Monday Morning Kickoff

Ready to go for another week of excitement. Actually as we always write we can do without the excitement and have all stocks and bonds trade perfectly flat day after day.

The 10 year treasury opened last week around 2.97% and then spiked higher to 3.04% by Wednesday before closing the week back just below where the week opened at 2.96%. While closing the week at 2.96% the 10 year remains at the highest level in 3 1/2 years so now we will see if the rate goes above 3% and sticks.

The biggest item we have for the coming week economically is the FOMC meeting which starts Tuesday and ends Wednesday. No one is talking about any rate hike for May, but with a new Fed leader I don’t think one can count it out. A ‘surprise’ rate hike would be really disruptive to markets and honestly wouldn’t be warranted as the economy is fairly tepid, but the Fed is trying to ‘normalize’ interest rates and they might do something silly. We hope they wait until next month before moving again.

Today we have pending homes sales being announced as well as the Chicago purchasing managers index. Tuesday is the ISM Manufacturing index and the Purchasing Managers Index. Wednesday is the ADP Employment report–and while this could be meaningful, most will blow off any surprise number as it is not ‘official’ and wait for the ‘official’ number which comes on Friday. Thursday we have the Productivity and Costs index being released and this has some potential for moving interest rates as it has inflation components in the report–any inflationary indications will help to move the 10 year treasury above 3%. Lastly as mentioned above we have the Employment Situation report being released Friday and the expectations are for 190,000 new jobs with an unemployment rate of 4%. The expectations of wages is that they will remain flattish and any jump in the wage component of this report could also move the 10 year treasury.

The average $25 preferred and baby bond fell by 13 cents last week to end the week at $24.88 and there are now 217 preferred stocks trading under $25. This compares to $25.01 and 198 respectively last week–so pricing is getting more favorable for investors–slowly but surely. Investors sometimes think they are remaining flat in the shares, but over time–month by month they lose 1%—it is just a very slow drip lower. For buy and hold investors like us it is difficult to do much more than break even, but we see no reason to change our ways–it is for us the most comfortable way to invest and we will be happy with modest gains on the year.

We do note that the Fed ‘runoff’ started back on track last week with a $13 billion runoff–

Of course even at this rate it will take longer than most of us have on earth to run off the balance–but the point is that it is moving slowly in the right direction. This runoff when combined with new money being raised by the treasury will keep rates moving higher–regardless of economic vitality.

9 thoughts on “Monday Morning Kickoff”

  1. Thanks guys… I’m sure that Grid would not dare buy an issue past maturity and slapped with a 3% ‘penalty’. He’s way too disciplined for that!

  2. Are we speaking of term preferreds with those massive ‘penalties’ if they don’t redeem them on the maturity date or just any term preferred in general?

    You guys ever seen a time where a company didn’t redeem at the maturity date and just let it keep going? Was wondering how often this actually happens…

    1. GW, dont confuse the conversation with facts! :)…. Yes there are two types. I was thinking about RILYL term dated baby bonds. But there are the penalty ones too like some of the Gladstones. I have never been involved with a penalty one, that traded with penalty, so I dont have any personal experiences with what has happened there.

    2. Never see one that wasn’t redeemed on time–of course there could be a 1st but I hope I am not there to watch–I’m risk averse to hopefully be gone before it happens.

  3. I look at it like depreciation of a business asset, say, a sewing machine for example. Your portfolio is your working asset, but it’s going to sustain some wear and tear over the course of normal business activities, just like the sewing machine does. Sometimes it’s great and no repairs are necessary and you’re ahead of the game and sometimes you have to pony up for repairs and you’re down on your cash for awhile.

    Managing your own money is the very same thing as running your own private business. I would know, I’ve run more than a 1/2 dozen and I still do run multiple businesses. So I made business analogies in this context, for what it’s worth.

    You can also look at it like the ‘typical’ 2 sides of a porfolio, the fixed income and the common stock sides. Typically, when one side is up, the other is down and vice versa, depending on conditions. That’s why we need to ‘balance’ like we hear non-stop from the experts. Mitigation of capital loss is the game for some, maximizing returns is the game for others, others are just happy SWAN with securities they rarely have to touch.

    I think Tim is just trying to say that ‘downward creep happens’ and we’re certainly seeing that in perpetuals and longer term preferred’s. Little by little, they are dropping as rates rise or the fear of the same rises.

    1. Thanks GW–yes it happens and I am not ‘balanced’ as common stocks simply aren’t my thing now. It happens even in shorter maturity term preferreds by it is very small in amount and eventually you get out at $25. I want all term preferreds to be around $25 now–or lower–will take a little capital loss at this time to lock in a nice yield with a date certain for redemption.

      1. For me, that is why I like term issues that I am willing to buy. As long as company is fine, mentally, I see drops as only a chance to buy, not as a real loss since there is a near finite end date of $25.

  4. You said: Investors sometimes think they are remaining flat in the shares, but over time–month by month they lose 1%. For buy and hold investors like us it is difficult to do much more than break even, but we see no reason to change our ways–it is for us the most comfortable way to invest and we will be happy with modest gains on the year

    Can you explain this.

    1. Hi Ray–I simply mean that preferreds and baby bonds waste away a few cents at a time. For instance the average share is off about $1.50 in the last 18 months–some of it is because of higher coupons being called and replaced with lower coupons–BUT much of it is simply the slow drift lower because of higher interest rates.

      Shares don’t move in big dollar moves–but a slow drip lower which is barely noticeable.

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