Lots of Fear in the Markets

Wow–there is a rush to ‘safety’ today. Some folks think U.S. Treasuries are safety as the 10 year has plunged down to 1.58% at this moment. Others think that buying gold is safety as the yellow metal has spiked up by $19/ounce.

For me it is sit and watch mostly. It looked dangerous all week–that fake-out rebound in stocks yesterday was almost a gift and I took a modest position in Proshares SP500 UltraShort (NYSE:SDS) which is proving to add nicely to 1 account today–I have moved my stop loss 3 times today following the market down. This is something I seldom do and when I do it more often than not I am wrong and lose money.

The preferred and baby bond arena is not selling off to speak of–plenty of stuff off 1/2% to 1%, but nothing dramatic–but that could come yet later in the week. Do we get a full blown panic and a dash for the doors? No one knows, but it could happen and we all need to have a strategy mapped out–what would you buy if preferreds fall 5% or 10%? What might you sell to redeploy elsewhere? As always I can’t direct anyone to investments, but income investors need to give this some thought today and tonight. Let’s not be caught without a plan.

A good place to watch the general action in large losers is this listing here. Right now (at 12:30 CDT) it isn’t showing anything out of the ordinary–but it might later. Most losers are the usual suspects–mall reits, shippers etc, but what tomorrow brings no one knows.

33 thoughts on “Lots of Fear in the Markets”

  1. Its going be interesting to see how some of the newly issued, lower coupon rate preferred shares hold up in a prolonged ‘risk off’ environment…especially ones that have risen 4-5% in the short time since they’ve been issued. I’m not so sure their credit rating is going to save them from taking a plunge, especially if they’re not term dated. Hopefully folks here already have cash on hand to partake in some of the buying later, because the bid-ask spreads on some of these new issues do not favor sellers.

    1. CW, I bought heavy on IG IPOs earlier this year but stopped in June. That basket is up end of market today 8.1% excluding dividends, a new high for basket. I didn’t buy any IG IPO after June so I don’t know how those ones are faring and of course no idea how anything will perform going forward. I can say that recent issues always tend to perform worse than seasoned ones apples to apples in a big enough downdraft from weaker hands. Of course the market converges that difference over time. I trust almost everybody on this site is capable of making apples to apples comparisons and spotting a good spread on old to new. I raised some cash but not a buyer but something good to keep in mind if you are.

    2. The interesting thing is near term there is no guarantee of income issues dropping in price. We just hit record lows on 30 year bond this morning….But we are NOWHERE near record lows on perpetual preferreds. Not even close….. 1940s the 10 year was in ~2% range and the below issues still trading preferreds were issued around this era…
      WELPP 3.6% par
      NMPWP 3.4% par
      UEPEN 3.5%
      CNLTL 3.8%
      UELMO 3.7%
      There are more examples, not posted….We have been worried about the 5 handle being broached. The above flew past the 4 handle with ease…..The future? Who knows…. That is where ones plan comes in handy.

      1. Yep. Folks are clambering for IG noncallables. The busted convert BAC-L, a de facto noncallable, had an interday yield yesterday below 5%, though it bobbed back up at the close. And CNLPL rose to 60, about 2.5 years worth of divvies above its call price. And it can be snatched out of your sock drawer at any time. And and and…

        So, will we soon be bidding up those Gridbird noncallables with 4 or OMG 3 handles? Not that many of them may even be available. Oh, what to do, what to do…

        JMO

        1. Camroc, I surprised you havent had them for years. You were legally bellying up to the bar when they were issued, lol…Those I referenced above, on a relative basis I find to be “overpriced” and not a lot of value even presently below par…But they generally always are because scarcity of shares, illiquidity, and being under par past call always keeps them that way generally. Some of the callable ones occasionally get redeemed from mergers of companies not wanting preferreds in their cap stack.

  2. So far this year I fed my cats only fillet mignon and lobster and they only drank filtered Fiji water. They seemed happy. I just ordered them a bag of kibbles delivered and am switching them over to tap water. They won’t be happy about this. That’s all I know.

    1. P….no dry kibble for cats…. especially boy cats with their long skinny plumbing, unless you want it to get clogged. Water rich diets only fir cats!

