Markets Living on Borrowed Time

Virtually every day we continue to see equity markets move higher–in spite of the news on Covid 19 and poor employment prospects.

Not to repeat myself too often, but I am just sitting tight–no buying and selling. My damn real work is getting in the way of doing what I really love which is working on the website.

We are just a week away from the end of the unemployment supplement money–that $600/week extra which has served to ‘juice’ the economy. Will we see a new program from the federal government? Certainly the states have no ability to pay even modest amounts–most of them are totally dependant upon the federal ‘printing press’.

Dovetailing with the upcoming reduction in unemployment payments we are seeing jobless claims rise again–1.4 million new claims last week.

This is not going to end well–but at what point markets begin to head sharply lower is anyone’s guess. With all of the liquidity the government has pumped into the economy individuals, banks and corporations are all holding bushel baskets full of cash–at what point this changes–who knows?

67 thoughts on “Markets Living on Borrowed Time”

  1. Talk about a sign of the times. EMTY is the Short Retail ETF and is trading at close to a 52 week low…

  2. The day a vaccine for the Covid-19 virus is announced, everything will change. In the meantime, try not to be so pessimistic.

    1. I was surprised to hear that the bar for the first generation vaccine has been set very low i.e. 50% efficacy implying if it helps 50% of the people (of course without causing harm to others) it will be approved.
      So in reality if may be good from the psychological viewpoint (and better than not having a vaccine) it may not really stop the spread well and may not be the magic bullet everyone seems to think it will be. May be the 2nd generation of vaccines might get better

      1. This is a natural scientific flow – there were several polio vaccines before the best was obvious. I would expect it will take 4-5 years to settle on the one, best vaccine – if indeed there proves to be such a thing.

        1. Excellent point, Tim W. It usually takes 5 to 10 years to develop a new vaccine in order to demonstrate its efficacy as well as safety. One worrisome development is the number of – so far very small – studies that show that those that have recovered from this virus tend to lose all their antibodies within a 90-day period. I would not consider a vaccine a success if it only grants you immunity for such a short period. I have great faith in science and technology, but this may turn out to be another case, like polio, where it took years to find the silver bullet.

          1. My fear is that the market might get unduly optimistic (which it already is) about a vaccine with a low bar set for its efficacy, short term effect of it and other unknowns. But lets hope science and technology will bring a paradigm breakthrough or as the President says COVID-19 will just fade away

          2. There are two types of immunity. 1. Antibodies which are easily monitored and 2. Programmed T cells which will be directed toward viral particles but these are more difficult to screen for. So if a recovered patient (or vaccine recipient) has lost their antibodies, they might still have protection from programmed T cells. Or not. Don’t let anyone ever tell you medicine is simple.

            1. Vin
              there is another set of issues which is how long the vaccine will last for. This one may well need a booster every one or two years. We do not know yet.
              The other point is that the AZN product requires to shoots. The content of the two is not quite the same. Not that to my understanding all of the American produced vaccines have not produced a strong T cell response. The AZN vac has. The issue seems to be that all of the U.S vaccines are using more or less the same manufacturing process. As such there is very little diversity in the U.S. among the prototypes now under development. The AZN product does use a different design formula. best SC

              1. As for the possibility of requiring an annual booster (at least until a permanent vaccine is found), who among us isn’t already getting annual flu shots? Adding one more seems no big deal.

                1. I agree. No problem with a booster. Merely expanding the data so that it is hopefully a bit more complete. Be well. SC

      2. Here’s the dilemma>>
        say out of 100% of people who get vaccinated only 50% are successful. How do you know which 50%? How do you know who are not inoculated?
        And …. more importantly, given the rush to release >> What could be harmful side-effects, to what degree, when do side-effects manifest, and to whom?
        Anyone remember – Thalidomide??
        just curious…

    1. Camroc, Interesting read on the world bond yield info. Not one that appears to be a trend to change anytime soon, I gather. The chase to nail anything to the wall with yield of any degree of safety will continue….
      It appears she likes prospects of preferred stocks, but wont come right out and use those specific words though.
      What trades are appealing now?
      You’ll have more attention on the asset classes that are a hybrid between bonds and equities and still offer equity-like returns.

