Monday Morning Kickoff

The S&P 500 opened last week at 3024 which pretty much was the high for the week as the index tumbled by more than 90 points (3%ish).

The 10 year treasury traded at a high of 2.08% before the FOMC meeting and then tumbled all the way down to 1.84% before closing the week at 1.85%.

The Fed Balance sheet fell by a giant sized $24 billion last week.  Fed Chair Powell has now announced an end to quantitative tightening so we may quit following this down the road.

The average $25 preferred stock and baby bond was up another 14 cents last week to $25.25. We now have 139 issues trading at $25 or below–10 issues fewer than last week.

We had 1 new income issues sold last week.

Highland Income Fund (NYSE:HFRO) , a CEF, has sold an investment grade preferred stock with a coupon of 5.375%. The issue is now trading under the permanent ticker of HFRO-A and closed at $25.07 last Friday.

The Newtek issue announced the week before began to trade. Newtek Business Services (NASDAQ:NEWT) sold a new baby bond with a coupon of 5.75% and ticker of NEWTL (note that this ticker has been used before). They are redeeming their NEWTZ 7.50% issue. The new issue closed at $25.34 last week.

Disclosure–we bought small positions in each of these issues.

30 thoughts on “Monday Morning Kickoff”

  1. A sad day. I bit the bullet and went for 500 shares of STT-C at 25 stripped. So I settled for 5.25% until the thing is called. Which could be tomorrow.

    1. Hi Bob (or anyone else who can chime in),

      Did you pick STT-C over STT-E because E has a higher coupon rate and is therefore more apt to be called?

      C (5.25%) CY = 5.19 @ 25.28 callable anytime

      E (6.00%) CY = 5.88 @ 25.52, callable 12/15/19

      1. Amy, I own STT-E, bought at $25.38 several months ago.

        There will be 2 more dividends before First Call, so if you buy at 25.52, you would receive $0.75 in dividends – less the cap loss of $0.52 if called = $0.23.

        That is roughly a 0.9% return for a 5 month holding period – about equivalent to a money market fund. This is the worst case scenario where they call at FC date.

        But, if STT-E is not called, you enjoy a 5.88% yield until such time as called, so that would be the potential bonus.

        1. Innsbudget and Amy – I think I have some good news for you on your math. The more accurate way to calculate what yield you can get on this trade is to calculate yield to call as yield to maturity and to subtract the accrued but undeclared coupon amount from what you paid. So in your example of STT-E your “return” equals an annualized yield to 12/15/19 of 2.57% after subtracting the 22 cents of accrued from the 25.52 purchase price. The other good news on STT-E along with many bank preferreds apparently (thanks to affinity4 for opening my eyes) is that if it makes it past 12/15/`19, you’ll be guaranteed to own it for another 3 months since it’s only callable on a dividend payment date…So make it past 12/15 and your minimum yield to call would be 3.97%. Then finally, though I didn’t actually investigate this one specifically, I bet it like most is callable only after giving a minimum or 30 days notice so you’ll only have to wait until 11/15/19 to know if you’ll make it past 12/15…. It looks like there are more of these picking up pennies trades available out there than I realized. The final plus to these situations is that if the interest rate trends all of a sudden reverses direction and go higher, imho, a 6% Baa1/BBB credit has something like a 75-100 basis point cushion before it would theoretically begin to decline in value as a perpetual instead of a short dated (because of the call) security,

  2. Good morning, may I ask a question of the group? I own variable preferreds Met-A, CFG-D, RZA as examples. I don’t really understand why they are going down when the 10 year treasury is down? E.g, Met-A pays higher of 4% or the variable /spread over libor. As rates go down, I would think this is a good thing to have 4% ? THoughts?

    1. Debbie—a day like today the ‘baby gets thrown out with the bath water’. Folks get scared and hit the sell button. You are correct logically income issues go higher with lower interest rates, but there are times–like now, when newer investors simply want out.

      1. Thank you Tim and Gridbird, words of wisdom and much appreciated here. Given your reply Tim, is today a good day to add exposure to quality issues ?

        1. Debbie–not necessarily, although I just now bought BFS-C which is a quality issue, but likely will be called shortly, but there is no call risk at $25.10ish. It has been partially called before, but with a 6.875% coupon I will ride it until called.

          The real bargains I speak of are when a giant panic hits and shares fall a dollar to 2 or more–then I want some super quality cheap.

          1. Tim, funny I bought some just a bit ago myself. This is a tightly little controlled out. Probably the insiders getting out on a finish it out final redemption. But its money good even if it does happen.

            1. Grid–you must have seen yieldhogs note on SI also. I’ll take a good idea from anyone anytime. No matter it has no call risk and if we can squeeze an extra div out at 6.875% all the better.

              1. You are spot on, Tim….Throw me in jail for investor forum poster cerebral theft! 🙂

            1. Bob, I told myself if XOM went to $70 again, I would hold my nose and buy. It hit $70 so I bought a couple hundred. Nasty, hated sector, but basically plus 5% and going exD next week, I am trying for some yield here.

        2. Only very selectively. I ask the non rhetorical question of do you want a IG issue with a nominal yield of 5% and a yield to call (and likely to be called) of 2-3%? I hope not but if you do I can give you a list.

          Selectively, special situations are out there. Tim is right spot on with BFS-C. Whether it’s outstanding another day or another year it’s 6.875% yield to anything.

