Markets Closed Tomorrow

All markets in the U.S. will be closed on Friday the 10th.

With the long weekend the last 2 hours today has potential for some fireworks–one way or the other. With an OPEC+ video meeting tomorrow the markets are betting on a big cut in production–no matter the size of the cut (if any) it won’t do much for the huge over production of oil and gas globally–domestically we will have lots of bankruptcies in the oil patch.

Today I haven’t done anything–maybe I will look in the last couple hours, but my original plan has been derailed somewhat. While waiting for a market setback to get a little better pricing the FED decides to back stop everyone–welcome to Japan!!! I mean really buying junk bond ETFs – we used to call this the risk/reward–in return for a higher return you take some added risk. NOW you get a higher return with risk being removed.

Regardless of the FED I can’t plunge into this market–add some more issues here and there in a nibbling fashion maybe–but wholesale buying isn’t going to happen.

So off I go to see if there are some issues that I can nibble on a bit.

87 thoughts on “Markets Closed Tomorrow”

  1. I frequently peruse SEC filings to me what may be going on. Looks like the some activist is setting themselves up for failure again as this will go over like a lead ballon again. One of these days they will give up.
    Ameren Corporation (NYSE:AEE) A Vote FOR Item 4, Shareholder Proposal Regarding Independent Board Chair, is Warranted Due to the Company’s Costly Failure to Adopt a Meaningful Decarbonization Plan and the Lack of Qualified Independent Leadership under the Current Board Structure
    In this time of unprecedented transformation in the electric utility industry, the long-term prospects of Ameren Corporation (“Ameren”) depend on robust independent oversight of management. The stranded asset risks faced by Ameren and the board’s failure to recruit directors with renewable energy experience are indications that the board lacks the needed oversight capacity. At the May 7, 2020 annual general meeting, Ameren shareholders should vote for a proposal that would enhance oversight through independent board leadership.i

    We recommend that shareholders support the proposal for an independent chair (Item 4):
    ● More robust board oversight is needed because Ameren has failed to set a decarbonization target that aligns to the goal of limiting global warming to 1.5ºC or develop a strategy that would eliminate its emissions on a timeframe consistent with achieving a goal of net-zero by 2050. Unlike a half dozen of its largest peers, Ameren refuses to acknowledge that net-zero carbon emissions by 2050 is the minimum goal recognized by climate experts to mitigate the risks of climate change and position Ameren to take advantage of the opportunities presented by the transformation to a zero-carbon economy.
    ● Ameren depends on coal for 75% of its electricity generation, more than twice the 30% average for all investor-owned utilities.ii The company has no plan for ending coal’s role as its single most important fuel prior to an unspecified date after 2040, even though 77% of its coal infrastructure is estimated to be uneconomic.iii Ameren’s inadequate decarbonization plans prioritize investments in natural gas infrastructure instead of leapfrogging to renewables, exacerbating stranded asset risks.
    ● Ameren’s board does not have the right skills for the challenges it faces. Unlike at least nine of its peers, Ameren does not even list environmental expertise in the skills matrix used to eval

    1. Grid, Without a history lesson, remember MSD and real history of the 60’s, 70s and 80’s? (for others, that is St L County Metro Sewer Dist or 20 million toilets. City StL is and was just as badly managed, but it was going directly into Miss River.)?
      It’s too stupid a story to tell regarding responsible citizens/officials to go into details here when they fought the science of those running the sewer district,
      I WAS one of those kids who played along the cesspool creeks and rivers and was warned to stay away since I was too young to pay attention to the signage warning disease/death. Long history of this stuff in MO.
      Same yokel Jeff City Successionist Leftovers.

      1. Joel I grew up in outstate rural MO. I couldnt tell you how many gyms as a kid watching games I dug my hands in the asbestos sprayed walls of the barn gyms, ha. And of course we played with mercury with our hands in the classroom. Ah the good old days.. Hope it doesnt get me!
        Anyhow, Concerning Ameren, these activists lie and mislead though. Im not against renewables and stuff, but they mislead on it being cheaper. These plants if they got decommissioned would most likely be added to the utility bill as the amortization on the plant lives extend out to 2040 and 2050. That is why Ameren is not doing anything. It isnt because they are coal loving freaks. We presently from Nov. 1 until June 1 are paying about 8 cents a KW first 750kw then 5.38 cents KW for anything after…June to Oct its 11.81 cents a KW.
        Activists dont need to lie and tell me Im paying too much now. They are clearly misleading as we presently have some of the cheapest electricity per KW in the nation. Its so cheap I dont even program my thermostat or adjust it when I leave the house.

        1. Hey Grid, do we, as owners of AILLL, AILLO, et al, have any voting rights?
          Just wish that I had the rates you posted, but PG&E is in a world of hurt and the almost certain outcome is higher rates throughout.

          I will definitely vote to nix the proposal if I have the opportunity to.

          1. Inspy, your preferred share votes are limited to rudimentary decisions concerning Ameren Illinois directly which is one of the two subsidiaries. This activist is really focused on the other subsidiary Ameren MO through holding company because this is the traditional triple vertical integrated utility model. Ameren Ill is just transmission and distribution of electricity and natural gas.

