Once again we got economic data yesterday they would seem to indicate the economy is slowing–NOT in a dramatic fashion, but pointing in the slowing direction. Jobless claims were slightly above forecast at 238,000–although below the previous week, BUT continuing claims were 1.824 million up 15,000 from the previous week. On the other hand until we hit 300,000 on a weekly basis there is no reason to think we are going to see a recession–near ‘goldilocks’ for now. The Atlanta Feds GDPNow is forecasting 2nd quarter GDP at 3%–certainly no recession in sight.
The 10 year treasury is trading at 4.23% this morning–next Friday we get the personal consumption expenditure index (PCE). This news has the potential of kicking the 10 year yield 10-15 basis points higher or lower. We have been stuck in the 4,21% to 4.29% all this week–I like it, but I would like 4.00% to 4.10% better–lower than that would certainly give preferreds and baby bonds a major kick higher. Let’s have some more capital gains on the high quality, low coupon issues!!
Did you notice last night in the ‘headlines of interest’ that insurer Athene Holdings LTD was upgraded by AM Best? Lots of good things to say about the company. Disclosure that I own the ATH-D 4.875% now trading at $18.65–a current yield of 6.53%. I have a capital gain of 10% on these shares and expect another 10% in the next 6 months. We’ll see.
Well we have the release of the S&P Flash services and manufacturing purchasing managers index, existing home sales and leading economic indicators being released in 90 minutes. We’ll see where they are pointing us economy wise.
Can’t bring myself to do 5%. Keep telling myself trading profits make up for the higher risk of a relatively safe 6% issue up to a somewhat risky 10% issue with more trading volatility. My only concession is buying some pinned to par issues they have less downside.
I cant disagree with your line of thinking, Martin. Im just being lazy and less engaged this year doing a few other things. I like to be on top of it all, so I have been content to punt on 3rd down with some of the stash. I have a couple plus 10% ers myself. And actually a relative fair amount too. But they are LTH’s and am just bloated coupon clipping with those.
CDs are creeping up again- as soon as I bought a little more at 1 mo. 5.4%, they had more at 5.45% a day later.
LEI’s have been in the mud for months but no confirmation from CEI’s which are neutral…..Unemployment is a lagging indicator of the economy . By the time it flashes recession you already know it…!
I read the stats but they often miss the point – on average everything always seems fine plus or minus a wee bit. Averages hide a lot: remember subprime bonds? Looks like two economies to me, with some at the top doing very well and others at the bottom doing poorly.
Report from the top – Birthday parties, anniversaries and “life events” are now major events for the wealthy who use party planners and hire entertainers.
At the bottom – Retail analyst (Flickinger) on Bloomberg reports a major shift in home/away food consumption with more buying being done at the grocery. Much cheaper to eat at home than say McDonald’s which has a 700 to 900% mark-up on food, beverages 1000% .(not a misprint, link below at ~11.00) MCD has had 30% price increase in 2.5 years driving away what it calls “low income” consumers, $45,000 / year or less, 30% of America. Reports suggest they don’t seem to want the business. (Although a big bro-ha-ha from the stock touts about the new $5 dollar meal. )
FWIW – if MCD burger prices don’t bother you, see “McDonald’s Burgers Are The New Dividing Line in America” – May 24 Bloomberg podcast.
Here is a short segment on shifting retail preferences, may be of interest to retailer and REIT owners. Covering retail, movies (down 30% affecting mall traffic), online retailers challenging Amazon, BJ/Costco taking old big boxes, malls shrinking etc.
Shoppers Cutting Back. SRG’s Burt Flickinger on Bloomberg
https://www.youtube.com/watch?v=VwPJOL_5SR8
Current sentiment: Avoiding fast food and casual restaurants, grocers a hold, continuing to decrease brick and mortar, cautious on mall REITs. Looking closely at the retail component of the portfolios of the net lease REITs which are always touted as “very safe” by the stock pumpers on TOWS. Watching as new Amazon competitors evolve. JMO. DYODD.
Remember when fast food at places like McD meant getting food fast and cheap? I remember going to away games on sports teams in high school in the 60’s and looking forward to a stop at McD. The whole team was in and out in minutes it seemed and got meals and change for a buck if I remember correctly… Now you order something and get change for a $10 and a request to pull up and wait so they can bring you out warmed over food if you’re lucky after waiting 10 minutes. Big bucks (relatively) for slow food.
Good info BearNJ. I certainly notice quite a bit of difference in the ‘haves’ and ‘have nots’ out there.
