Mid Day Rambling

After a day off and time to let emotions settle down a bit stock prices have moved strongly higher (probably too strong).  We suspect this is a 1 day gain and we will see much more calm trading after today.

The never ending selling in the income issues appears to subsided and many issues are now going through some ‘backing and filling’–although there are a few laggards that didn’t get hit enough early this week and last week and they have been smacked.  For instance the newer Gladstone Investment 6.125% baby bonds (GLADD) opened the day up 35 cents to $24.95 which must have set off a bunch of small sellers as numerous small trades of 100-400 shares came through and took the price all the way down to $23.10–would think that ‘limit’ orders should have been used?  Buyers have come into the issue and it is now at $24.

Some of the shippers have seen strong buying in their preferreds–Seaspan, Hoegh LNG and Tsakos issues are all up over a buck.  Additionally MLP Nustar Energy preferreds are all bouncing over a dollar.

We checked the CHSCN 7.10% reset preferreds from CHS and the shares are trading at $24.35 (from a low last week of $22.95)–up 67 cents for a current yield of 7.30%–wish we would have bought on the low last week.  This is on our buy list, but we are doing our best to hold off a few days.  We have a number of starter positions in some decent perpetuals, as we mentioned last week, and want to add shares, but this ‘reflex’ rally today in many issues will likely back off a bit later this week or next.

For the time being we are barely watching the 10 year treasury–historically we kept an ‘eagle eye’ on rates, but income issues are not trading based on interest rates right now (rates down, prices up) and other than watching as to whether it is forecasting a recession it is not of immediate concern.

44 thoughts on “Mid Day Rambling”

  1. Dear Retire, P and Gridbird,
    Much appreciate your thoughts. What was odd is the quality issues I owned dropped when the 10 year Treas rates dropped, which really was baffling. Most of the recommended preferreds by folks here are in the REIT industry…how stable are REITs and mortgage backed instruments these days?

    1. Hi Debbie–sorry I haven’t followed your thread with the other folks, but YES there is a total disconnect between interest rates and preferreds right now. In many years of preferred investing this is the biggest disconnect I have ever seem–just goes to show that one thinks they know how these things work and then they prove you wrong. Fear is getting in the way of making money here.

      1. Tim, thank you for confirming my confusion on the behaviour of preferreds lately. Part of me thinks it is a major buying opportunity but perhaps smart money is telling us something…like rates will spike a lot in the next year? If so then variable preferreds such as Met-A and VRP would seem attractive?

        1. For what it’s worth, my observation is exchange traded seems to have been following the more tangible rising 2yr rate closer than more speculative falling 10yr rate. Some people are all worked up about that bond disconnect right now. Sometimes it can predict future problems. Talking heads normally blather “don’t fight the Fed” and right now Fed says the economy is solid. Of course Fed is not always right and now talking heads blathering “Fed is wrong”. I try to absorb everything and sometimes find it amusing.

    2. Debbie when it comes to preferreds (baby bonds also being exchange traded)
      at times they will exhibit the worst behaviors of both debt and/or equity during market volatility. Market appears to be repricing some spreads between preferreds and govt debt. It is just the way it is, especially for the more liquid issues. Reit preferreds that I have watched have been dancing up and down also, with a longer term downward bias also.
      Assuming govt yields are stable and company finances also are, they will begin to settle down and stabilize. Then in after a while if nothing changes people will begin to seek yield again. Historically perpetual preferreds trade between 200-400 basis points of 10 year bond… That in equity pricing means price differential of sometimes $4-$6 or even more off par and that would still be considered within normal. So one can take a serious capital kick in the britches and it still would be considered in normal range. People got a bit too comfortable with pricing stability past few years.

      1. Thank you, Gridbird, that is an excellent explanation! I guess I will monitor this pricing relationship and when it approaches 400 bpts, perhaps that is the time to go heavy on quality preferreds?

        1. Debbie that is hard to determine…As preferreds were not issued in a vacuum.
          For example..A recent par 5.25% Baa2 will have traded differently than say a 6% Baa2 issued say 7 years ago and is still trading… Its more of a “Monday Morning Quarterback” historical stat than a true forward guideline. Your purchase should be based more on your assumptions of future long term interest rates…Or comfort in the income you are getting and not being overly concerned with price movement and capital. That is where you have to decide what is best… If 10 year is staying at 3%, over time the 6.5% QDI investment grade type issue is historically in good shape…For example, decent venerable issue PUK-. It is borderline investment grade and was issued at 6.75% in 2004 when 10 year was in 4% area…PUK- is presently near par now and 10 year is now under 3%…So it appears to be relative value here…But keep in mind since 2004 its price has traded from $5 (during 2008-09 crisis) all the way up to $27.98 in 2016…So you pick your hold your breath and buy knowing it can do anything… Btw, the above was an example not a reco, but I seen Mr. Lucky bought it today, and I do think about…But it would require a sell of something, and I am reluctant to sell most of what I have.

