I will be adding a new link titled “Sandbox” in the right hand menu.
That link will get you to this page.
I had originally set up the “Reader Initiated Alert” page for ‘alerts’. I was thinking this, for instance, might be when a preferred stock is undergoing a temporary selloff and someone wants to let the population know about it quickly. Of course we all (including me) use the ‘alert’ page for general messaging.
I am requesting that we start using the Sandbox page for all general talk, and try to preserve the ‘alerts’ page for ‘alerts’.
I have had a screen up on one of my monitors all week where I see all comments – no matter where they are posted–it is a great page and I wish everyone had a page like that–believe me we all benefit from all the knowledge being shared. I don’t want to stifle any of the exchange of knowledge, but hope to get things a bit better organized by adding the Sandbox page.
Most of us on this site participate in an effort to help each other in our investments.
Keeping that in mind, I suggest you re-read the following SA post that has been discussed before:
https://seekingalpha.com/article/4729081-the-unstoppable-rally-creates-a-broken-market-where-no-one-is-watching
The author’s message is that the marker can be very inefficient. He posits that many investors confuse Fed short rate decisions with long rate bond and preferred yields. In his view, many investors believe that future Fed cuts will bring capital gains to holders of all debt instruments.
His conclusion: the historical spreads between riskless Treasury rates and other longer term instruments with similar durations (2.5-4%) have now shrunk to @1% because of strong buying by investors trying to capture those future gains.
He opines, and history appears to support his opinion, that eventually those spreads will increase back to their historical levels.
I asked myself:
-What do I believe the future short and long term rates are most likely to be?
My opinion: 3-4% short; 5+% long.
Based on the above, I have been winnowing my portfolio over the past three weeks, selling some of the stronger 6’s and all of the weakers 6’s. Also reduced exposure to the higher yielders likely to be challenged by economic headwinds.
The above rate and spread assumptions generate a pretty pessimistic outlook for a long-term fixed rate preferred portfolio.
So, I have been adding 9 mo to 3 yr T’s and A rate corporates yielding 4-5%.
Portfolio now at 75% T’s/CD’s/A corp’s avg 1.3yr duration; 25% preferreds
IMHO
Meant to be a helpful challenge to my brothers/sisters:
How do you see the rates and the spreads going forward?
Westie,
Could you explain what you mean by a ‘weaker’ vs ‘stronger’ prfd?
And what sort of higher yielders are you thinking may be challenged? Reit /mortgage related? Thanks for your insight.
If not everyone knows, Westie comes from a banking background in a former life.
He is reiterating the point he made earlier about the safety of an investment verses the spread.
I have culled a few holdings and back to 19 to 20% cash equivalents
My problem is I am addicted to placing bids at the crap tables every time I see something posted here.
As for what to sell? some of what I sold I have seen them continue to run up in price giving me regrets that I sold. A few I keep walking down my asking price as it seems after the run up to and after the election the market has peaked and run out of steam.
Honestly I think we are going to enter a time of uncertainty over the next 3 months maybe longer.
Charles
You are not alone…..
Even through the fog of my pessimism
that temptress SPMA at $27.80 enticed me
Bought 300
Nobody’s perfect
Love this site
I bought it too. sold all duration past 5 years. 25-30% sgov. like mtba because of big mortgage spread, can add if necessary and mod-dur is low
Westie, can you still modify you post? think it’s supposed to be 24.80
Westie 18…… Don’t beat yourself up…. I got tempted also and bought 500 shares at $24.80. Fit my strategy.
furcal
Others on this site are far more expert than me in judging quality
My simplistic measures in what to winnow:
– Mortgage REITS
– BDC’s paying out close to 100% of their earnings
– BDC’s that seem to have to issue more equity to keep up their NAV
– Those whose value has not gone anywhere (as in down) since I bought them
Not recommended to be followed – just my personal prejudice
DYODD
Westie,
I sold my only hi yield BB of a mortgage REIT only to see it go up. Sold a long term out 30yr insurance note and seem to have caught the peak. Sold another long term 24yr out maturity note of a financial bank holdings company yielding 6% on cost that continues to lose share price. Sold another note of an insurance co 34 yr out on maturity current yield about 6% seems I caught the peak. Sold CNTHO yield about 5-1/2% almost at par. Sold a BDC note due in 3yrs The current price is still holding at what I sold. Also sold SCE PH as it is at about full value to call to free up cash,
Buys
BDC Common up about about .80 on my cost
2 bank perpetual preferred yielding about 7% one Fixed rate reset.
Bought LNG carrier up about 1.75 share with plans to flip
Most helpful, thanks. I appreciate any suggestions for what metrics to use–I am trainable if pointed in the right direction. So for one example , since I had it on the screen, the usual caveat not a reco, ARCC seems to pass based on 12month earnings. Or would you look at a shorter time frame?
Sum of TTM EPS/Share $2.41
Sum of TTM Regular Dividends $1.92
from: https://www.bdcinvestor.com/arcc/
furcal
Best BDC site
https://www.raymondjames.com/-/media/rj/dotcom/files/corporations-and-institutions/investment-banking/industry-insight/bdc_update.pdf
page 20
Thanks again. I appreciate your thoughts.
How does a drop in 3-month term SOFR affect the price of a floating rate preferred? The prices of AGNCM, AGNCN and AGNCO have not fallen noticeably despite the significant drop in SOFR. Anomalous or typical?
From my point of view you have to continually look at F/F with a mind toward the premium current yield you receive vs a non F/F issue from the same or comparable issuer… If you do, then it’s understandable why SOFR can drop significantly without F/F rate issues dropping in price… Yes, your income goes down, however, so does the alternative income of the fixed rate issues that are your comparison… So you continue to achieve a premium rate of current yield, even though the amount you receive is getting reduced…. In exchange for this premium income flow, you can expect to give up hope of dramatic price appreciation on what you own in your F/F rate holdings..
2wr—I own the NRUC 7.76% F2F issue with a current coupon of 7.76% which is based on 3 months sofr plus 26bp plus 291bp. It had previously traded with an 8.42% coupon. I was not sure or had any clarity regarding how it would trade at the new lower coupon so I sold half my position at $100.3. It’s now trading at $100.475. This confirms to me what you have suggested. My income is down but the price is about the same. Also, my income is better than other possibilities and it’s rated at A3/BBB.
whidbey-
What is the NRUC 7.76% F2F issue you mentioned?
2whiteroses – I am in your camp but can understand how others see it differently.
A spread is a spread, after all. It is a spread over the current market rate. This is common talk in the institutional world, but less so in retail.
One of my favorite themes is to buy discounted floaters that would trade near par if they floated today. The YTC can be quite juicy as many investors simply don’t want to wait it out.
This includes names such as KMPB and EFC-B. The pickings are getting slim though, I must admit.