With yesterdays melt up in stocks and income issues I was very pleased to look at the accounts last night. Nice gains all around.
Of course suspecting this was a ‘fake rally’ I didn’t get overly excited–and today has proven that its ‘easy come, easy go’ as interest rates shot up – the 10 year now at 3.08%. So all of yesterdays gains have evaporated (and more)–but in the end I continue with my plan.
Yesterday morning before all of euphoria I took a new position and added to a few current holdings.
I initiated a part position (200 shares) of the new A1 rated Rivernorth Opportunities Fund 6.00% perpetual (RIV-A) at $24.10. I wish the price was better but the brokers had issues making this one tradable.
I added more nibbles (50 shares each) on the following issues–
Insurance company AIG-A 5.85% preferred at $23.99
Asset manager Affilated Managers MGR – 5.875% baby bond at $23.83
This morning I added the following nibble –
Saratoga Investment 6.00% baby bond (SAT) at $24.67.
Of course I could now add these at lower prices–but for now I hold and wait a while.
A few highlights from a MarketWatch article today which help to see the market in space:
–S&P off 13.5% from Jan high
–Nasdaq off 23% from Nov ’21 high
–Eval of 19 bear markets over past 140 years, ave price decline 37%; while ave duration of bear was 289 days
–An astounding 49% of Nasdaq constituents are down over 50% from their 52-wk highs
–58% of Nasdaq constituents are down over 37%
just completed a tax saving trade in my wife’s account, she’s zuper conservative wanting defined outcomes. bought 1000 shares of tvc @ 22.80 had to work on 2 days to get it filled, has state tax free for 6 years then long term cap gains at maturity with total return of over 3.5% annualized
I’ve been meaning to take a trusty old bond calculator to TVC and TVE recently just to see where they stand, but never got there……thanks for the reminder…. you must be talking about a stripped price of 22.80 because I do not see any trades as low as 22.80 either today or yesterday and only one 124 trade on the 4rth at 22.75… Not bad for what it is….. At 22.80, not stripped, YTM = 3.76%. Though it might have been easier to buy, the comparable TVA 1k zero coupon version bond due 6/15/28 yields 3.56% on a ytm basis offered side right now. If you did manage to buy at 22.80 gross, you got an extra 10 basis in actual YTM when you take out the accrued but not paid .
you are correct its $22.88 typo error still over 3.5% sorry? mike
Still not bad… taking out the 10.2¢ accrued, it’s still 3.78% YTM… As agency debt, it stacks up pretty well for its maturity and would beat any CD alternative plus allowing better liquidity I’d bet.
Tim
Was wondering what your thoughts are on municipal bonds and closed end
State specific funds.
Based on what you stated you might benefit from non tax income.
I hold various preferred, closed end fund preferred as well as baby bonds.
Living in NEW JERSEY I am hammered by taxes. Trying to find income from
Lowered taxed assets.
I hold a portfolio of stocks that I use for income but also reinvest in the SPY.
Tex—in 1979, the debt to GDP ratio was 32%. In 2021, it was 124%. This is a different time and situation. There is no way in hell the Fed will drastically raise interest rates from here because the debt has to be serviced. Imho, we are heading into a Japanese style (slow to no growth) economy. If the Fed somehow loses control and rates go sky high, we are just in the initial stage of becoming a banana republic. JM2C
I will go out on a limb and guess that we do not have any 121 year old III posters. That is a significant age because they would have been retired ~ 65 when the last bear market/inflation up/interest rates up started in 1966. For those younger than 121, a little bit of history. The Dow hit 1,000 in 1966 and did not climb above it until 1982. That is 16 years of a “nominal” zero return. But that is NOT the worst of it. In “real”, inflation adjusted returns, Dow 1,000 in 1982 was worth about 333. Investors lost 2/3rds of their value, excluding dividends.
And on preferreds, we have a concrete, real world example in one of Tim’s favorites: TY-P. It is a 5% coupon $50 preferred that IPO’ed in 1963, so it traded from then until now. It bottomed out @ 18.00 in December 1981. So investors were down a nominal 74%. In “real” terms it was worth about 6.00 then so it lost ~ 88%.
One other point for the less than 121 year old crowd: The entire time that interest rates were going up, “experts” kept forecasting the high was in. IIRC, NOBODY in 1966 forecast US Treasury 3 month bills would hit 16.3% in 1981.
