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Quiet Markets Continue –Not Going to Last

Looking at the equity futures this morning it looks like we are in for more ‘paint drying’ trading–and honestly if that continues I am fine with that.  Unfortunately it won’t continue – it will break hard in the next 10 days if the debt ceiling stalemate continues.

Interest rates are moving up a bit this morning – we are at 3.74% on the 10 year treasury.  This means mortgage rates are moving higher once again.  I saw a Zillow article yesterday that values in some of the most heated housing markets (i.e. Boise and Austin) have dropped sharply.  It happens (drops) on a regular basis – prices are driven up and of course they are going to correct–most are not dropping like Boise, which is off near 20%, but they are not rising.   If interest rates remain high and we finally have the long awaited recession we will see a housing bloodbath.

I see the Philly Fed non manufacturing index was just released at down 16–these smaller report while not market moving help to point to a FOMC rate pause in June–of course lots and lots of data yet to come in prior to the meeting (June 13-14).

I note that Fitch downgraded Allstate (ALL) yesterday and rated the new 7.375% preferred (ALL-J) at BB+, which is a notch below investment grade.  Given the hammering that insurance company’s have have taken in their investments and very high claims experience in their property and casualty businesses this is not a real surprise. But we all know how this works in insurance – a bad year means rates are jacked up and never come down again which creates giant profits down the road.  

Banking preferreds were strong yesterday – we are near a point when one is going to have to buy if they want ‘bargains’–but there is risk obviously.  I’ll be looking and nibbling this week.  I hold no full positions in any banking issue–not even ½ positions.  I own numerous issues in small quantities so will just nibble some more adding to the issues I own.  If you want to lock down 8% current yields you have to expose yourself to risk – there is no way to get around it.

28 thoughts on “Quiet Markets Continue –Not Going to Last”

  1. You would think that under normal circumstances for an entity other than the U.S.A. that you would hear some kind of words of warning out of the rating agencies regarding a possible downgrade for Treasury bonds…. The political pressure to remain silent must be intense…

    1. Unfortunately, I think the negotiators are playing “chicken” to see who will crack first. +

      -McCarthy is beholden to the far right house members who can challenge his position as speaker and who want to reverse a lot of Biden’s spending.

      -Biden is beholden to the far left both for his current policies and for his shot at the next presidential election and who don’t want their social spending cut

      and neither guy wants to be viewed as having “caved” to the other.

      I can’t see anything as an individual that I can do to influence it.
      So, regardless of your politics, all we can do is put on our crash helmets….

      1. Well per a CNN POLL: “A majority of Americans — six-in-ten Americans — want to raise the debt ceiling ONLY if spending cuts are included as well” so we know what the American public wants

        And if Yellen’s June 1 house on fire date comes and goes, life will go on. The government will still pay the debt, interest, and other priorities and only be unable to pay some discretionary spending

        There may be tradable opportunities one can take advantage on if that happens, but life will go on

        1. Maverick I don’t put much faith in polls. Depending on how the question is worded you can get the response you’re looking for.

            1. Don, I want debt reduction too..
              But I don’t want it linked to approval of raising the borrowing ceiling to pay for what was already spent.
              So I guess you can count me as one of the 6 in 10 who wants debt reduction I just think it needs to be talked about separately before we default on what we owe

              1. Well Charles you will be glad to know that not all of the money in the calculation to raise the ceiling was spent. It includes expenditures that were authorized but will be spent in the future. So you can’t default on what hasn’t been spent.

                And quite frankly, given Washington DC is dysfunctional, tieing reducing spending together with raising the ceiling is often the only way to lower government spending

                All we can do is monitor and trade accordingly

                1. Agree Maverick, back to business and ignore the noise. Trying to figure out my next moves. I bought full positions in UBP preferreds. This past year they traded within a range except for a few times they dropped in October, March and early this month but they always recovered. This deal goes through they may get called or if the deal falls through they drop but I would expect a recovery.

    2. Guess you spooked them!

      “Fitch placed the United States’ AAA rating on negative watch, citing debt ceiling brinksmanship around the debt ceiling negotiations and the approaching X-date, which Treasury Secretary Janet Yellen has said could be as early as June 1.”

  2. At 3-4% interest rates, everybody is WORKING HARD, no wonder inflation still persist! Hard to have a recession with cheap $$ boundlessly floating around !

    Better to spend it than let inflation eat it up! CRAZY!

  3. We contracted to build in a new development near Daytona last year. Prices went up 10 to 15% since then. Resales slowed this year but not very much, they sell up to $100,000 more than new builds because they can’t build fast enough to meet the demand.

    1. Martin I think a lot of this is because “people will keep paying it”. I had a low-level laborer tell me a few weeks ago he likes to make $1,000 a day and promptly sent me a $2,500 labor-only estimate for what he estimated would take 1 1/2 days. hahaha.

      We’ve done many $Ms in build/improve/remodel projects over the years, few of which would have properly penciled-out with current labor/labor cost constraints. Until demand wanes, appears labor will remain the spoiler.

      1. Our build was delayed a couple monrhs which is not unusual. What’s different is they said it was due to labor shortages because contractors couldn’t hire enough workers. Waited almost a month for insulation. How hard is insulation?

            1. Thank you Charles. I did open and read on California’s plan to “tax the sun” via charging per kWh a solar panel provides to a residence. Quite remarkable.

              CA utes are constantly under attack, but you can be sure the likes of CALPERS are buying enough lunches in Sacramento to ensure those pension fund investments will stay liquid and ultimately pay out those dividends.

              1. Alpha, California is the expert at passing taxes.
                I didn’t get that far in this month’s articles. I had read the editor’s report on construction strength and labor shortages. This is a Western regional coverage. From the Rockies to the Pacific

  4. Tim – thank you for all the work you do here. Just a quick note about housing. Here in the Northeast, especially MA/CT the market is BOOMING. We can’t buy a beautiful home without offering 5-10% over asking and that goes for anything 450-750k. Meanwhile the cost to build is sky high as well. So we hope the slowdown in other parts of the country eventually catches up here.

    1. Very similar here in South florida here as well! Cost to build is nuts as well since land, labor and material have all gone up tremendously since covid..we are talking about close to 700$ per sq ft!

      1. Well, the weather in FL does help in scraping the landscape fairly frequently- prepares the land/sand for new structures ( for some reason).

        1. Gary, Keeps my company busy with sending 40,000# to 80,000# a week of lead flashings to Florida. They seem to keep being blown off the roof there.

    2. sjc123–yes things are really localized now. Here we have seen no drop–but they are not rising any longer.

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