Let the Beatings Continue Until Morale Improves

The baby, the bath water and the bath tub are all being tossed out the door. I would love to buy–but I can’t!

There is no use being a hero until we can see action relative to stopping the spread of Covid 19. I note that Wisconsin just went ‘shelter in place’ and I am certain within 72 hours Minnesota will do the same.

Forget about the Fed action and the clowns on capital hill. The Fed is keeping the financial system from imploding, but this does zip on arresting the virus spread and the government really seems more inept than I already thought they were.

I have been down this road with the Federal Government back during the Gulf Wars. 1 of the businesses I managed for Pillsbury was the production of MRE’s (meals ready to eat) for military use. 6-12 months or so before the war started the department of defense asked us to ramp up production–of course we had no capacity for increasing–so they threw millions of dollars at us for a new production line. Being specialized production equipment it took months and months to install the line. By the time we had the line installed they no longer needed it and they simply gave us the equipment. Later we donated the equipment to Rutgers University Nabisco Food Research Center.

So I expect by the time the Fed government is all ramped up we won’t need them anymore–can’t count on the Federal government for much.

Anyway I still watch the spreadsheets for bargains–just not taking the bait yet.

Here is the Lodging REIT preferred spreadsheet--huge bargains, but dividends are being suspended–they are cumulative. Thus far Hersha Hospitality (HT) and Sotherly (SOHO) have suspended common and preferred dividends. Pebblebrook (PEB) has reduced their common dividend to 1 cent and are monitoring preferred dividends going forward. RLJ Lodging has gone to 1 cent on the common. Is HT preferred worth the $3/share price right now? Don’t know but the risk reward is pretty juicy–we’ll see.

63 thoughts on “Let the Beatings Continue Until Morale Improves”

  1. Will this happen again if the bank pref. go down further.

    October 13th 2008
    WSJ reported that the US Gov’t was set to buy Pref stock in the biggest banks.

  2. I’m sorry, I guess I’m a bit confused…

    I thought this was an investing website…not a politics website?

  3. I thought you guys might get a kick out of this.

    My weirdest transaction of the day was selling KTBA for $27 and then buying it back for $25.15 in just a few minutes time. I noticed someone sniffing around for it so I put both limit orders in and they both executed within just a few minutes.

    It’s just a really weird market where no one has any idea what anything is worth at the moment.

    1. I sold KTBA as high as $30.80. Now I’m reluctant to jump back in, not sure the carnage is over. Might try a small order.

  4. At least it looks like relief is coming sooner rather than later.

    At the press conference today it sounded like the leading option is to open the country back up and just lock down the hot spots. Keep the sick and elderly quarantined, while having everyone else go back to work. That pretty much has to happen. There is no stimulus equal to the GDP of our entire country, which is what it would take if we keep things locked down nationwide. I imagine those who go back would need to wear masks and practice distancing/disinfecting. Older workers could work from home where possible.

    The experts said they would have data this weekend so they could present options and recommendations and the president said he was looking at it being weeks rather than months. The mortality rate also seems to be on the lower end, well under 1% for those who test positive. By the time you throw in all of the people who have it, but never seek treatment it is going to be a lot closer to the flu than to the 3% or more they were fearing, although it will still be particularly deadly to certain age groups. At least this is what the data so far seems to be showing.

    I guess we will see. For the time being, everything is still on sale.

  5. I am mostly a lurker here but really admire this site and especially the very knowledgeable contributors. I was hoping that Tim and/or Gridbird would offer their opinion as to their favorite investment type for safety given a choice between IG cumulative preferred stock or IG baby bonds. Thank you in advance.

    1. Haz, If am to feel the responsibility of recommending something my preference would be an 8% CD, but I cant find any, ha. BTW there are a lot of just as knowledgeable or more people here than me.
      As far as preferred vs baby bond the difference is more determined by the quality of the issue and what type of baby bond. In other words a baby bond from company A could be a more riskier issue than a preferred from company B. If you want cumulative you are eliminating the biggest sector banks/financials as they must issue non cumulative.
      And remember when a total crap outfit issues a preferred they essentially throw in cumulative as a freebee. Because likely with these outfits they are going under anyways if they hit financial problems.
      And the crazy thing like Charles just mentioned pricing can change immediately making something with so so value to be something of interest to own. Will it unnerve you if you bought something and it dropped $2 the same day?
      I have to admit even though I am well aware of historical movements and price ranges, I have to own some that mature in next 6-8 years. It helps with knowing the pricing isnt as important if there is an end point. Do you own individual issues presently, Haz?