        2. Local utility uses coal / natgas. My delivery riders are higher than my actual usage on my bill.

          Energy Charge ……………..736.000 kWh @ $ 0.058900 / kWh ……..$ 43.35 *
          (Feb 11 to Mar 9)

          Energy Charge …………………1.160 GJ @ $ 1.647573 / GJ ……………$ 1.91 *
          (Mar 1 to Mar 4)
          Energy Charge …………………8.910 GJ @ $ 1.755416 / GJ ……………$ 15.64 *
          (Feb 6 to Feb 29)

  2. Tim,
    Your thoughts match mine, welcome to Japan indeed. The only thing missing is for the Fed to start buying stock ETFs. A lot of justifications being thrown around for fed actions, but it’s become a blatant bailout of private equity, hedge funds and other high risk credit investors using our tax dollars.
    This is a nice summary of where we are from very smart guy, Peter Boockvar and his views mirror those of many economists and investors :
    “The Fed is essentially nationalizing the US public markets except in stocks for now (say goodbye to whatever is left of free market capitalism if they do buy stocks). Its entrance now into corporate bonds, particularly high yield, via special purpose vehicles is a complete run around the Federal Reserve Act. They are being viewed as hero’s here but this is a movie we saw before. The Fed cuts rates sharply, encourages a huge build up of debt which then creates a fragile financial system and then an external event/recession comes, and it ALWAYS EVENTUALLY DOES, and all this debt comes home to roost. The last time with households, this time with corporate balance sheets. Lower leverage and higher rates of savings does not immunize a system from a big recession but it gives it a lot of antibodies to handle it. Again, the Fed lights the match and then shows up in the fire trucks to put out the eventual fire. “

    1. Japan was the largest creditor nation in the world when they started this policy. The U.S. is the largest debtor nation in the world. Not sure the outcome will be the same.

  3. When you buy a bond below par value, a portion of the discount will be amortized each year and count as OID income. The idea is that if you buy a bond and hold it to maturity, all of the income over time should be taxable as interest; there should not be a capital gain. This is not the case with preferred stocks.

    1. Karma – R us sure that’s true or should there be a qualifier to your statement? Aren’t you only talking about a bond that wass originally issued at a discount as opposed to a bond that was issued originally at par but was bought in the secondary at a discount to par?

    2. You can defer recognition of market discount until disposition or maturity.
      You can also elect to recognize it currently.
      Under current treasury regulations, deferral is the assumption and the investor has to opt in to make it current.
      and all bonds can have market discount.
      It is just the amount from the purchase to the adjusted issue price on the date of the purchase. For par bonds, that is face. for bonds issued at a discount greater than 1/4% per year outstanding, the adjusted issue price changes every day because of the OID accruing. So the same purchase transaction two weeks apart could have discount on the first one, but have none on the 2nd one, solely because the adjusted issue price moved up in the interim by the OID accrual.

  4. I know that many of you make fun of and hate S.A. but upon occasion I do find some things over there pretty interesting. Some of the authors do some very legitimate research and homework on specific companies. Anyway, having said that their is a new article over there by a guy named J.G. Collins that writes a pretty well thought out article on how this Covid-19 nightmare is going to affect us going forward and obviously how certain industries are going to make it or not make it. I thought he brings up some pretty valid points. Hope and Pray this finds all of you guys doing well today. I don’t see many ladies on this site for some reason??? Iam trying to look into my crystal ball over the next 12 months and imagine how this thing is going to play out—its a challenge for sure. Let me give just “one example”. Carnival Cruise Lines the worlds largest cruise line with 105 ships issues a Mega Bond that pays 11.5% interest. I think the issue was over $4 Billion. Iam trying to envision just how they are going to fill those ships after this nightmare subsides??? I didn’t buy into the issue and don’t plan to do so but yet I read where they had No Problem selling it out. There are an awful lots of things now that Iam finding very “strange”. Another example, now China is 5th on new cases according to Johns Hopkins website. If you haven’t gone to their site you should, as it has some really interesting stats on it about the entire world. A country with 4 times the population of ours and they now are 5th in cases??? My last point is a simple one but I wonder who else has thought about it—-How are we going to stop China from this behavior in the future??? They have been the originators of 3 pandemics now. As I type this there are now 1,721,353 cases and 104,799 deaths worldwide. Don’t know about you guys but my feelings are somehow this behavior by China needs to be put into check. Look at the “Death Toll” and what it has done to economies all over the world including our own.

    1. It’s hard for China to change (if they desired to) a culture of millenia that sees characteristics of animals that can be transferred to humans by consuming them in one way or another- Rhino horn, snake, bat, and a host of endangered animals. In that sense they are stuck in a primitive state that although it can kill, it can be seen as a source of virility, strength, etc.
      Sadly, the world pays for their ignorant superstitions – with disease and extinctions.
      We have much more to the downside, and a long road to economic recovery.

    2. Chuck – there are a few decent follows on SA but many like Rida and his crew are pure hucksters. For example, I enjoy reading Colorado Wealth Management Fund – he is a honorable guy and a straight shooter.