          Same on STT-C, but at 5.25% QID. BFS is not QID.

          Better times are coming. Lot of static in the air; something is bound to blow up.

        1. Different Tim, but I can answer – yes. If you look for I ton QOL, you can link to prospectus which spells it out/

    2. Debbie, on a relative basis, this is higher than a month ago, so Tims thoughts need to be appreciated for you. Now remember this is a bit of different issue. Not commenting near term but outlying birds eye view. But, sometimes these issues get caught in the middle. The promising aspect of this issue is escalating libor, and yield being carried over the floor minimum. So in rising rate environments or expectations of, they typically appreciate. Of course right now its the opposite. But counter intuitively if rates fall enough, the fixed floor minimum can compete against fixed floor perpetuals. So then the floor of its price becomes stabilized because of its attractive floor versus fixed perpetuals.
      Not now obviously but in some periods these issues can go down even though Libor and yields are heading up. How? Because if the yield is so far below minimum floor, market knows near term increases wont help the yield. If long term rates are rising and fixed perpetuals are yielding better then they become the more attractive own because fixed floor Libor “cant compete” in yield. So then it drops.
      FWIW, the chart shows its peak and descent with peak of increasing rate expectations last fall. So overall, its held up pretty good. And as fixed perpetual issuances keep falling in yield, this will ballast the price support of this issue.

  3. I bought a lot of $25 IG IPOs this year SREA was my last one and I didn’t sell any yet. Not counting divvys those IG were up average of 7.7% this morning open. That’s up over 2% from last week. The highest NRUC up 9.6% lowest SREA up 5.5%. See where they stand next Monday. Rope a dope for me with IG, kinda rhymes. Good golly Smoot Hawley rhymes better.

  4. Money market and h/y savings coming down. 3mCD I had matured, was paying 2.4 now I see offers at 1.9. My precious metal mutual fund that I avg’d into in Aug/Sep ’18 is up over 30% which is a nice “barbell” in the safety strategy. Maybe just “summer”.. maybe not! Bea

    1. sorry this posted twice? a message came up said “looks like you already said that?! so i did a small edit.. but both posted.. anyhoo best to all. Bea

  5. I see short term rates, money market and h/y savings coming down. 3mCD I had matured, was paying 2.4 now I see offers at 1.9. My precious metal mutual fund that I avg’d into in Aug/Sep ’18 is up over 30% which is a nice “barbell” in the safety strategy. Maybe just “summer”.. maybe not! Bea

  6. logged into my account to a big fat red minus sign. Mreits are only 12% of my portfolio but account for 50% of my loss today :*p

  7. Hi Tim,
    Saw this last Friday. Would like your view and others on whether this is significant enought to sell the FDUSL and Z. Thanks

    BDC STOCK WATCH: The stock price of Fidus Investment $FDUS has taken a hit because of one sudden and unexpected portfolio company bankruptcy, following an FBI raid ! Price down (5.6%)

    1. Hi Gary–I don’t know the specifics and don’t find the news—BUT in general you will see bankruptcies in the BDC sector of portfolio companies–that is the nature of the business they are in–they loan to more marginal (or sometimes just new) companies. Unless there is more news to follow I wouldn’t exit based on 1 BK as long as one holds their debt.

      1. Ok, thanks Tim. Along these lines, how do we tell which BDCs are CLO based and then how do we tell which are equity based CLOs vs debt based CLOs or do most BDCs hold both equity and debt ?

        1. This is the time when I remember why Bruce Miller, who wrote a conservative retirement book. Mr. Miller does not want to get into BDC’s because it is extremely difficult to analyze the financial statements which consists so many different positions. On the other hand, BDC’s can be very profitable for us income investors with the “correct” ones. The two which stand out with data well over the Great Recession are ARCC and MAIN. I hold significant positions on ARCC bought with my prior subscription to Rida Morwa and never sold any regardless when he gave SELL signal. Recently with the second quarter Earnings Call Transcript, I bought some more with some moderate unrealized loss. I sold my few shares of MAIN taking profit about a month ago. MAIN has proforma dividend of closeto 6% whereas ARCC has proforma dividend yield of 8.7%. When quizzed by analysts, ARCC management commented that they do not see any non accrual. Closed End Funds, according to Bruce Miller is another black box. I sold my UTF taking profit but kept on buying UTG which invests in utility commons plus juicy utility preferreds. Rida gave me this useful BDC LINK:

          I foolishly bought 150 shares of PFLT in April 2019 right before they reported 4 non accruals all in one quarter. According to BDC Buzz, who wrote
          “”PFLT has now had 9 out of 349 investments on non-accrual status since its IPO with a previous recovery rate of around 98%:” The chart looked terrible. Mrs. Brehm at Silicon made a post there saying that Factoid (no longer making posts at SA but somewhere else) gave signal to SELL.
          The Earnings report should be Aug 9,2019 estimated by BDC Buzz for both PFLT and PNNT. I intend to hold, the market seems to assume that PFLT has no chance to recover the 4 accruals.
          Scott Kennedy and perhaps BDC Buzz seem to be the two most credible BDC experts in SA. BDC typically shows good performance in bull market.

          1. Thanks for that info johnkcal, very helfpul. I agree that both BDCs and CEFs are sort of black box investments without more due dilligence. The link you sent will be helpful. Thanks again

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