Moving Into a Downward Tilting Goldilocks Phase

Talking about common stocks it sure looks and feels like we are moving into a Goldilocks phase–with a downward tilt. No one can foresee the future and we don’t have many more ‘bailout’ programs left at this time to ‘juice’ the market.

Seems to me that folks are slowly accepting that the economy will be in rough shape for many quarters–fortunately folks are not panicking just slowly rotating their holdings.

In the arena most of us play in – preferreds and baby bonds, the deals are likely gone for now–the panic selling done. From this point I think most deals will come in reaction to individual companies having issues–many in the REIT arena and in particular mREITS, lodging REITs and I suspect in some of the triple net lease issues. These will all play out over the next 12 months.

We are now getting the reports of the damage in the collateralized loan obligation area. Oxford Lane Capital (OXLC) has released their NAV (net asset value). The company burned up almost 50% of their NAV since 12/31/2019—ouch. The company will continue to pay a couple monthly dividends already declared but then likely will suspend the common dividend there after.

It is very interesting to watch the term preferreds from Oxford Lane–they have 3 issues outstanding. They are trading with current yields of around 8.5%–not bad for junky issues. This is a test of the asset coverage rules–they have to cover preferreds by 200% and debt by 300%–my suspicion is they have broken coverage.

I have written before that Oxford Lane, Eagle Point Credit and Priority Income (all CLO holders) would have challenges in a recession. Because of their structure–no matter how poorly the common shares do, I think they will eventually be just fine–no guarantees however.

Just like the above issues we will wait to see howly poorly the financials are in the business development sector (BDC). Undoubtedly there will be significant damage—if you are making loans at 15% you have to know that there will be defaults a plenty. These announcements in the future may create some deals for us in the BDC baby bonds–only time will tell.

Today the only activity I have done is that earlier today I let go of 1/2 my SDS short hedge–still hold a little, but with panic maybe waning I think I don’t want to be too short.

47 thoughts on “Moving Into a Downward Tilting Goldilocks Phase”

    1. JDA,

      As a registered closed-end investment company, OXLC is required to comply with the asset coverage requirements of the 1940 Act and the Articles Supplementary governing OXLC’s Preferred Stock. Under the 1940 Act, the Fund may not issue additional Preferred Stock if immediately after such issuance the Fund will not have an asset coverage of at least 200% (defined as the ratio of the Fund’s gross assets (less all liabilities and indebtedness not represented by senior securities) to its outstanding senior securities representing indebtedness, plus the aggregate involuntary liquidation preference of OXLC’s outstanding Preferred Stock). In addition, the Articles Supplementary governing OXLC’s Term Preferred Shares require that the Fund have an asset coverage of at least 200% as of the end of each fiscal quarter. If the asset coverage is not at least 200% as of such measurement dates, OXLC may not be able to incur additional debt or issue additional shares of Preferred Stock and could be forced to sell a portion of its investments to repurchase or redeem some shares of Preferred Stock when it is disadvantageous to do so, which could have a material adverse effect on the Fund’s operations. Further, OXLC may be restricted from making distributions to holders of the Fund’s common stock if the Fund does not have asset coverage of at least 200%.

      1. Affinity thank you. interestingly, in order to cure the ratio shortfall,
        they may have to buy back some prefs at par, well above current mkt.
        below, i dug out the covenant on OXLCP.
        please advise if anyone thinks differently:

        “Mandatory Redemption for Asset

        “If we fail to maintain an asset coverage ratio (as defined below) of at least 200% as of the close of business on any Business Day on which asset coverage is required to be calculated, and such failure is not cured by the close of business on the date that is 30 calendar days following such Business Day (referred to in this prospectus supplement as an Asset Coverage Cure Date), then we are required to redeem, within 90 calendar days of the Asset Coverage Cure Date, shares of Preferred Stock equal to the lesser of (1) the minimum number of shares of Preferred Stock that will result in our having an asset coverage ratio of at least 200% and (2) the maximum number of shares of Preferred Stock that can be redeemed out of funds legally available for such redemption. Also, at our sole discretion, we may redeem such number of shares of Preferred Stock (including shares of Preferred Stock required to be redeemed) that will result in our having an asset coverage ratio of up to and including 285%. The Preferred Stock to be redeemed may include, at our sole option, any number or proportion of the Series 2027 Term Preferred Shares and other series of Preferred Stock. If the Series 2027 Term Preferred Shares are to be redeemed in such an event, they will be redeemed at a redemption price equal to their liquidation preference per share plus accumulated but unpaid dividends, if any, on such liquidation preference (whether or not declared, but excluding, interest on accrued but unpaid dividends, if any) to, but excluding, the date fixed for such redemption. “