      As to China being #5 – well when your communist government lies and vastly underreports the numbers, that is what you get. Based on reports from citizens monitoring the number of urns returned from mortuaries in Wuhan, the estimate is over 40,000 people dies in Wuhan – and I think the CCP reports it as around 3,200 . Don’t believe any data out of China, Iran and those type of regimes

    3. Chuck
      I really think the world needs to get together or at least the US. and ban purchases from China. At least until they ban ALL open air animal markets.I don’t give a s-ht about their culture this is war. Are we just going to sit back and just let them buy our wheat ,while our kids, Mothers, Fathers are dieing from their nonsense?? IMHO this is getting old, we are in a biological war with them. How many more people need to die?

      1. My wife and I have started checking labels concerning where a product is made. While it will be hard to completely get away from everything that is made in China we will be doing our part a little at a time. Even just a few thousand dollars per year from just one couple like us could turn into some sizable numbers if amplified around the country. US companies and importers have plenty of other places around the world to source products. China’s power hinges on just one thing: $$$$$$$$

      2. This did not come from the wet market. If it did China would not have allowed it to reopen already. Further, the bats in question are not even sold at that market because they are not native to that area of China. The WHO and China lie continually and we act like we can trust what they say knowing they are inherently untrustworthy. China handpicked the head of WHO because he is a maoist and covered up 3 pandemics in Ethiopia before being appointed. He further tried to put mass murderer Mugabe from Zimbabwe on the WHO payroll – that says it all.

    4. RE: “Analysts” at Shrinking Alpha …

      There are some good people over there but the ones that get the most attention, and have the most (paid) subscribers, are some of the worst. HDO leads the pack for sure.

      SA could do a lot to improve the quality but they seemingly have no interest in doing so. Whatever makes them money they favor.

      Realize, please, that most analysts are subject to a great many rules, and have a great many disciplines placed on them. Have disclosure obligations. Have rules against self-dealing. “Analysts” at SA have none of that. They lie, they misrepresent, they forget, and they hide behind the paywall.

      BTW, same goes for CNBC.

  5. Someone compared Wall Street to a Soviet Sausage Factory this morning…proving that even cynics have a sense of humor.

  6. Good Friday morning to all my new found friends. Hope this finds you all “SAFE, SOUND, & HEALTHY”. Over on Marketwatch there’s a really good article by Mark Hulbert. He is saying along with Ned Davis that if history is a guide there is about a 70% chance that the S & P will return one last time to its lows reached in March. He says it will happen somewhere between June 14th and August 7th. I love it when these Gurus make these calls and especially when they give “specific dates” as well. Would love to hear from you folks as to your thoughts. I have 3 things I want to add to if that does happen.

    1. Chuck…I saw the MarketWatch article, but haven’t read it yet. Will get caught up on that during the upcoming rainy weekend. I’m still sitting on a 40% cash pile in IRA’s and will follow the preferreds from AGNC and NLY. An interesting article from Blue Harbinger over on SA.

    2. I believe he’s supposed to be a reputable guy, though obviously he doesn’t know the future. However, his estimation of the future deserves consideration. It’s probably time to unload a few gainers, and cut losses on a few of those I held before the virus hit, so that there is more dry powder ready. AND, to make a list of good IG-level preferreds to watch IF they get hit hard again.

      Hulbert article: https://www.marketwatch.com/story/stocks-will-revisit-their-coronavirus-crash-low-and-heres-when-to-expect-it-2020-04-09?mod=mark-hulbert

    3. 70% chance back to the lows = better odds than Vegas

      still

      30% not going back to the lows = better odds than Vegas

      Conclusion: Vegas was not built on winners

  7. There’s an interesting article over on “MarketWatch.com” by Mark Hulbert. Would love to hear your thoughts on it. He is saying there’s a good chance that between June 14th and Aug. 7th we will revisit the March lows. If so I will be ready to buy 3 more things.

    1. Chuck,
      I think the only correct answer is – nobody knows. We’re all flying blind here to a certain extent.

      One notable development for me has been the growing # of talking heads yesterday who totally reversed course and stated that they do not believe we will retest the lows, after what the Fed put into place this week.

      I agree with you in that there is plenty of juice to be had over on the common side. I’ve been working over there more than on the fixed side.

      I hope we do not retest the lows. There is no need to, IMO. But, the shorts, the bots and the algo’s will have us doing it if they deem it to be profitable for their masters.

      1. Exactly A4I. Anyone who says they know what will happen with 70% confidence level is just spouting a bunch of BS. No one knows.

        People have the – oh we need to retest the lows line ingrained in them. Yet this is different than anything in our history. Both the cause and the response from the Government and the Fed. Not only the trillions of dollars being injected but also 0% interest rates which make dividend income that much more attractive

        This wasn’t brought on by poor financial decisions but rather a response to a pandemic. So not sure how anyone with any semblance of rational thought can say based on history this is what will likely happen going forward. It’s BS.

        Given the circumstances and response, I agree with you that there is no need to test the lows. But the market will do what it will do. Just need to be nimble.

        I myself have done several things:
        1. I was on a planned month long vacation when this all began – so it was harder for me to react at the beginning of the plunge – although I adapted after it was under way.
        2. Took advantage of pricing differentials among some preferreds
        3. Took the opportunity to sell some stocks that held up well to buy others that dipped too much
        4. Also swapped some preferreds with lower credit quality for stronger ones
        5. Added some new common holdings that had gotten beat up
        6. Added to some other long term common holdings that were down big a few weeks ago
        7. As of last Friday, I was nearly fully invested for me (caveat me being fully invested in the two accounts I am talking about means still having around 5% cash to trade opportunistically)

        I think we all just need to continue to look for opportunities, short and long term and be nimble.

