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Dazed and Confused

Markets seem confused–rate cuts, no rate cuts. Not sure why there is confusion–either there is data dependency or there is not. Data keeps coming showing the economy keeps chugging along –weakening maybe, but a fair distance from slowing sharply. Yesterday we had 1st time unemployment claims come in at 187,000 versus forecast of 208,000 while continuing claims fell as well. Housing starts and building permits came in above expectations. Retail sales, which were released on Wednesday, came in hotter than predicted–let’s face it rate cuts are not warranted now or likely in March. We do have bunches of data to come in before the March FOMC meeting–things could change.

The 10 year treasury yield continues is now trading around 4.13%–about 1 month ago the yield was 3.78%. With this sharp rise we should have seen a setback in income issues–but it was very minor which surprised me–over time preferreds and baby bonds inversely follow the 10 year treasury closely, but for now they have disconnected a bit-fine with me.

Equity futures are up this morning—who knows where they will be by days end. We are in earnings season and I have paid attention to bank earnings and am seeing about what I expected with earning lower year over year as net interest margins have been reduced and special assessments from the FDIC have been biting. I did notice that 1 bank reported record earnings–Bank OZK. Thus far bad loans have been manageable – hurting yes – disaster no.

The last couple of days I have barely even looked at my accounts–yesterday I did glance at them after the market close and was prepared for lots of red–surprise – accounts were off, but not in a large manner–very minor.

Today I will do no buying–selling? I have been pondering locking down more profits in bankers and select insurance companys, but I don’t want to sell just out of boredom (to do something)–what is the point? I am building my list for next month (and March) when I have bunches of CD maturities. The list will center around issues I already own–my list of holdings is here. Of course short term CDs are still attractive in the 5-5.25% so this is an option–we’ll see.

41 thoughts on “Dazed and Confused”

  1. The issue again is liquidity more than any other data point. Liquidity is a real issue right now with QT and tighter credit conditions.

    Without more liquidity, things that look healthy take a sharp turn for the worst like a healthy person hiding a widowmaker.

  2. Just talked to a manufacturer who buys from me. Does national and far east sales.
    Told us steel prices are rising again especially stainless. Said so in demand suppliers are only holding quotes 24 hours. Inflation is going to be sticky for a while.

    1. Charles,
      Now that it is starting to hit the press a little, I can share some things we have been tracking.
      China is expected to / has started dumping a lot of export items (like steel) to help manage their economic woes. China accounts for about 30% of global manufacturing output but less than 15% of demand.
      Rather than addressing its underlying economic problems (like the housing and credit messes), it looks like they are going to “do more of the same” (massive manufacturing, even when there is not much of a domestic market for things), which means they will start dumping things to get the cash flow to help cover their real troubles. As they start dumping, prices in those commodities will fall.

      I personally expect that some governments will start putting in anti-dumping tariffs (including the US, if Biden can bring himself to do that in an election year), but until they do, we should start to see price drops in major Chinese export sectors.

      1. Private Depends on how knowledgeable the seller is of the market or I should say the secondary market. My customer has contracts that specify American made. He told me no or very little stainless steel is American. It all comes from China. With the delays in shipping because of the Panama canal. Shipping cost is up. The way a lot of manufacturers get around it is to say assembled in America.
        Unfortunately people saying they would only buy American meets the reality of paying the cost when they see the same product for less for the same quality.

      2. Private
        Imposing tariffs on Chinese goods, only serves to increase the cost to the
        American consumer. The only real way around this is for U.S. producers to find ways to reduce costs. Along those lines it would be very instructive for someone to follow and document the experience of Taiwan Semiconductor in their efforts to build two plants in the U.S. Both are delayed by at least a year. What was interesting is how quickly they are going into production in Japan and Germany.. Unfortunately I don’t know the whole story so I’m not sure if they took over an existing facility in Japan or not.
        I agree that China is having a lot of major issues now. One is the status of the military. The staffing changes which recently took place are only the top of the iceberg so to speak. My sources suggest that the military were and may still be most opposed to any advances on Taiwan . There is a saying in Mandarin ” red paper fades”. People who supported u once do not always do so further on.Interested in any more insights you might be willing to share. sc

        1. sc4 – in a fair market, you are right. Competition drives competitors to compete.

          What I think we are seeing China doing/will see China doing is once again is pouring government subsidies into the manufacturers of some commodities in order to drive export sales at less than a fair market price. We have seen dumping before, and we will see it again. It helps shore up weak areas of their economy.