I am not suggesting the 66-82 carnage will be duplicated here, but there is a finite, non zero chance of it. Everybody gets to make their own forecast and invest accordingly. My highest probability guess is higher interest rates and LOWER preferred prices for the foreseeable future. This is not a new opinion if you read past comments I have posted. From an investing standpoint, we are not buying any preferreds, with the exception of a few rare special circumstances, like thinking they will be called shortly.
Obviously this could be 100% incorrect and the “lows” are in and we should be buying preferreds hand over fist. Check back a year or two from now and we will know the answer. . .
And your TY-P example was just vanilla interest rate related, Tex. All sorts of crazy things can pummel them too, as you well know. The 08-09 crisis put the vast majority of bank preferreds in single digits and even the ute illiquids close to 50% off!
What I try to do is just be cognizant of worst case scenario. And as you mentioned in what you own, all preferreds are not equal nor have been treated in such manner. CMS-D down 29% YTD alone, BAC-Q down 28% YTD. While issues like NSS is down 0.8%, TECTP down 0.77%, CUBI-E down 1.1%, so they are net positives when allowing for dividend payments. So some are beating the pants off the market (S&P down 13% YTD) while others (mostly newer last year issued perpetuals) have been capital killers.
Credit risk, duration risk, sector risk, yield risk, and market risk have all been part of dancing around the flames of preferred fires. Fed and inflation risk have now been added to that list. Fighting the Fed via income issues is a tough fight to win. But I have a lot that have and hopefully continue to mitigate the risk.
As always, thanks for sharing Tex!
Another way to think about that TY-P preferred is that even though its price per share bottomed at 18… over that 20 year span it paid 50 dollars in variable dividends/interest. That is cash on the barrelhead right there.
Assuming it paid reliably it performed it’s duty ridiculously well. That is why a person bought it right? Now if they could afford to use some of that interest/dividends/extra cash and kept buying more higher yielding securities for a stretch of time while the gettin’ was good.. their income upon deciding to spend the cash was doing reasonably well. After 1981 it was all down hill from there. Their balance only went up when the worm turned.
Glass half full??!? Just playing devil’s advocate a bit here. I know one can poke holes into this story but thinking the average investor could dance around that hurricane 20 year period is unrealistic without some damage.
Today, I was contacted by a broker and shown a list of 3 year CDs above 3% with the Three Year Treasury rate at 2.91%. Less reason to fight.
Tex – I’d be curious which preferreds/baby bonds you have in your expected to be called bucket… Currently, I own UMH-C, BRG-C and D, NEWTZ and NEWTL, WCC-A, WTREP, and what’s probably a pretty risky 1k bond note issue, Tenneco 5.375% due 12/15/24 all under that premise…. I’ve probably overlooked a few others as well such as SPNT-B, but that’s the lion’s share.
Bottom line if rates would appreciably rise and in an orderly market one will fully begin to appreciate in the wallet that preferreds do not act in unison.
If Fed funds rate went to 4% and 10 year 4%, you could see issues like CMS-C
go to $14-$15. And with oil strong do you really think NSS would follow suite? Is the market going to give you a relative freebee 18% interest payment on NSS at $15? Nyet…That is why CMS-C is down almost 30% and NSS is still at par. Also todays call anchored issues can become tomorrows cannon fodder if they cross that threshold where call risk has dissipated from rising rates…. And as you well know, singular company issues aside, one can only beg for a shorter duration term dated issue to drop hard below par.
In the short term I also have PNC-P, SAK and EBBNF on my list. They are almost sure things
AMH-G, SCCC, WBS-G and PLYM-A are also possible, but maybe not as likely
Interesting how definitive UMH was on the cc yesterday about calling UMH-C. I’m not sure they could issue that today at $25.00 lol
Of course the pick of the litter is NEWTZ which is a quarter-stacker with the make-whole. Thank you for highlighting that
Well, if SAK goes – there should be at least the May payment (ex 5/13) and a few more bucks on what I paid for it. Hope not. Not holding any of the others listed here.
Tim,
What is the ticker for the sat u bot?
I found only Sak, 7.25% term until 2025.
Tx
Oops, now I see; it is sat.
With the carnage in the market today, the prophetic words of fomer federal reserve Bill Dudley made in April 2022 in a Bloomberg interview stated that the Federal Reserve to fight inflation may have to do what is needed to lower the market and increase unemployment to cool the economy. Until the unemployment goes up, the demand for housing goes down substantially, and the consumer cuts spending, the federal reserve will do what is needed to lower the “wealth effect” of the stock market. Any thoughts on how to navigate in this type of market based on past history? Over forty years since this type of inflation was encountered.