        1. Maverick61,

          70% confidence level? Heck, my confidence level is 0% I know where the market will be in 3 months and 0% confidence I know where the market will be in five minutes. I know nothing.

          Your playbook is much like my own. For similar criteria and starting In late December I was a net seller on weekly basis as the yield spread (over TNX) was hitting historical lows across the board.

          Not being the smartest of the group I need to keep it simple. My primary focus for any issue is:
          1) Moodys/S&P Credit Rating: we know they’re of questionable accuracy on a per issue basis (thinking of SR-A and AEE series) though when applying the law of large numbers they are extremely predictive and in the long run a heckuva lot better than my own review of financials. Last summer through February, I’d dropped almost all rated less than a solid BBB, though still held a few NRs and two BBB-.
          2) YTC (and QDI-adjusted YTC) v TNX plus spread: there has to be an appropriate risk premium. I settled on TNX+2.80. As the weeks passed by over the last few months issue by issue YTCs were falling below this Maginot line and triggered a lot of sales. The portfolio value kept climbing (absurdly), but more and more was in cash so the scheduled income was steadily dropping. Yet by selling into the shrinking yield spread, the risk/return relationship of the portfolio was being maintained.
          3) Price: Past-call issues priced wildly above “par” plus accrued forced a lot of sales. Issues that de-coupled from their index forced a lot of sales. EBGEF comes to mind. The underlying UST5yr was dropping for months yet the price kept climbing. Though I’d planned to hold for years, sold it all at $20-something.
          4) No BDCs, no Shippers, no MLPs, no mREITS (except AGNC-pfds), no Retail, no external management and no K-1s.

          As the “event” unfolded, no regression analysis, no algos, no emotion and sure as hell no CNBC: just kept applying the same simple criteria above. Months of selling at prices somewhere the other side of the asteroid belt rotated into buying the same issues at red-hot re-entry prices. As the market dropped the buying increased; every single day, all the way to the bottom while pushing in taller and taller stacks of chips. Ignored (literally) the account balances and stayed focused on the individual issues, averaging down long-held positions and initiating truckload positions in A/BBB+ issues that had previously been price-unavailable. I mean, utility mortgages below “par” in a 0%-rate environment – could not buy them fast enough and pushed in all the remaining chips. Some of the pick-ups include EAB/$20.45, ENO/$22.15, RZB/$15.75, AGO-F/$23.29, AEB/$16.09, HFR-A/$21.61, NCZ-A/$20.20, FTF/$11.24.

          Running out of allocation space for preferreds, shifted to a few crazy-priced commons and pulled $$ in from an external cash account five times in two days. In a million years would never have thought of buying a retail clothing store stock (broke a rule), but at $65 ROST looked absurd. Sold it two days later at $85. And never would I have thought VPU would be a buy, but at $99.25 hit the buy button hard and sold it for $124 the next day. FPF at 11 and change was a dream come true and still holding. Got beat up on a few commons like XOM but averaging down around 30 makes that a near push now.

          If not sticking to a set of rules not unlike your own, I’d constantly be exposed to the risk of analysis-paralysis, trying to guess where the market bottom would be or if the end of the financial world as we know it was approaching; and just blankly watching it go all the way down then all the way back up.

          Now on the other side of the “event”, average credit rating of held preferred issues jumped to between BBB+ and A, scheduled income is up 33%, portfolio balance is at new highs and funds have been re-patriated to the external cash account. We’d been waiting for this “event’ for a long time. I don’t follow Hubert and am probably not smart enough to follow his advice, but if his guess is correct and we have “event” after-shocks, will absolutely be adding if the criteria above are satisfied.

          1. Alpha8,
            A couple questions on your point 2), if I may ask:

            With regard to the QDI adjustment do you base that on your own personal circumstances (not asking what they are), or do you use a global adjustment that would be more generally applicable in a valuation model?

            With regard to the risk premium to TNX, is that the same for all IG issues, or would it be less for an AA (a Gabelli CEF, for example) than for a BBB?

            If you prefer to keep all of that to yourself, I fully understand.

            1. nhcoast, One could correctly make the case the adjustment should be based on an individual’s “incremental” (next dollar) tax rate. To keep it simple though, I simply use the bottom tier of 12%. So if a QDI YTC is 4.5% and a non-QDI is 5%, the QDI YTC for comparison purposes is re-stated as a taxable equivalent of 5.11% (4.5%/0.88). Exactly correct: no. But I know it will always be an “at least” correct calculation. This would be my own example of not letting the perfect get in the way of the good.

              Really excellent second question. Like above, one could correctly make the case yield spreads should vary by rating. I have measured individual issues in the past and even calculated what the yield should be based on default-risk, though also like above, I now use one spread across all holdings, which was raised to 3.5% after the recent event. But then, I’m only focused on the higher rated issues so one spread works for my own situation. But if one were comparing for example ENO v F-B, there should certainly be a significant difference in yield spread.

