Recession Ahead?

Earlier this week we had FED chair Powell speak and we expected that to be the highlight of the interest rate week. You can be certain that anytime one thinks they know what markets will bring, they will prove you wrong. We all knew Europe has had a weak economy–and this continues and I believe will continue for a very, very long time.

The plunge in the 10 year treasury (to 2.42% from 2.60%), since Wednesday, is kind of ominous–but does it mean that there is a recession ahead? Honestly no one has an answer to this–everyone thinks they have an answer–but no one really knows.

With the interest rate drop we can be certain that some new issues will be sold to ‘refi’ old higher coupon issues. We have been through this game before so we all have a hint as to how it could play out for preferred stocks and baby bonds. Maybe the good part right now is that many of the issues we hold are not redeemable until 2021 or later.

We have noted that preferred stocks have crept higher week after week and it might be a good time to ‘harvest’ some gains if you have gained a years worth of dividends in capital gains–of course everyone is different, but we certainly are scrutinizing our holdings for potential sells.

Of course any sells generate cash which needs to be redeployed–but the good part this time is that the money market we hold is paying 2.38% as of this morning (Gabelli US Treasury MKT AAA–GABXX). Certainly this could change in the future, but at least for now it is a hell of a lot better than ZERO.

The other thing we will be doing if we see economic weakness is scrutinizing many of our ‘base holdings’. We hold all kinds of Gladstone term preferreds and Gladstone Investment and Gladstone Capital should be watched for portfolio weakness since their holdings are Level 3 (value assigned by management since holdings do not trade on an exchange and value are not directly observable). We do not plan action here–but every time rates plunge like they have my focus gets a little sharper.

6 thoughts on “Recession Ahead?”

  1. I thought a recession usually occurs because the economy is hot and the gov raises short term interest rates to cool it off. You then get an inversion and a recession. This economy does not seem very hot and i have not seem the gov frantically trying to cool it down.

  2. A recession with declining interest rates can be a good thing for perpetual preferreds or a bad thing depending on quality and callability. I have been historically a past call over par “dare them to call” preferred stock holder. But I took advantage of December fallout to sell out of the steady priced past call illiquid issues and roll into about everything call protected and also under par…Out of my 20 issues owned only recently purchased PPX at $25.29 and PW-A are past call and over par…I have kind of squared off the edges recently not getting overly balanced on any side. Owning reset adjustables that have fixed durations mostly until 2022-23, perpetuals, perpetual non callables, and some high yield issues also…. A skeptic could say that 5.5% high quality perpetuals are a steal if one thinks yields are going a lot lower..
    I bet many here do not realize that 3.5% QDI perpetual preferreds have been issued before in low rate environments..If one doesnt believe me check out still trading investment grade preferred UEPEN.

  3. Tim, I have 2 Gladstone issues, LANDP & GAINL, have owned for about a year now. Both seem to be steady wrt price action, but I’m not happy as they are about 1.5%-2% below my cost, don’t think they have recovered fully from the December decline.

    Thinking about reducing down to a minimal position ( 200 shares or so ), since moving into more conservative and dependable issues like NEE-N, MTB-C and RNR-F. Lower yields but feel much more comfortable with high quality.

    Comments and thoughts welcome.

  4. Today just reminds me how poorly we forecast the future.

    A year ago, I’d of been overjoyed if the 10 year was between 3.25 and 3.5. With the Fed increasing the short term rates, a 10 year below 3 just did not seem possible.

  5. you are absolutely right, Tim, no one knows clearly what lies around the bend. But experienced knowledge can very often help steer through the dark. Really appreciate all the information and forum of ideas you make available here. thank you very much
    David

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