          1. Grid, I have 400 shares of PUK-, the last batch was bought around par, but with dividends received my cost basis is below par, so am now collecting dividends and, if it be called, so be it.

            What you said about preferreds exhibiting the worst attributes of stock & bonds is correct – they act like bonds when rates go up, and act like stocks when rates go down.

            But I have been thinking that folks who buy Preferred ETFs ( like PFF ) think they are stock ETFs, so sell when the stock market goes down, not really understanding the nature of preferreds. That may be why the disconnect happens.

            1. Inspbudget, that is a pretty decent issue to hold. And as you know based on the past month it has held up very well. 6.75% QDI is still a respected yield.
              This is Prudential out of England, not Prudential “The rock” from US, as it get confused with. But a very respectable long lived stable entity. They issue odd preferreds. They start out as trust debt, then get rolled over into perpetual preferreds at issuers option over time. Nothing wrong with that at all. I am just interested in that stuff as many do not know the genesis of the issue. I wouldnt mind owning myself, but I would consider it to be a hold issuer not flipper and am at loss to what I would be willing to sell, to buy it though. Or in other words I am not wealthy enough to own everything I would like to buy, ha.

            2. I have no credentials, so take this for what it’s worth. I was aware of the risk but got lulled even so. Rates have been raising and yet preferred coupons were declining. Yield hungry buyers had few options. A risk premium appropriate for company or the increasing economic risks, something you would normally expect, was largely overlooked. Buyers were desperate for yield. People finally woke up to concurrent higher rates and the possibility of recession. That combination is driving what we see happening now. People freaked out and ran right through their front screen door. It will get sorted out and be better for the future. It could be a lot more complicated than this but I need to keep things simple in order to understand them and this looks to me like it fits.

              1. P, I was fortunate to survive almost all of the carnage and even have made a few bucks… Despite dumping losers CHSCN and NSS after absorbing a sell off. The key was holding high quality illiquids that were not involved in the sell off. I was able to jettison some of them at a profit and then roll proceeds into some of the newly beaten down issues. Hopefully this helped me to absorb the brunt of the downturn and possibly benefit going forward on any price increases.

                1. You are right Grid. I starting unloading sketchiest in September but not as quick on some others and it cost me. I too had NSS, a lot, but I dumped it the first day it broke under $25. I was out of CHS too but have dipped back in, bought some too early, some at current 52 week low. Crazy thing happened tonight. All year I have been looking at my spreadsheet and didn’t notice it till today. Something wasn’t right. I corrected the formula and money appeared just like that. I’m doing better this year than I thought! Embarrassing. But I’ll take the money.

          2. Gridbird, thank you and great advice/example. Oil is down, long term rates are down, gold is rising, global markets in turmoil, technically could be beginning of a bear market in the US…recession brewing?

        2. I am a newbie. I have gone high quality BUT that means longer duration’s then term preferred which seem to be working best (or where things seem change quickly). I longer duration’s high quality, I have gone floating rate since I can get them below $25. IN 4-5 years, if interest rates are higher, that offers some protection. They could be lower of course but I am kinda betting that the days of interest rates below today’s rates are less likely than higher rates in 3 to 4 years. Remember, I am a newbie I could be wrong

          1. Just a note, the higher quality I am buying that float have dropped as much or more than other issues. It is not going to give you price stability. In essence, I am buying what I would have brought if they were trading at $27 – $28 earlier this year

  2. Looking at UZA (US Cellular) vs UNMA (Unum group) notes – have added some UZA on dips last week. Any thoughts on risks around US Cellular debt vs Unum Group? Thanks for any feedback!

  3. Hello there! Anyone have a thought on non-cumulative preferreds and risk of dividend suspension? I own Met-E, Bac-B and a few high quality names but non-cum dividends. They obviously got affected more by the market decline but I have not been able to find any news on when solid companies have not paid their dividends. Thanks so much for sharing your knowledge!

    1. Just my opinion so take it for what it’s worth but even during the depth of the financial crises back in 2008-2009 I believe all the major banks like BAC, C, WFC and JPM all continued paying on their preferred stock. It’s hard to imagine things getting that bad again in my lifetime. The FED has upped the capital requirements significantly for the institutions it supervises. If the world ever gets so bad that these institutions stop paying on their preferred issues, then nothing will be safe.

      1. Debbie

        I agree with Retired although I think some suspension guidelines exist today along with the better capital requirements. Both of the issues you cited are high quality but low interest. I would guess they experienced the price drop in response to the raising rates rather than over any payment concerns. This would be viewed as a normal reaction.

