Monday Morning Kickoff

Well last week can be described as exciting–holders of a basket of common stocks would likely describe it in more colorful terms.  For us and for other holders of lots of preferreds and baby bonds it was much less exciting as long term interest rates trended lower-although in the end we lost a little bit of money.

The DJIA traded in a range of 24,242 to 25,980 closing the week at 24.388.   While common stocks tried find to some upward energy a number of times, in the end, the bears won out.  The 10 year treasury opened the week at 3.04% and drifted down, down, down to close the week at 2.85%, the lowest close since mid August.

Last week we had vehicle sales released on Monday at a higher than expected sales rate of 17.5 million units against a estimate of 17.3 million units.  On Wednesday the Fed Beige Book was released and it showed that the consumer stayed relatively strong during November, but the housing market continued to face headwinds-neither of these are surprises-they confirm all data from previous releases.  Thursday the ADP employment report was released at 179,000 new jobs created which was a somewhat soft number and this was followed up on Friday with the ‘official’ government employment situation report which showed 155,000 new jobs created against an estimate of 190,000, but more importantly it showed wage pressures have moderated a bit rising .2% in November against a .3% expectation.   Consumer sentiment released on Friday showed a reading of 97.5 against expectations of 97.3.

For the coming week we have producer prices released on Tuesday followed up by consumer prices being released Wednesday.  Neither of these numbers are expected to show substantial inflation–the CPI is projected at +.2%.  These are the only bits of economic news being released next week that are likely meaningful, although on Friday we have retail sales, industrial production and business inventories being released.

The Fed Balance Sheet had a runoff of $11 billion last week–of course with falling interest rates obviously the runoff is not exerting much upward pressure on long term interest rates.

Last week we had only 1 new issue announced and that issue has apparently not yet been priced.  BDC Great Elm Capital (NASDAQ:GECC) announced a new baby bond early in the week, but has not, as yet, released the pricing details of the issue.  Guess we will have to simply wait.

The average $25/share preferred stock fell last week to $23.31  which leave the average share down 41 cents in the last 2 weeks and about 60 cents in the last 3 weeks–not a good November.  We have 285 issues trading at or below $25/share which is by far the largest number we have seen in the last year.

5 thoughts on “Monday Morning Kickoff”

  1. My question is related to closed end term target funds.
    Would like to buy a mixture of these types of funds
    Already own the ones you have listed
    Also own a lot of baby bonds, preferred and bonds.
    Have cash as I am tax loss selling to offset gains.
    Thank you

    1. Jonathan – if I may, a couple thoughts …..

      Some of the tickers listed are filled with a lot of junk. I mean real junk. Because term dated funds often have a short duration they try to goose returns by wading into the deep end on credit quality. Don’t buy a fund (term or otherwise) if you don’t like the components. Look at the aggregate fund stats as well as browse the schedule of investments. If you don’t like the ingredients you won’t like the dish.

      Also, consider some of the negatives of term funds that often go undiscussed. As a fund gets closer to it’s termination date the term structure becomes something of a noose. As holdings mature or get called, they get replaced. The replacements are usually either T-bills or issues that extend beyond the termination date of the fund. BSJJ, which terminates in 1 years is 75% invested in issues that extend beyond 2019. Some of them 10 years past.

      If it’s T-bills, the yields drop like a stone. If it’s longer dated issues you have a very considerable price risk when the fund terminates. If markets are down, the investments still get sold, whatever the price they can fetch. This forced sale eviscerates one of the main benefits of CEFs, that being the ability to not have to sell into bad markets, as both OEFs and ETFs do.

      You also often see a drying up of liquidity as the fund nears the end of its life. Just when you want to get out of a fund you can’t. You ride it out to the end, no matter the declining returns and termination price risk.

      An alternative: accomplish the same goal of laddering (or limiting duration risk) with non-term dated CEFs. If you look through any CEF fixed income category you will see a wide dispersion of average maturities/durations. If you wan’t to ladder in – say – munis, pick 3 CEFs with durations on the short end, middle, and long ends. You’ve got your ladder, without the drawbacks of term dated.

      In any event, be careful on entry price with all CEFs. How much you earn over time has a great deal to do with what you pay upfront. Also, the yield curve flattening is hurting all leveraged CEFs now. A big chunk of what they earn comes from the carry by borrowing short term and investing long term. Right now, that carry is worth very little.

      I’m watching the CEF world very carefully now, waiting to see some indication that the yield curve is not going to flatten further. When that happens there are some great CEF bargains to be had.

  2. It may be some time before we see the next GECC baby bond. The red herring came out on the 4th. Once that happens the underwriters are out beating the bushes for takers. One those are lined up the FWP or final prospectus comes out. That usually happens the next day, and sometimes even same day. We are now 6 days out and counting …..

  3. The market is looking horrible again for equities this morning with the DOW now off by over 480, close to 2%. Those two-year CDs at rates of a little over 3% are looking good for fixed income investors now.
    While the site does not have any individual bonds listed (yet), my small bond portfolio is holding up very well over the past couple of weeks. With decent yields of about 7% on preferreds/baby bonds right now, I’m not sure why people are so interested in keeping a majority of their funds in the stock market. I must assume they just don’t know about these types of securities.

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