        1. Sounds like you’re on the right track for any of the companies required to meet debt covenants. Personally, I do own OXLCP but will be liquidating it. This is no longer a pool in which I wish to swim in. There are far easier things for me to understand that have a helluva lot less risk to them. Ute and bank preferreds/ETD, and quality common stocks is where you’ll find me with my shades on. Good luck to you though, if you are going to ride it out with them.

          1. i’ve not been a fan of the CLO space for some time.
            i just wanted to follow thru to the conclusion on this issue.
            agree it has a level of complexity that i am avoiding.
            cheers and thanks!

            1. Yup, CLO related companies and mortgage servicing companies are now in the ‘off limits’ bin for my portfolio’s. Much lower hanging fruit to pick these days. Maybe this announcement means that NRZ-A and NRZ-B will pop $10 bucks a share tomorrow so I can unload them?? Ha!!

        2. jda – there’s one important clarification (I hope) in what you are saying and it’s one I hope is important….. OXLC will not be “buying back” preferreds at par should this happen, least I hope not… They will be “redeeming.” The difference is that if they redeem I would expect that to be pro rata for all holders as opposed to there possibly being a food fight to get one’s shares to be the shares that are bot back. A4I are you implying the “Business Day on which asset coverage is required to be calculated” is officially only once per quarter at the quarter’s end? I own some OXLCO in my “let’s see what happens” folder, but did cut it in half recently… I bot in to theoretically take advantage of the recent partial call but got caught with the remainder before I could unload. So now the dregs are relegated to “let’s see what happens” and let’s see how good 1940 Act protection turns out to be.. …

          1. 2wr,
            What I posted came verbatim from the prospectus. I just did a simple copy and paste from the applicable section. But yes, that’s how I read it. Once they compile and file their quarterly paperwork and find themselves coming up short on the coverage ratio – somebody better be getting out the midnight oil to burn because they’re gonna need it. I guess we’d have to dig into the 1940’s act to find out what kind of timeframe they have to get back into compliance and what not, to know more. I would ‘guess’ they would need to get it resolved within that quarter that follows them knowing they are below the threshold. Certainly seems like a reasonable amount of time to get things squared away.

            The redemption issue you raised does take an interesting aspect. Maybe instead of pro-rata, they do FIFO or who knows what else. Very interesting question as to how they would redeem. I haven’t a clue how that works.

        3. jda–they may well sell common shares to cure a asset coverage failure–that would be more typical than preferred purchases–but Tortoise MLP fund just (last month) did a huge senior security repurchase, but off course had to sell holdings to get some cash for the repurchase. The problem with this is that the more securities sold the lower the price goes–although they may negotiate a sale privately behind the scenes.

          Here is how Tortoise dealt with the coverage failure.

          1. @tim et al thanks everyone for posting on this subject.
            very relevant in this environment.

  1. Just now on tuesday morning listening to Christopher Ailman who is the CIO of CALSTRS who has over $227 Billion under their management. He said he really can’t understand this strong market as it makes no sense to him whatsoever. Its like people are not paying attention to all these business’s struggling and many going out of business. I’ve been thinking the same exact thing. Here’s a case in point for you: AAPL was $227 back in March and today its $297 which makes no sense in my opinion. A move of 31% in just a matter of around 6 weeks. Crazy.

    1. Chuck P: I’ve been wondering the same thing. Regarding AAPL, considering the world economy at least for the next year, will the same number of people be buying $800 dollar or even $400 phones when $100 phones are available. No matter how good a company, if the market changes revenues change.

      1. The answer for the majority, is yes – plenty of people will forego paying their rent or paying a car payment or two in favor of getting a new phone. Sounds silly to those of us who are fiscally responsible, but then again, if most people were fiscally responsible, we wouldn’t be where we were before the ‘crisis’ hit. Credit card debt at all time highs, personal savings at all time lows, yadda yadda. I caught my last swath of AAPL common shares $65 ago on 3/23. They have a lot more going for them then just selling phones. Services and wearables are the latest areas of interest – but the coming 5G flood of phone purchases will propel them towards $400 IMO. I’ve also been playing much of tech via XLK.

