Dog Days of Summer Drawing to a Close

We love summer–the heat is something I have learned to love.  In my younger years I hated–absolutely hated the heat of summer, but as one grows older the heat is much less “hot”.  It used to be my wife loved the heat of summer–I would turn the air conditioning down to 68 degrees and she would turn it up–now she has hot flashes and she turns the air conditioning down and I turn it up.

So in Minnesota we have the State Fair starting, which is the official announcement that fall and the school year are just ahead–it used to be that schools in Minnesota were not allowed to start school before Labor Day as youth were supposedly helping work in the fields harvesting the crops.  Needless to say it has been a long, long time since the youth of Minnesota have worked much harvesting crops

Investing for me is something I absolutely love, and this has always been true, but over the years all of the factors that go into investing change.  I wish as a younger person I would have had the wisdom and the patience that I have now–with the benefit of 20/20 hindsight we would all be very wealthy indeed.

We can tell the ‘dog days of summer’ have been truly upon us as only 1 income issue (in our universe) has been announced this week (Saratoga Investment).  The 10 year treasury has barely moved all week long and even the DJIA has moved in less than a 1% range.

We also note that REITs have not been issuing $25/share preferred stocks.  The last issue that was sold was in March, 2018–almost 6 months ago.  REITs have historically been huge issuers of preferreds (less than banks, but still huge).  I have noted many, many issues of REIT common shares coming to market so they continue to access capital–just in a different way.  Also many of them had sold preferred stocks in “refinancing” transactions (redeeming older high coupon issues and replacing with ultra low coupon issues) and it is likely they have refinanced all of the older preferred issues that were outstanding.

So as we coast out of summer we are certain that the markets will be plenty exciting in the fall as we will see a FED rate increase in September, which will minimally give us more return on our ‘cash’ holdings.  Of course we will have elections in November which will very possibly change the political landscape of the country which will add plenty of excitement.  We continually, as a nation, are faced with massive deficit spending and at some point this comes home to roost–will it be this year–or will it be 5 years or 10 years from now?


24 thoughts on “Dog Days of Summer Drawing to a Close”

  1. Tim, I’ve been frustrated about the lack of new REIT preferreds over the past six months as well. QTS did a convertible preferred back in June, but it is not a “true” preferred as it is convertible.

    Hopefully the next six months are better for REIT preferreds, especially if companies want to lock in fixed rate financing as the Fed is still expected to raise rates twice again this year.

  2. Gary, yes trust preferreds are different. Technically you are getting “shares” that lay claim to actual debt held in a trust. So these sit on top of true preferreds in payment and have debt protection (usually with a differal clause if things got bad though). They tend to trade stronger than preferreds also. I will post later tonight some of my examples when I get home to my ipad for you.

    1. Gridbird has been a valuable resource to many of us by letting us know if the underlying bonds supporting a Trust Preferred ( TRUPS ) trade with a favorable spread or not. Another data point to be included in determining if the issue is suitable for your particular situation.

      1. I actually found these Trust Preferres hiding in plain sight on this web site in the master list spreadsheet:

        1. Yes, Gary, you hit the remaining few. I quit holding ALLY-A as its adjustable has been rising and 2019 is a “cut off” date with Dodd/Frank on legacy trust preferreds for banks over $15 billion in assets. Although the details are beyond me, ALLY-A and C-N are in grave danger of redemption because it appears they will not be allowed to be used as regulatory Tier 1 capital then. MER-K is last man standing from BAC trust preferreds and it could be on a short rope also, unless they deem it worthwhile to drop to Tier 2 capital. Most of the bigger banks have shed their trust preferreds already.
          BANFP, OSBCP, and ASRVP are exceptions due to their permanent exclusion of Dodd/Frank being under $15 billion (well under). In fact in their regulatory filings they state they will be continued to be allowed as regulatory capital.
          I personally own the above three plus HE-U. In fact HE-U is one of my bigger holdings. ASRVP is also. The biggest concern besides being past call however, it price entry point. And during boughts of real illiquidity they can move quite violently so firm price entry points and patience for the few times a year a seller is out to sell are needed.
          For example, I have been in and out of HE-U for years. About 2-3 months ago just prior to last exD date, a seller came out and I bought 1000 shares of HE-U at around $25.80 and bought them on the golf course with my phone app. I plan on holding. ASRVP can be quite violent, due to liquidity issues. One day a month or so ago, it went down a dollar, only to go up $3 from there before closing 50 cents above previous day close. Many days these 4 dont trade a single share. “Fake” or “sucker” ask prices are always out there but ignore and hold to a reasonable buy price and accept the fact you many not get any.
          If you compare the 10 year yield to when they were issued (late 90s, early 2000s) to now, their yields on a comparative basis is considerably better now than when issued due to past call status and the “pull towards par” this exerts on an issue.

