So What If a Crash Occurs??

So with the likelihood that we will see some kind of corona virus outbreak in the U.S. and further likelihood that folks will overreact to the news—then what?

From my own experience I can say 1st off don’t willy nilly sell your portfolio–there are folks that sold at the lows in 2009 that have still not reentered the markets–instead opting to bury their cash in the back yard in a mayonnaise jar. Do your upfront work NOW.

2ndly–have some available cash. I have 2 eTrade accounts and they are 90% invested. The FIDO account is around 50% cash—all in all I have 30% cash. If we were to get the giant plunge I would begin to plan to buy CEF preferreds–assuming they took massive tumbles as well. If we truly got the huge plunge it takes months and months for shares to recover – these things don’t happen overnight – if I remember the 2009 plunge it took a year to recoup share prices.

I remember in 2009 there were some solid insurance company investment grade preferreds that traded down in the $7/share area–I only wished I had the courage to buy lots of them instead of a taste–when plunges happen you are scared shitles-, you think the world is going to end and all you can think about is ‘let me out’. Resist the urge.

How do we know the bottom is in? We won’t know–no bells rung at the top–nor at the bottom. If a Gabelli CEF preferred with a 5% coupon is selling at $12.50/share would I be happy with a 10% current yield? Hell yes!! I would buy a part position and wait before committing more to the position.

So–get prepared. No time for panic, just rational behavior – have some cash – now!! We don’t know what the market close will bring today–let alone what happens next week.

34 thoughts on “So What If a Crash Occurs??”

  1. Wishing everybody a good trading day tomorrow. Keeping my eyes on JPS, FPF,PFO, FFC although none of them are a screaming buy, they got knocked back to summer prices with a teensy discount. I just try to buy little at a time without trying to catch the bottom if the price is palatable. If there are rate cuts coming, I want to be prepared. It might be finally time to thaw out my cash from the permafrost of low yielding instruments.

    I overdosed on RQI today as the aftermath of the rights offering knocked it back more than usual.

    1. I did buy some FFC now down almost 8% from its highs. Still concerned why it went down so quick with equities.

      Bought some now, using reverse of my rule-of-thumb to sell. My sell for Pref & CEFs such as FFC largely holding Prefereds is to sell when gains in less than a year become more than annual yield, so buy should be when it declines more than year’s yield or more. Aim to add if 150% lower than annual yield and last buy at 200% if it gets there.

      Wonder how others here decide when to wade back in and bottom-fish some of these and other fixed-income CEFs.

      If ‘Not Yet’, then when?

  2. Tim – I point out your admonition for readers to do their homework NOW.

    Have a battle plan. Know what you want to do BEFORE a crash. Fortunes are made and lost through acts done in turbulent markets.

    Hopefully, you have already figured out your risk tolerances. To be blunt, if you can’t withstand a 10% drop in equity markets you may want to rethink being in equities.

  3. Tim,
    No newbie, except been away from your site for a while. Was sitting on 40% cash in a 401k now down to 20%.
    In the past week down over all in the account 2-1/2% Still have almost 40% cash in two other accounts.
    If I jumped in too soon no one to blame but myself. Everyone here has been
    Very gracious with their comments sharing what they are in

    1. TEF – I tend to agree with you. While it is unfortunate people are getting the flu, many elderly people get the flu every year and on occasion during the winter all the beds are full at some hospitals. In a few months, I believe this issue will pass and this week could be a great time to pick up securities that have been beaten down over temporary issues. If the underlying fundamentals of a company are good – this week could be a great buying opportunity.

    2. Teff,
      Please check your number quoted for hospitalizations .
      Also I think if you dig a bit you’ll find that the number of influenza deaths quoted by CDC is purposely inflated as a tool to push people to get flu shots. Some significant number of people die in the winter from pneumonia and other causes and very few of them are tested to determine if they had influenza. Many of these deaths get lumped into flu deaths.
      With regard to the current situation , we are probably in the early stages for this year. There is little doubt that the Chinese numbers are way low. Easy to see why even if they were very diligent. Now we are seeing seeing a global spread.
      I think it’s wise to keep an open mind. Not to panic or exaggerate but to consider the complexity of the disease and of our interconnected world.
      Remember what Yogi Berra said.