          For example, about 15 years ago, China gave free land to companies, allowed companies to borrow against that land for operating capital, gave them no cost equipment financing, (etc.) to start up solar panel companies. Their heavily subsidized prices just about drove the North American producers out of business, until anti-dumping tariffs were put in place.

          So, yes, US consumers certainly paid more than they would have if the US had allowed the Chinese exporters to kill off US producers, and they probably paid slightly more than if the industry had all been competing fairly, but US producers survived and China wasn’t able to gain much benefit from their dumping into the US market. They still managed to sell quite a lot into other countries, but the very lucrative US market was mostly denied to them.

          Not sure what this next round will look like, but it will be ugly.

  3. Let’s be honest about the fiscal state of the USA. You have runaway defecit spending of 1.5 to 2 trillion a year from now into perpetuity. No stomach for spending cuts in any area. Maybe taxes will go up. I can even see them eventually putting in a national VAT like Europe to raise funds.

    This all leads to higher long term interest rates on the debt. It’s gonna fluctuate like everything does, but higher over the long term. Borrowing money to pay interest on borrowed money.

    1. First, we don’t measure the deficit right. The real deficit is the increase in national debt. In the last 12 months, debt has increased about $2.6T. Fiscal expenditures increase and tax credits eat away at tax revenues so this real deficit should increase. Second, all federal tax revenues are now about $4.5T. Just to balance the budget, tax revenues will need to increase more than 50% on everything.

      I wouldn’t exclude a VAT: it’s cheaper and easier to collect but they are regressive. Everybody is going to have to accept some nasty sacrifices or the rating agencies and the bond market will make some of the decisions for us?

      1. Potter, you are right, our yearly revenues versus expenditures is more out of whack than the actual total debt to GDP is. If a few judicious budgetary cuts are involved too, I would be supportive of a VAT. That way everybody at least has a skin in the game, since it is everyone’s country. Plus foreign tourists and illegals can help pay the cost too! The income tax isnt even an income tax anymore for many. How did the income tax become a vehicle to give tax refunds to people that exceed what they paid in, assume they paid in any at all? The legislatures that enacted the 16th amendment are rolling over in their graves over this, lol.
        Ok ok, off my soap box.
        Tying it back to interest rates…The debt is what keeps me from going hog wild buying on the perpetual end. Not only is the thirst to issue more debt increasing, they are rolling it over in shorter durations which keeps the debt constantly rolling over and the need to issue more frequently and or more to be auctioned off.

        1. Grid, I agree that it’s dangerous to our democracy that less than half the voters pay income taxes. I am concerned that new types of taxes like the proposed wealth tax in California will be voted in by those that mislead themselves to believe that not everyone is going to have eat this S sandwich. Also, I hope that we can acknowledge that the debt is a bipartisan crisis and that everyone is responsible for creating and tolerating it.

        2. Definitely seems scary to consider any form of unsecured debt farther than 5 years out. Even for inflation adjusted, I’m not comfortable more than 10 years out.

          Future forecasted credit and interest risk higher than my preceding decades.

        3. Grid, This is what bothers me about the Baby Bonds and preferred coming to market lately. I can’t say it’s from marginal companies because I don’t know enough about financials. All these different levels or tranches they call them they use the money to invest in just seems too risky to me. Then add in that these CEF and BDC’s seem to issue larger amounts and use part of the money to pay off old borrowing it seems like they are operating responsibly but is starting to make me uneasy. I was looking at some of the newer players last night like Eagle point and trying to understand how its issuing an 8% preferred that is being bid on the market at 24..55 when you can get the older ECC prD with about the same yield for 20.40 ? This also could cause the rest of the preferred and notes to drop in value so they match the yield of 8%
          Leaves all other people holding the older stuff with a drop in value.

          1. Charles – ECC-D is a 6.75% coupon preferred and is perpetual vs the new issue being 8% and having a term date of 2029. That’s big difference imho and accounts for most of that 20.40 price on D vs. ECCF. It’s current yield equating making up for most of the market price differences with perpetual vs 2029 term probably making up the rest…. I would guess all these firms are pretty much reliant on an ability to refinance upcoming maturities all the time and right now, 5 year maturities or terms or tranches are all the market will allow them. That’s why they’re all coming in with 5 year type terms or maturities – it’s all Mr. Market allows…. just an opinion on my part..