      (Sorry, Larry, I know that this OT post should have been made in the Sandbox…especially about cat food…. but I felt compelled to make it here lest a boy cat die from a ruptured bladder. )

      P – actually, your cats paid me to post this. They were lovin’ their lobster.

      1. Amy, those cats always try scamming people. Use Hills Urinary Care c/d and I guarantee no problems. About $100 for 17.6 pounds but that’s cheaper than lobster. Lots of tap water but no more Fiji. You are right cat discussions belong in the sandbox, lol.

        1. Thanks for the pass, Tim. I am happy to hear that I have not been put in the “time-out’ corner for straying OT…..on a non-Sandbox page…… talking about boy cat bladders rupturing from being fed water-depleted (dry) diets.

          I will push ‘send’ on this message as soon as the market closes lest I get in more trouble for posting during market hours. :>)

          Mikeo, I am very sorry for your loss. I will soon be losing my best 4-legged friend of almost 19 years. Excruciatingly painful…..

      2. Amy, I respect you Veterinarians immensely. We had to put down our loving Sheltie companion of 9 years Tuesday and a caring retired Vet neighbor come to our home to ease her out of our misery.

  3. Nothing is a certainty but for preferreds in general a vanilla stock drop usually wont provide a preferred rout. Typically in general you are going to need a credit spread blow out away from 10 year. Last December was a good example.
    Obviously individual issues can have problems or rates in general backing up would cause this too. But the latter doesnt seem on horizon. As long as “Operation Reverse Twist” doesnt occur from Fed.

    1. Col Grid, Debrief us on “Twist”.
      Seems the Fed should hand over all their assets to Social Security so they have a fund of actual assets (of undescribed value). The Fed, by selling into the markets, is ‘running down’ something which implies value. So, they were private assets, taken by public treasury dollars, into a special private bank and are now being sold off and given back, sterilized, to a bankrupt Treasury. After the magic lockbox at Social Security has something besides promises, fold the Fed and restart an actual Bank of the Nation doing the same duties and LESS in an open and transparent methodology. Matching Assets and Liabilities.
      Seems the Fed here in StL is already the high-confidence, well respected source of all tracking info used by parties globally for economics. I know two people who work there and it is a v large and ongoing entity already. May be a core for a new start?
      Begins to solve two problems. Am I close….NO way!

      1. Your getting too deep for me, Joel. I keep it simple, because I am simple. Reverse twist would simply be to sell off some of their substantial long end holdings and then buy on the short end. This would help “steepen” the yield curve which is a point of contention. I was not suggesting they are just giving a random example of what could possibly cause an unexpected preferred swoon.

        1. Grid, I’m taking the same view. Net-net, lower market rates are positive for “most” pfds. I intentionally did not look at the value of the portfolio today, though scanned prices for opportunities – zilch.

    2. For people like me who didn’t take even a single economics class in college, this discussion of credit spread may help:

      https://en.m.wikipedia.org/wiki/Yield_spread

      “When yield spreads widen between bond categories with different credit ratings, all else equal, it implies that the market is factoring more risk of default on the lower-grade bonds. For example, if a risk-free 10-year Treasury note is currently yielding 5% while junk bonds with the same duration are averaging 7%, then the spread between Treasuries and junk bonds is 2%. If that spread widens to 4% (increasing the junk bond yield to 9%), then the market is forecasting a greater risk of default, probably because of weaker economic prospects for the borrowers. A narrowing of yield spreads (between bonds of different risk ratings) implies that the market is factoring in less risk, probably due to an improving economic outlook.”