              But even so, across a large number of holdings, not sure pursuing a 1% or 2% yield boost is worth the increased potential of a 10% or higher capital loss. You might find S&P historical data on this interesting. See page 60 here: https://www.spratings.com/documents/20184/774196/2018AnnualGlobalCorporateDefaultAndRatingTransitionStudy.pdf

                1. A4I, Yes thank you I had seen this link in your previous post and did spend some time looking it over. Excellent intel. Been surprised to the upside at the recent speed of the rating agencies in providing updates. Especially grateful for those whose prior ratings were re-affirmed!

                  1. Lest we forget, the other major rating agency, Moodys, also provides similar, customizable information via email alerts for registered clients. Registration is free. I receive a morning summary of ratings changes and corporate reviews daily from Moodys directly to my email address. It only takes a second to review the names that have experienced ratings changes but the details are available for each change if you wish to dig deeper…. I don’t believe you can see the customizable list of email alert categories until you register but it’s well worth while to set up alerts relevant to you to get a general flavor of what’s impacting their ratings changes.

                    1. A8 and A4I – Thanks much for the S&P forwards. Very useful info.

                      2WR – I get the Moody’s morning summaries by e-mail too. For some reason, I have the impression that the morning summaries aren’t comprehensive. I can’t cite to anything specific, but I vaguely recall ratings changes that didn’t show up there. Then again, it might just be me.

              1. Most helpful

                Thanks much for the thoughtful response

                For what it’s worth, that’s similar to how I adjust for QDI

                1. nhc – I agree with you on Moody’s morning summaries possibly not being all inclusive, however, to me, that’s not terribly important and might possibly be overcome by signing up for more alternatives than I have signed up for… What’s important to me is the overall impression I can get when reviewing what they’re doing in general… for example it’s interesting to see that practically most of the danger sign type names we see these days have only been knocked down a single half step at a time even though they remain on credit watch negative.

              2. Speaking of credit, if one wants to chase distress yield, always look at the bonds before chasing preferreds to evaluate value. Take Crestwood. You can buy CEQP- the preferred for 18% yield. Or, you can buy the 2023 maturing senior unsecured bond at $55.57 for a 30% yield. Im not a player in either but you can bet if I did it would be with the senior unsecured.

          2. Good to here Alpha – nice moves.

            I am thinking now about buying some out of the money SPY puts – although I am not someone who typically buys options. But I think they would be a good way to hedge things at this stage now. Just trying to figure out the best options – looking at June or July expirations and different strike prices

            I am curious if anyone else has bought SPY puts or thought about it – and if so what strike and expiration did you or would you target and why

            1. I trade TAIL, an etf that buys out of the money puts. Not as targeted as choosing your own puts but easier to trade. I like following the price fluctuations it’s another indicator of investor sentiment.

            2. Maverick61, I never buy options but do sell them against issues I’d be happy to hold, at strikes below current price and for quantities that will be partial positions if filled.

              If assigned shares and the position is not filled, I’ll then sell another put for a yet lower price (immediate average-down potential), and in some cases simultaneously sell a call against the shares that were just assigned. Mostly for fun but provides flip-like yields especially when collecting divvies and call option premiums on the same issue at the same time.

              I’m sure you’d agree to caution anyone looking at options to know them inside out before working with them and only in issues that are keepers.

              1. For those who don’t want to fool with options and haven’t seen the previous posts, you can always take a look at the ETF’s SDS or DOG or any of the other “inverse” offerings that accomplish the “short” for you of either the SDS or DOG. They are very liquid in my experience. Gotta be nimble, though. In this environment, these suckers can turn on you quickly.

            3. Thanks Martin, Alpha and A4I
              I agree – options are definitely not for everyone. One should be cautious with them.

              The reason I was looking at them more than TAIL or SDS was due to the leverage factor. You need to buy a whole lot more SDS to get the same potential from a SPY option.

              Thanks for your input

      2. I happen to be in the re-test the lows camp, if only because the coronavirus is still out of control and economic activity has ground to a halt in a lot of places and the fact the stay at home orders are not nationwide is going to lead to massive flare ups of the virus continuing over the summer.
        The only way to stop it short of a vaccine is by massive testing and quarantines and stopping its spread.
        And wondering why oil is still $25.00 a barrel. it should be down in the single digits, as demand craters from the statewide lockdowns.
        And with all that debt that is right above investment grade, i am fully expecting a bankruptcy filing from somewhere completely unexpected that will cause a domino effect.

        1. Justin, I saw your name and reminded me of my taxes this morning and your previous comments on those trust preferreds… I noticed I had some Original discount “tax” to pay as one of those was in my taxable account for a short period of time last year. I didnt look to see which one as I just imported it all into Turbo and didnt bother to look. If someone buys a sizable amount of say AATRL, they could get a nasty surprise if they purchase and I assume sell from taxable account. That is probably a lot of the reason why it is discounted so much from its sister baby bond, but Im just guessing there.

          1. Is that the case even if you don’t collect a dividend while it’s there? I had thought to leg in in my taxable commission free between dividends and then transfer it to my tax free in a lump since I have to pay otc commissions there. Bad idea?