Well, if things go like they did in late 70’s and early 80’s you buy 15% T-bonds and forget about stocks.
Tim, I see some people on here say they avoid perpetuals but i notice you don’t. Curious why you don’t avoid them, if u care to share. thx
Franklin–it is a bit of a change in the last year. I used to be sensitive to capital loss and was more of a ‘total return’ investor. The older I get the more I am leaning to ‘immediate income’ as an investment style. I still lean to short duration issues (term preferreds and short maturity baby bonds) BUT when I can get investment grade at 6% or so I am slowly getting some (and they are investment grade). When I can get a A1 issue at 6.3%–such as the new RiverNorth Opportunities fund perpetual I am taking it–not to say the share price can’t go lower–but my 6.3% yield is for many years. It should go without says that one has to believe that eventually inflation will get under control or 6.3% is too little.
My breakdown of holdings now is probably 60% term preferred and short maturity baby bonds with 25% perpetuals and the balance ‘dry powder’.
If I looked back 2 years I probably owned NO perpetuals–but with semi solid companies now having current yields in the area of 7-7.25% area I need to have some of that (Arbor Realty issues).
I don’t know when and if I will ever draw funds from my accounts–with 2 pensions and 2 social security checks our income is about $85,000/annually—then add in 2 jobs, I don’t see savings withdrawals in my future (at least that I can see).
The preferred market seems to follow the market actions of the issuer. There are several examples: RILYO 6.75% Due 05/25 which I bought a small position in my IRA moved down just 1 penny. This one was based on a SA article penned by Preferred Stock Trader, who joined Rida Morwa but got a nod from Gridbird. A couple of years back, he recommended some small brokerage senior unsecured baby bonds one with 7.25% if I recall correctly, the other 6.785%. The issuer got stressed and reduced dividend to 1 penny to its common shareholders. Someone at your website opined that it was obvious that the issuer was recovering nicely. Yep, very good pick. On a perpetual I bought another 200 shares to prior 400 shares of FRGAP 7.5%. Fidelity analysts are bullish on the issuer FRG, which sells some vitamins. I stopped buying fearful of falling in the yield trap like QRTEP following QRTEA. ATLCP when it was first introduced and unloved, ATLC was rated bullish by Fidelity analysts. Today, neutral with 1 analyst say SELL. The coupon 7.625% is more generous. Yet it tends to drop below par faster or deeper in a down market down. There are exceptions when the YIELD is significantly higher. On your website, on the first day of Taper, someone suggested SPNT-B with 8% with BB+ from SP. On that day, it was trading near par or actually below par. I quickly checked SPNT on Fidelity: Very Bearish. I never see this one trading close to par again. I suppose BB+ from SP is really not so bad at all. I was holding onto EVA a renewable which has not made money for about a year, borrowing money to sell renewable to Germany and Japan. The quarterly snapshot was disastrous. Way off in estimated loss AND down on revenue as well Because its past record, the price first went down 12% but closed around 9.75%. I will not be surprised that it could go down some more. I should sell some taking profit but instead add another $1,000 knowing that the ex dividend date is this month. They increased the dividend. Live and learn. The shippers generally stayed well at least for now. I should try to sell off some in exchange for the very nice list of SWANS. All high yields work UNTIL IT DOES NOT, as Gridbird would say. Thank you for your generous sharing your wisdom and thoughts and the BEST WEBSITE in the world. BTW, Mrs. Brehm (mis spelt) at Silicon identified HMLP-A with its super generous dividend, on news that HMLP found some financing facility after its old finance facility refuse to renew. HMLP and HMLP-A up today. I bought some small amount a few weeks ago, learning the news by Mrs. B. Someone else opined that HMLP-A should be TRADED, buy and sell … I have legacy shares bought above par. Lord ‘xt opined that the financials were the best of all the shippers and the preferreds were offered. Market makers demand premimum. LOL. Because of the Taper, duration risks seem to be not so concerned. I still have the original large positions of PRIF-K 7%. If I have time, I should trade some of these for SWANS as well. I do not believe the inflation will last for long. China’s shut down and bad common stock prices and the weakened consumer should quiet down the demand. Just MHO.
John, you are fearless, I admire that! I got back in one I thought you used to own today. LBRDP at 25.82 today as it got spanked by a paddle with holes in it. I havent owned this since I sold near $29. Ironically Charter was one of only a couple of stocks that went up today.
