Rotational Sell Off Continues

What seems like a rotational sell off continues in the preferred stock and baby bonds arena.

Today the Callon Petroleum 10% perpetual (CPE-A) jumps off the page at us.  This issue held up pretty well until today, but is off a giant $3.29/share right now (this is a $50 issue).

You can see the big dump here.  The issue went ex-dividend last week and as such was ‘marked down’ by $1.25, but the sell off continues.

We had held this issue until a month or so ago when we reviewed their financials, in light of the falling oil prices, and thought it looked a bit dicey.

It is amazing what a few misplaced words from the Fed Chair can do to markets–kind of silly in our opinion, but just the same we have to ‘mark to market’ each day and of our 4 investment accounts 3 will likely end the year in the red by 1% or so.  We have 1 account which is still up by 1%–so far.

58 thoughts on “Rotational Sell Off Continues”

  1. If one does an “Expert Screen” of preferred securities on Fidelity, Callon comes up as the number 1 choice and it says the company has interest coverage of 102.3x.
    Can that be correct?

    1. Fidelity preferred stock screener cant even get the yields figured correctly on many a preferred. CNBC yesterday had Callon listed as one of the 6 mentioned as low credit ratings and low cash flow to EBITA. Sub $50 oil isnt going to help that any going forward.

  2. One issue that had been holding up ok until the last 10 days is MDLX. This baby bond is down by about $2.90 (13%) just today.

    1. MikeV–so far everything gets their turn for a spanking. You think you have something solid then the next time you check it is off 2 bucks.

    2. Mike,

      Rida Morwa on SA has ~1,700 subs and he issued a ‘sell’ on MDLQ this morning. Many of his subs hit the ‘sell’ button. Add in the skepticism that the merger of MDLY + Sierra will go through…..and you had major catalysts for the nosedive.

      And since MDLX is a sister to MDLQ, it also cratered.

      1. Amy, I would be more worried if I ever hit the buy button from anything he touts. He doesnt know a thing. His picks are a disaster, and that was before the past two weeks, also. He got lucky one year in 2016 when everybody in income was a winner. Now he is pressing to make things happen, but the “emperor has no clothes”. A pitiful balance sheet reader. Thinks cash flow only is the answer to everything….wrong….

        1. Yep, and as you and I have discussed privately, the only reason I’m still with this service is because I am not charged. I mainly stick with Tim’s site and SI.

          As I have also mentioned to you, I use you as my ‘stop taking so much risk’ barometer. And, my order for FISOP just triggered in your honor. :>)

          1. Amy, ok, I confess…You stumped me. What is FISOP? Oh, I bet you had a fat finger and meant NISOP. 🙂
            It may move around who knows, but it will be fine. Regulators let them recover their capital costs very quickly which compensates for the higher debt levels. And of course the regulated monopoly assets are there as the backstopper. These just are very rare anymore. In fact Moodys made that comment in NI credit analysis noting it was the first ute issue since Alabama Power 5% issue in September 2017.

            1. I bought some at $24.80 when it first started grey trading and wanted to add if it dipped in the future. Yesterday some other recent issues got hammered down by 10%-15%, and that was enough to intice me, but this one stubbornly refused to panic. I hate that.

              1. P, the only real shot one has on a ute preferred sell off is a low 5% issue readjusting or own that has tragic destructive fires that could bankrupt it like PCG.
                Many issues are bouncing up and down. Some I am too chicken like KTN to let it go when I could have higher yesterday after buying the day before. But I have with SRC-A…I went in a hair too early buying 400 at 21.70 (got the divi though, whoppee) then it cratered to 19.66 and bought 400 more. Sold 400 at 20.70 when sell limit hit, then just now repurchased them at 19.97. That is a lot of bouncing in a few days.
                But I only do this if I am comfortable not getting them back. I like this issue, but dont love it.

                1. Whenever we have significant upheaval, and right now is qualified to me, I patrol the recent issues. Seems like often some combination of new weak hands, perhaps some underwriter “leftovers” getting dumped for liquidity, or funds selling can cause a short term disproportate price drop to value. Hasn’t happened with NISOP yet. That PCG thing is a mess. I had bought a few bonds after the previous debacle and dumped them immediately when this years fires got going. Probably work out for them but then it is California. I wouldn’t touch PCG with a 10′ pole.

                  1. P, I am slowly working everything back towards my utility core. Wont ever get 100% but it will be near 70% in a month or so if I am lucky. Bought 192 more AILLL…It is the big dog that barks in my portfolio. I could put it all in it and not worry. Im a pensioner though…One I have loved for years but always hated the yield is IPL-D. Flipped a few times but par 5.1% never has an allure for me so I hadnt owned it for a few years. It took forever today, but in dribs I got my entry 400 share position in at $21.83. It it gets under $21 I will buy 400 more, and at $20 400 more. So I hope this goes down more.

