Common Stocks Getting Hammered Hard as Interest Rates Fall

Wow–maybe we are going to get the 1000 point down day on the DJIA that I have been waiting for for a month.  This market feels a bit scary–although if you lived through the October 1987 tumble this is ‘childs play’.  Remember in 1987 if you tuned in the old Financial News Network (FNN) the folks were some shade of green-so scared they could barely talk-this is nothing like that.

Additionally as you all know the 10 year treasury-and all interest rates are tumbling hard.  Much discussion everywhere about inverted yield curves etc.  I’m not certain that the curve being inverted by a basis point or two is meaningful—kind of a rounding error of sorts to me.

Income investors are likewise taking a little bit of a spanking–the baby is going out with the bath water–preferred stocks are off a dime or so.  The thought that income issues should rise as interest rates fall is not working so well at the moment–patience is required.  We may also have some year end selling to book losses for tax purposes–look at it as maybe a time for bargain hunting although we would suggest that a week or 2 from now might be better.


38 thoughts on “Common Stocks Getting Hammered Hard as Interest Rates Fall”

  1. Get ready for more fun on Thursday. Dow futures off 200+ points, 10 year at 2.904%, might it break below 2.9%. Time will tell

    1. SteveA, the futures being down does not concern me at all. The 10 year Treasury at close to 2.90% could actually be a good thing for us fixed income investors.

      1. I agree. I am looking at adding to Ally-A if we get a good price drop. With 10 year dropping preferred’s should be stable to increasing so the sell-off needs to be looked at as an opportunity to buy things that were previously too expensive

  2. How do you folks who are heavily invested in fixed-income assets plan to out-earn inflation?

    I’m not yet 60 YO and if I didn’t allocate some portion to growth, my portfolio would effectively dwindle over time, due to inflation, leaving me without sufficient income in the far future. I’d like to devote more of my portfolio to FI, but keeping pace with inflation is my sticking point.

    My portfolio is about 40% DGI, 33% pfd and ETD, and the remainder in high-yield REIT, mREIT and BDC companies, with no more than 2% in any one issue. Half my wealth is in income-producing real estate, which I expect to outpace inflation. In my stock/bond portfolio, I lost 1.55% yesterday, or about half the market’s loss. My gains, likewise are less than the market can achieve, but the dividend and interest streams are most important. I can accept this level of loss and gain, so long as the income is solid and outpaces inflation. What do you say?

    1. Bruce, that is a good question that ultimately is determined by each persons needs and goals. Inflation is running around 2%-3% yearly. Some of my core issues yield ~6%, so in effect my portfolio income purchasing power already is growing ~3%/4% allowing for inflation. So by this very nature is growing automatically ,as all income generated is reinvested to increase yearly income. Snowball effect so to speak….If someone was actually currently needing the entire 6% now, then yes, adjusting for inflation, would be problematic down the road. But for me that is not the case, my investment money is more or less a secondary backup “break in case of emergency” situation.

    2. Bruce, I will add on to Gridbird’s comment. As he stated, each person has different goals and needs. At least for me, I have easily been able to beat inflation and play mostly in the REIT preferred sector.

      Just a current example: UMH Properties owns about 20,000 mobile homes. I have used their preferreds many times in the past, but their UMH-A 8.25% were called some time ago. Right now, the UMH-C issue yields about 7.5% and trades about $22.50. While I was a little early getting in and probably average a price around $23.25, the current yield is very attractive and handily beats inflation. While the issue does have some risk, it is part of my diversified portfolio. With a yield like this, I see absolutely no reason to take risks with common stocks. Hope this example was helpful.

      1. Hey Kaptain….You better get Tim to delete your post and fast….Mobile Homes? You are looking at 6-9 years hard time no parole if UMH sees your post and prosecutes….Its “manufactured home communities”. 🙂

        1. Grid, if I get 6-9 years then I expect you to bake me a cake and put a hacksaw blade in it !! But at 7.5%, I’ll be up about 50% just on my dividends alone if I have to do the time.

    3. Bruce,
      I understand that ‘growth-co’s’ may seem attractive in almost any environment, inflation or no. Also, having formerly lived in the Bay Area, heart-of-tech, for almost 20 years, was surrounded by all of the start-up-to-the-moon irrational exuberance. at all levels, public or private.

