Monday Morning Kickoff

With critical consumer confidence continuing to be measured at a very low level, relative to readings just 6 months ago, commons stocks, as measured by the S&P500 continue to move higher.

The University of Michigan Consumer Sentiment survey tells a different story than the stock market–this will not end well–although it may remain irrational for quite a long time.

The index traded in a range of 3354 to 3400 closing the week at 3397 which was 3/4% higher than the Friday before.

The 10 year treasury, which had closed at a recent weekly closing high of .71% the Friday before fell back to close at .64% Friday. Weekly jobless claims spiked up to 1.1 million versus a forecast of 910,000 which helped to keep rates moving lower. Is this the double dip fall in employment?

The Fed Balance Sheet grew by a pretty healthy amount last week–$53 billion–the largest amount since 6/10/2020. The Fed has announced plans for the period of 8/14 to 9/14 to purchase $80 billion in treasurys–so after modest purchases the last few weeks a large jump is no surprise.

The average $25/share baby bond and preferred stock moved slightly higher–up 13 cents/share. Banks were the strongest group – up 30 cents. Investment grade issues were up 16 cents, CEF issues up 4 cents and utility issues up 17 cents. mREIT issues were flat.

Last week we had 3 new issues price.

Prudential Financial (PRU) priced a new 4.125% Junior Subordinated Note. I am not aware that this issue is trading as of yet, but I believe I saw a few folks buying via their brokers bond desk in the $25.30-$25.40 area.

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Small bank holding company CNB Financial priced a 7.125% non-cumulative preferred. The issue is trading now under the OTC temporary ticker CCNEL and last traded at $25.26.

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Lastly lodging REIT DiamondRock Hospitality (DRH) priced a new cumulative preferred with a coupon of 8.25%. The issue is now trading under OTC temporary ticker DRHPP and last traded at $24.70.

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40 thoughts on “Monday Morning Kickoff”

  1. Sorry Maverick: I live in florida. Lots of friends and family in the health care field. I’m aware of the numbers you see and the numbers you don’t.What you are saying (sorry Tim for the diversion) is absolutely wrong. Not a false narrative, not a media creation — a real-life pandemic. No political agenda here. Please dont spread your false narrative on a site where we are all here for investment purposes. No disrespect intended, Maverick, but that’s just wrong and I won’t get into the analysis of why. I’m here for the preferreds and the knowledge of people (including you) in that arena.

  2. I’m surprised more people here didn’t buy KKR-C. 6% QDI. Sure it’s a convertible, but you got 3 years to sell it before that happens. Thoughts?

    1. The price of the convertible will move in lockstep to the common. Just because it converts 3 years later, doesn’t mean you won’t have a capital loss if KKR goes lower so that is an important consideration when looking at converts

      1. They shouldn’t even be called convertibles as that implies optionality and there really isn’t in these securities.

        1. What should they be called? “mandatory convertible” seems pretty accurate to me. You have the option to convert early too!

          1. Fair point but too many people are confused by these securities. How about Mandatory Exchange Preferreds. Takes away the word that confuses people.

            1. It is pretty established vernacular and explained well in the first page of the prospectus for anyone that cares to look. There is also the option to early convert prior to the maturity. Also there is implied optionality on the min/max conversion price/rate. They aren’t really straightforward but it is a good example of “know what you own”

              1. Mandatory Converts trade in lock step with the common.
                KKRprC $53.31 and $3.00 annual dividend. If the stock goes nowhere over the next 3 years you would get $9.00 of income and lose $3.61 in principal, for a total return of $5.39 or 10.11% or 3.26% annualized.
                If you own the common you get 1.55% annually in yield. So in this case the convert is slightly more attractive than the common.

        2. I think the good thing here is that most of us don’t assume anything. We sometimes ponder the implications of announcements, etc. But in the end, it is an investment vehicle and we read the ipo doc that was filed at registration time, and any amendments to that for the answers, or call their IR team. So they could call it a duck if they wanted to, and then we can sit in a circle and play duck duck grey duck… or is it goose?

        3. Look at Centerpoint: the common sells at 20.20 and the preferred for 37.99. The literal value of the preferred is about 37.50. The yield on the common is 3 but 9+ on the pfd. Why buy the common when you can triple your yield? An efficient market shouldn’t allow this big a gap?

          1. CNP converts in a year, and if the current price holds you get 1.8349 shares of common stock.

            With CNP at 20.20, that equals to about 37.06 of market value per share. CNP-B is trading at 38.00 so you are paying a premium of about $1 to get 3 dividends from CNP-B before it converts to stock. You also have to value & account for the changing conversion ratio if CNP appreciates.

            Subtracting the CY of each isn’t the way to go about calculating this.