      1. Gridbird, she mentioned a number of possibilities, i.e. hy bnd, cmbs, reits, etc.
        but never mentioned preferreds. I found this kind of curious.

        1. I think she is implicitly stating this here:

          What trades are appealing now? “You’ll have more attention on the asset classes that are a hybrid between bonds and equities and still offer equity-like returns. “

  3. I am waiting until after the election to make any big adjustments to my portfolio. IMHO a promise of higher taxes and a war on oil will not move the market higher.

    1. Presidents are overrated scapegoats for the market action. Some things will happen no matter who wins.

      1. Sure, some things will happen no matter who wins, but this time a lot of things that will happen DO depend on who wins.

    2. “Person, woman, man, camera ,tv”
      “Frankly, I wish her well”
      “I Know words. I have the best words”

    3. While there may be some turbulence around the actual election, history tells us the markets really do not care who is POTUS.

  4. Oddly, the 5 largest stocks in the S&P (FB, AMZN, GOOGL, MSFT, APPL) are up 35% YTD but the remaining 495 are actually down 5%.

    In addition, the Dow Jones Utility index is actually down 5.6% YTD.

    Folks are not exactly fleeing to safety (yet).

    1. Collectively 495 of the S&P500 may be down 5%, but many of them are up significantly (Walmart for example is up over 10% YTD).

      1. yes, I picked up Wally around 103…JNJ at best 112 (avg low 120s) and many more. My big mistake was LOW – I bought at 69 but hesitated and only bought a few…added at 117 but never got the full amount i wanted…bummer.

  5. This is starting to feel a lot like 1999 / 2000
    https://www.msn.com/en-us/money/news/e-trade-experiences-record-trading-in-the-second-quarter-as-the-retail-trading-boom-continues/ar-BB1774fm
    I think a lot of people here are thinking the same thing, that we may have another drop in the market in the next couple months but it will recover especially in a election year. After that all bets are off. Unlike Tim I have been selling off and raising cash. I think on the next drop, newbies and day traders will sell and make the drop worse, but then come back afraid they will miss the recovery and trying to make up losses.
    Banks are preparing by cancelling credit cards and reducing the credit limits of even the best credit qualified if they have been carrying large balances. They also have been reserving large amounts for loan losses. This on top of issuing preferred the last couple months to have cash on hand.
    The evening’s getting late, and when the music stops there will be a rush for the doors. Remember the market takes the stairs going up, but the elevator going down.
    I think Grid has it right on Preferred utes that are cumulative and 2ww view on bonds of solid companies.

  6. While this is certainly just my opinion, and I am a more aggressive investor, I do believe there are a lot of values out there at the present time in the preferred markets. Reading Barron’s a few weeks ago, there 100+ companies looking for a vaccine/treatment for the Covid virus. I’m a very positive person and believe we will have a treatment in the next couple of months, but it will certainly take time to manufacture and distribute. With this being said, over the past 60 days I have spent many hours building up my REIT preferred portfolio. Things I look for in my research:

    1) High insider ownership
    2) 20+ years of an experienced management team making very few mistakes
    3) Low debt levels
    4) Open and honest communication with shareholders concerning rent collections
    5) Interest levels of less than 15% of rent collections

    There are many high-quality REITs that have been around for decades and I fully expect all of their preferred stock to pay on time. Things I don’t look for are listed as follows:

    1) Daily articles on Seeking Alpha, where the writer’s primary reason for the article is just to get “views” or sell their damn newsletter. It happens on a daily basis now. I simply will not take advice from those people who base their income on writing daily articles for $35, plus page views. They are not experts, they are just people doing marketing work. They do not care about you, your family, your cat, your dog, or your grandmother, or your investment returns – although they will say the direct opposite. Comments are now “scrubbed” to make sure past recommendations are not mentioned.

    1. plus if you look at 2 of the most popular SA writers rida morwa and brad thomas that are actually 2 of the lowest rated “analysts” out there. tipranks has them near the absolute bottom. and yet SA readers flock to their picks

      1. rdking647 – Excellent point. My comments on SA are now being “moderated” because I posted the Tipranks link for BT, who is rated 0 stars out of 5 and is in the bottom 3% of all bloggers. Rida is a little better with 1/2 star out of 5, but clearly their investment returns are very, very poor.

          1. My comments sometimes last a few hours, and then they disappear. Its a good gig to protect authors and drive service revenue for SA.