      However, suggest looking at the real historical data. Average S&P returns for any given 10-year period is around 8 – 8.50%. Some pundits claim 9.50%+. Not so.
      So ….. holding fixed-income securities yielding 8% or better virtually assures net-net parity, and often better, with S&P or growth issues. The difference?? Not as much high-volatility, stress, or dependency on $PPS rises for gains. Cash generated through distributions is a very nice alternative!

      JMHO … of course ..

  3. I haven’t been paying much attention lately but I noticed that the Enstar pfd is trading below par.

    Interested, I go and take a look at their latest news releases. See something about them entering into some “retrocession agreement to effect a loss portfolio transfer.”

    ??? Since I can’t make any sense of this, I won’t be buying any shares.

    I’m also discourarged by the CHS news. Makes me want to just sit on the sidelines and accept 2% in a savings account.

    1. Hi Jacob–the Enstar news mainly tells of ‘what they do’. The insurance business they operate purchases portfolios of policys from others. Like you if they are too hard to understand I don’t buy.

      Relative to CHS I am hopeful the bad news is behind them–I purchased a position yesterday.

    2. Jacob, that the loss portfolio transfer is from Maiden (MHLD), ~$2B worth of their most toxic loss-making AmTrust garbage. Enstar is setting up a new Cayman entity to take hold of it, capitalizing it with $500M, and effectively making a bet that future losses will come under the ~$2B in retroceded premiums + bond returns.

      Enstar has a pretty decent track record, so I imagine they know what they’re doing here. But nonetheless, that toxic AmTrust reinsurance they’re taking on has brought Maiden nearly to the brink of insolvency and wiped out most of AmTrust itself..

  4. Tim,

    What do you think about some of the higher quality REIT prefs like NNN and VNO? They are nearly 6.5%.

    1. Hi Hang–I have been watching them. I am probably more inclined to buy the KIM issues than NNN, but it is likely that over the longer term the HIGH quality issues will do well. As you probably know I have been a short maturity issue buyer/holder for a number of years and am kind of targeting the end of December for a slow move toward select perpetual preferreds.

      1. Tim, thank you for your response. I am also thinking of legging into PEB-D and AMH-E which are now 7.3% and 7% respectively at below par. These are also large REITs with good balance sheets. I’d be happy to get 7%+ yields with high quality credit for a long time and not worry about maturity (which would only be an issue if we have venezuela type inflation).

        1. Hang–I had mentioned the AMH issues preferreds in the last week or two as presenting good values. I shy away from lodging REITs preferreds if we are heading toward a soft economy.

  5. Tim, Not to throw shade on the buying party today, just mentioning that some selling opportunities also, ummmm …. , Arose!

    Given the fall-off on 10yT’s and other gov issues, State-Munis responded somewhat in-kind.
    I added to a very-LT PCQ position – Cal-Muni CEF – about 1.50 months ago around $14.55, sold a slug to average down today when it jumped over $16.20+.
    In addition to the constant stable monthly distribution, picked up appx. $1.65 for a swing-trade gain.

    Not too shabby on a heavy down day -:)

    1. Well SteveG–at least something is responding to the change in interest rates.

  6. Tim, “Baby with the bath water” is for sure. Volatility is presenting some interesting bargains. Low-liquidity/ high-quality term-dated KTN touched an astonishing 6.27% YTM (29.05/share) for a 340 share trade. I get the dufus award of the day for paying 29.55 an hour earlier. Goes to show just how patient you we need to be with these low liquidity issues – as GRID has mentioned numerous times. For those not averse to duration, take a look at KTBA an IG issue with a YTM of 6.70%. The LT maturity will be an obstacle for most but I’m OK with an appropriate layered into the stack. Added some and may pick up more.

  7. Tim, I started to see some values. I couldn’t help myself. Bought 1000 shares of KTBA at 26.0
    It has a long maturity but I just cannot resist to yield 6.73%
    It may be too early. But I’m not good at market timing. If come down more will double down.

    1. LimitYourRisk–yes when bargains come the temptation is always that they will get better so one holds off buying always wanting a ‘better deal’. I solve this by ‘legging into’ a position–a little now and a little later if the bargain gets better.

