I had just looked at the overall picture of preferreds and baby bonds early today and ‘on average’ they were up 2 cents from last week. But on a day where interest rates ground higher (as represented by the 10 year treasury) to close at the high of the day – 1.41% – investment grade issues–lower coupon issues–were pretty much all ‘red’.
Losses were not deep–maybe a dime, but out of the 217 $25/share preferreds and baby bonds I track only 22 issues were higher–with the balance unchanged or lower.
So going back to the ‘olden days’—the days when interest rates used to move in both directions we know a couple things. 1) Higher coupon issues will trade firmer than low coupon issues when rates move higher and 2) issues that are near maturity (baby bonds or term preferreds) and those issues that are ‘anchored to $25’ with a call threat over hanging them will move little with higher rates, except in extreme conditions. In general this will occur irrespective of the quality of the issue.
My sincere appreciation for the thoughtful and I can tell heartfelt – postings today from NWGG and JC. It’s these kinds of writing that make my time reading here (much more reading/listening than posting) so valuable. Much thanks again to Tim for making this site so important a resource for less sure folks like me ~
Market is due for a correction. It will latch onto some narrative as an excuse for that correction. I thought it might be Evergrande but that narrative seems to be fading. An upcoming possibility is the debt ceiling. If there’s a showdown that takes us to the 11th hour, then markets should correct like they did last time that happened. That time, bonds sold off (yields went up) and stocks corrected about 5%. That’s the worst kind of selloff as everything goes down and there’s no flight-to-quality trade. I think we could see more like a 10% correction this time around because we’re overdue.
Timing on this would be about mid-October which would set us up well for a year-end rally.
My CUBI-E is holding at more than I paid for it, I sold my BRG-PD below the high but I collected a profit equal to the dividend and turned around and had a partial refill to buy it back. I watch nature, not the TV and fall is here, my low bid bought a preferred gas stock last week and I am up on it not counting a divy in 5 weeks. Believe its one GB is in or has been. Thanks Grid.
I am holding on to a few companies that have buyouts waiting to close. Was burned before with riteaid but these are biotech. Cash about 25% with low ball bids in waiting for the fight over the debt ceiling to heat up. Sold out of the PRIF- H at a small profit, been a dog and don’t want to hold if market drops
They all fell the same small amount? That’s a sign that it was an orderly day. On wild disorderly days the prices move in wild disorderly ways. Perhaps this small orderly move down is nothing more than low yield issues going down when rates go up. If systemic risk was the concern I’d expect higher risk issues to do worse.
This message is for those who have never been through a bear market and/or interest rate shock (not the current or former industry types). Obviously, these are two different things, so I will address them separately.
I tried with no success to get my previous millennial co-workers (in 2018) to sell their S&P 500 index funds or at least take some off the table. I showed them that the S&P would have to return average low single digit returns in order to go back to the long-term average mean return.
They laughed and said that I was an “old man”. They new better and the gravy train would last forever. These were actually all finance majors to boot, but they were too stupid to not believe a bear market can and easily has lasted ten years or more.
I believe my thesis still applies. I haven’t done the calcs lately, but the S&P 500 has continued its run since 2018 so the number may now be negative or even lower than what I previously calculated to break even. People who invest now and get 3%-5% + return of principle will probably be WAY happier than those who took it on the chin in a bear market. Sometimes return of principle is better than return on principle.
Most people I have observed don’t even buy any BB/Pfds when they think the rates may go up. They get scared because the price of the stuff they already own goes down so then it’s “wait and see”. Then they wait and here comes the reverse move and then it’s “I coulda shoulda woulda”.
There is always something to buy that is attractive, but in my IMHO people are WAY too chicken. They want to wait until things “settle down”. I can’t believe how many good free ideas I get from this board. They are meaningless though if there is no action taken.
A LOT of people want to “set it and forget it” or I’ll just stick with IG. IMHO these are terrible ways to invest and lend themselves to losses and disappointment. I have made the most moolah when I have to “plug my nose and buy when cheap” or “make myself sell when it’s fully valued and/or overvalued”.
We have some people on this board who are going to go broke safely. IG, Banks, Utes, are where they play at. Remember, these markets are usually priced for perfection. You are also competing against the “Big Boys” who are tough to beat and have endless resources to game you.
Why do you think GB spends so much time in the Illiquids and other weirdo areas? It is because most will pass these over for one reason or another and he takes advantage of it by using the illiquidity/quirkiness of that market to his advantage.
Find your area of expertise and EXPLOIT it.
Many people make this WAY to difficult. Remember, if you aren’t trading then the best you can do is get your int/div payments and par at maturity. You are not trading cryptos, fangs, pms or whatever the “hot dot” is today. If you buy and hold, don’t look at your statement when rates rise if you only buy high quality paper (not an EJ BBB- special).
You can expect a 10% drop in value for about every 1% rise in rates even in IG. You might say, “well this is an IG bank, ute”, whatever. Your beloved fortress of perpetuity will just go down and down and down. If you don’t have the stones to leave it be, then you will most likely sell at a loss. Remember a rising tide lifts all boats (and vice versa) when it comes to rates.