        1. Good morning Lou…not sure Tipranks is all that good at rating SA authors who write about preferred shares and baby bonds. For example, when an SA author recommends a term dated preferred or baby bond, Tipranks often considers that a recommendation for the underlying common shares and grades accordingly. Doesn’t happen every time, but often enough to skew the results for authors writing articles of value/interest to income investors.

          1. Good point Citadel West regarding authors that write about preferreds and baby bonds. BT does not write about fixed income much, but Rida and his crew often write about them. However, Rida’s had a number of real scary common stock picks, so I will often read the articles for entertainment value and just not purchase any shares he recommends.

        2. don’t forget pendy and jussie – they will take you to the bottom with their REIT ship just to get some click revenue.

      2. rdking, I think its more of SA directing readers in a certain direction. If you go to the web page the main page highlights certain writers over and over again.
        Also it seems more and more pop ups are happening to get you to sign up to a newsletter or some other paid membership. I fear the days are numbered for it to be a free forum. I suspect like the news outlets it will start to say you have 10 free views and will count them down until it blocks you from viewing unless you pay.

      1. Retired Broker – my picks may not be suitable for everyone, but they suit my investment needs and believe they will provide solid income and also a nice chance for capital appreciation. I’m in both of the following securities at an average cost of about $20.25 each, plus collecting a dividend from each this month.

        UBP-K is the 5.875% preferred issued by Urstadt Biddle, a company I have followed for many, many years. Insiders control the voting shares (UBP), solid and conservative management team and had a streak of 26 years in a row of dividend increases that was broken this year. Primarily hold grocery-store anchored shopping centers outside the metropolitan NYC area. For the prior fiscal year, interest paid was only about 10.2% of total rent collected – very low. These guys are good at their business model.

        BFS-E is the 6% preferred issued by Saul Centers, also a company I have followed for many years. Long-term management team and old Frank Saul (think he is in his early 80’s) owns about 50% of the common stock. These guys don’t make many mistakes either. They hold a number of grocery-store anchored shopping centers primarily in the Washington, DC area and 28% of their properties are in SuperZips (U.S. zip codes in the 95th percentile based on education and income based on property sq. ft). They also have some mixed use office/apartments near a number of the Metro stations in MD and VA. Interest paid was 18.1% of total revenue, and while I would like this number to be lower, about 90% of their debt is non-recourse. I’m a big fan of non-recourse debt for REITs.

        Both securities are trading higher now and will not go ex-dividend again until October and there clearly could be some more downside pressure. However, I am a long-term investor and going to hold both securities for the income and capital appreciation. As I’m retired now at age 51, I need a steady stream of income to pay my bills and am very comfortable with both of these securities. UBP-K is not callable until 10/2024 and BFS-E is not callable until 9/2024.

        1. Kaptain Lou

          I like your thinking as I started positions in prefereds of UBB and BFS this week. I think prefereds of grocery center REITs are in the sweet spot right now.

          I live in the MD suburbs of DC and regularly shop at one of the BFS locations. I noticed that they have begun leasing a new high end apartment complex that is within a mile of Amazon’s HQ in Arlington, VA.

          1. Greg Gilbert – Not exactly sure where you live, but you may be referring to The Waycroft property in Arlington, VA. Mixed used property with apartments above, but a nice 40,000 sf Target store on the first floor, plus close to 500 apartments that should rent in the near future. These two investments are no-brainers for me, considering the current pricing level.

            1. I live in Rockville and do some of my grocery shopping at MoM’s Organic Market in a BFS mall located in North Bethesda, MD.

              We try to eat healthy 🙂

        2. Kaptain Lou, these two have been my long term favorite as well. First bought at IPO and perhaps too much, sold some after one or two dividend payments with small cap loss. Bought back small number of shares after Covid 19. Good picks. Or get the UBP-H with possibly some capital gain down the road. I bought and paid too much on IPO on the 3 regional banks, all rated by Kroll bond without the big 3 rating agencies (Moody, SP, Fitch). They finally are now comfortably above par. There was an article from Schwab.com saying that technically these are non cumulative and the banks could skip dividend payment. Then it was deemed quite unlikely because the Feds would most unlikely stand around risking how the financial market going down fast and furious. LOL.