            1. Nhcoast, Maybe there isnt I dont know. It gets stranger as I dug it up. I have owned AATRL, KTH, and others in tax free account so never had a concern. I had OID this year on brokerage form and only just now dug to find out as I didnt remember buying anything non QDI in taxable. So I checked just now and the OID came from OSBCP. I remember it had a sell off last fall and bought in taxable as that was where the cash was at. It was just a flip and I didnt even own long enough to capture an interest payment.
              To be honest I wasnt even aware this one even generated any OID. It was a small amount about $60 off about $20k purchase. I have no idea which trust preferreds generate OID and how much it would vary issue to issue based on the discount…..Or why it is even decided to be issued that way….Or if all brokerages even consistently implement it.

              1. You will get OID on any bond that exercises the deferral.
                So Hillman and old second cap were the only ones that did it in 2019.
                The rest that did it (like Ford in 2009) have either paid off or gone bankrupt since they deferred.

            2. nhcoast – You bring up an interesting point on AATRL but I’m not sure what it is…. When you say “OID didn’t cause any AATRL discount” 2 months ago, I’m wondering a discount to what? That got me thinking that maybe you meant a discount to its most comparable brethren baby bond, MGR… Both AATRL and MGR are guaranteed by Affiliated Managers but with slightly different structures which leaves AATRL with a few technical wrinkles that gives it a slightly lower Moody’s rating but that should be offset by AATRL having a 2037 “maturity” date while MGR has a 2059 date… Given MGR only came out in March 2019, it should be easy to show a comparative chart of the 2 to see relative performance and whether or not AATRL did have a discount 2 months ago. Lo and behold, if this shortened link works, it’s easy to see that AATRL’s discount to MGR began almost immediately after MGR’s issuance, widen out slightly from 4/29/2019 and March 2, 2020, then widened dramatically when both crashed along with everything else… The spread has now narrowed to what’s seemingly been normal between the two over this time with AATRL being back in line, but is the spread justifiable? Is it justifiable because of OID? Well, to me, it’s not justifiable so naturally I have no clue whether OID and the tax implication is the reason why it exists. See https://is.gd/61687n BTW, I own AATRL bot pre crash and thought I was a trading madman buying more at 30.45 on 4/6 and flipping them out the next day for 2 points. Genius move! LOL AATRL now has a 7.43% yield to its maturity vs a 5.99% YTM for MGR…. Go figure

              1. I was hunting oid info in the prospectus and also found something about market discount. Does that mean buying it at $30 means you pay taxes on the discount to par too?

                1. Sort of. Market discount is computed based on the adjusted issue price, which for a normal discount bond would mean yes, buying it at 30 would mean the $20 would be market discount.
                  But one thing AATRL is not, is normal.
                  AMG does not consider this to be paying $50 at maturity. They consider it to be paying $207.00 at maturity, which is what an equivalent non-convertible bond would have paid if it had been issued at the same time.
                  That is referenced in this line.
                  “U.S. holders may obtain the projected payment schedule by submitting a written request for such information to: Affiliated Managers Group, Inc., 600 Hale Street, Prides Crossing, MA 01965, Attention: Chief Financial Officer.”
                  And with the final maturity amount of 207, the adjusted issue price in April of 2020 is about $76.00 a unit, so a purchase for $30.00 today, you have market discount of $46.00 per unit.
                  the only saving grace about market discount is that it can be deferred and only recognized on disposition. But as I mentioned in an earlier post, any gains from this security are going to be taxed as ordinary income no matter how long it is held, regardless if it is from recognition of market discount, or solely because this is a contingent payment instrument.

                  1. So I’m stuck paying enormous taxes on my 15 shares even if I only hold them a week buying at 30 and selling at 39? 😬 very bad idea I had! Am I better off keeping it until maturity than dumping them or is it hopeless?

                    1. Not for that short a time. You will pay taxes on that like any other short term gain. Anyone buying this for a short term flip will not get hit severely. It is the long term holders that get hit.
                      it would really get dicey if you held it more than 15 months, as that gain would have likely turned into a loss because your cost basis would have caught up to your proceeds by then.

              2. 2WR – What I meant was discount to what the price would be if there were no OID – pretty much what you inferred. I believe that in a rational market (which all seem to agree is most certainly not what we are in now) AATRL would trade at a slight discount to a similar issue with no OID, and all else equal. For example, using MGR as the comparable, if the OID is ignored, then the AATRL would trade at about 45.5 to achieve a YTM of 5.99%. As near as I can figure, the annual OID on the AATRL is in the order of magnitude of 0.40 per share. Assuming that this is right (and I don’t know that it is), then with a 35% income tax rate, this would reduce the annual coupon on the AATRL by a pre-tax equivalent of about 0.215. Then, to get a YTM of 5.99%, the present value of the AATRL would be about $43.15. This valuation ignores the fact that the OID is added to the tax basis and reduces the taxable gain when the AATRL is sold or redeemed. It is also does not take into account the fact that the AATRL can be held in non-taxable accounts, with zero OID impact. Conversely, it does not account for growth in OID as maturity gets closer or state income taxes. But using MGR as the standard, I would say that a reasonable comparable value for AATRL would be $43 – $45 in the present circumstances.
                I also started out pre-crash and have more recently “averaged down” (as the euphemism goes).

                1. Annual OID is a little higher than $6.00 a unit right now. It is calculated at 8% (which is the yield on the instrument as calculated by AMG at issuance) on an adjusted issue price of around $76.00 a unit for 2020.