  4. Just wanted to say thank you Tim for all the info you provide, and for the many knowledgeable responses to posts. Been a constant watcher on this site but never commented before.
    Anyway all your work doesn’t go unappreciated. Hoping some of these high quality preferred’s go on sale in the coming days and weeks!
    Best,

  5. Tim, I just picked up 200 shares of CTBB, 6.75% @ $24.955 or so. CTL’s latest Earnings Transcript Call Q & A suggest that the Fearless CEO Jeff Storey from Level 3 has continued to pay down the debt refusing to do unprofitable or less profitable retail and government old biz. Most of the CapEx are used for dark fiber and new Tech, presumably with very nice profit margin. So, revenues fell agin moderately and free cash increase is solid. Many SA writers are recommending + Morningstar analyst continue to believe FMV is $20. I have cancelled MStar premium. They are wrong on CTL and ET (fundamental paying no attention to market actions and DETAILS in Earning Call Q and A IMHO). Risk: if the market tanks, will Storey risk by reducing (halving) the common dividends once again to lose his credibility totally? Obviously those who bet on the pro forma dividend (as I have bought to average the cost down) will suffer. However, the bond holders deem otherwise. My 20K worth of intermediate bond has climbed above par with nice unrealized gain. Hence, CTDD seems quite attractive in comparison to the lackluster Indiana bank preferred with lots of impairment to write off IMHO. BTW, CTDD has climbed to $24.98 bid with common CTL down around 0.91% at this time with 2.36% decline in Dow and SPX. LOL.

    1. johnkcal–I haven’t looked into Centurylink in a long time. Maybe I need to scope it out closer.

    2. John K

      I’m a big fan of CTL as well and have positions in one of the preferreds and two of the bonds.
      FWIW, I’m retired from the telcomm industry (marketing support of sales to the Federal government) and almost all of my work buddies are now with Century Link. Fiber is an asset that gets little respect but is key to making the additional towers and small cells needed for 5G implementation cost effective.

      1. Greg, thanks for your post. I actually doubled CTL common down right before the latest Q report. Still, my average cost is a little over $13. I have not tracked the Level 3 performance prior to the acquisition of Century Link or Qwest Corp. Have been going in and out with CTL’s baby bonds for a very long time seeing the once upon a time deemed investment grade and then double downgrade by Moody and SP. Sold all my CTAA 7% when it gapped up to a ridiculous price of over $26 when Jeff Storey redeemed the higher coupons. Plowed the proceeds to CTL commons and CTL bond. In the latest Earnings call, Storey told all the analysts that it will show its worth in about another 2 years. Market price of today suggests that CTL commons went from a 2+% loss early this morning but beats T and about the same relatively small loss like VZ. Coming from a small startup, I am also partial to small company with great technology.

        1. John K

          After I noticed the drop in the common after the div cut, I’ve avoided it for fear that another div cut may be coming. Recent adds have been the bonds: CUSIPs

          156686AM9
          156700AT3

          Not sure I see CTL as a start-up as they have rolled up some significant players.

          Best of luck with CTL.

          1. Greg, thanks again. yes 156686AM9 is what I have, just slightly below par. Coupon
            6.875%. This is actually a better buy than CTBB. Many years ago, I learned from someone at SA commenting why not buy the Real Bond instead of the baby bond. The person was correct and still seems a wise approach today. I feel certain that Moody/SP should be kinder to CTL’s rating outlook. I will not want to pay Moody a few hundred dollars to find out. Should be a good risk/reward play. We should all pray for Jeff Storey’s, and your friends and former colleagues good physical and mental health and bring CTL as a credible company. I know that he treated his people well, paid sizeable bonus to himself and people on the same Q as he halved the dividends, angering some shareholders no doubt.

  6. Tim, What would I buy? Starts with credit quality and the probability would be more of what I already own as those issues have been fully vetted.

    In the current environment, I have no problem averaging “up” into a solid issues that will increase income.

    1. I don’t know for you alpha8, but in a panic I will be about quality–mostly CEF preferreds, maybe PSA and PSB preferred. None of these are bargains today but if you were in preferreds in 2009 or so you know how low they can go–don’t expect anything like that to happen now–but everyone must be vigalent,

      1. Tim:
        PSA preferreds are flat to up 0.12 on a day when the S&P is down 81 points. A flight to quality in a down day?

        1. Not much on sale yet. I am only down -0.17% so far. Unfortunately that will more than double when my Target 2020 fund kicks in its losses later tonight.

      2. Tim, PSA’s receipts actually “increase” during eco-downturns. A remarkably recession-resistant business.

  7. Hope some of the investment grade preferreds go below issue during this fallout. Need some more NNN and PSA.

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