Monday Morning Kickoff

Well here we go into what no doubt will be a wild week.

Last week the SP500 traded in a range of 2175 to 2629–an incredible 20% range–before closing at 2489.  This was a huge gain on the week and is highly likely to be a rally in a bear market.

The 10 year treasury, which for the time being has become fairly meaningless, traded in a range of .72% to .90% before closing the week at .75%.

The average $25/share preferred stock and baby bond closed the week at $20.40/share which was a gain of about 10% from the week before which was around $18/share.  mREITs are still the laggards at $16.01–even below shippers at $16.76.  We urge caution when buying the mREIT preferreds–after the bounce back in preferred prices last week there is potential for large losses if mREITs suspend dividends (those that have not already done so)–a 50% hair cut would like occur.  Investors should ‘leg in’ to any mREIT preferred purchases for another week or so.

Utility preferreds are at an average price of $24.12 which represents big gains for holders–we personally experienced these gains.  Additionally CEF preferreds closed higher and now are at $23.22.

A CASE STUDY ON CEFs

Investors should look at both Kayne Anderson MLP and some Tortoise closed end funds for what is total destruction.  Many of us feel fortunate that what was a ‘near cash’ type holding in Kayne Anderson MLP 3.50% term preferred (KYN-F) was redeemed a month or so ago.  KYN traded as low at $1/share–down from a 52 week high of $16.49.  Tortoise Midstream (NTG), which used to have some very nice term preferreds outstanding, closed last week at 99 cents/share–down from a 52 week high of $14.65.

Both of these closed end funds had broken leverage limits (they have debt and non traded preferred for leverage now), but it looks like while the common holders have been virtually vaporized, the senior security holders remain covered.

In the case of a very specialized CEF like the 2 above, which hold MLPs, they are self destructing when prices fall this fast.  The company has to sell securities to meet leverage limits, which causes prices to fall further, which requires more selling.

It actually looks like the companies are now in compliance with leverage tests as they did massive selling.  Here is an earlier statement from Kayne Anderson on leverage and how they handled it.

27 thoughts on “Monday Morning Kickoff”

  1. I really like your lists of preferred stocks ranked by “Alpha” and “Yield”. Can you explain how you determine Alpha? Thank you

  2. GLOG-C. Tim, I asked you about this last week, but you must have missed my question. This preferred is in one of your model portfolios. How do you feel about it? I’m trying to decide on holds and switches. Thanks.

  3. Good morning to Tim and Everyone; Is there anyone out there than can “explain” to myself and most likely many others as to “How” Bill Ackman turned an investment of $27 Million into a whopping “Mind Boggling” gain of 2 BILLION?????? I read where he did it thru “Credit Default Swaps”. I then looked up the “definition” of what they are but I still FAIL to understand how you can turn $27 million into $2 Billion. That would be something like a factor of 80 times your original investment!!!!!!!!!!!!!! Lets just put it on a much smaller scale. A $100,000 investment would have turned into around $8 Million Dollars!!!!!!!!! Not bad!!!!!! I hope this finds you all very “SAFE, SOUND, & HEALTHY”. On another side note there’s an interesting article over on S.A. by a guy by the name of James Kostohryz about how the market is going much much Lower. I for some reason have turned much more “Bearish” than I usually am for some reason. I guess I look at how this changes the entire country and also how millions of investors now have a whole new look at investing and what they buy and what they don’t. Most likely many have gone to cash just to preserve some kind of decent lifestyle. I feel for the Cruise Lines in particular as I just don’t see how they return to “Normal” for many years. Many millions of people have had their psychology destroyed over this.

    1. He didn’t invest 27 million, he committed to paying 27 million a month to put on the trade. It isn’t a good analogy, but the return profile of the trade is similar to buying an out of the money put that is now deep in the money

      1. “…the return profile of the trade is similar to buying an out of the money put that is now deep in the money.”
        *****
        Exactly. Say on Feb 21, with talk of the virus heating up, you have lots of gains in your portfolio, you are nervous about the market anyway, you don’t want to sell everything, but you would like some downside protection (see Tim buying SDS). So you buy some out of the money puts, maybe the SPY Apr 17 275 for .59. You buy 100 contracts, costing $5,900. You make that much every two weeks in dividends. Cheap protection if the market does blow up. Fast forward a month to Mar 23, all hell did break loose, but you haven’t sold a thing. You have some big paper loses. But your SPY puts which were purchased way out of the money can today be closed for around a $520,000 profit. Plus, your portfolio and your dividend stream remain in tact.

