pay a 100 or 200% tariff, we will make them pay a reciprocal tariff of 100 or 200% right back.”

          Trump has previously suggested raising tariffs by more than 60% on Chinese goods, as well as revoking the global superpower’s “most favored nation” status for US trade. He has also floated a 10% tariff on all goods imported to the US.

        2. Charles
          Take a look at PFE
          Definitely not a growth stock – another falling knife
          It’s paying a 6.3% dividend which is well covered by earnings and stock price is close to all-time low
          I’ve been buying for the past six weeks

          1. Westie, I have been in and out of it. I am not sure I have the conviction to hold long term. I almost bought it at the low, but who knows if that was it ?
            Lot of haters over the Covid vaccine and who knows in this crazy world if some court in Florida or Texas allows a lawsuit to proceed.

          2. Westie, PFE is trading down >50% from peak largely as the EPS for the prior 12 months is down ~70%.

            Close to an all-time low maybe in nominal terms though current PE is well-above average for most recent decade.

            #covid, #amazon, #costplusdrugs #drugpricenegotiationprogram

            1. Alpha short term increase in profit from the Covid vaccine and they sold their generic drug division. What have they done with All that money? They say they are pivoting to cancer drugs,so now it’s a show me the results and the money. I.E. the income coming in. This might be a multi year effort. Will the dividend be covered for that time?
              I did BMY because they hooked up with Merck on one drug.
              You have to remember one of my rules of investing is I like a 50.00 stock I can buy 2 shares of compared 1 share of a 100 stock.

      2. Alpha, bemoaning about credit spreads, say what? Some perpetuals are back around 5.5% and near par when you can snag a 10 year treasury around 4.2%. That is borderline crazy. Hell, on a relative basis, those gawd awful 4.5% issued perpetuals during ZIRP were deals compared to today…. With short term rates paying what they are, income wise, there has never been a better time to be “wrong” and wait for that “event” or “adjustment” that INEVITABLY always occurs.

          1. Charles, I consider trying to totally time interest rate/credit spread cycles as largely futile. But I definitely tilt as that also curbs risk of income market and being in short duration is not so penal now….But I still have some perps. Maybe 20% in pure perps. Around 65% duration 0-4 years in CDs, IBonds, TBills, TIPs, bonds. The rest in 5–11 year duration debt. Will have plenty of liquidity to “chase deals” if/when they arise.
            I still trade and upgrade with the perps I have remaining…Oh and developed a nasty disease small ball trading the RILY crap. Made a couple quick trades on Z and M and pocketed over a grand last week. I need to sell out and walk away before it bites me. And keep my investing money and my betting money separate. But if the Minnesota Wild miss the playoffs and the Blues go over 83.5 there will be sports betting profits money being moved over into my investing accounts!

        1. Grid, We’ve been here before. The yield chase is on; into descending levels of credit-worthiness.

          We may get another price bump/swelling of account values on holdings if rates drop but I’ve found staring at account values to be a false prophet.

          Our very best sells have always been when account values were stratospheric and very best buys have been when account values were plunging. Besides – there are plenty of other options.

          We can wait.

          1. Now Alpha, you have me second guessing myself. Have to look at the ALL J again. Not sure off the top of my head what yield I am getting from when I bought it. But if I sell to lock in profit what am I going to replace it with? Said I wasn’t going to sell.
            My issue is the income first and growing the account second. No, change that. Second is protecting capital.

            1. Charles, Income is also my top criteria and I’m IG-rating before yield. Fortunately we have a back-door now via MMs, CDs and Treasuries. Take that PSA-Q trade for example. Bought near 1K shares in Q4 at exactly $15.25 and sold last week at $18.32. Rolling that into a 9-month treasury (for example) at 5.15% will lock in a 25%+ gain in one year. On a risk-adjusted basis, not seeing the upside to trying to squeeze more out of that batch. We buy relentlessly into the down cycles, so holding quite a few like that and have been slowly rolling them off.

              I recall our pal Grid doing exactly the same thing in a big-way about 12-months ago. No guarantees about what opportunities may present themselves in the next 9-months or therafter. Though if we need to average the 25% gain into something with a lower yield but a better credit spread – that math will work.

              Best to you Charles – really appreciate all your posts.

  2. This is a bit off-topic, but if you’re willing to consider bonds, Main Street Capital has a 6.95% note maturing 03/01/2029 and not callable until 02/01/2029. It’s currently trading about 100.60 and yielding 6.8%. I think Main Street is one of the best of the BDC’s and have bought a chunk of these. CUSIP 56035LAH7.

    1. I picked up a few in January, would add a few more in future when opportunity and available funds align. Agree MAIN is one of the best, I’m betting the money will be there in ‘29.