    2. LYR – just saw your post after adding mine below. A fellow KTBA believer! One of the reasons I really like this issue is the YTM is so close to the average of LT yields at around 7%. I suspect there’s a lot of calendar between today and that potential IR level. And in the meantime, don’t need to look at this one more than twice a year – June and December. I look at this holding as one that will potentially go to the kids.

    3. LYR, Read your note after posting my own below. Glad to see a fellow KTBA believer! I like this IG tier trust preferred issue because the YTM from is so close to the average LT yield. There appears to be a lot of calendar between today and the potential date we reach that IR level. In the meantime, we only have to look at this issue twice per year – June and December and then once when we hand it over to the kids.

      1. oops! Regarding that double entry – please don’t tell my wife. She’s always saying I repeat myself.

    4. I have a question on KTBA. Since BellSouth isn’t around anymore who is paying the notes?

        1. Thanks Tim, that is what I thought I remembered. You are basically relying on AT&T’s credit. I think that will turn out OK, but they have a lot of debt.

          I have been selling options on the common stock. It is paying over 6% and you can goose it a good bit with the options.

        2. Wow great parallel inncident! Tim I sent you an email today regarding Aliant and its relationship with ATT.
          Also, anyone care to comment on the appealing GOVNI? The common looks hammered along with REITs, but the initial rating via quantum is reported at BBB-??

  8. Tim, most of my portfolio is in preferred stocks and baby bonds and things are actually holding up well for me today – much more so than common stocks. I hold a number of JCAP-B shares and they are holding very steady on low volume. Also, past call ARI-C is down a mere .03 cents today.

    Heavier traded preferreds are not doing as well. KIM-M is pushing a yield of close to 6.7% and is down $2 per share in the past month. If I can get a yield of 7% on Kimco preferreds, I will certainly be a buyer.

    1. kaptain–mine are off 1/10% of a percent–which is what I gained yesterday–I hate givebacks–but like you if some get knocked lower I will buy more. I did pick up a position in CHSCN earlier.—7% or so.

      1. Tim, market conditions are quite odd today. I own baby bonds in US Cellular. UZA goes ex-dividend on 12/13 and is trading at about $24 today, but I pick up a nice interest payment in the near future. Another issue, UZB, is trading at $24.80 and does not go ex-dividend (or is it ex-interest?) until 2/27/19. While UZB does pay 30 basis points more than UZA, market conditions are odd today and UZA is clearly the cheaper issue. I sold out all of my UZB and replaced with UZA. Basically bought the UZA issue for .80 cents less, plus will pick up the interest payment as well.

  9. Wish it were down 0.10 cents, that may be my BEST performer today (ok a little flippant but not very far from the truth). Grim and bear it time

    1. SteveA–yes the average change is not a great indicator, I lost what I gained in a good day yesterday–oh well that is not anything a reasonable person can do.

      1. Well, I made a gain of $.03 cents yesterday. Today, I took it on the chin for an average loss of $0.18 (ouch) on the portfolio. I am making PFF look good. I got especially hammered in those that just paid a dividend last month. Will use this as an opportunity to see if there is a pattern. A quick view ; (a) those that just paid a dividend (b) my high yield/high debt Telecomm’s TDJ/CTAA and (c) financials

        1. Steve, my portfolio tracker said I lost 0.12% today. Of course its hard to lose much money if two thirds of your preferreds didnt even trade 1 share today, lol.

          1. I did some spreadsheet work tonight. The segment of the market that I focus on is credit bureau rated offering at least B or better (1 exception is 2% of my portfolio is ECCA). Now, almost all of my portfolio is investment grade or just below investment grade. When I look at the entire universe eliminating the one’s priced below $10 and RR Donnelly at $16.43 a share, that gives me a pool of 229 issues limited my coupon to 5.6% or above. Average price is $24.36. My average is $24.18 – not horrible but below. Surprising to me, the one area where I show the most under performance is the 6.25% – 6.49%. I am 0.68 cents a share below average. This is where I got hammered since 11/29, where 3 of the 6 issues just paid dividends. Time to be patient but I will analyze further to see how to do better at capital preservation across all issues. Average is okay, above average is better, significantly above is the goal. Time to buckle up, stay the course and learn more

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