        1. Hello my friend Affinity; I really wish I had bought a whole lot more back when it was at $227. I did pick up 220 shares but thats not near enough to quench my thirst. Ever since I heard Warren Buffet call AAPL the greatest company on the planet it really got my attention big time. As you probably know his position in AAPL is now over $72.5 BILLION DOLLARS. Sometimes, I get mad at myself over these things. I can’t believe how all these common stocks have shot straight NORTH. Truly an unbelievable experience. Same goes for all the high quality preferreds. Now very expensive. Well I guess none of us should bitch too loudly as over the last 2 weeks we’ve done quite well.

          1. Hey there big guy,
            You and me both! Will take one helluva big problem to bring it back down to the $220-$230 range. Oh well. Until I feel more comfortable with buying it up here in nosebleed territory, I’m fine with picking it up alongside all of the other great names in the XLK. Same with Microsoft. If I could again be buying it in the $50’s like I started out doing, I’d be laying on my private beach now typing this. But, the woulda-coulda game is a losing one, am I right?

            I think we’re doing just fine and I don’t think the market has gone exceptionally far – exceptionally fast. A bit rich? Sure, but attribute the positives mostly to the Fed and a lot of the negatives to the way many people have lived their lives without much regard for saving money. Folks have been commenting here for a very long time about how this was going to catch up to folks, one way or another. Covid was just the straw that broke the back.

            I’m still finding bargains – or what I think are some that are left at decent prices for the risk. For example, ute DUKH, ute PPX, or REIT PSA-E. All are dual IG…. lower yields, but I care more about the dual IG right now than I do another 1/2 point or so of yield.

            Liquidated UNUM today after it lost its single IG rating. Been liquidating GIS and buying more SBUX just to name a few.

  2. Speaking of BDC’s did you see HTGC earnings from last night. Seemed pretty decent so far, but clearly the loan defaults are probably 2nd/3rd QTR events.

    1. ChrisW – on the other end of the spectrum, did you see CPTA? suspended dividends, and not in compliance with debt covenants on senior secured credit facility a/o March 31…. The rich get richer and ………….

    2. Chris W – Thanks for the heads up–yes they look decent. With the ‘fake economy’ we have right now I think you are correct that it will be 3rd or 4th quarter before we know the real story. So many loan programs out there for eligible companys–I suspect most of the companys can get by a month or two—but 3,4,5 months or more will definitely tell the story. Additionally these bail out programs are likely to create bunches of ‘zombie’ companies–those that will never survive long term, but will hang by their fingernails for a long time. I think in the fall we may have the opportunity to sift through some of the BDC baby bonds and preferreds searching for the winners.

  3. Stepping back Grid, what I see is computer monkeys which is a program written by humans so some of the program reflects the human aspect. Same as the trading programs written today. Written by humans will do the same as humans. Scan for current news, watch for downward and upward trends and trade on those.
    Your back to the principles of researching the company to see if its metrics make it a good investment.

  4. Tough markets for everyone now, but if there is a recovery in the next couple of months – there are many REITs trading at attractive values at the present time. While I’m not a buyer of Kimco yet, they could be a play in the next couple of months if the US can open up again.

    1. k-lou, Same is very true of CN energy prefs holding good DRBS ratings…with the same caveat.
      I see clearly the well documented human behavioral element in this market. When all the shadow players are in, there will be a blast of media to support them, probably a trumpet player will come down your street.
      ‘So tell me boy, feelin’ lucky?”
      Very best for YOU!

  5. Bought a couple 5% sock drawer issues a couple percent lower than where I recently sold similar issues. Don’t know if that’s a wise move or not, but that’s my game. Added a little to a short fund at the closing mini-rally.

    1. Tim-
      I think that we are actually in the middle of some very major shifts in investment allocations. With the government issuing dollars at a high pace, the buying power of the dollar is bound to be impacted. For this reason all fixed rate investments have to be reconsidered. In fact there should be a shift to very high quality equities and perhaps gold or other commodities. This is a major shift in thinking and not one many are prepared for.
      Further, in an uneasy world, index funds and all other passive founds are likely to see massive departures. Once again we will see the reward for active management. But that said, selection of limited high quality equities can probably be a safer alternative to funds.
      Lyn Alden Schweitzer (sp) had a couple of relatively clear pieces on SA which tried to explain this situation. For me her analysis of the problem was a clearer than how to handle it but that is me.
      I’m not denigrating fixed rate, rather I’m concerned about the longer term viability of fixed rate in a period of reduced buying power. Would be interested in other thoughts.
      P.S. the talk of allowing states to go bk only makes things more concerning. How responsible politicians could even consider such an option is beyond me.