  3. CHS announced about 500 million in buybacks but never said which issues. Still waiting for details but with this company who knows when that’ll come. I wouldn’t touch CHSCP with a 10 ft pole, crazy. Current yield is 6.3% and it’s $6.5 above call price. I have a full position in various CHS prefs so I’m interested in what Tim finds in his deep dive.

    1. I have CHSCN and noticed it ratcheting higher of late – getting a little on the rich side IMO.

  4. Tim.. HI, Our thoughts ,, why aren’t, the banks making more tender offers, on bonds and preffereds, they would be making 15-20 % returns ..?? Georges

    1. Equally curious is the passive stance taken by Fed agencies to call over-couponed issues. I bought several FHLB and FedFarm bonds with maturities ranging from 2024 to 2038. All have coupons over 6% and the yield to call also was over 6%. Most were callable in 3 to 6 months. Of those in which I bought small positions, two were called (both FedFarm with coupons of 6.4 to 6.6). New issues of similar bonds have 50bp lower coupons. As a fixed income investor, I expected most would be called and am surprised and happy that few were (2 of 17 to be precise). As a citizen taxpayer, I wonder who is minding the store.? 50bp isn’t that much, but even compensating for the few basis point cost of calling and reissue, our government would seem to be paying, perhaps, billions of dollars of interest that they needn’t do. Doesn’t someone or some agency figure out the cost of refinancing and take steps to bring down the Fed’s (OUR) interest expense?

      1. While Farm Credit and the FHLB are Federal Agencies, their interest expense if fully paid by their business operations and not the responsibility of taxpaying citizens. They are both very efficient in how they call bonds and take into consideration many factors that investors may not be aware of: cash flow needs, call option values, alternative debt costs. If you peruse the comments in their financial statement, they continually state how much savings they have recognized by calling and re-issuing debt.

        1. I continue to wonder why FHLB called a 6.0% issue maturing in 2028 after six months, and failed to redeem several callable issues with higher coupons that mature in 28 or 29? Similar situation with FFCB issues. Calling lower coupons than higher with similar maturities. We used to hear about how carefully and intelligently Freddie Mac and Fannie Mae managed their portfolios–also independent agencies with implied government guarantees. Mind you, I’m happy riding this train as long as I can. But, I’m not convinced that the portfolio managers are on top of things. Hope I’m wrong because, in the end, WE pay the price.

      2. I had a 5.45% coupon one called on 2/24/24 as well – the original maturity was 5/24/24.

  5. My thoughts at this time of morning are scrambled like my breakfast eggs. But I have learned one thing from a few others here on this board. Some people are collecting 8% on their CHSCP and are happy to keep collecting it even if it is called and falls to $25.
    But, others on the board here have said if rates of return in the market are (pick a number) say 6-1/2% then why not sell and pocket the difference and pickup another solid holding that is paying 6-1/2% and even try for under par to add icing to the cake.
    I picked up more CHSCM this past month between 25.05 to 25.15
    Now I would like to hear Tim’s report.
    Something to add, I read last year was supposed to be a bad year for corn a major crop. So when everyone thought it was going to be a tight market they held corn back in storage waiting for higher prices. Then late rains hit and it turned into a decent harvest. Now those farmers are sitting on corn and also paying storage fees. If they have to sell to raise money for this years planting it could be at a loss it you add up expenses. This in turn could be a tight year for companies who supply the farmer if the farmer cuts back on spending.

  6. CHSCP has always been an anomaly. Its original call date was 2013. Even prior to announcement of getting extended 10 more years it never descended towards par as it approached original first call date. And it never broke par during GFC crisis either which is an extreme anomaly. Its best just to quit scratching ones head over CHSCP and just flat ignore it.

  7. Tim; Really glad you are doing a Deep Dive into CHS. I own a huge boatload of the CHSCL. I called their I R Dept a week ago and their “Treasurer” returned my call stating that they do not have an I R Dept. Anyway, he said there have been no discussions by the board of calling the preferreds, for whatever that might be worth. I’ve been investing for decades and know that is pretty much meaningless as things are subject to change quickly. I will not add more of the CHSCL as its priced ridiculous now at $26.15 which tells me there are tons of investors that do absolutely no homework on these things. Its callable on Jan. 21, 2025.

  8. Has the CHS board made any comments on the preferreds?….I thought I read here awhile back that they were “talking about the preferreds”….I wonder how many farmers own these preferreds…thanks for doing the research…

    1. I think Craig hit the nail on the head. CHS is a Coop where the customers are the owners. While there should be a clear separation of business management and owner objectives, sometimes that line of separation is blurred. My speculation is that customers own a significant portion of the preferreds thus keeping the issues outstanding.

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