        I’m not sure what Ackman’s risk profile was on his deal, but the risk profile on this trade is clear your $5,900.

        1. Rick; So using that analogy would you do that trade today or do you feel we’ve hit pretty close to the bottom now??? I think we may have more to go on the downside myself. And in your example that would be a 88 Bagger which again would be an “astronomical gain” to say the very least. Maybe you should put on a class regarding this. I’m interested but have never bought “puts” or “calls”.

          1. With fear in the market, puts are much more expensive than they were when everybody was feeling relatively good. It would definitely cost more now, with the corresponding upside limited accordingly.

            Bottom? Who knows, really. IMO we likely have another couple thousand points (at least) to go, just not as violently (hopefully).

  4. CIM and NRZ commons and preferreds getting destroyed this morning…anyone see news on why?

    1. I saw reports that a large part of NRZ’s portfolio will NOT be covered by any bailouts announced to date/backstopped by the Feds. So down it goes on worries about how they will be able to handle this. Plus, I also saw some mention about ‘certain’ people being given up to 12 months of relief on loan repayments on their mortgages. Have no idea if this is just rumor or what – so I’m just sharing some things I saw this morning over on SA. Also, NRZ is expected to halt the divvy on the common and possibly defer the divvies on the preferreds.

  5. Pleased to report that Sachem Capital Corp (SACH) made their first interest payment on the recently issued 6 7/8% notes due 12/30/24. I was concerned as the stock went as low as $7+ and has bounced back to $15.17. Would you continue to hold or sell here? Thanks for the input.

    1. David,

      See my notice in the Reader Alerts section regarding SACH. Might be something you want to look into.

    2. David…Satchem just reported record revenue for 2019 and is sitting on a pile of cash from the issuance of their 6.88% note in November 2019. They’re having an earnings call tomorrow morning to further discuss their results and plans for 2020. In any event their note holders (SACC) are well protected in the near term and will continue to get paid, even if the common dividend is reduced/suspended.

      1. Sachem was lucky that they hadn’t deployed all that cash before the meltdown. Puts them in a good position to weather the storm. Unfortunately they just announced suspension of common dividend. But the baby bonds cotinue to get paid…

  6. Tim,
    There was a new NEE equity unit issuance last month that I don’t remember seeing announced over here.

    NextEra Energy, Inc. 5.279% Equity Units Due 3/01/2023

    Ticker is NEE-P and it is dual investment grade, no QDI

    1. Hi A4I–yes I have not covered the equity units as of yet. Will add once we get a couple months down the road from the Covid excitement.

      1. OK, no worries. Just wanted to let folks know about it since we have so many living in ‘uteville’.

        1. A4I, Got buried deeper in Uteville today. The long slow rotation of moving a chunk of cash back into more illiquid utes… Pleased with the progress so far. Dumping winners in the liquid that got my stash back on top again.
          Next focus will be pruning the subordinate debt bank issues I own.

          1. I tried to join you but wasn’t chasing anything in this tape. I did however, nibble a little more JPM-D. Both JPM-D (and JPM-C) as well as BAC-B held up extremely well in the crash and burn. Quickly, they have returned back to being well above par. That’s a CLEAR sign of strength to me and I’m all over that. Crosshairs have been focused on SREA, ENO, EZT, NEE-N and a few others.

            1. I didnt prune well at all day concerning banks, as I added ha. Bought more of AXO under $21 today. Need to prune some MER-K, AXO, INBKL at some point. Probably wont touch my ASRVP or CBKLP though.

    2. Another one to be careful of.
      No long term cap gains on this one and NEE can defer payments on it if they get in trouble. It also has phantom OID income that replaces part of the payments.
      Non-US holders should also be aware of the tax withholding.
      This isn’t as bad as some of the others, but holding it in an IRA is definitely preferable.
      Some brokers will get this dead on, but some may also have trouble with getting it correct.

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