                    1. to model it, it is fairly straightforward.

                      Just to make it easier, I’ll use 1/1/2008 as the issue date.
                      it starts at 50 and has 4 periods per year.
                      first period:
                      50*.08/360*90=$1.00 of OID for the last period of 2007. the adjusted issue price goes up by the OID and down by the payment. ($.64375) (this prevents double counting of the income), so the beginning AIP for January 1, 2008 is 50.35. (this isn’t exact because the period had like 80 days and not 90) in the next period, it has OID of 1.0068 and an ending adjusted issue price of 50.70.
                      this schedule continues until 2037 October of 2037, where the final amount is 207.00. You can model this in excel, and the numbers “match”. (they won’t match exactly because of the short first period, and the yield isn’t exactly 8.00% but rounds to 8%, but you would get the idea.
                      as you can tell, the OID accelerates the farther along the schedule, because of 8.00 yield and the 5.15% coupon, which is how you get to an AIP of 76.00 in 2020 and OID of about $6.00 a share.
                      Brokers’ should be calculating this automatically and sent you a 1099OID for 2019 if you owned it in 2019. If you are buying this for the first time in 2020, expect an OID form in 2021.

                      And as bad as this one is, CCZ is way worse.

                    2. Justin – Your explanation on tax implications on AATRL just goes to show me that even as a prospectus reader as I consider myself to be, if you don’t really understand the fine print or actual implications of what you’re reading, you could be in for a world of hurt when buying this kind of esoterica. So let me ask you a theoretical question about purchasing AATRL in a tax deferred account without actually seeking tax advice…. If someone buys AATRL in an IRA right now at $35 and they hold it until maturity do any of these tax consequences ever matter to them at all? In other words, if someone buys in an IRA AATRL AMG Capital Trust II, 5.15% Convertible Trust Preferred Securities due 10/15/37 on Monday April 13, at $35 and holds it to maturity, will his tax consequences ever be any different than someone else who buys @ $35 XYZ Corporation Senior Unsecured 5.15% $50 par Note due 10/15/37?

                2. Interesting mental exercise, nhc. helpful… what it does for me though is makes me more glad than ever that I own in IRA…. I be liking the zero OID impact.

                    1. Justin, thanks much for the explanation. I was able to approximately replicate that on a spreadsheet. As I understand it, then the annual “phantom” OID taxable income in excess of the cash dividend from the trust would be around $3.50 now, that is 8%*76 minus $2.575 (What I have is in a non-taxable account, and I didn’t have it in 2019). The amount seems so out of proportion as to be surreal.

                      I had taken my estimate from Footnote 5 to the AMG 2019 10-K financial statements, which showed total accretion of around $3 million for the junior convertible issue, which seemed reasonable and proportional for an issue that would accrete to $50 per share. I guess this reflects their book treatment, but not their tax treatment. Obviously it does not apply to an issue that would accrete to a totally unrealistic supposed obligation of $207 per share.

                  1. inside a retirement account, it is essentially a bubble, so any tax consequences of the passive income from securities inside the bubble don’t have any impact.
                    There are generally only two exceptions to this.
                    1. if the IRA invests in a security that produces active income (MLP’s, which have been covered by other posters)
                    2. If the IRA distributes the bonds instead of cash as a distribution in-kind.

                    When reading a prospectus, if you see the phrase “contingent payment debt”, do not buy it in a taxable account unless it is for a short term flip.
                    These are not good long-term income instruments in a taxable account because of all the nasty tax consequences. But there are only 4-5 that are publicly traded.
                    I forgot about the interest expense.
                    That is a hallmark of phantom income. The amount of interest expense taken by the corporation has to match the income received by the investor, so the amount phantom income for the entire issue will always be shown in the annual reports as interest expense by the issuer.

        2. I think it’s 50/50. I’m in the NYC area, cases in NYC are really down, it’s not being specifically reported. See here: https://www1.nyc.gov/site/doh/covid/covid-19-data.page

          New cases in NYC 3,876 on 4/7, 2,507 on 4/8 and 967 on 4/9.
          1,394 hospitalizations on 4/6 and 368 on 4/8
          Predictions for needing 100,000 hospital bed off by like 80,000.
          It’s only April 10 and the curve is drastically shifting in NYC. I realize many other places it’s still rising but I think if the curve starts to shift down overall and people sense the economy will start to come on line, markets will stabilize.

          1. but there are a bunch of places that are under lockdown, so the spread will just shift elsewhere. If we had done this nationwide all at once, then it would have been over within 6 weeks or so. But we aren’t, so all it will take is another outbreak from someone traveling from a non-quarantine state to start this all over again. Look at Chicago. one person was responsible for almost 1,000 cases because he went to two large gatherings, and the large outbreak in southwest GA can be tied to just one funeral.
            All it takes is for a single asymptomatic person to attend an easter sunday service at a large church and you could have 1000 hospitalizations from that one person.
            Also, that 100,000 hospital beds could have easily been met had they not triaged and instituted a lockdown citywide.
            read this thread.
            https://twitter.com/Craig_A_Spencer/status/1248837634820116480

      3. Agree w you 100% Affinity. If someone knew what the market was going to do on a specific date they’d be retired on an island they own! The peeps at SA with the products they sell — well they wouldn’t need that income if they really knew, would they? all we can do is evaluate fundamentals, create a personal strategy and do our best to adjust. And that’s why i love this site, educated people who drill into the specifics and discuss what they think can work. Happy holidays to all of you.