                  2. P, I am slowly working everything back towards my utility core. Wont ever get 100% but it will be near 70% or more in a month or so if I am lucky. Bought 192 more AILLL…It is the big dog that barks in my portfolio. I could put it all in it and not worry. Im a pensioner though…One I have loved for years but always hated the yield is IPL-D. Flipped a few times but par 5.1% never has an allure for me so I hadnt owned it for a few years. It took forever today, but in dribs I got my entry 400 share position in at $21.83. It it gets under $21 I will buy 400 more, and at $20, 400 more. So I hope this goes down more. This T&D will pair nicely with my AILLL T&D, but at a lot less in shares though.

                    1. Grid, I had not looked at IPL-D because of the low coupon, but seeing you mention it is now around, $21, my interest is piqued.

                      I will put it on my watchlist for a few shares if it breaches $21, which is quite possible the way this darn market is dumping everything.

                    2. Inspy, I was bouncing up and down a buck today, but the drift has been lower. Its yield up until a couple weeks ago was simply too low. At 5.84% its a bit light still, but I am getting the groundwork laid. But in comparison to what is left in the ute universe it actually is very decent.. Besides NISOP which isnt quite the credit quality, CA fire stressed SCE, and well over par illiquids CNTHP, CNLPL, and AILLL, it is the highest yielder and unlike the above 3 is actually well under par. So some potential cap gains in next recession with this one.

      2. Thanks Amy. It is amazing that one person can move a market, but we see it all the time. I find myself looking at SA less often and now look forward what Tim writes here and all of the comments that follow.

        1. MikeV–It used to be worse than it is now. I moved the market in a REIT once–and got a call from the CEO. In the end I was right and he got canned.

      3. Amy – would I be correct in assuming the sell on MDLQ only been made to subscribers, i.e. not to those (like me) that don’t subscribe?

        1. P–it is usually the right thing to do–but this market is very unusual so I hope it is still the right thing–I hope to buy some Christmas cheer next week–resisting for this week.

          1. Tim
            First off let me say your site is great and obviously people love it. You should open a bar too. As to the market, your choice looks the correct one to date.

    1. Makes you want to rethink the whole premise behind holding preferred shares when they become more volatile than the commons.

      1. Citadel West – it is why I laugh when I read on Seeking Alpha that preferreds are safer and less volatile–percentage wise it isn’t true–but this too shall pass-I hope.

    2. Tech guy–thats what I say everyday about GLOP-A,B and C. Actually I quite say it because I got tired of it day after day.

  3. Throwing in a consideration for those potential buyers: UNMA due 2058 closing in on 7%, Stable rated AM Best and rated AA S7P May 2018.
    Just sayin’ those December payments are there for re-investmenmt and upward qual.

  4. Actually, in the long run, my opinion is Fed is working perfectly for quality perpetual preferreds. In short run preferreds are equity and can crater like commons. But in long run, raising short end can tamp things down and protect the long end. Maybe it will teach a few companies about leverage, variable debt stress, and debt walls. I would never touch Mreits, but this scenerio sure isnt making their bottom line better either.

    1. The issue with rate normalization is the pace at which you do it. We have huge amounts of corporate debt, the idea that you can have 10 years of low rates and all of sudden reverse course in a year is just blame foolish. If you had to do this due to inflation or because the economy is overheating that would be totally understandable. That’s a business risk. But to push rate normalization as fast as possible (4 rate hikes in 1 year) is a policy decision. But the market could adjust to that, if you didn’t plan on continuing it. I think he tried to say they will not. I believe they will not.

      But Mr. Powell has alone opened up a new risk. The “mortgage” debt below was burst by the Fed – they felt it was out of control. They didn’t have to be this aggressive. Powell who expertise is understanding markets is making a similar mistake but this time with corporate debt. Foolish.

      Yes, higher quality preferreds is what this market should ultimately reward

      1. SteveA–I agree I don’t think they will raise again anytime soon–but Powells wording was poorly chosen–and markets are unrealistic–but it is what it is and we have to live with it for now. I think as we head into 2019 we are going to have some consumer confidence issues and the economy is going to lose a fair amount of steam-no recession–just slower.

        1. I have found your views to be dead on. Awhile ago (several months back or maybe even mid summer), you said something to the effect that we will not get rate hikes in 2019 that they would be not prudent (I am paraphrasing). And I agree with your comments the markets are unrealistic.

          The one good thing about an economic slowdown ( and I agree – I think we should be able to avoid a recession ) is it will stop the fed before they go to far.

    2. Grid–watching the 10 year yield crater is a bit scary if you are borrowing short and lending long like the mREITs

      1. Im a know nothing but I have viewed this as a scam anyways…. My 3 cores rules are no Mreits, No shippers, and No BDCs. Doesnt make me right, but its just how I personally roll.