            1. I know what you are saying 2WR I was looking at it from the view of what I can get right now. According to Quantum the D is at 8.27% yield for a cost of 20.41 I could hold for the same 5yrs
              If rates fall and the ECC F goes up in value D should also, maybe not as much but it costs me less! Kind of like I purchased a Ford for the value and a friend of mine bought a BMW.
              Sometimes the difference matters and other times not.

              1. Naturally it’s all a matter of risk/reward and goals…. I think you’ve got it bass ackward on what you’ve actually written but I’m betting you realize that…. If rates fall and ECCF goes up in value, D will go up in value even more because F will become immediately “pinned to par,” while D will not… So it definitely has the greater upside potential in price if you get the call on interest rates right… But if you want to take duration risk essentially out of the equation and want stability vs price appreciation (or depreciation don’t forget), out of the two ,you go for F. There’s a place in the world for both.
                There’s a place in the world
                For a gambler
                There’s a burden that only
                He can bear
                There’s a place in the world
                For a gambler,
                And he sees
                Oh, yes he sees

          2. Charles, this past years opportunities has allowed me the chance to “do what I want to do” finally. Which is in line with your thoughts above. I dont want the stress and having to do “faux half ass financial analysis” that hacks like Moron and PennYlessY attempt to do and largely fail at.
            My stuff is pretty simple now and I dont want to try to think through worry or study the BDC, CLO, RILY junk of the world anymore. I have close to half in various smatterings of CDs, IBONDs, Tbills, TIPS extended out to 2028. I will just roll that for now. For example yesterday, I had a 4.6% 20k CD mature (dont remember when I even bought it) and I just rolled it right back into an 18 month 4.75% one.
            Around 15% is in FGN, AIC, AUB-A, CHSCN, GLP-A, WAFDP, the old SJIJ, and a fair chunk in 2033 and 2035 Empire District Electric bonds bought back they were ~6.7% YTM.
            The other ~35% or so, are all in various old preferreds with an average age of 62. Older than me! And I need zero thought with these. Just some mechanical trades between the sisters if the opportunity presents itself.
            Since I wont be getting the returns this next year I have had in recent years, I will focus more on tax efficiency to mitigate that a bit.

            1. Grid, please don’t forget you are my 7.45% coupon quarterly pay Phoenix brother in sickness and in health until the CUSIP 71902E208 goes to its 2032 maturity 🥳

              1. Azure, this was probably one of my top bone heads that I guess has worked out. I got that $19.15 tender offer in my account. Never having had one before, I was curious and was playing with it taking it through the process. I was intending to cancel it and clear it. But I guess I got distracted with what I was watching on tv or with GF talking and forgot to undo it. Next thing a few weeks later I noticed cash in my account and looked around to see those shares missing and that is when it hit me. I bought around $16 so I made money, and I just looked now and noticed they are back under $17 again. I had planned to buy them back and then forgot to do that! So thanks for the reminder, I will move some stuff around and get back in this again. The present credit rating is actually higher now than when I originally purchased.

                1. Grid, I accumulate a pretty large amount and have held on all these years. I chuckle every time I see the quarterly distribution hit my trust and just how the firms trading this bond have manipulated the market price for so long (just like JP Morgan’s manipulation of the silver market). I am holding in my Vanguard account(s); do you think they would be allowing a buy of the bond anymore ?

                  1. I don’t see why not since it trades on the desk. Vanguard is pretty good at retrieving any of this stuff through 3rd party desks. The key is just getting to the “income specialist” ( second transfer) and not the village idiot who just looks at the screen and says there isn’t any….Which is normal since Vanguard doesn’t offer them on their site.

                    1. I have a direct line to the Fixed Income area if you need it. When you do call, please report back as I’m curious to see if they will allow new buys of Phoenix

                2. GB, I am curious how you know the credit ratings? As I own I have access to their financial statements. As you know they are privately owned. I am not an expert on evaluating insurance company financials, but the last few years has caused me anxiety. Where are you finding the credit rating? I actually had to call Nassau to have them update the website for Phoenix; it seems to be not the most well organized outfit.

                    1. Thank you. Yes I have visited their website. My understanding is the Phoenix bonds are ringed from Nassau? One must obtain passwords and differing website to access the Phoenix financial statements. (Which I have done and monitor.) I spoke with Nassau and they confirmed my understanding. Have you reviewed the Phoenix financial statements? They seem questionable to me but again, I don’t truly understand how to evaluate insurance companies financials. I once tried to sell but there were no offers. I have no choice but to HTM with fingers crossed. Perhaps you can alleviate my concerns.