    2. I hate MW..they never say anything positive. Love to spread fear and doom.
      Ok. I said it, I hate those guys..

    3. You don’t get rich predicting the future. Unless you can sell your predictions.
      stay flexible and be prepared for this to happen or not happen so you can respond accordingly. …Hey. I didn’t mean for that to sound Zen.

  8. For those of you that have a little spare time on your hands there’s a really interesting article over on “Marketwatch.com” by Mark Hulbert. Its interesting because he and Ned Davis think there’s a 70% chance that we will revisit the March low on the S&P somewhere between “JUNE 14th & AUG. 7th”. Of course no one really knows but I will have some dry powder ready if that happens. There’s atleast 3 things I will add to if I get the chance. Right now, they’ve all ran up too much to add to at this point. Don’t know about you guys but I still own a handful of common BLUE CHIPS as well. I live by the theory you need some “growth” in your portfolio almost at any age. So 10 to 15% in common stocks is not a bad thing in my opinion. But I no longer buy speculative names or names with outlandish PE’s. Those days are behind me. LOL

  9. Now that the Fed is buying every asset but stocks, the chatter is already starting on the possibility of direct stock purchases by the fed as a final bazooka. Most are saying it’s not happening yet, but just the fact that it’s being talked about is enough to put the ultimate Fed put under the market. Who in their right mind would dare go short with such a threat.
    Valuing stocks is now an even more difficult task given the almost total disconnect from fundamentals. Ultimately it’s us the tax payers who are paying for another Wall Street bailout.

  10. Thank you Federal Reserve for remembering those who own stocks and bonds account for a large part of consumer spending — far more than those who do not own stocks. Great to see tons of money coming into the bond and preferred stock market this week from large bank trading desks, hedge funds, etc.
    As more places in the USA learn the simple lessons of Hong Kong, Singapore, Taiwan that wearing face masks dramatically reduces covid 19 spread and reduces the overload of patients in ICU, deaths will fall, and news coverage will improve. Hydroxchoroquine reduces viral replication per multiple doctors (prescribing the drug quietly) will further reduce deaths. The fire sale for now is over. Bank trading desk profits will be huge. Interest on deposits will reach new low and net interest margins will be healthy for banks. Meanwhile millions of Americans will be out of a job
    due to lack of preparation and action by those who lead the country, states, counties,etc. Investors be glad you don’t own a small business.

    1. No one cares about costs and budget deficits when it comes to bailing out failed corporations and banks but it’s always a big deal and a lot of concern about deficits when it comes to helping the little guy.

      1. the little guys doesn’t have the lobbyists to get congress to move along or a CEO to call Kushner

    2. Bloomberg reports Federal Reserve pouring money into Hi Yield Bond market this morning driving up prices of Hi Yield bond funds by 7.5% today. I wonder if the big banks, hedge funds, politically connected knew anything earlier this week about the Fed’s pouring of money into the Hi Yield Bond market the day before Good Friday? There sure seemed to be a lot of high volume bids this week on low investment grade bonds and junk bonds, some preferred stocks,etc. Jerome Powell is determined not to be labeled as the Fed Chief during the Greatest Depression in US History-== not a family legacy he wants for his kids and grandchildren to have to endure for the next 50 years of their lives as they hang out at the country club.

      1. It was also pure coincidence that this was announced at almost the exact same time the unemployment rate was announced. So, like you, this to me implies this was known and coordinated with the administration. It had to be. So leaks were much more likely that a normal Fed action.

        I am not sure if section 13-3 requires approval of the Treasury. It looks to me like it does.

  11. Nibbled on some NLY-F in $21s. Think once Fed buying hoopla subsides a bit, the big and experienced operators like NLY will be able to buy some assets at attractive prices and most of their preferreds will head back to $24-$25.

    Did sell most of the mega-bank preferreds bought in $23-$24s past few weeks for $25+. I increasingly hear chatter of banks ‘being asked’ or shamed into pausing dividends and do not want to give up nice gains if there is some truth to this…I doubt this actually happens but even if it gathers more news cycles it could be detrimental to these

    1. I sure hope they don’t stop paying the “Preferreds”. The common I could easily see happening but truly hope they don’t do that to the preferreds. I loaded up big time on all the high coupons of the Mega Banks over the last 2 weeks. Close to $2 Million dollars worth. Yes, really did. On a side note did you guys see the interview today on CNBC with the guy from a company called “Social Capital”???? Really a very interesting interview as he stated that this money isn’t reaching down to the common man/woman on the street. He was very critical of the whole stimulus trillions and trillions, etc etc. not really reaching the workers like you think it will.

      1. Chuck, yes I heard it all, or at least what I could stand to hear in doses of what he was babbling. He seems very upset that his best friend dropped out this week and thus, ranted endlessly about how income equality is exploding. Sounded like the poster boy for anti-capitalism, which is odd because he is an opportunistic venture capitalist. He wished all kinds of doom and gloom to happen to many successful people, as you know. What a goof.

Leave a Reply

Your email address will not be published. Required fields are marked *