          1. Grid, OSBCP and BANDP are anchors in 2 of my IRA’s and I doubt I would ever take profits on these great income producers. There is too much of an incentive for the underlying to continue to hold these even though they are paying above market new issue rates. As you know I sold all of my ALLY.A, I continue to believe it is just a matter of time before this large $2.7 billion Trust Preferred is called and replaced with a much lower issue. I manage these IRA’s as very risk adverse and a few months back started to create a zero risk ladder with CD’s, US Treasuries, IBonds and money market(s) because I’m finding it difficult to get decent yields with low/no volatility. Wishing you profitable investing, Nomad

          2. Nomad, I cant quite track down the “entire package” and largely it wouldnt matter anyways because the inner workings are way to complicated for me. But besides the obvious that ALLY-A and C-N are simply too big of issues to be giving away free money to people at above market rates, my understanding is all big cap banks are regulated out in 2019 to be able to use trust preferreds as tier 1 capital. So assuming these arent under some fine print exclusion, I have to assume they are running out the clock with these issues and are assuming they will need less regulatory capital sometime in 2019. So it might just be a delay and redeem with no reissuances. Because on the surface a decent quality issue such as Citi, has no reasonable logic to expose themselves to floating rate debt that is already well over 8% par to them. Total crap companies can issue 8% debt. Somebody is gonna get caught holding the “call bag” on this issue.

          3. Qniform, its been revised since that 2012 paper. All banks under $15 billion are fully permanently grandfathered with trust preferreds. But they can not issue any more…For Tier 1 capital anyways. I have read 2019 phase outs on final regs before. But there could always be fine print, or changed again….Many revisions since 2012, its hard to keep up and understand.
            After immediate outcry from the industry and a lawsuit by the American Bankers Association, the regulators have rewritten the Volcker Rule to exempt securities of TruPS CDOs that (i) primarily hold TruPS of banks with less than $15 billion in assets, (ii) were issued before May 19, 2010, and (iii) were acquired on or before December 10, 2013.

          4. Gary, although not necessary, BANF on the 24th just declared interest payment next month for BANFP per an SAC filing. So clearly near term they still have no interest in redeeming.
            BancFirst Corporation will also pay the quarterly interest payment on $26.8 million of its 7.20% Junior Subordinated Debentures related to the trust preferred securities issued by its statutory trust subsidiary, BFC Capital Trust II. The trust will use the proceeds of the interest payment to pay a dividend of $0.45 per share on the trust preferred securities, payable October 15, 2018, to shareholders of record on September 28, 2018.
            Here is another example of the trust issue being fine with Basel iii requirements from BANC latest annual report.
            As of December 31, 2017, the most recent notification from the Federal Reserve Bank of Kansas City and the FDIC categorized BancFirst as “well capitalized” under the regulatory framework for prompt corrective action. The Company’s trust preferred securities have continued to be included in Tier 1 capital as the Company’s total assets do not exceed $15 billion. There are no conditions or events since the most recent notification of BancFirst’s capital category that management believes would materially change its category under capital requirements existing as of the report date.

        2. Gary, here is some additional info for you concerning in this case OSBCP to explain the situation. Notice this paragraph from this years annual report.
          The Company completed the sale of $32.6 million of cumulative trust preferred securities by its subsidiary, Old Second Capital Trust I in July 2003. These trust preferred securities remain outstanding for a 30-year term, but subject to regulatory approval, they can be called in whole or in part at the Company’s discretion after an initial five-year period, which has since passed. The Company does not currently intend to seek regulatory approval to call these securities. Dividends are payable quarterly at an annual rate of 7.80% and are included in interest expense in the consolidated financial statements even when deferred.
          As cited above it certainly doesnt appear they are inclined yet to redeem. As mentioned trust preferreds are valuable because holding companies in effect can use the double leverage from the actual bank and holding company capital, in addition to the tax break unafforded by non cumulative bank preferreds.
          This one stays in a very narrow range and will go exD next month. It usually stays in 10.50s and then exD it sometimes crawls below 10.40. I had some spare cash today and just went ahead and paid the rake rate today and bought a few thousand more, as it hadnt budged in several days and the seller was there not hiding them.