        1. These days it takes an honest and humble person to correct him or herself. Very much appreciated.

  4. I have gotten more defensive, and lost some money the past few days, but really hasnt been anything to worry about. I always track each month where I am at and am still up from end January, and January I was up from December. Im sure most are near that also.
    One may want to watch credit spreads which have largely stayed tight. Though preferreds can trade equity wise in market craziness divergences can occur. For example in 2013 Taper Tantrum when rates were rising, high yield issues stayed strong while the high quality lower yield issues suffered considerably more. In 2016 when rates drifted back down, the opposite occurred.

  5. Ouch, Been too busy to feel the pain, but i am down 1% in my Pref holdings.
    Didn’t sell anything but picked up IPLDP , CBKLP and VNOPL at the close .

    “No Pain, No Gain”

  6. Sage advice, Tim.

    I went thru the ’09 and tech crash some 9 yrs earlier, and did nothing of major consequence one way or the other, because I was about 95% invested and didn’t have that much cash. I did nibble and bought O, MAIN and a couple of others during that period. I also made sure all dividends were DRIPed.

    This time, if a true deep dive occurs, I have cash due to forced RMD taking, so I plan to look at some more investment grade preferreds, among others I’ve been following but which are too expensive.

  7. I raised quite a bit of cash 60-90 days ago and am not putting more than a nominal amount back into play as yet. If it goes down another 1,000 from here I will begin; if it goes down another 2,000 then I will start to get enthusiastic about it.

    This environment is good for harvesting tax losses by buying/selling near-identical issues. ETFs work well for this.

  8. The very first question is is it a shopping time now or better to sit and wait. Frankly I am confused about this, I see some tickers which I wanted to buy, now are priced what I thinked is their fair price; but I can’t push a button… maybe today I just love my cash much more than yesterday lol

    1. Yuiy want to thank you again. I picked up the NEE-I today at 25.16 maybe too early to jump in but compared to sitting on cash in a MMF I am getting almost 5% now

      1. Charles you may want to look at EP-C if you like those types. Its back under par, will go exD next month, has a BBB- credit rating and has a sweet 2028 maturity back stop. It is presently callable but that is of no importance being under par. It has an owner optional present conversion but it useless. A conversion by owner is $25.18 cash and .7197 KMI share. That conversion presently is only worth about $40.30 so its basically just a decent quality issue with a finite 8 year maturity. I refilled my war chest of them after selling for a nice cap gain a couple months ago.

          1. Max, I think Tim put this in his website of EP-C.. But this is from KMI annual report this year, so its correct.
            Capital Trust I (Trust I), is a 100%-owned business trust that as of December 31, 2019, had 4.4 million of 4.75% trust convertible preferred securities outstanding (referred to as the Trust I Preferred Securities). Trust I exists for the sole purpose of issuing preferred securities and investing the proceeds in 4.75% convertible subordinated debentures, which are due 2028. Trust I’s sole source of income is interest earned on these debentures. This interest income is used to pay distributions on the preferred securities. We provide a full and unconditional guarantee of the Trust I Preferred Securities. There are no significant restrictions from these securities on our ability to obtain funds from our subsidiaries by distribution, dividend or loan. The Trust I Preferred Securities are non-voting (except in limited circumstances), pay quarterly distributions at an annual rate of 4.75% and carry a liquidation value of $50 per security plus accrued and unpaid distributions. The Trust I Preferred Securities outstanding as of December 31, 2019 are convertible at any time prior to the close of business on March 31, 2028, at the option of the holder, into the following mixed consideration: (i) 0.7197 of a share of our Class P common stock; and (ii) $25.18 in cash without interest. We have the right to redeem these Trust I Preferred Securities at any time.
            Added thought.. Justin has mentioned tax issues with these trusts as many times they were issued at a different payment than the underlying bond. This has no effect at all if held in tax free accounts. But you need to study that segment a bit if buying in taxable. I dont know specifically in this issue but it can occur. I have owned this many a time over the years and its zero problems in tax free I know that. I rarely own debt in taxable accounts so I often neglect to mention these things.