      1. Thanks for the reply Gridbird. Yes, I currently own some common, some baby bonds a few CEF’s and lots of preferreds. My portfolio like many others has taken quite a hit but fortunately I still have a fair amount of dry powder. The reason for my question centers on the future. I am trying to build a list of must own “sock drawer” securities to add to my portfolio once I feel comfortable that some degree of normalcy has returned to the market. At my age, safe income (whatever that is) investments are my focus and I find myself leaning towards IG preferreds and BB. I like IG BB’s with short to medium term maturities but they are hard to find. I was interested in hearing what the more experienced investors on this board, like yourself and Tim thought about this approach. Because I follow this board religiously I knew that many of you are willing to share your knowledge with those of us with far less experience and for that I thank you again.

        1. Haz, Have you looked at KTH and KTN? These have duration risks of 7-8 years at YTM without call options in 6%-7% ish range.

          1. Gridbird, I was not familiar with KTH or KTN and have taken a look at both of them with interest. I have put them on my priority watch list to see what happens next. Thanks for the heads up I really appreciate it.

    2. Haz1–I won’t speak for Grid, but CEF preferreds rate A1, A2 etc are my favorites purely for safety. All cumulative.

      1. Tim, after seeing your reply above I printed your spread sheet for Preferreds Of CEF’s and found several IG funds that caught my attention. Interestingly I already own ECF-A, GGT-E and OXLCO. I appreciate your pointing me in the direction of these CEF’s as I have begun my DD and have created a watch list. I would be remiss if I did not thank you for creating this site and for unselfishly sharing your expertise. Many thanks.

  6. Hang in there. Illiquidity in the preferreds in a massive forced-sell market has sent them to artificial lows. Except for energy, I am betting they all slowly return to equilibrium as this blows over. I also think we are within 10% of a bottom, maybe less. I have been buying up blue chip divvy payers WMT, JNJ, MMM, CSCO, SBUX, LOW, etc. at prices no one would have dreamed of 4 weeks ago. While I do not think we return to all time highs very soon, I would bet we V to 2800-3000 this fall and winter. Being 3 years from retirement, I loom at this as a huge opportunity…GLTA

  7. How does it make sense that electric utility common stocks get hit hard? On average the big caps in this group is down about 1/3rd. It’s doubtful that their income is going to be greatly affected in both the short and long term. Neither interest rates or the cost of their cost of raw materials are on the rise.

    1. I too am surprised by how hard they have been hit, but I think the dramatically lower level of industrial production and the much lower level of business activity in general from people staying home will indeed have an impact on their earnings. They will also be under pressure to stop disconnects and also forgive utility bills from people who can’t pay. You know the politicians will be on their behinds because they are an easy target.

    2. Derek, from what i understand it has to do with debt structure of electric util – capital intensive and when their debt rolls over, there is not enough liquidity for them to reissue so it will cost them.

  8. I picked up DRUA (dominion energy ps) and waiting for SRE-a or SRE-b convertible stock as well. ANy other decent util preferreds that should be able to weather thru this? What about PSA preferreds? Thank you!

    1. PSA preferred stock is a great bargain. PSA carries an A3 rating from Moody’s. It has low debt and a very safe stream of income. In fact demand for storage units is way up in many areas, such as college towns, where students have moved home. All but one of the issues is yielding over 6%. I would load up on PSA-H or PSA-I because they can’t be called before 2024. Also, the dividends are cumulative should the improbable happen and the company suspends their dividend.

      1. TEF, PSA-pfds have been gems laying out in the open. High IG, low debt, company thrives in up or down economies. Have added plenty during this fire-sale.

        There’s been a rare opportunity to buy something worth holding every day since the downdraft started. There’s still a lot of cash out there and given the yield landscape, expecting the volatility on the way up to be as volatile as it’s been on the way down.

    2. Debbie, In case you didnt know, remember a mandatory convertible preferred is totally married to the price of the common stock. Also remember holding company preferreds are usually below cap stack of subsidiaries.
      I havent looked specifically at this one so please remember that. But for example EIX Edison International owns Southern Ca Ed (SCE). The preferreds of SCE are actually superior in cap stack to all the bonds EIX has. In other words the debt of EIX is subordinate to the preferreds of the subsidiary.