      2. Retired – How about GS non-cumulative preferreds with all their issues right now?

    2. Debbie, just to add some color.. These financials have to offer non cumulative for capital purposes. Regulators will not allow them to issue cumulative preferreds for the purpose of the issuance. So they are not issued this way to possibly try to rip you off. Yes BAC would have most certainly not paid their preferreds in 2008-09 if not for the TARP bailouts… But as Retired mentioned that is basically fighting the last war as it is or an done. Anything can happen so diversity and proper allocation size are always important in any issue.
      The word cumulative really is probably one of the last criteria to be used in buying what one needs. I presently dont own any non cums, but that really is just more accident than a specific biased reason against them.

  4. Guys,

    What are your thoughts on BPRAP (ex GGP-A)? In my opinion this cumulative preferred stock has a tremendous potentionl to go up. It’s a callable, pretty solid company and high current yield.

    Regards,
    Evegeni

  5. Although it’s right at my 5 year maturity limit, I picked up some more GLADD at 23.30 today. At close today YTC is 10.41% and YTM 7.76%. Still amazed I can pick up more SBBC maturing in 5 months with YTM 8.51%. SSWN maturing 4/30/19 at 5.96%.

  6. Tim,

    Any projection of the 10 year for 2019 assuming no recession and no more rate hikes. It hit about 3.26% before the last hike. Do you see it in the 3.4%-3.5% or just in the 3.2% – 3.3% ?

    1. The forecasts I am seeing from doing a google search are about 3.2% (Goldman Sachs, Bloomberg and others). I am asking because I am looking at 6.5% yield from IG rated issues which would be 2x the 10 yr. Tbill

      1. For things to return to normal, 10 year needs to increase. Looks like most are forecasting low 3.2 type range for 2019, same as saying we have reached the high.

  7. Only thing I see down is VER.pf.F.

    I’ve been nibbling on it at a 7% yield. Pays monthly.

    1. William–that one is on my list also. They have done a good job of getting that company straightened out and finding 7% on quality company list this is tough.

  8. In appreciation of your (outstanding) CEF primers Tim scooped some super-safe NCZ-A today at 22.79 yielding a tad over 6%. Will pull more under 22 if the opportunity presents itself. If called in the next 8 years it’ll bring the YTM to 7%+. Makes up for having to stand in the corner on some others – but have been climbing the quality ladder so just need a few coupon payments to restore the luster to any laggards.

    1. They’re on my list for next week for me–hope they stay down til then.

  9. Close to 900 points up on DJIA? Talk about volatility. To me, a sign of more to come not a sign of stability. Looks like a bounce, We shall see next week

    1. No kidding!! Wow–I don’t even keep the TV on any more–too many screens of data on my setup here.

    2. I’m with you Steve…its a bit too soon to let your guard down, and would much rather hold cash than equities in this volatile market.

      I’ve been using these rallies to sell winners as well as losers, in part because I’ve noticed a lot winners get taken out in subsequent down turns.

      The Arbor Realty preferreds (ARR-A, ARR-B) are a name that come to mind in that regard. They were steady Eddies all through the fall down turn and then got slaughtered. I got out ahead of the drop, but am of two minds whether or not to rebuild the position.

  10. Hi Tim, I’ve started positions in GLOB-A, NCV-A, NCZ-A, ECCB, and PBB the last few days. I am kinda liking these prefs and owe much for the knowledge I’ve gained from you and the various commentators. GLTA.

    1. Jay–you are too much like me–a mixed bag of safety and not as safe.

  11. Its been a good couple weeks for me Tim. Flipped a few for gains, locked in some gains, and increased quality of preferreds owned and yield also. Getting a tip from Inspbudget today was icing on the cake today too.

    1. HI Grid–I saw you have been messing around with some of the MTB issues–guess I need more sock drawer issues. My best sock draw issue is a 5% issue – almost no movement over weeks. I could do some flip–but they would be ‘back flips’ at this point in time–ha.

      1. You gotta be quick on the draw to take advantage of dumps in the thinly traded area.

        CBKLP is another one that is rather compelling at this point, around $96.
        But I was able to pick up 5 shares of CNLPL at $53.96 – should have got more, but my open bid at $54 for 100 shares was NOT totally filled, just these 5 shares. Go figure – how that could happen, I have no damned idea.

        1. Inspbudget–just updating my %50 and $100 preferred pages putting 52 week highs and lows in listing for those that want to play like you and Grid.

      2. Tim, Inspbudget and I own a top tier 8.48% QDI that hasnt traded a 100 shares all year…Long live FIISO! :)…But I have others too such as MSEXP, CNIGO, CNIGP, and UEPCO off top of my head. On second margarita in Old Town San Diego so I wont remember them all, lol..

        1. I have had CNIGO for a long time.

          You can come back for more posts after your 4th margarita.

          1. Tim, I only had two, four would have made me sick…Back in old Midwest with you today again. I have studied Corning quite a bit and just love the two preferreds, but their common stock split a couple years ago cracked me up (and helped CNIGP long term, also). They did it to provide liquidity for the common stock float. Well if 6 people own 70% of the float, and they get basically all the new shares from split, but never sell them either, it doesnt really increase the float liquidity, lol.

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