                      It seems GB has access to the Phoenix ratings so I am looking forward to hearing about their rating!

                    2. Guys that is not the credit rating of the debt. The company has been restructured and reorganized a bit under a few companies. The Phoenix bonds fall under specifically this specific segment called “Nassau Companies of New York, Inc.” That BB+ rating is just the actual overall claims paying safety rank, for people who own policies, not the credit rating of the 7.45% debt. The BB+ is actually a pretty crappy level considering most insurers want that A- and above claims paying safety rating. The actual credit rating of the Phoenix 7.45% debt is it below…But hey it used to be single B so its a bit better since acquirer pumped some equity into it several years ago.
                      Nassau Companies of New York, Inc.—
                      — “bb” (Fair) on $300 million 7.45% senior unsecured notes, due 2032
                      This is the latest A.M. Best credit rating affirmed from 2/23.
                      Keep in mind that is A.M. Best “bb” not S&P “BB” though as you see they call it fair. A.M. has a bit different scale you can search on google to find.
                      BTW, TNT, you are correct concerning analyzing insurances financials. I would say 99% of the people who think they actually can are fooling themselves into thinking they actually do. I know I cant. You gotta know all the pieces to the puzzle otherwise its just a half baked understanding with little use.
                      Here is the A.M. Best affirmation rating of the company.

                    3. Grid and TNT, just a little color on Phoenix/Nassau. I think (after speaking with them) that management likes being private and not having to release all their detailed financials. We will never get the complete picture as insurance companies are like the Great OZ; how do you know the real risk level and what behind the curtain. You just have to look at their asset base and trust the rating agencies (many times that has not worked out well). When I spoke with the management person they transferred me to, I asked about the likelyhood of any default. Their answer (in my copious notes) was, “we have always paid our obligations and will do so into the future”. I certainly have no plan on selling my Phoenix notes, as the insurance company is in much better shape than when I initially bought the listed bonds. This investment (like most private unlisted bonds) is not for everyone and most investors should watch their investment size, liquidity needs and risk levels before investing.

                  1. AB and GB, Again, thanks for the information. GB I totally misunderstood your original posting; got my hopes up the rating was better. I took this discussion as a chance to go back and review 2023; I think an expert would have to review (and goodness knows I am not one).
                    A few months back I emailed the NY and CT insurance commissions, asking for their ratings and such. Both were great! Basically explained that each state requires an insurance co. registered in their states to hold liquid investments to ensure policy holders don’t lose $. I asked where on the financials is this information detailed. They didn’t know.
                    I have a friend in FL that audits insurance companies; he is presently in Bermuda but promised to help me in a few weeks. I even signed up for online seminars but all were geared around ensuring policyholders are safe. I looked online at glassdoor and linked-in to find information/ratings/reviews for this subsidiary. I searched for agents to compare pricing, etc.
                    I believe in “KNOW WHAT YOU OWN” and in this case I have failed.

                    PS AB, I never rely on IR or any company representative. Until one tells me to “SELL” ASAP, (then I might). 🙂

                    1. TNT, I probably used poor choice of words. I shouldn’t have said “pretty crappy” in terms of the BB+ claims paying safety. It should be just fine. I just know conservative people buying policies are told to look for at least A- designation.
                      I’m looking at Phoenix through a longer time frame. See they darn near went bankrupt maybe a decade or so ago or more over LTC plans. They have since muddled through got bought out and recapitalized by acquiring capital fund company. And they improved so much they were willing to buy back all the bonds at several dollars higher than they were trading at. I forget exactly but it wasn’t like everyone tendered. And 7 years ago it was a single B rated. So it’s holding its own. And for the credit risk it’s YTM is very exceptional. But as you know largely you are going dark and it won’t be liquid. Also remember state regulatory agencies only care about claims paying ability. They could care less if some bond holder from the holding company that doesn’t effect customers policies at all goes bankrupt or not.

            2. GB, Back in the summer (I think), I asked them if they would buy back. The answer was no. I feel safer with the large caps. I know their financials and balance sheets; most are bigger than countries so if they go BK, we are all lost. Plus, much more tax efficient!