  3. Tim, State Fair sounds great. Around me (NY), quite of bit of farmers markets and cultural feasts will start (Italian, Greek, German) pushing great food and grog. I can deal with the heat as long as the humidity level remains low (very low). Otherwise I start to melt. Weather wise, fall is my favorite season in the NY area. I do like the beaches in the summer but nothing like a good brisk hike in the upstate lake areas.

    I also enjoy investing and continue to learn as much as I can. Since retirement I devote more time to it without rushing into / out-of anything. Actually, generating income for expenses has become a necessity to stay above water. Working so far, but only time will tell if I can sustain into my future years. I look forward to continue collaboration across this forum and thank you for keeping it together. My goal is to tweak my preferred holding to a hold more IG). I know I will give up yield but think I will sleep better. I also want to cut down on the number of preferred and ETD issues I hold. May have to increase my holdings on what I do keep but then I will start to probably feel I have too many eggs in one basket and not diversified enough. Something I need to ponder on..

    1. Right or wrong, I have done that, Rich. I would rather have more in an issue I understand and feel comfortable owning than spreading it out just for diversification sake. I actually have had to go the opposite way and increase my money in more ETD than actual QDI preferreds, as most of them outside of some banks are rare and of crap quality.

      1. I also have been moving into more fixed income such as baby bonds and preferreds ( usually in the 5 – 8 % range). I plan to retire in the next year or so.. I have read a lot of gridbird posts here, on SI and SA. Thanks for sharing 🙂 When you and Rich refer to ETD Are you referring to futures and options? If so does that not just add another level of complexity or are you using as a hedge?

        1. Gary, no, no,no for me…I am a simpleton! ETD means “Exchange Traded Debt”,
          or in other words the “baby bonds” or “trust preferreds”. I actually have been hitting up the old trust preferred debt more because I like the 2028 to 2034 ceiling range on maturity. Most new issues have maturites into the 2050s to 22nd century. And I have a bit in that range all, along with my QDI perpetual preferreds.

          1. Thanks for the clarification. Do you have examples of trust preferred shares I could look into? Thx gary

        2. Gary, it depends as I hate to throw out tickers if they arent suitable to ones individual goals. Mine generally are “maximum yield with relative maximum safety and some back side price support if rates rise”. So this generally leads me to issues paying above relative market yield, but mostly past call and often well above par. But being past call they cant trade to the true price of the lower yield it should pay.
          Many income seekers who want secure income mean that to be, no call risk, and are not comfortable with a call risk. But many may not know they are exposing themselves to capital loss of duration risk if rates rise. Some I know dont truly care as they never plan to sell and only want an income stream. Some think they want that until they see the price drop and then may regret.
          I like some old bank trust preferreds with issuance yields of over 7% to 8.5%.
          These hang around past call because the banks are under 15 billion in assets so they get to permanently grandfather these trust preferreds. The banks are reluctant to redeem because they get the fed/state income tax break that makes the effective yield for them considerably less. So I get to “steal” some relative yield all while getting a 10-16 year backstop mandatory maturity date the minimized duration risk. So you would have to decide first if that type of situation interests you are not first.
          And to change examples, you have other scenerios….For example, AGO-B. I would rather have it (goes exD this week) and its stripped 6.7% yield or so past call Baa2, than a new hideous 5.35% yield ATT baby bond with Baa1 and call protection. But that is a defined decision one must make relative to their own goals and needs.

          1. I have ago-b, I don’t hold att because usually they are perpetual and too low a dividend. So we do think alike. What peaked my interest was that you said trust-preferreds are debt. I thought all preferreds were shares. Maybe there is no difference but that was what I was asking about. Thanks for taking the time to respond.

  4. The adverse effects of budgetary and current-account deficits have been muted in large measure due to large capital inflows. This in turn were based on several factors including the USD being the international trade currency, higher interest rates in the US among the developed economies, the growth in global trade, the growth in energy export, the independence of the financial institutions, etc. Hope these factors remain favorable. When the next recession hits, and government revenues slide, the effects of operating exorbitant deficits may well become unsustainable.

    1. Hi SPM–of course you are correct and all the winds have blown in our favor – for now – until they don’t.

      My personal belief is the next recession could be as ugly as the last one–although for different reasons. The last being the housing sector etc, and the next being governments and pension funds. If you can’t get ‘healthy’ when times are good, how are you going to get financially healthy when times hit the skids?

      1. Tim
        As a relatively new reader, wounder if you could expand on what you see the shape of the next down turn More specifically, how do we go about insulating ourselves from the problems as much as we can. Cash and near cash can prevent one from selling units which have lost value but in your view which types of units will be best able to hold value if not grow? Have a great weekend. sc4

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