Monday Morning Kickoff

Last week it looked like the “tension on the tape” was broken, but then the markets again settled into tight ranges of trading.

The S&P500 traded in a range of 2896 to 2940-closing at the high for the week. Tuesday the index moved up about 1% – this was the only day that showed much movement at all.

The 10 year treasury moved in a range of 2.50% to 2.59% closing the week at the low yield around 2.50%. This occurred despite the reported 3.2% growth in 1st quarter GDP which was reported Friday.

The FED balance sheet assets fell by about $3 billion last week. With the strong GDP you can be certain that the asset runoff will continue–and probably even some talk about a FED Funds rate hike will start. It is simply way too early to worry about any further rate hikes in 2019. I had originally (last year) predicted (guessed) that we would see a hike in June–but that won’t happen.

The average preferred stock and baby bond ended the week at $24.80/share a move higher of 8 cents over the previous week. There are now 231 issues trading at or below $25/share compared to 244 last week.

Last week we had new preferred stocks announced by Regions Financial (NYSE:RF) and KeyCorp (NYSE:KEY). RF sold an issue of fixed to floating rate preferred with an initial coupon of 5.70%–it is trading on the OTC Grey Market under ticker RXFCL and last traded at $25.44. KeyCorp sold a fixed rate, investment grade preferred with a 5.625% coupon. The issue is trading on the OTC Grey market under ticker KEYLL and last was priced at $24.92.

Energy Transfer which had an new issue trading on the Grey Market under ticker ETPEP has seen the units now moved to trading on the NYSE. This is a fixed-to-floating rate (7.60% initial coupon) which starts trading under ETP-E immediately. The shares last traded hands at $24.95.

Also the Sotherly Hotels (NASDAQ:SOHO) has seen their new 8.25% preferred move to their permanent market for trading. It last changed hands at $25.23 under ticker SOHON.

Lastly REIT UMH Properties announced a re-opening of their 6.75% UMH-C preferred. They initially announced a sale of 2 million shares, but that was upsized to 3.6 million shares which put plenty of pressure on the issue. Shares fell from the $25.70 area all the way back to the $24.80 area and closed the week at $24.86. I took a position on the fall and I am looking to exit with a 1-2% gain (we hope) in the next few weeks. NOTE the issue goes ex-dividend on 5/14/2019 so we would be comfortable holding through the ex date prior to exiting.

22 thoughts on “Monday Morning Kickoff”

  1. Gridbird, I also am trying to stay “sane.” I did succomb to the Drive Shack Preferreds. This company continues to lose money. In addition it just bonused $ 1 million to the former CEO who was relieved of her duties due to opening the most expensive golf attraction failure in the history of golf. I am exiting this one.

  2. Just saw this about bonds…
    Junk bonds, the riskiest corporate bonds, have had a default rate of just 2.6% per year over the past five years. That’s lower than the historical average of 4.2%, and the bonds most likely to default were the junkiest of the junk. Bonds rated BB, the junk bond rating closest to investment grade, had a default rate of just 0.18%.
    Over the past 32 years, bonds with an investment-grade rating had a miniscule default rate of 0.1% per year. In other words, odds were 1 in 1,000 that these bonds would default. And no investment-grade bonds have defaulted in the past 10 years.
    The individual investor should act consistently as an investor and not as a speculator.
    Nomad

    1. Nomad, as long as liquidity, no credit lock ups, tight spreads, decent economy, and thirst for yield continues…Its party on Garth! I am trying to stay reasonable disciplined and stay in character.

  3. Good Morning Tim,

    My FED calendar from early January indicates a rather large tranche of $30B UST and $10B MBS will be sold this week. This would be the largest weekly sale of FED assets in the past two years if it goes through on schedule…things could get volatile.

  4. I am new to this site so I apologize if this question has been asked before. Are the preferred shares issued by mlps such as ET suitable for investment by IRAs. I read the prospectus but frankly couldn’t understand the tax treatment.
    I appreciate anyone’s assistance in answering this question. TIA

    1. MLP preferred distributions are usually listed as “guaranteed payments” on the K-1, so there is no UBTI. I don’t hold any ET preferreds so I don’t know specifically what they do.

    2. MLP prefs are fine for a qualified account PROVIDED they are not going to generate UBTI in appreciable amounts. That includes most of them but you can check on the issuer’s web site to see tax status of past distributions to be certain (relatively speaking).

      I own DCP-B, ETP-C, GLP-A, NGL-B & NGLS-A in qualified accounts with zero UBTI.

      REIT preferred are also good, and never a UBTI issue.

      1. I sure can’t find any information on ET’s website about past or future UBTI. Did I miss something?

        1. Maybe, but in any event ETP-C had zero UBTI in 2018 and I doubt very much it ever would.

          If you don;t find info on the website or other place online call the company IR people. That’s what they are there for.