      1. Gridbird, thank you for the reply and info on EIX/SCE. I mistakenly thought DRUA was preferred, oops it’s debt! Yes SRE-A/B will be forced conversions in 2021 so this 7-8% yield is short term. I will look at SCE and PSA. I had quite a few shares of LDP (cohen&steers) limited duration preferreds which got beaten up but the company released a market update that makes it look like a bargain. Tough to tell who’s telling the truth anymore. Default risk maybe way higher than anyone is willing to admit. Marriott CEO said today this hit on their biz is worst than 9/11 and 2009 recession combined!
        P.s. is there a way to be notified if someone replies to my comment?

        1. Just to clarify Debbie, I wasnt suggesting SCE preferreds were a buy or not just giving an example. Many people incorrectly assume the holding company sits on top of everything. It doesnt work that just because they own the common stock of the subsidiary. Generically speaking in chaotic upheaval diversity makes sense and that can be found in funds. I havent taken the time to study any but I am practicing more diversification amongst similair quality and sector issues though.

          1. Crazy day Grid, I held SCE-PH for a yr. then sold it at a 25.00 loss minus 1yr of divys after I saw what was happening figuring I could buy it lower. I put what I thought was a low ball bid Sat. At 16.20 and got it only to see it fall at end of day! I liked it at the 6% I was getting so guess I can’t complain at 8% getting now

            1. Charles I have been in and out of the SCE over time, but havent been in for a few months. I can appreciate your willingness to own at 8% QDI though. I got some cash still but after todays drop Im itching to spend, ha.

  9. Been wanting to buy “WFC+L” for probably 3 or 4 years now. I remember just a couple of months ago when it was trading at a smidge over $1,500. Bought 100 shares today at $1,054. Took me around 4 years to finally nail it and buy it. Its a 7.5% coupon and face value is $1,000. Doesn’t trade alot of shares but its definitely a “SOCK DRAWER” keeper as Tim would say. I might add it will NEVER be called. Read thru the material, not gonna happen. Also I would like to add that “IPLDP” which is a favorite of some of you guys is now trading at $19.95. Certainly not a bad buy for a safe utility company. Coupon is a 5.1%. Another sock drawer keeper. Many sock drawer keepers right now assuming these companies don’t completely go away.

    1. It was so long ago, I had to look it up.
      I bought WFCpL on 10/12/2010 for $1013, and I still hold it.
      I never thought you would see it near that price again, yet here we are.
      I wasn’t smart enough to sell it @$1500, but I wish I was.

    2. Chuck- My dream preferred is CCI-A 6.875%, I am licking my chops at $1071 but I think I’m gonna hold out for par now. To think it was almost $1500 a month ago.
      (Unfortunately my powder is in NEAR which is 6% down…)

  10. Send any extra toilet paper you have to Congress. There is more arse holes there than I thought. Lol

    1. I have a brilliant idea (being snide). If they have agreement on some items and THEY DO. Pass multiple bills. Nobody cares whether this is `1, 2, 3 or 10 bills.

      In fact, 1 bill a day may slow market declines.

      1. Or you know, just leave out all the garbage unrelated to Coronavirus and the economic shutdown.

        Call me crazy but what does any of these have to do with helping out of work Americans, hospitals, small businesses and loans for bigger businesses impacted by the shutdown

        1. Corporate pay statistics by race and race statistics for all corporate boards at companies receiving assistance
        2. Bailing out all current debt of postal service
        3. Required early voting
        4. Required same day voter registration
        5. 10k bailout for student loans
        6. For companies accepting assistance, 1/3 of board members must be chosen by workers
        7. Provisions on official time for union collective bargaining
        8. Full offset of airline emissions by 2025
        9. Greenhouse gas statistics for individual flights
        10. Retirement plans for community newspaper employees
        11. $15 minimum wage at companies receiving assistance
        12. Permanent paid leave at companies receiving assistance

        1. Tim removed part of the comment

          The stumbling blocks seems to be the 500B to 600B available to treasury secretary. If they cannot argue to oversight and restrictions on this then do another bill.

        2. Tim removed part of this comment

          And the quarantine will likely last until the election. Forcing states into voting by mail lowers the transmission risk.

          1. Folks, that’s my point. We know we can agree on (a) direct payments to people (b) assistance to all small businesses (c) assistance to larger businesses especially hit hard like airlines (d) assistance to states that have extraordinary expenses.

            Tim removeed the balance of the comment.

            1. SteveA just getting a chance to read though the commentary at I had to go back to work at a essential business today.

              Tim removed the balance of the comment.