      1. SC; I too read Lyn Aldens writings. She is incredibly smart for sure. Can you give us 3 or 4 of your current favorites??? I see where UBS just today said WFC is now a sell in their opinion. Just a couple weeks ago their CEO said they were well capitalized and should be fine. Maybe like Tim said a few weeks back maybe a person shouldn’t watch CNBC all day. I own a ton of WFC preferreds. Will sell some in the morning.

        1. chuck
          I think that this is a major shift in investment conditions and to be honest, I’m not fully into it but high quality ideally with dividends is nice i.e. BMY.
          But most of these which will survive are large high tech firms who pay little or nothing names such as ma, v, msft, googe to suggest but a few. Banks may have their own problems. I do own some bank preferreds but am not sure about that. My real issue is if Lyn is right then holding a large collection of munies could be a real problem. I don’t think we have seen our way through this. Lyn also has a list of firms she likes but you need to be a mind reader to understand some of her choices which is why I said that she seemed better at describing the problem than offering a remedy which I was comfortable with. In all events time will tell if this rather glum expection turns out to be correct.
          p.s. for gold hold phys, cef, iau. but each to their own. best sch

          1. sc and chuck P
            I have read several of Lyn’s articles and am impressed with how she lays out her analysis, but remember she is also a gold bug. Not saying she is wrong, just also look at what she has written and even she notes “our” government in the past manipulated the value of gold.
            Things that make gold valuable happen quickly then its over for the appreciation of the metal for many years if not decades.
            Some places in the world it has great value, think how wealthy you would be in Venezuela, or Syria if someone didn’t take it away from you.
            Silver is valuable, so coins made out of real silver are more valuable than our current money.
            I went to coin shops and bought up all the old silver French, German, Dutch, etc. that I could find. People always come back from vacations with pocket change. This was before going on a trip to Europe. I figured it had to be the same over there as it is here and I could trade it for currency over there.
            Guess what ? ah ha. no one wanted it. The governments said it was no longer legal currency.
            Having a little precious metals in your savings might be good. just saying even in the Great Depression as Lyn referenced to there were even more things valuable.

      2. sc, Potential for reduced buying power: 100% agree.

        It’s for this reason I think some of us have been writing more about commons with bond-like qualities, chief among them – yield. Still fixed income-focused, but with yields dropping and the potential for inflation increasing dramatically, need some inflation protected assets too. If taking a guess based on available intel (deficit spending and the fed), I’d say a period of disinflation or defaltion followed by inflation – but just a guess.

        1. alpha-
          agree with your description. The problem is to find suitable holdings. I listed some of mine below, would be interested in those that you consider suitable for these changing times. I think the really important point is that we have to change our thinking to be able to adjust to what is a radical shift in the investment environment. the old 60/40 will not work. best sc

          1. sc, Many variables go into selecting common holds and most should be centered around one’s risk-tolerance, time horizon, trade v buy/hold and knowledge. On criteria for individual holdings I’d suggest starting with valuation. PE, debt-to-cap, agency-ratings, earnigns trends and balance sheet trends are starters.

            Diversification and allocation across many holds is equally important (at least to me). My target allocation is 2.5%. In that scenario, nothing is going to roll you over as even a complete capitulation of a position will be recovered by the rest of the portfolio in 4-5 months.

            Keep an eye out for Maverick 61 comments who is probably practices diversification more consistently than most.

            If younger, I’d be more focused on a balance of select preferreds and then indexes for the commons. It’s well-documented that picking good commons is not nearly as successful for most as a straight index. What do I mean? This will explain it in painful detail:

                1. Research consistently shows stock picking is largely predestined to underperform over time, especially the financial professionals. Thus the reason monkeys have always been better stock pickers, as logic and research with human emotion, make for underperformance. Monkeys benefit from their steely unemotional random selection skills.
                  This is a pitiful industry in general from head to toe. Stock brokers and financial experts chronically underperform index funds and monkeys. Thank God other professions arent like that. How would you like to have heart surgery knowing your doctors success rate was worse than a monkey operating on you.

