Mid Day Ramble | Innovative Income Investor

“Party On”–Everyday!!

Well the stock market is flying today as the “China deal” is the gift that just keeps on giving. Seems like this deal has given the stock market 10% of its gains this year.

Interest rates are just a tic or two higher–as high as 1.90% to now at 1.89%–maybe back in the previous trading range before the Iranian event.

Preferreds and baby bonds ($25 issues) are trading off 2 pennies today–for all practical purposes flat.

I have noticed a lot of activity lately on the “Canadian Chat” page. Seems there is more interest in Canadian preferreds now that we have fewer reasonable choices in the U.S. markets. Maybe I will need to bone up on this market–and maybe others should as well.

We had a pretty sizable REPO today by the FED. They took $49 billion in the overnight (1 day) market and $34 billion in a 14 day deal–a total of $82 billion. I believe there are some large treasury auctions this week so it will be interesting if the Fed has to do bigger deals in days ahead to provide more liquidity to the primary dealers–we’ll see.

This morning I bought a modest position in Brookfield Property REIT 6.375% perpetual preferred (BPRAP) for $25.33. Issue is now callable (since 2/2018). The most recent dividend was paid 1/1/2020 so now it is accruing for the next payment–assuming typical 30 day notice before a call there is about 15 cents at risk in event of a call (calculated off the top of my head for those checking with a calculator). My intention is to simply hold this issue–not flip–I need cash deployment.

The new MetLife 4.75% perpetual issue is now trading at $25.24 on the OTC under ticker METFL. Folks obvious are scratching hard for a little yield.

Interest Rates Creep Higher and Higher

Only 3 months ago we had the 10 year treasury touching in the high 1.40%’s.

Today we see the 10 year treasury trading at 1.93%–a full 4/10th’s of 1 percent higher.

In general, we have not seen substantial damage to preferred stock and baby bond pricing. Sure we see some of the high quality very low coupon issues having trouble with ‘traction’ in moving higher, but the evidence shows that interest rates are having very little affect on pricing–so far.

Only today mSquare wrote on the new “Flipping and Dividend Capture” page that he/she bought the new AT&T 5% perpetual preferred for $24.9x on the OTC Grey market and just sold it on the NYSE for $25.6x. This shows that there has been hunger yet for ‘yield’ –even low yield.

Today Newman mentioned that he/she was getting a bit concerned with the 10 year treasury moving higher.

As income investors we all need to be concerned with higher rates, BUT one can not ‘run for the hills’ because there is no one that can predict what rates will do tomorrow and we all need some sort of income stream–it has almost always been true that money buried in the back yard earns little interest.

As the old commercial on the television used to say “speed kills” (of course talking about driving), but we know that interest rate movements can be fairly well tolerated if the movement is slow–2,3 or 4 basis points up one day and down 1 or 2 basis points the next. The move from 1.4x% to 1.93% took 90 days or so–and this move has been well tolerated.

At this point in time if we see a 1/8% spike higher 2 days in a row–that would be a bigger concern. The low coupon issues will act very badly if we get these kind of moves. Additionally the low coupon issues will act poorly even if we get slow moving higher rates–month after month after month.

Lastly we can never predict some major moves. A few years ago the markets threw a ‘taper tantrum’ simply because the FED suggested a reduction in quantatative easing. The 10 year treasury rose near 1/2% in 2 weeks–simply based on a ‘suggestion’ of a tapering that never happened.

So in summary I would encourage investors to do what makes them feel comfortable. If rates do pop and you lay awake nights – make some sales–store some dry powder–or if you fear the future–next week or next month–sell a little and hold the cash until you mentally feel better. I have made a few sales recently and am in no hurry to reinvest–more because I am hoping for some better pricing ahead. In my 15 years of purely preferred stock and baby bond investing every big sell off has resulted in the opportunity to buy good issues at low prices–so keep a little dry powder.

Quiet Markets While The FED Meets

It is most interesting that since the FED claimed they are on hold until we see inflation news, markets are not paying too much attention at all to them.

They began meeting today and tomorrow they will make an announcement on the Fed Funds Rate–certainly any change, in any direction, would be one heck of a surprise to everyone.

Just watching the 10 year treasury–while no one is talking much on the meeting it is certain the bond traders are waiting for the official ‘news’–which will be no news.

The 10 year treasury opened the week at 1.83% and hasn’t moved more than 2 basis points in either direction in 2 days–that is pretty unusual.

Personally I have barely peaked at the personal accounts–although moments ago I looked for the 1st time today and there is some upward creep–I’m talking a few cents–maybe a dime in an issue or two and as always I am just fine with quiet markets–certainly excitement of some sort will come before the month is out.

And the Poundings Continue

The poundings of common stocks continue to take place today, but with a totally different bond market reaction.

With the S&P500 off just over 1% the 10 year treasury is moving sharply lower as well–off 13 basis points (13/100 of a percent) to 1.70%. Yesterday with the S&P500 off just less than 1% the 10 year treasury was actually up 6 basis points from last weeks close–this made no sense. Obviously the bond market was betting on a trade deal–which was in conflict with stocks.

I though for sure I would find some preferred stocks and baby bonds beginning to fall in sympathy with common stocks today–but NO–they are virtually unchanged, on average, over yesterdays prices. Both junky issues and investment grade preferreds and baby bonds are actually about even (although taking out the CBL and Just Energy issues from the picture shows prices up a couple cents).

We do note that the Pennsylvania Real Estate Investment Trust (PEI) perpetual preferreds are off 8-10% (1.50 to 2.00) in sympathy with CBL no doubt. You can see the PEI issues here.

An income issue holder has to be happy right now with the reaction of our issues to this rocky market. BUT this could change. Remember last December–I went into the month with a nice gain for the year and ended the month with a 1% loss for the year–11 months worth of work up in smoke in 30 days. Fortunately this year has been kind and thus far I am happy with gains, but have plenty of dry powder available.

Common Stocks Can Go Down?

For the 1st time today I looked at the stock market numbers at 11 a.m. (CST)–wow the DJIA is off 200 points. I didn’t know stocks ever fell–in particular 2 days in a row.

So just for the fun of it I turned on the TV (which I seldom do during the daytime anymore) and found 5 panelist on CNBC arguing about the market fall–each one of them was the smartest person in the room, at least that is what was conveyed.

Honestly while I don’t want to see a stock market crash, or even anything close to it, it would do all the smart people some good to see the equity markets take a nice 10% or even 20% setback – once we see that kind of a market we will at least have more of a clue who really knows what they are talking about.

Also a nice tumble in markets would separate the wheat from the chaff on Seeking Alpha where the never ending “recommendations” by some folks of total crap companies really grinds on me. With the ‘rising tide lifts all boats” market these folks are allowed to lead the sheep to slaughter. Not that there are not some good items on Seeking Alpha, but most of the most popular writers are legends in their own minds.

I concentrate on what I own–I watch interest rates and some potential causes of movement in the rates. I can’t say I get any ideas off of the TV and I get few ideas from Seeking Alpha–BUT I will admit to stealing ideas from the folks commenting around this website. I am only looking for a 6-7% annual return–I don’t need ideas from goofballs-and their are plenty of them out there.