            1. So the common equivalent is 45 cents times 1.83 or 82 cents. The preferred gets 3/4 of the annual dividend or 3.50 times .75 or 2.62 less the dollar premium or $1.62 vs .82. The conversion ratio is not close to changing and would only change if the price improves for both securities.

              Okay it’s only a double in yield, not a triple. I bow to your sharper pencil. That still seems to be an inefficient market and therefore a reason to be interested in mandatory preferreds. Note this only applies to broken mandatory preferreds and not new issues. New issues have much different risk characteristics.

              1. I’m not sold that this is as inefficient as you think. You can’t just ignore the short option you have on the changing conversion ratio, it is a risk you have to account for. The lower strike was in the money prior to March, a lot can change in a year. Also, you’re looking at CNP’s current dividend which was reduced from 30c to 15c in March, how are you handicapping the risk of a dividend increase? I’m not saying that there aren’t opportunities in mand/optional converts, there definitely are. This one is a little too skinny for me but good luck to you if you make the trade!

                1. So you don’t want to buy a busted convert at 39 because the conversion rate declines after the market price reaches 50? You also forget that by the time that a busted convert reaches 100 percent of stated amount the market awards a conversion premium of 5 to 10 percent so a preferred with literal value of 50 trades at 53 to 57 because of the conversion option. That dollar or so of premium increases to three to five dollars The amount tends to vary with the dividend rate, the volatility of the common and the remaining time. I have seen that occur on short term Sempra and longer term Broadcom. After a mandatory reaches 100 percent the of stated amount and the conversion rate declines, there can be strange changes except the conversion premium increases until the underlying common reaches the level with no further dilution to the conversion ratio.

                  The market is also inefficient because at times the preferred sells at less than literal value.

                  1. No, that is not why I’m not involved. I am not buying it because the trade isn’t juicy enough for me given the current prices of the security and its underlying. I have better uses of my capital.

                    The market is inefficient because there are at times price insensitive sellers or buyers. I’m happy to buy/sell/hedge any security if the expected return over the holding period is justified over other opportunities at hand.

          2. Analysis seems fair when you base it on the current price of the Centerpoint convertible. However, if you look at the IPO price ($50), the convertible becomes a terrible investment. I understand it should trade in lockstep with the common, but still, the convertible buyer wanted income but did NOT want to lose money. I almost never buy at IPO unless the issue is in a “real growth” industry, not a utility–which for me is a pure income play. BDX, BSX, AVGO are examples of convertibles from companies with POTENTIAL for capital gains (of course, the upside at conversion is more limited than if an investor bought the common, but there is a nice blend of income and growth potential). Utilities, no. By the way, the dominant industry in my preferred portfolio is Utes. I just think they’re not a wise play for income for a mandatory convertible IPO. Afterward, who knows?
            Tim, thanks as always for providing the best forum ever for the income investor!

            1. >still, the convertible buyer wanted income but did NOT want to lose money.

              I don’t actually agree with you on this. Convertible buyers willingly took the upside&downside risk of the common stock by buying a convertible. If they solely aimed for income, they were incredibly naive.

              1. Never said an investor wasn’t knowingly taking an equivalent common risk; most definitely a convertible offers upside and downside risk. I am saying, for the Utility Convertibles, it may be prudent not to buy at the IPO. In growth industries, a convertible seems to offer more upside (along with the downside risk). But for more weathered industries like UTEs, over time, the several convertibles I’ve followed eventually dropped about a year or two after the IPO, sometimes considerably. Of course this has a corresponding impact on the number of shares the investor gets at conversion (depending on the formula). But why go in at the IPO price when there is a reasonable chance that for a UTE convertible, the price will drop? You can’t time the market, but if an investor were to look at the last four or five UTE convertibles that hit the market (and this is over an six or seven year time frame), I believe all had price declines at some point over the first 24 months and Centerpoint is representative of this. Early this year, just before COVID “hit,” CNP-B was trading at $45-48, below the $50 IPO price. In my view, this was predictable based on other UTE convertibles. After January, all bets were off because of COVID. I acknowledge that for the first year or so after the Centerpoint convertible IPO, the price increased above par. But, it fell back as have the prices for most UTE convertibles a year or two after the offering. By deferring the purchase, some income is lost but, historically, this has been offset by the price. I do stick with my statement that the convertible investor does not want to lose money. No one does! It was an overly simplistic statement; thanks for calling me on it.

      2. Mcg – I agree with you that the preferred will follow the stock. I think this stock will probably perform better than SPX. Although I’m expecting a pullback at anytime in the market. The fib extensions for SPX projects to 4000+ over the next 3 years assuming our next President doesn’t shut the economy down again. If that happens we might be looking at the Great Depression 2. ATB

        1. I was never shut down effectively, which is why states have been on a roller-coaster of opening and closing.
          Look at the Sturgis motorcycle rally. You could easily see 200,000-300,000 additional cases from that one event, which should be causing hospitalizations to spike in the next 3-4 weeks.
          States like NY and NJ slammed the breaks on everything, and both have new transmissions under 1. (aka an R-0 number of less than 1)
          But places like Mississippi Texas and Florida have positive test results of over 10% to 20%, which means it is spreading out of control there.