    2. Yesterday I asked the Colorado Wealth Management Fund guy if it is a tradable or private fund. If not, is it legal to call it a fund since it seems to be a REIT Forum as he says.
      Not sure if he prompted removal or SA watchdogs. Somebody seems to be protesting too much- smells fishy.
      I think I’ll ask SA- if stonewalled, will suggest the SEC should check it out.

      1. Really???? CWMF is one of the few straight shooters on SA. Not sure why you are bent out of shape about his name. There are a host of scam artists like Rida and his crew posting on SA who deserve more scrutiny. Not one of the few straight shooters

  7. there will be another air drop of huge amount of cash in teh not to distant future.
    without it the economy WILL crash and if the GOP wants any chance at all of wining in November they cant allow it. do they will go along with another couple of trillion cash injection

  8. I think utility preferreds might be at risk. Cash-strapped state governments might look at utility balance sheets and see a nice big fat piggy bank to make some withdrawals from. The state regulator could mandate lower rates, continuing service to nonpayers, or “capital investments” in infrastructure projects or the like. I got burned on AES Tiete common in Brasil in 2012, where the government stepped in to prevent some utilities from recovering costs of new hydropower dams. If memory serves there were similar occurrences with RWE in Germany related to denuclearization. I see no reason the same sort of thing could not happen here, and I’m not holding any utility preferreds.

    1. Mike, they dont mind continuing to let non payers stay on the rolls. As almost all regulated utes allow regulatory rate recovery of monies. Its the prefect welfare Robinhood system that no one complains about, as the people who can afford to pay get stuck with the higher bill. Also..Think T&D utes as they are only pass through with no plants or power costs to worry about.
      Your example was power production and at the common level…AES by the way dutifully payed all their trust debt preferreds even during their darkest hour. And AES never had good credit ratings either.
      Also remember “layers of capitalization”. Most ute QDI preferreds are just a tiny sliver of their cap stack equity structure. Many are just office soda machine chump change payments. Im not concerned about getting paid, I am worried about a dearth of opportunities do to the fact any liquid ute is of almost nothing in yield in terms of YTC now.

      1. Thanks Gridbird… well reasoned points and you are probably right. I never thought about “layers of capitalization.”

        One of the things I love about this site is how people with a different viewpoint from my own can help me see things another way. So thanks Tim also!

        1. Just remember, Mike, they dont get permission from me first to suspend a dividend. But I wouldnt let them if I had any say, ha. Anything can happen. Also remember the subsidiary/holding company relationship. DUK-A is a holding company ute preferred. IPLDP for example is a subsidiary preferred. Holding companies survive and pay their high level of debts via cash dividends from the subsidiary (they own the common stock).
          So in theory DUK could suspend their preferred and still receive subsidiary cash dividends. Alliant does not have that luxury being IPLDP resides at one of their 2 main subsidiaries. If IPLDP was suspended Alliant (LNT) the Holding Company could not receive any cash dividends from Interstate Power until they paid the preferreds.

          1. Hey Gridbird, not sure you caught the interview on CNBC yesterday with Palihapitiya on Tesla. He is a huge Tesla bull, not because of cars but because of solar, batteries, and software that will revolutionize utility industry, to the detriment of existing utility companies. I know this is long-term thinking but it is something we should definitely keep in mind when buying perpetual preferreds. Here is a snippet: “What Tesla is going to do with their battery packs and software will all of a sudden allow each of us to be in the energy business, as well,” Palihapitiya said.
            “Again, people will get angry, they will not understand, they will try to push back, and they will be wrong. And what’s going to happen is this stock is now going to represent the totality around decarbonization and sustainability, so it was really great to own this thing around cars for the first few years, I get it. But now I underwrite this stock as a push toward decarbonization, towards unregulated energy, and towards the ability for all of us to become our little micro utilities.”

            1. If the money losing car business doesn’t sink them first….
              There was a reason the solar company purchase by Tesla was so contentious.
              I just have a feeling that Tesla is going to be the next Enron, where supposedly “the smartest guys in the room” were actually “the guys who covered up the fraud the best”….

              1. With a P/E of nearly 800 ??? Going from a 52-week low of $211 to a current $1452/share?
                Naw, they couldn’t be overvalued.