                  1. Stepping back Grid, what I see is computer monkeys which is a program written by humans so some of the program reflects the human aspect. Same as the trading programs written today. Written by humans will do the same as humans. Scan for current news, watch for downward and upward trends and trade on those.
                    Your back to the principles of researching the company to see if its metrics make it a good investment.

                    1. Charles, ANY type of monkey has shown to beat stock pickers. Even the real ones…Its truly a pitiful industry.
             Give a monkey enough darts and they’ll beat the market. So says a draft article by Research Affiliates highlighting the simulated results of 100 monkeys throwing darts at the stock pages in a newspaper. The average monkey outperformed the index by an average of 1.7 percent per year since 1964. That’s a lot of bananas!

                      What is all this monkey business? It started in 1973 when Princeton University professor Burton Malkiel claimed in his bestselling book, A Random Walk Down Wall Street, that “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.”

                      “Malkiel was wrong,” stated Rob Arnott, CEO of Research Affiliates, while speaking at the IMN Global Indexing and ETFs conference earlier this month. “The monkeys have done a much better job than both the experts and the stock market.

                  2. GB,
                    Well spoken and hilarious! You need to weave that last sentence in to your comments on your “favorite” SA touts.

                    1. Sfinley, The industry itself is basically fraudulent in its premise of “investing experts” concerning common stocks. The only thing “expert” is being aware of proper allocation to bonds, cash, stocks, time in the market not time the market, proper index funds and expense ratios.
                      That is why I like Warren Buffet. He largely has been irrelevant for many many years if not decades in terms of beating S&P 500.
                      But he admits it, which I respect. He admits it really isnt possible for him to beat the market at his scale anymore, and always says the average investor just needs to invest in an S&P index fund. His will is unchanged for his wife, with 90% of the money being put into an S&P 500 Index.

                    2. thanks Grid,
                      Needed a laugh to go with the morning coffee. :} But then you have been successful investing as you do.

                    3. Charles, same here with the java. The best thing in retirement is being able to slowly enjoy my morning coffee while slowly waking up. About to finish off the third and final cup…And then get ready by opening bell to beat the experts and the more formable opponent, the dart throwing blindfolded monkeys today….Vegas sports books are posting me as a 6 pt favorite to beat the experts, and a 7 point underdog against the Monkeys today…

                  3. Grid, I’m impressed by these monkeys of yours. How much do they charge and can you send me contact info? 🙂

            1. Yes, I do believe in practicing diversification, a lot. Something I learned the hard way a long time ago. These days, I diversify not only among asset classes but also among industries.

              But as I have mentioned before, I have set my portfolio up so I have 4 to 5 years of living expenses in laddered CDs / high yield money market funds – thus I can afford to take a long term view with everything else.

              I try not to have too large a position in any one issue, trying not to exceed 2.5% in my tax deferred account and 5% in my taxable (my taxable holdings are more conservative than my tax deferred ones). I have one position that is the exception to these percentages – and it is in my taxable account. I have been hesitant to take profits on this one exception because it will result in a big tax hit. Plus I still like it and want to own it.

              And another rule I follow is every common holding should be a consistent dividend payer. In my tax deferred account, I automatically reinvest all dividends (Fidelity buys partial shares if need be). I don’t do this in my taxable account. I can only recall one holding I have had in the past 5 years that was not a dividend payer.

      3. SC
        What you are advocating is that ‘red’ States bail out the massive underfunded pensions of ‘blue’ States, which were in serious financial problems prior to the Coronavirus; ie. Illinois, NJ, etc.
        Is it the fault of Idaho that the States that act like they have limitless budgets have financial difficulties ?
        I live in NYS which takes in a MASSIVE amount of money but
        ALWAYS spends more than it takes in. I’ll stop because this is not a
        political site.

        1. HP
          If you live in NY State then you probably are aware that ny state pays more into the federal government than it takes out.The numbers do not uphold your point of view. The red states are not bailing out the blue as they don’t have the money to do so.But for this site the core issue is should one hold munies as an expected source of income during retirement or not. That is the core issue. We are all searching for routes to survive and in a low income environment we need to be creative. The question is will Munies be able to sustain those who hold them. SC

  6. Tim,
    I like it when you’re ruminating. Great insights into the preferred market.

    I’m long PSA, NNN, AXS preferreds. You are correct about the “deals” being gone, for now anyway. Yes, keeping an eye on the eREITs, Just noted that NNN is negotiating with tenants for rent deferrals.

    Keep up the great work.


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