Monday Morning Kickoff

So another week is gone and for many investors it was an exciting time and obviously for many it was a panic time.

Interest rates traded in a fairly wide range as the movements in the stock markets drove rates down to 2.75% for part of a day (a flight to safety), but by and large rates (10 year) moved in the 2.82% to 2.89% area. We would expect pressure on rates to continue with the lower end being 2.80% and the upper end being 2.90%–for now at least as we await further economic data.

On the economic data front the most important number coming out next week will be the release of the CPI (consumer price index) on Wednesday, February 14. Year over year change is estimated at 2% with a range of predictions of 1.9% to 2.3%. Given that the FED is focused on inflation any deviations outside of this range could move markets–in particular in the interest rate complex.

After a big week of run-off of the FED balance sheet a week ago the FED actually increased the size of the balance sheet in the last week by $1-2 billion–more or less a rounding error. A week ago we wrote on what we think the outcomes of ‘quantitative tightened’ will be and it isn’t good if the FED goes down that path without adjustment on the way. The bottom line is they can run-off assets on the balance sheet or they can raise interest rates–but not both.  We shall see.

Preferreds took a bit of a hit of 6 cents on the average share (of course averages don’t tell the whole story).  We were disappointed that even the short maturity term preferreds and baby bonds moved a bit lower as the ‘spillover’ from the constant equity poundings finally drug them a bit lower.  We opined this may be coming as it always does when there are multiple day downdrafts in equities.  Of course we have been in a ‘Goldilocks’ market so long our expectations are likely a bit high.

We have 223 issues trading under $25 compared to 219 last week so with the minor price pressure and the modest change week to week in issues under $25 we may be moving to a more stable period.  If interest rates stay in our expected 2.8 to 2.9% during the coming week we may see a modest bump up in prices this week.

A few new issues traded through their 1st full week such as Fidus Investment (NASDAQ:FDUSL)5.875% baby bonds trading at $25.05 while the Jernigan Capital (NYSE:JCAP-B) 7% perpetual preferred fell a buck on Friday to trade around $23.

Sotherly Hotels (NASDAQ:SOHO) announced a new baby bond issue with a very short maturity of 3 years and a pretty decent coupon of 7.25%. A quick review of SOHO’s financials show a reasonably strong, yet small, lodging REIT. This issue is high on our list to purchase this week, both in model portfolios as well as personal portfolios.

In addition to the Sotherly baby bonds we are looking for 2 issues for the  high yield income portfolio which should get that portfolio oever 50% invested–additionally we may add some of the KIMCO common shares (NYSE:KIM) simply because we believe there is some decent capital gains that may occur with KIMCO, but we would rather miss a purchasing opportunity than to buy it too early.  For us a $14/share price (or slightly under) would be a good purchase price.

Tonight (1 am CST) the DJIA is up 175 points on the futures while the 10 year treasury is trading with a higher yield in the 2.89% area.  Hopefully we will see the 10 year treasury trade down in yield during the course of Monday as we think the next potential breach of the 2.90% area will be with the release of the CPI on Wednesday.

Good luck to all as we likely enter another exciting week.

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