          1. I doubt it too, but the point is that ET doesn’t provide any guidance on the issue, on their website or elsewhere.

            It’s also been my experience that IR people will do anything possible to weasel out of answering tax related questions. Here’s an actual IR response that I got recently when I asked about the tax characteristics of a REIT’s 2018 preferred distributions:

            “With regard to tax related questions, please speak to your tax accountant. It is a general rule that we do not provide tax advice or respond to tax-related inquiries.”

    3. I invested in K1 assets with my IRA and outside of my IRA last year. When I went to enter the IRA K1 schedules into turbo tax, they came back and told me not taxable.

      The way this works is the brokerage needs to determine whether the K1 has UBTI taxable or not. This is not yours to do. They pay the taxes (apparently from your IRA) for you. They will issue a 10xx form to you. Not clear if you have to amend your annual tax filing if they do since many K1’s come in late (I believe my AGO in my taxable accounts came in 1st week in April).

      As some posters pointed out, the tax rate on UBTI’s in an IRA is rather steep.

      For me, I have decided I would rather own a closed end fund that pays dividends in effect turning K1 income into dividend income. Of course, CEF’s are leveraged.

      1. To clarify a bit, K-1s in a taxable account are entirely your problem. Goes on your 1040. You pay the tax.

        K-1s received inside a qualified plan are your custodian’s problem, at least with respect to UBTI. They file the 990-T return if need be and use money from inside the qualified plan to pay any tax due. The 990 is a separate return from the 1040. It has its own due date with an extension filed (by the custodian) if required.

        Owning MLPs through a CEF is certainly one way around the K-1 issue. But if you go that way avoid funds that pay out all QDI, as the tax benefit is wasted. KMF is a good choice for qualified accounts as its all non-QDI and ROC (which you won’t need to recapture at any time as you would in a non-qualified account). KYN, by comparison, is 100% QDI and is better in a taxable account.

        1. Hi Bob, you wrote:

          “…..and ROC (which you won’t need to recapture at any time as you would in a non-qualified account). ”

          This is interesting. I thought we had to pay tax on the recapture when we withdrew the money from an IRA….???

          If we sell a MLP in an IRA, I don’t think we pay anything on the recapture at that time because it’s in a tax advantage account but I thought that we had to pay the piper when we took the money out of the IRA.

          ??

          1. The tax rules on MLPs and K-1s in an IRA are tricky

            The sale of an MLP triggers a recapture of those deductions that allowed the distributions to be tax-free in the first place. Instead of a capital gain upon the sale of the MLP, that recaptured amount is taxed as ordinary income, and the cost can be significant. In extreme cases, the entire gain might be taxed as ordinary income. The trickiest part of this is that the recapture amount is unknown by the investor until it’s reported on the K-1
            issued in the year the MLP is sold.

            Now the way this is handled in an IRA is part of the 990-T filing for UBIT.
            There are two components to UBIT
            1. Those amounts reported on your K-1 each year
            2. The recaptured amount calculated when you sell you MLP. These numbers can be substantial

            While you may skate by without ever triggering a necessary filing from item 1 (under $1,000 a year). You can generate large recpature amounts from item 2

            Here is one decent summary

            https://content.rwbaird.com/RWB/Content/PDF/Help/Taxation-Master-Limited-Partnerships-FAQs.pdf

            1. Hi Maverick,

              I am in a couple of chat groups where UBTI is constantly being discussed but I always try to remind people that there is 1) annual UBTI and 2) UBTI upon sale.

              I find that most people focus on #1 and forget to consider the tax consequences of UBTI upon *selling* MLPs in an IRA.

              1. Amy – I agree with you to the point I won’t put MLP common in a qualified account any more. They go in taxable.

                Prefs in a qualified account are fine (great), and they are one of my biggest Roth holdings.

              2. You are correct Amy. Most people focus on #1 and not on #2 – (the UBTI on a sale)

                I have over a couple of years sold most of my MLPs in my IRA and replaced them with a couple MLP heavy funds. I still hold a small number that I couldn’t bring myself to sell but because the recapture amounts are taxed at ordinary income rates, those taxes can be a shock to people

            2. Mav – you laid it out very well. Accounting for MLP sales in a qualified account is a horror, which is why I no longer put MLP common in a qualified account. I will put prefs in a qualified account, after checking what the K-1 is going to look like and making sure no ROC or UBTI. Usually there is none.

              The recapture thing is especially evil. You pay ordinary tax rates on what in many cases would have been qualified dividends. Same is true of other investments held in a regular IRA (but not a Roth). Reverse tax arbitrage!

              1. Thanks. I agree, the recapture aspect in an IRA at ordinary income rates is not pleasant.

          2. Amy – you are correct about recapture in an IRA. I was thinking Roth, but didn’t say that.

            I have all Roths so I’m not used to thinking in non-Roth terms.

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