Category: Mid Day Ramble

Equity markets are trading in a tight range today–debt deal or no debt deal is the question. Certainly all sides will have a lot of yakking to do relative to the supposed ‘deal’.

It is surprising to see the 10 year treasury yield dropping by 12 basis points–my understanding–listening to the ‘smart folks’ is that Treasury will be selling near a trillion dollars worth of debt as soon as the debt ceiling is raised–have to rebuild the coffers I guess. It would seem that this would put more than just a little pressure on rates–but we will see.

What are folks doing? Anything at all–or just watching like me. I am ready to do some buying but today is a busy day for me and I haven’t really had time to peruse the ‘bargains’ out there. It is now almost 3 months since the banking crisis and while there will be some land mines out there I think doing some more nibbling is in order.

My basic outline is to let the CDs and treasuries run off and with luck do some buying on preferreds and baby bonds. I am back to wanting to lock in current yields in the 7-7.50% area on average. I am guessing that I am in the 6%-6.25% area now because of a heavier than normal allocation to CDs, treasuries and money market funds–but my sights are on many issues in the 7.5% to 10% current yield area–I will get into the target area fairly quickly when I think the time is right.

Last week when the website was ‘broke’ I added just a nibble on the Bridgewater Bancorp 5.875% perpetual (BWBBP) at around $15–CY around 9.5%. Very small bank ($4 billion). Many of these small banking issues are very, very illiquid. This issue has traded just 49 shares today – no wonder they move fairly violently when someone tosses out a market sell.

Things are quiet–really quiet. The S&P500 is moving in about a 3/4% range, but at this moment is up just .07%—there is no doubt about it that the debt ceiling is holding the market hostage to any major moves. I’m just going to wait to see what happens there prior to further commitments to preferreds or baby bonds.

CD rates remain high–as much as 5.30% on a 1 year–and I might go ahead and add another purchase there – 1 year at 5.25 or 5.3% is darned good – there are NOT call protected but a 9 month or 1 year commitment may well go all the way to maturity.

Here is what FIDO has right now available.

I see that PacWest has sold off a bunch of there real estate loans–of course at as discount, but the discount isn’t as high as one might expect–the portfolio is a $2.7 billion portfolio which they sold for $2.4 billion. Info is here. The regional banks continue to de-risk.

I was just looking at the lodging preferreds and while it should be obvious to everyone why at this point in time would anyone buy any of the Sotherly (SOHO) issues? Current yield on their issues are about the same as Pebblebrook (PEB) and other other higher quality issues–it makes no sense–should be trading in the 10% current yield area. The lodging preferreds are here. Regardless I am not adding further to lodging issues until we can see the debt ceiling resolved and then I will step back and re-evaluate given the potential recession ahead.

The 10 year treasury is right at 3.70%—treading water just like equities. So I guess I’ll just watch and wait.

Finally we get a bounce in banking and insurance preferreds after the SEC mentioned potential market manipulation in small bank common shares. I mean is there any doubt than big players have been instrumental in the pummeling shares have taken–although not necessarily illegal. Of course I am talking my book–I don’t like losses or worse yet seizing of banks by the FDIC when there are ‘runs’ on other wise reasonably strong banks.

Here is the sea of green in banks and insurance issues.

Do I think the issues are over with – NO! It is going to be a long time until this is behind us.

I did not sell me banking shares in the community banks since we are seeing a glimmer of hope–we’ll see where this goes next week. The reason I considered selling is because there is no telling which bank will be taken down and shares end up at zero. I am positive holders of First Republic preferreds thought they would eventually recover–obviously not. I am 70 in a few months and there is not time to recover massive losses (although I am going to live to 110) I continue with very nice gains since December so I am now in capital protection mode until we resolve the banking issues.

Employment was much stronger than forecast–not helpful for that potential rate pause, but lots of data to come out in the next month so we will see where that takes us.

So we are 15-30 minutes away from the FOMC rate decision announcement. The day has been pretty tame so far–but that will change. We will see the S&P500 shoot straight up (or down) likely followed by a move in the other direction as the algo’s run the market for some minutes. Then we will wait for Jay Powell to hold his presser at 1:30 (central) and this will no doubt move markets depending on his choice of wording in his statement and while answering questions.

Banking preferreds are mixed today with losses outnumbering gainers, but the losses are not massive like we have seen in some recent days. 1 issue of note is the PacWest fixed rate reset 7.75% (PACWP) which is trading off again and now is at $12.00–this would be a very dangerous buy and not something I would mess with–a total crap shoot as whether the bank will survive.

So buckle up for a few minutes of wild machine trading–we’ll get this behind us and then await employment numbers on Friday.

All in all equity markets are pretty quiet with the S&P500 up about 1/3rd%.

On the other hand the regional and community banker preferred stocks are taking a spanking–in spite of their earnings reports being pretty darned good. I have small positions in a number of the small banks, but the positions are very small and I am waiting (and waiting) for those issues to find a bottom–and for some of the ‘fear’ to clear out from the First Republic (FRC) seizure and no telling how long that will take–a month or more almost for certain.

One of the smaller banks I really like is Merchants Bancorp (MBIN) which is a Indiana based banker with $14 billion in assets. Shareholders equity has continued to grow in recent quarters which is one item I like to see happen. Their lending is weighted toward multi-family–which up until recently seemed to be a safe haven, but we have seen foreclosures in that segment recently. Obviously best to wait for a bit. There are current yields in the 7.5% to 8.50% area available. Here is their latest earnings data.

All the bankers are here and it would be my recommendation to build a watch list–not for current use, but to watch in the months ahead. The current situation will pass – just may be a while.