Almost daily I look at many preferred stock issues that I might want to own–some are for ‘flips’ but some are for long term holding.
My own searches and comments made by folks on the site usually lead to some preferreds with really interesting behavior — most of it appears to be ‘herd mentality‘ related.
The issue went ex dividend on 12/31 and was marked down by the dividend amount–in the $25.40 area–6 days later the issue is trading in the $26.40 area–$1 higher.
This pricing is crazy–at least if you are a rational investor. This issue has been callable since 8/2017.
I hope that those on this site that had owned the issue are now exiting–my guess is that some readers have nice profits on this issue on short term trades–that’s great, but now is time to exit. This is but 1 example of irrational behavior by buyers at $26.40–there are lots more.
We all know that tomorrow the monthly employment report for December will be released.
Is it likely to be meaningful to markets? No, I don’t think within a reasonable range it will be meaningful for longer than 2 hours–then the stock market will move higher.
But really–the expectation is for 160,000 new jobs being created in December. ADP showed over 202,000 new jobs in their report on Wednesday–of course no one really pays much attention to ADP. Just the official government report has power to move markets–occasionally.
Of course I have no idea what the number will be, but any huge outlier number could move markets. By huge outlier I mean something like 50,000 on the low end or 300,000 on the high end. When the number has missed by a fairly large margin (20,000-50,000) recently there have been almost no reaction after an hour or two of digestion So tomorrow if the number is 50,000 nervous nellies will yell ‘recession’. If the number is 300,000 interest rates would move up by a few basis points and folks would yell ‘higher interest rates coming’.
In the end it is highly likely the stock market will end higher Friday and interest rates (measured by the 10 year treasury) will move in a tight range of plus or minus 2 basis points (from the current 1.86%).
So stocks ‘partied on’ and interest rates spiked up to as high as 1.88% before settling a bit lower.
I though when I tallied the numbers today I might see a little give back in income issue prices–but NO. The average price of all preferreds and baby bonds moved 4 cents higher today.
The new MetLife 4.75% closed at $25.10–goes to show that investors are getting almost desperate to buy a little yield.
Even the Uhaul Investors Club has cut their short term coupon issue to 2.50% (2 year term). For the last year the 2 year term issues paid 3%.
For me I guess this all means that I am going to have to ‘reload’ on issues that are in the redemption period and are pegged to $25 because of the call risk. Right now it is the most reasonable place for my cash.
It is strange how we can go from a fairly large drop in the futures markets overnight because of Iranian missile attacks to a market that is acting remarkably calm.
With the killing of the Iranian general last week I thought that we would see some short term market weakness, followed by a nervous flat market. With missiles flying last night from Iran I thought ‘oh no’ this could get much worse than I expected.
Last night I did take a peek at the futures markets and saw they were down a couple hundred down points–all things considered not a big deal-and by market opening today we were flat and interest rates remained flat in the 1.81% area.
So, for now, we are back to semi-normal conditions. Of course this will be hanging over our heads for another week and it will temper moves in stocks and interest rates.
We do have the employment report being released on Friday . The forecast is for a modest 160,000 new jobs being created–certainly if this number is close we won’t see interest rate reactions–but we shall see.
Sometimes we hesitate even posting items like these–most of the times they turn out to be meaningless.
On the other hand better to post than anyone get a surprise.
1st off I am not an expert on repurchase agreements that the Federal Reserve executes, but I am knowledgeable enough to know that the FED is now–and has been, executing repurchase agreements with the ‘primary’ dealers of government debt since September. The Fed takes government securities (including agency backed mortgages) as collateral and lends the institution money so they have enough liquidity to serve their customers.
The primary dealers are typically large banks and securities companies which are trading counterparties for the Federal Reserve. They are expected to ‘make markets’ in government securities. They generally must make bids for government debt at auctions. This is all done to implement monetary policy.
With that said the New York Fed releases a monthly forecast of open market REPO operations.
The Fed last released a monthly forecast on 12/12/2019 which can be seen here. This forecast covers the period ending 1/14/2020–thus we should see a new forecast soon–the end of this week or Monday.
Here’s the problem. When the REPO facility was started back in September it was in reaction to a huge spike in overnight lending rates–they spiked as high as 8-10% as liquidity was unavailable for those needing money. Supposedly the liquidity was needed for tax payments and for settlements of U.S. government securities–it was implied this was a relatively short term problem.
GUESS WHAT-the issue seems to go on and on and whether this liquidity crunch will improve is anyones guess.
Today primary dealers offered $41 billion in collateral for a 14 day REPO, but the Fed only accepted $35 billion–this means less liquidity was supplied than the market thought it needed.
The question is – is the Fed going to try to withdraw liquidity? What will their next forecast show?
I will make my own forecast–the REPO will continue indefinitely. Additionally the size of the Fed Balance Sheet will continue to grow all throughout the year–there is no choice–the U.S. is going to run another $1 trillion dollar deficit.