Grid,
Thanks for alerting me on LBDRP. I have accumulated a whopping 800 shares. Here I thought the unrealized loss, approximately 5% was just “natural” as the CY for this defacto “SWAN” was just unacceptable because of the drastic rise of 10 Yr US Treasury. Stupid me. As I mentioned about SLMNP, I still hold and own 18 shares in two taxable accounts. Many low coupon SWANS bought at IPO all ended up with sizable unrealized loss vs. high risks shippers working UNTIL hopefully not STOP. I have few common stocks and 3 mutual funds. Bought moderate “breakout yesterday” on AMD and SBUX only to see IMMEDIATE unrealized loss. COST (Costco is my favorite store for everything), BRK/B , EWBC are still good with dividend (except for BRK) reinvested. PFE and GSK are probably reasonably safe but unloved with some dividend. Yes, I did hear good news on CNBC on Charter Inc. Yes, it is important to take profit before it turns sour. I got rid of NEM NewMount Mining before it started to drop. Bought it probably 9 months ago after hearing Adami, leader of FAST MONEY kept on praising. Warren Buffett GOLD was probably better or because he bought. I am a gold bug or crypto bug. BTW, Preferred Stock Trader seems long on GLSD and RILYO plus a third one which he admits more risky with higher yield with Rida Morwa. I asked him about DSX-B. He said good but with some theoretical call risks. He also mentioned CMRE preferreds, I did not want to add more on CMRE. So picked up with some DSX-B. DSX-B was on Richard Lejeune’s buy list for a while or at least considered less risky vs SB, I disagreed because DSX just held on their cash, doing nothing until they had the chance to buy competitors’ old ship when in financial distress. Picked up ATCO-H using some of the SB C partial call money. I do not want to buy SB common, which stays firm with pro forma yield of close to 5% $0.05 per quarter. The two Greek brother owners are getting old plus lots of headwinds and Athens got climate change risks as well. PLus Geopolitical risks. I probably should sell some of my weak shippers GLOP A before it turns sour. Last Q, GLOP had a bad quarter. Price down just for a few days and then climbed back. Founder of GLOG, which used to own grandchild GLOP has retired. Market did not react. TNP seems to have recovered after CEO Antonio Tsako first bragged that he made his customer to pay for the scrubber. Then the customer made him pay for it because the premium fuel to meet the European climate change regulations sky rocketed. Analysts urge him to deleverage. He seems to have listened.
Tim, thanks for sharing that. It was very enlightening and educational for me. Really appreciate everything you do here.
You’re welcome Franklin.
Tim, is that annual income including or not including all revenue received from this site? 😂😂😂😂
Grid–yes that includes this ‘gold mine’.
I am pretty much in the same camp as Tim. I am 73 and will be retiring at the end of the year. The wife and I get full SS and a couple of small pension checks. I am not trying to grow capital but am solidly in the monthly income stream mode. I have mostly term BB’s and preferred stocks, however I am in agreement with Tim, when I can get around 6% from a solid company, I will grab it. I do believe everyone has their own personal CPI. If you own your home or have a fixed mortgage, no variable rate loans, maybe just you and the wife at home like us the present inflation affects your pocketbook very little compared to some, so a 6% dividend may be all you need to reach a monthly income goal and sleep pretty well at night.
I agree Bill S. I just retired in my early 60s, collecting one SS, waiting to collect the other. No pensions so the money we have is what we have. Preferreds are about 15% of my portfolio (i also buy bonds to hold until maturity, not sell, for income; and have a fair amount of dividend stocks.) The “growth” portion of the portfolio is obviously taking a hit and while i previously thought i would cash it out in 7 years and grow net worth, I am rethinking that. With preferreds, 50% of mine are term, the rest mostly quality and all about 6% yield. If they take a hit in price (and many have) I’ll just hold them because they still pay. We have no need to up our income now but I moved into more cash and prob will buy treasury and bonds from companies I trust, as rates go up. BTW: in my exprience, retiring before 65, the BIGGEST expense by far is private health insurance.
You’re right Bill–we have no debt to speak of and we can offset quite a bit of inflation. In fact I simply wash my car in the driveway now instead of doing $10-15 every week at the car wash–haven’t washed it in the driveway for years–takes 10 minutes–figure I will save $500/year as i live on a gravel road and wash frequently. In stead of rib eye we’ll do a chuck steak and on and on. Relatively speaking we live like kings so there is plenty of fat to be trimmed with no affect what so ever on our lifestyle.