            2. Chris they have been talking that for a while. Slowly progressing. In fact utes are now using battery back up systems instead of peakers now.

            3. Batteries are not energy generation, just storage.

              Solar arrays work best as huge farms, which utilities are best situated to exploit.

              So, I don’t know what this guy is talking about. But then again, neither does he.

              Where utilities might be vulnerable is to something like the small scale, modular nuclear reactors which can be deployed in large factories, small communities etc… Still need infrastructure without one in every house though so utilities seem to be in no danger for the foreseeable future, and that is before you get into the political protection they have.

              1. Scott, I agree, our runway time is so far out there its not a short or intermediate term worry. And long term may not be inside my life expectancy. I love the solar cost versus gas and oil debate. Many lose sight of the fact many utilities have “stranded asset recovery” mechanisms in play. So even if solar is cheaper, the regulatory recovery process makes this not cost effective. This is why utilities such as Ameren are really dragging their feet relying mostly on coal, nat gas, and nuke. And at 9 cents kw are near it, Im certainly not pushing any change as I like my current low AC bill.

    2. Mike, Here is a good local article that expresses your concerns on utes. I think the stress if any nearer term from weak economy is more a common stock dividend issue than anything. I would suggest a deeper dive into states policies. For example here is MO the shut offs have already began. Spire started July 6 and Ameren will August 3. So keeping large deferral monies that may or may not be collected wont be here in less consumer sympathetic states than ones that have suspended shut offs indefinitely.
      https://www.stltoday.com/news/local/metro/a-tidal-wave-of-utility-disconnections-about-to-hit-st-louis/article_381256e4-e2c5-5b04-a680-6d5038db5cd5.html#utm_source=stltoday.com&utm_campaign=%2Fnewsletter-templates%2Fbreaking&utm_medium=PostUp&utm_content=092720c794c5657df9b21972958e8c4d10cc8ce7

  9. If regulated utilities go bankrupt… the world is probably in chaos, and cash is probably worthless. I would be worried about: do i have land in Montana that i could go to, do i have food stockpiled, and do i have security/guns to protect my family.

    1. @Mr. Conservative

      Stash your stuff in Wyoming…no state income taxes there. Montana is getting a bit “progressive” due to an influx of Left Coasters.

      1. Ron, The Hollywood crowds are even going to Wyoming. It was reported Kanye West retreated to his ranch in Wyoming after his recent rally in South Carolina. Believe me, there are bigger issues out there that can affect you. Intel is the only domestic chip maker pretty much. Everyone else is ordering chips from manufacturers in Taiwan. If PRC invades Taiwan you can kiss even your electric toaster goodbye since they are putting processors even in dumb appliances. I don’t know if you have noticed how limited the availability of kitchen appliances is at your local Walmart.

    2. Or they got caught bribing half of the state government. Look at the story of First Energy in Ohio….
      If they reverse the legislation, would those coal and nuke plants sink them?

      1. I have stated this quite often here, that part of the reason utility preferreds are a major part of my preferreds are precisely what they did. As utes can usually grease enough people to usually squirm their way out of most tough spots. The problem is they are in a slump and getting caught which is not part of the objective. In past two weeks Con Ed and now First Energy have got caught with some grease on their fingers. They are meaningless utes to me being they have no issued preferred securities. Doubt I would ever invest in Con Ed anyways. At my age, running across a ticker symbol “ED” frequently may provide bad karma where its not needed…….

  10. Tim I agree with everything you are saying. Im only holding rated utility preferreds. But I think they are at risk too. Most of the utilities are offering a grace period due to high unemployment and the virus. Acourse alot of people who know they don’t have to pay there electric bill won’t pay. This can not be good for earnings. I will probably be sorry by December that I didn’t reduce the utilities preferreds too.

    1. Twinjett, That’s why we hold the preferred instead of the common. Things would have to be pretty bad for the dividend cuts to come that far down the line. Maybe I’m too optimistic, but all it would take is a viable vaccine to start an economic resurgence. That being said, the post covid economy won’t be the same. People I know would do anything not to have to get on those damn trains and travel daily into NY and the last three months showed telecommuting was possible. Then there’s the trend away from brick and mortar commerce which was already underway before the pandemic. My preferreds are mostly big banks and I’m sitting tight.

Leave a Reply

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