  5. Watching Mr. Fed live yesterday was really painful to say the least. Maybe along with unemployment and inflation a third fed mandate is deflating the markets…

  6. Is “rotational sell-off” just a nice way of saying “circular firing squad?”

    I think I own nearly everything that has tanked. Yeah, I have a lot of issues that have held up well, but that doesn’t really buoy the huge losses on others. Having never been through this I don’t know whether to wait it out or bail. With stocks you can just wait it out as long as you are diversified. I am not sure about the preferred market. I am only up a couple of percent over the last two years in my preferred holdings, but I put the bulk of the investment in this year so that makes sense.

    I am trying to move up in quality, and shop for bargains, but it is hard to do that when you can’t pull capital from one area without taking a loss. Tough decisions. One decision I made was to buy some of the Fidelity FDIC insured cd’s which are tied to the stock market return. They are seven years with a max return of about 10% a year. I figure this is a decent entry point for those.

  7. I might understand the drop of weak credits directly related to oil but it’s beyond imagination what’s happening to LNG shippers and especially their preferreds (falling even harder than equities)

    1. Some history. My experience is I got absolutely crushed many, many years ago by the shippers. Watched them casually ever since and have observed if it floats on water it starts sinking as soon as things get dicey. Every time. It just does. Similar to oil wildcatters, a ocean going version. Very cyclical. When they’re hot, they’re hot. When they’re not, they’re not…..like screw over everybody to stay alive. Doesn’t mean trouble ahead, it just means a lot of people don’t want to stick around to find out. Good luck.

          1. Hi Jeff–I own C–I am holding. The financials are excellent (relative to other shippers) and at this moment the future looks bright–of course this can change quickly. Most of their ships are long term leased to Royal Dutch Shell. If we could get some price basing I might add a little.

            On the other hand they are a shipper and as someone else mentioned that means they always are higher risk.

            1. The striking thing is the difference in performance between GLOG-A and GLOP-A/B/C.
              Generally if bonds are issued at parent level, bondholders are often subordinated to the majority of the cash flow so GLOP looks the place to be.
              Second, the recent agreement to modify incentive distribution rights lowers the cost of capital for GLOP.
              Unfortunately it seems the big crash/outflow suffered by funds dedicated to MLPs (and so owning GPs as well) has been a much stronger negative force than the 2 positive factors above.
              Since the spread of GasLog plain vanilla bonds (NOK denominated and the USD issue maturing in 2022) have barely moved, I see a very compelling opportunity in buying GLOP as soon as the dust settle. I will increase my allocation to the lowest priced B preferred below $20 with a target of $23.

  8. Yes, I agree way overdone. Call me Mr. Anti Jay Powell or the worst critic of him on this board. He is 1st non economist as Fed chairman. Part of the rationale was his understanding of markets. It is not just the comment yesterday. The Fed says we have reached the low end of neutral. They say inflation is in check. They over the course of 3 months have yet to clearly explain why they want to forecasts more rate hikes in 2019. So in my anti-Powell view of the world, it’s not yesterdays statement, it’s 3 months of not explaining why they want to do this. Their growth rate for 2019 is under 3%, so it is not to cool the economy off. So if economy is not overheating and inflation is in check what are they doing? It’s 3 months of not explaining what you are doing to the markets.

    With that said, trying to be fair (which I am not in his case), he did say them would respond to the changing environment and they did lower their forecasted rate hikes from 3 to 2. But that doesn’t explain if you haven’t explain the rationale for any. “Rate normalization” is not going to cut it. If you want normalization that a recession is normalization also,

    End of fed rant for today.

    1. Yeah, this selloff is a little hard to figure since there seems to be no real reason for it. Interest rates aren’t rising all that quickly, and are following a set schedule that should have been baked into the cake by now. Most earnings are still strong. Employment is high. Inflation is low. And despite all the talk of trades wars there really hasn’t been any slowing of the economy other than the typical kind of rotational stuff. The rest of the world economy is moribund, but that has been the case forever now, especially in Europe.

      It is hard to know what moves to make without knowing what sort of animal you are dealing with. But I guess you never really know until after the fact.

      1. If they forecasted inflation as rising or they forecasted growth as too high, it would be understandable. Instead we have moderate growth with moderate inflation. They need to explain the rationale for more rate hikes. Honestly, I do not think they will do any rate hikes at all. So, I think this is totally overdone and a severe over-reaction. But when Mr. Powell’s alleged expertise is his understanding of markets and he shows he doesn’t, why should the markets trust him?

  9. Callon was on CNBC yesterday as an example of an oil company with low credit ratings and low cash flow to EBITA. In other words it is susceptible to problems if oil stays low.

  10. Don’t count it yet… we still have some more trading days left and I don’t think its going to get better. Right now I look to only see a 9.43% return for the year… but we keep getting hammered that will be worse. On a bright side… are you looking company with large FCF and has paid its dividend for many years… T is trading around $28.66 a share which yields a nice 7% dividend.

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