The moral of the story is know your limits now before you find out the hard way. Believe me, myself and every other grizzled veteran who knows a thing or two can’t wait for you to FOLD and take your lunch money. There is nothing guaranteed to buy on this site. If you need that comfort, then you don’t belong here (IMHO).
Finally, I have changed my investing style to more of “Skate to where the puck is going” . I think that was Gretzky (help me out Canadians and puck heads). Or, if you made money you are RIGHT or if you lost money you are WRONG.
BTW, thanks again to Tim who is doing this for FREE. Hard to find anything worthwhile at that price.
They used to call me ‘grandpa’.
Yes, it was The Great One, Gretzky, but he never played against the three toothless Plager Brothers on defense.
https://www.stltoday.com/sports/hockey/professional/the-night-the-plager-brothers-all-played-on-the-same-line/article_4c4bf7b4-7c1a-5e69-8921-761f5712926e.html
JKnow how to play defense!
Couldn’t resist:
https://www.stltoday.com/sports/hockey/professional/the-night-the-plager-brothers-all-played-on-the-same-line/article_4c4bf7b4-7c1a-5e69-8921-761f5712926e.html
Know how to play defense!
J.A.
I was from SoCal and remember Gretzky putting hockey on the map. LA loves a winner.
I now live closer to Barflandia where we have our beloved Winterhawks. Some of the kids on the team went to the same high school as my kids. I went to one of their games with my bank’s branch manager. We got HAMMERED at the Dandelion across the street and were screaming at the top of our lungs at the game for the ‘Hawks. Man, you can just taste those HITS in that intimate setting. Nothing like seeing it live especially with those semi-pros guys really working theirs tales off!
Thanks NWGG–for the shout out and the sharing.
The day was NOT too severe. We have seen much worse. Here are a few stats on issues that closed >=$10.00/share
Median preferred= -0.18%
Median baby/term= -0.08%
227 up
447 down
41 unchanged
98 did not trade (Nearly all Grid issues!)
Only had 5 issues that were down =+2.0%
Hey Tex, I looked. Kind of a busy day for my preferreds. Only 12 of my 34 didnt trade today. I own such an eclectic group mine tend to zig and zag away from normal market trends. I was down yesterday in total, but up today.
Thanks Tex–red for sure, but not anything severe–actually just how I like it.
The day was NOT too severe. We have seen much worse. Here are a few stats on issues that closed >=$10.00/share
Median preferred= -0.18%
Median baby/term= -0.08%
227 up
447 down
41 unchanged
98 did not trade (Nearly all Grid issues!)
Only had 5 issues that were down =+2.0%
The problem as I see it is lets say you start thinning the herd of your low yield preferred tomorrow. You create this pile of cash. Now you have to sit back and wait for something better to come along. Anything right now with a higher yield and the same IG rating is obviously more expensive and the price is firmer. It won’t drop as fast as low yield like you mentioned. It is probably not a good buy YTC wise.
So this pile of cash is just sitting around quarter after quarter missing payouts while you wait for the 10 yr to reach 1.9-2.3% and hopefully new IG issues come out around 5.0-5.5%. Who knows how long this will take with the fed hesitant to take action. 12 months? 16 months? Years?
In the meantime you missed out on payments with the whole “time is money” saying ringing in your ears. Your future purchase now has to make up for those lost payments. Most likely rates will take so long to go up we will all have plenty of time to adjust our holdings if we desire. A “new lower” plateau of what we call normal rates will take place keeping those low yield IGs in a pretty decent place I imagine. Just think what the 10 yr has to be at to cause PSA to issue a 5.5% preferred. Double the current rate almost. On top of that redemptions have cleared out whole swathes of previous choices at higher yields. You are counting on new issues from IG companies that probably have no need to issue new anyway at rates that look terrible from the recent past.
Probably better off just collecting payouts and hold off a while reinvesting it if you don’t need to spend them right away. I don’t see selling right now as a prudent move. Unless you can predict a spike in rates in a 6 month time period it is probably a fools errand to attempt it at this stage.
Geez.. if you read all the way to the bottom here thanks. Much smarter folks on this forum then I but I do a lot of reading of smarter folks and the above is my two cents.
Did I miss something? Jeez, what angst. My Ills (thanks to whoever came up with that abbreviation) have been fairly rock solid. Sold a few PPWLM in the 170s, e.g., and reinvested in other solid Ills to gain 40-50 basis points.
I’ve long ago given up trying to maximize CG and now just try to maximize income. When EPD, for example, went to <11 last year, I was buying with every nickel I could stack. I never flinched.
Pay me. Just pay me. I don't give an eff about anything else. And oh BTW, my forward annual income is up over 19% YTD. If I'm correct and they continue to pay me, I don't need anything else.
JMO
I have a feeling you meant to reply to NWGG. I don’t think i was to angsty. lol.
No. It was a general comment to the board. No offense.
BTW, my cash is a bit high today: $193.70 😉
$193.70 is the exact price for a box (26) of Padrón Churchills at Holts Cigar Company…no coupon, but still a good investment.
https://www.holts.com/cigars/all-cigar-brands/padron.html
When your success metric is income growth y-ov-y. With low draw down risk.
Price is only a means to achieve your goal quicker.