            2. The Senate had no negotiations. The text of the Senate bill is insane.

              Tim removed further comment

              1. Justin – I suggest if you want to be accurately informed, you go online and read the text of the bill in the Senate – and the one Pelosi is trying to push. Both are published online, The statements you have made here are wildly inaccurate

                1. I am more informed than you think. Here is a ridiculously long-winded answer.

                  Tim removed the balance of the comment.

                  1. I just saw your answer with the sections listed. That is not the Senate CARES act. Can you send me a link to that legislation? it was not posted on LOC that I could see.

            3. Steve

              The assistance to large businesses and state and local governments is the $500B. And as noted, $75B is for the airline industry and national security. The remaining 85 percent of the funds ($425 billion) are set aside for “loans, loan guarantees, and other investments in support of programs or facilities established by the Board of Governors of the Federal Reserve” , for lending to businesses, States, or municipalities.

              Tim removed part of this comment

  11. Single digit preferreds going to be a new page?
    in 2009, things like ISG were selling for $3-4 a share.
    I haven’t seen any screaming bargains right now, except maybe BSA could be had for $10.00 a share.

  12. Tim, morale can also improve with some fun trading at the margins. Thanks to your excellent spreadsheets with stock gains/losses I was able to pick up ANH-C last week for $8.65 apiece. Sold at start of market today for 16.50 and bought again later today for 8.35. Not huge numbers involved, but helps – at least temporarily – with morale. GLTA

    1. We are almost to the point that we can put it to the company… Max you familiar with the put option?

  13. I went to a full position on common stock United States Banccorp (50% off it’s 52 week high – so it has the potential to double). Current yield on the common is 5.74%. It’s preferred stock is rated BBB or A3 and has traded decently.

    United States Banccorp is one of Warren Buffet’s top ten holdings and one of the 10 ten banks in the US.

    I don’t particularly like buying either but this large cap high quality Bank is trading at levels it traded at in 2012. I am prepared to average down, if this continues to drop.

    Of course everybody needs to do their own due diligence

    1. Just read a report on banks by JPM. It seems USB has taken more risks lately, BAC is more conservative.

      1. Thanks. I could not find information on energy loans. I know they have committed to stop or curtail fossil fuel loaning. But I have seen exposure to ETP.

        So I am concerned with them having taken on additional risk. I decided to stick with the credit ratings for the preferred stocks. USB continues to be rated as one strongest banks by the credit bureau’s. I hope I am right. Last USB preferred was issued in Oct 2018.

  14. You mentioned HT preferred at $3, buy 20 shares (the price of a juicy steak dinner) and forget about it. The steak dinner will always end up in the toilet, the preferred may not.

    1. Todd–I couldn’t help it – I bought 100 of them at 3.xx–I suspect a year or two from now I will make out great.

  15. I still own a ton of INN+D and also INN+E. It has been absolutely crushed to death but at this point its almost pointless to sell out. Both are cumulative but who knows when they will return to their glory days. As long as they don’t go completely “Belly Up” I assume down the road even if its 12 to 18 months that they will pay up and since they are cumulative hopefully they will make up any deferrals as well. If you are not familiar with the name they own 74 High Quality Hotels in 19 different states. But when something is down like 75% I think its crazy to sell out now. I as of this morning have built up a pretty good sized cash position so for the next 3 years can just live off of it. I hope it doesn’t take that long to see a decent recovery.

    1. Chuck P, Jeff Fisher sold his Lodging business to Innkeepers back when. He sold it at the top of the housing boom.
      In 2009-2010 he rebuilt a new lodging company CLDT.
      I thought he would do the same in 2019-2020 period.
      But, i like you am stuck with stock i won’t sell for pennies.
      Cut yourself some slack and hang in there.

  16. Thanks for the back story on MREs, Tim, ate a few in Iraq, remember my fave was the jambalaya, think it was #18.
    Put in a buy for DXB last night, it filled this a.m., sold it soon as I could, made $30. Too crazy out there, thanks for remaining a voice of reason in the noise.

    1. D–we did Ham Slices and Hot Dogs–we did the hot dogs because no one else could slide 4 of them in side by side.

        1. D–Believe it is a real trick to slide them in to a thin foil laminate pouch in a production setting.. The guys operating the business were masters at resolving these things.

    1. You can play with BJK. I wouldn’t touch it yet unless they found a miracle treatment for the virus. Anyway in the last week it has lost less than IG preferreds!

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