Bear, from comments on this site I think you have to extend the divide to brokerages too. All seem to want pension and retirement clients and not so much the individual investor like people here. Problem is a lot of the segment of the consumers these companies are counting on are not spending wisely or over spending. I see Insta Cart, Uber, Starbucks, Netflix and others having a problem if the economy contracts like it did in 2001
I am virtually a novice when it comes to baby bonds and preferred stocks. I do not even have a small fraction of the knowledge that many of the regular posters possess. However, I do follow market history. I interpret BearNJ’s post as identifying that cracks are starting to form — and those cracks may be a precursor to a recession.
Below is a chart of the Baa bond yield relative to the yield of a 10 year Treasury — the max chart option is the most instructive.
https://fred.stlouisfed.org/series/BAA10Y
As can be easily seen, spreads are atypically narrow right now and increase dramatically during recessions. Now, I can buy a one year CD at almost the same yield as a perpetual preferred from a money center bank. For me, the choice is easy.
af,
Sometimes i like to think about the data a bit more and this is speculation on my part. During very low rates like we had during covid I could see any sane business calling anything and everything they could to refinance it at historically low rates. On top of that any sane business that wanted to lock in some borrowed cash would also do it during that same time period.
Wouldn’t that mean there was quite a bit that matured, called, etc.. only to be replaced by new that was at an insanely low rate? So all of this borrowing during this time frame might have lowered the overall interest rate for Baa corp bonds?
Now they are not borrowing as much. Now fed interest rates are much higher in a very short period of time. This would cause the spread to reach new lows in a basic way, correct?
So as long as things are “calm” this spread won’t suddenly explode to the upside. Actually if things reach a recession the feds will most likely lower rates, people will seek safety in bonds, and we might not get the widening that many think might happen as in > 3%…
I dunno. Just thinking out loud.
I don’t think “this time is different”. A recession will be characterized by higher default rates and much credit higher spreads. It’s just a matter of “when” not “if”.
I follow Buffett’s rule — the first rule is don’t lose money and the second rule is don’t forget the first rule. The market is offering a 5%+ return with no chance of losing money unless the U.S. government defaults — that is a very attractive option for me right now.
Use the 5 year chart option below:
https://ycharts.com/indicators/us_recession_probability#:~:text=Basic%20Info,long%20term%20average%20of%2014.80%25.
AF – Here’s a math problem for you to consider:
Pick a low coupon preferred trading well below par. Let’s use UEPEM for $64.25 for example. At $64.25, it has a current yield of 6.2%.
Let’s say sometime in the next 10 years, the average market yield on preferreds is around 5% for high quality issues. This could be due to lower inflation, economic slowdown, flight to safety, yield curve control by the Fed, etc. We also have a large demographic retiring in this country who theoretically will be shifting more and more of their investments to fixed income.
In order to yield 5.0%, UEPEM would need to be priced at $80. Let’s say when it hits $80, you decide to sell. If it took 10 years for this to happen, you’d have an annual return of around 8.6% (cap gain plus dividends). If it happens in less than 10 years, you’d have an even better annualized yield. That type of return holds its own pretty well versus average index fund returns. Further, in order for this to work, you wouldn’t need preferreds to hold an average yield of 5% for an extended period of time. You’d just need it to happen once in the next decade. You’re also getting 6.2% in qualified dividends while you wait.
Anyways – I hope that example helps. If not, good luck with your CDs/money markets! If rates fall down the road, I hope I don’t see talking about how preferreds/baby bonds are too expensive and how bad the CD rates have gotten.
I read an article recently that said something like “Bonds are math. Math is hard and people don’t like hard work.”
Thanks, but I still think my best option is to take the 5%+ now and wait to be a buyer of other securities if spreads widen. I agree with alpha — with spreads this thin, the risk/reward ratio is unfavorable.
However, UEP/Ameren may indeed be a good common stock trade at this price — it’s hot as hell in its service area and Q2 earnings should be strong.
And I have no problem with math. I’m a Ph.D., and taught Probability and Statistics at a top 25 university.
Af, we will find out in a few weeks when I get my next bill from Ameren. But not as hot as where I am going next week…Vegas. I just hope it stays under 110 there, ha.
have unloaded 80% of bonds/perps for that exact reason: razor-thin risk spreads. keeping 20%, near all A-rated, as a hedge.
we can wait.
Im mostly in patiently waiting camp. I did so well 2020-23, just got lazy and taking most of year off. Though I have shrunk the Tbill/CD stash down for 55% to under 45%. Will take it down some more later this year when more mature. I was charting some old utes I have been reentering after taking a nice profit haul from buying off last October’s dump. Probably no more than 25% fixed perp but looking for opps if they occur.
I think those tight spreads are more penal on the IG bond market side than the IG illiquid perp side. As comparing to turn of century prices of these they are not a bad buy. But like you I can wait.