              1. Yes, I didn’t mean to imply they would offer it again. Back in early ’22 when they tendered interest rates were lower. I totally agree it’s an off the beat track issue to own. Don’t disagree with your thoughts at all.

  4. Tim, if you’re looking for ideas on what to trim, I liked reading CWM’s article yesterday on big yields meet big trouble.

      1. David, Colorado stated it was based on the price difference between them:
        “Currently, the spread is about $3.89. The investor misses out on some “income” over the next several years. But not enough to offset the $3.89 or so they would pocket upfront.”

        If we were to swap EFC-C (bid = $23.80) into EFC-B (ask = $20.35), we pay $3.45 less per share. So right now, we’d pocket $3.45, not $3.89.

        EFC-C 8.625% Coupon quarterly div = ~$0.539 per share.
        EFC-B 6.25% Coupon quarterly div = ~$0.391 per share.
        So a swap to EFC-B results in ~ $0.15 less per share each div, or ~$0.60 less per year. That’s the amount of “missing income”.

        EFC-B resets on 1/30/2027: 12 more divs before then.
        12 divs X $0.15 (less div per share) = ~$1.80 less divs by swapping.

        By 1/30/2027 (the date EFC-B resets):
        1. we pocketed $3.45 per share in the swap, and
        2. we lost only ~$1.80 in divs.

        Another (probable) advantage of EFC-B is about their resets.
        They have almost identical reset spreads:
        1. EFC-B = 5-yr T + 4.99%, beg 1/30/2027.
        2. EFC-C = 5-yr T + 5.13%, bet 4/30/2028.
        Yes, EFC-C has a slightly better spread, but assuming they reset off a similar 5-year Treasury rate, EFC-B will yield more because we paid so much less.
        And we’ll get 5 divs from EFC-B at its new rate before EFC-C resets. As long as EFC-B resets to a 5-yr Treasury rate > 1.26%, it’s 6.25% coupon will reset to something higher than that.

        1. The assumption of a share for share swap doesn’t make sense to me, since I would always do a dollar for dollar swap. EFC-B’s current yield is 7.7% while EFC-C yields 9.0%. I have no idea what the 5 year T rate will be in 2027, but EFC-B would have to reset to 7.3% + whatever the investor feels is needed to make up for that 1.3% yield difference over the time between now and the reset. I’m sure that’s possible, but unless I’m missing something, it’s far from a sure thing.

          1. David,

            Frankly, I can’t put a math example to a dollar-for-dollar swap and come up with an easily-seen solution, like what appeared to be the case with my share-for-share example. Right now the best I can come up with is that for this to be a good swap, then – as you stated – once EFC-B resets, those future cash flows should at some point more than offset the lost income that will accumulate until then. Therefore it does seem to hinge on what coupon it will have on reset.

  5. There is an article in the Mpls Tribune about CHS and Growmark a possible merger of the two…1/19

    1. Apparently this was announced as being explored on Jan 12 – https://www.chsinc.com/about-chs/news/news/2024/01/12/growmark-chs

      Two of the country’s largest agricultural cooperatives say they are exploring ways to “further collaborate to better serve owners, customers and the cooperative system into the future.”
      CHS and Growmark issued a joint release last week announcing the beginning of an exploratory process to further existing partnerships between the two cooperatives.
      “While the outcome of the exploratory process is not yet known, both GROWMARK and CHS anticipate emerging with an even stronger relationship focused on improving customer outcomes and strengthening agriculture for farmer- and cooperative-owners,” the release says.
      The coops specifically noted the 2021 launch of Cooperative Ventures, a venture capital fund focused on ag innovation investments….

    2. The article is worth a read. Compares the strengths of the two co-ops. CHS is about 3x bigger. Although Growmark’s Ag construction business looks like a good specialized service for farmers, etc I’m not keen on the construction business in general while rates are high.

      (Of course, I was wrong on Bank of the Ozarks, or OZK, which keeps pumping out out-of trade-area construction loans like Mondelez pumps out Oreos. (You cant buy a 5.4% CD from OZK if you live in New York City, but you can get a $95 million OZK construction loan on a multifamily on East 50th.). During the 2023 bank crisis, the stock touts pitched OZK as the safest commercial real estate lender because its construction loans were an in-and-out business. Now that permanent financing is drying up, OZK is now saying its happy to hold construction loans on its books. This morning the touts were praising OZK: “so successful”, “strong buy” “what’s not to like” etc.


      JMO. DYODD.

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