          1. Sorry but this “But places like Mississippi Texas and Florida have positive test results of over 10% to 20%, which means it is spreading out of control there” is just a false narrative.

            All one has to to is look at the case curve and you can see the outbreak in Southern States was fear porn spread by the media. here is a graph comparing NY and NJ vs Southern States

            https://twitter.com/kerpen/status/1297690877004058626?s=20

            1. That graph is problematic. Notice when the curve starts turning down? Exactly the same time when they switched to HHS collection from CDC, (1st article, July 10-15) a database which is having all kinds of problems, and why they are switching back in the next few days. (2nd article) The decline was solely because of hospitals having trouble reporting their data to the database, not because the infections were under control.

              https://www.npr.org/sections/health-shots/2020/07/15/891351706/white-house-strips-cdc-of-data-collection-role-for-covid-19-hospitalizations

              https://www.npr.org/sections/health-shots/2020/08/20/904450628/white-house-stokes-hopes-that-key-hospital-data-tracking-will-soon-return-to-cdc

                1. No argument here.
                  The market looks like the dot com bubble, and everything is being bid out of sight, while the Fed just pumps liquidity into the system, and once the dancing stops, it will be bad.
                  That is why I am limiting myself to buying stuff right at par with stop orders in for par minus one dividend payment because i fear a repeat of March and would much rather own things with a cost basis of 15 than a cost basis of 25…

                  Two last links about COVID that worry me..
                  Right side of the graph:
                  Compare
                  Connecticut:
                  https://coronavirus.jhu.edu/testing/individual-states/connecticut
                  to
                  Florida
                  https://coronavirus.jhu.edu/testing/individual-states/florida

                  It isn’t an income investment if it falls to $12 a share, and a lot of REIT’s such as malls and hotels could be in for a lot of more pain.

      1. Haha…glad to hear that! I paid $25.40. I usually overpay for anything I buy but I was going to be especially disappointed with myself this time.

        1. Dick–as soon as I saw your note I thought ‘it was Dick who paid 25.40’–sorry for the startling error.

        2. Well in this instance, I paid even more! Vanguard quoted me $25.45 and I bought some.

          I still do not see it trading or its symbol to consider adding. Anyone else see it on their trading platform?

          1. I’m just curious why people are buying this Prudential BB? are you looking to flip it when it goes higher? Or just ok with the low yield? No judgment, just curious.

            1. I often buy IPOs and flip but doubt this one goes much higher as record low coupon.

              But I will be fine to hold it past a few dividends as it will be highest rated one in my portfolio for now.

            2. I am not buying but I suspect that a large part of the motivation is that the yield to worst for most “quality” issues is so low that a little more than 4 percent for five years sounds pretty good. What happens after the call protection is another story?

              1. Thinking about these issues in terms of yield to worst is probably helpful. For example, NTRSO ended the day at $27.61. It has a 4.70% coupon. The yield on current price is 4.27% and the YTW is under 2%.

                NTRSO is BBB+ rated just like the new issue from PRU. If my options are to either buy NTRSO or the new issue from PRU or sit in cash in an online savings account which yields under 1%, I think the appeal of PRU starts to show itself. Especially if you can buy PRU before PFF starts to buy it with reckless abadon because it is tied to an index. (For Simplicity, I’m ignoring the fact that NTRSO is QDI and the BB from PRU is not. However, look at PSA-M which is also not QDI and has a coupon of 4.125% and a BBB+ rating).

                On a related note, can anyone think of a reason why I shouldn’t sell my shares of NTRSO (besides letting the capital gain become long term a lower the tax bill)?

                1. how far are you from 1 year? Rates can’t go much lower, so I expect the inevitable increase in rates (even a modest one) to hit hard any preferred trading way over par with a really low YTW.

                  1. I’d be looking at around March 2021 to get long term treatment. I have a 10% unrealized gain currently. I don’t know if rates will rise before then…that seems quick but who knows.

                    1. If Biden wins as seems more likely right now, you risk him making the Long-Term CG going away (though I doubt he can actually getting this done for all tax payers as he has also said no increase for those under $400k).

                      Also, post election volatility may be far more than most of us expect …

                  2. Justin – I’d disagree with you on your premise. If a preferred is trading at its current price substantially above “par” because of its low YTW, then relatively speaking, the yield math will provide a cushion for the preferred holder of that issue when compared to what will happen to a newer issue with a lower coupon priced at “par.”

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