            1. EP-C was issued 3/12/98 at issue price of $50/share to the public

              “The proceeds from the sale of the Trust Preferred Securities (including the proceeds, if any, from the exercise of the Underwriters’ over-allotment option) together with the proceeds from the issuance to EPG of the Trust Common Securities will be used by the Trust to purchase 4 3/4% Subordinated Convertible Debentures of EPG due 2028 (the”Debentures”).”

              Is that enough info to make any concerns about holding in a taxable account go away???

              1. Nope…There are other possible tax issues to look at. I dont because I wont put in taxable.

                A holder that sells Trust Preferred Securities will recognize gain or loss
                equal to the difference between the amount realized on the sale of the Trust
                Preferred Securities and the holder’s adjusted tax basis in-such Trust Preferred
                Securities. A holder’s adjusted tax basis in the Trust Preferred Securities
                generally will be its initial purchase price increased by any original issue
                discount previously includible in such holder’s gross income to the date of
                disposition and decreased by payments “other than qualified stated interest”
                received on the Trust Preferred Securities to the date of disposition. In
                general, such gain or loss will be a capital gain or loss. Any capital gain will
                be (a) long-term capital gain if the holder held the Trust Preferred Securities
                for more than 18 months, (b) mid-term capital gain if the holder held the Trust
                Preferred Securities more than 12 months but not more than 18 months or (c)
                short-term capital gain if the holder held the Trust Preferred Securities for 12
                months or less as of the effective date of the Merger. Long-term capital gain of
                individuals currently is taxed at a maximum rate or 20%. Mid-term capital gain
                of individuals is currently taxed at a maximum rate of 28%. Short-term capital
                gain of individuals is taxed as ordinary income. Ordinary income of individuals
                is currently taxed at a maximum rate of 39.6%.

                The Trust Preferred Securities may trade at a price that does not
                accurately reflect the value of accrued but unpaid interest with respect to the
                underlying Debentures. A holder who disposes of or converts his Trust Preferred
                Securities between record dates for payments of distributions thereon will be
                required to include accrued but unpaid interest on the Debenture through the
                date of disposition or conversion in income as ordinary income, and to add such
                amount to his adjusted tax basis in his pro rata share of the underlying
                Debentures deemed disposed of or converted. To the extent the selling price is
                less than the holder’s adjusted tax basis (which basis will include, in the form
                of original issue discount, all accrued but unpaid interest), a holder will
                recognize a capital loss. Subject to certain limited exceptions, capital losses
                cannot be applied to offset ordinary income for United States federal income tax


                Holders that purchase the Trust Preferred Securities at a price that is
                greater or less than the adjusted issue price of such holder’s proportionate
                share of the Debentures (which generally should approximate the face amount plus
                accrued but unpaid interest on the Debentures) may be considered to have
                acquired their undivided interests in the Debentures with market discount or
                acquisition premium as such phrases are defined for United States federal income
                tax purposes. Such holders are advised to consult their tax advisors as to the
                income tax consequences of the acquisition, ownership and disposition of the
                Trust Preferred Securities.

              2. Note the ability to defer interest payments.
                If they exercise that option (like our recently redeemed Old Colony) anyone holding in a taxable account could be recognizing income up to 5 years before it was ultimately paid.

        1. its funny you mention this. I looked at it when KMI converted its MLP and drew the ire of long time holders. I remembered them buying El Paso Gas. When KMI was around 18.50 this EP-C was lower then now. But its got to be better than The lodging REIT’s Tim mentioned today.

      2. You are welcome ))) but the thanks probably must to go firstly to Tim for this site, thanks to which we can share our thoughts in a such good, friendly atmosphere.
        I also made lot of good purchases reading the discussions here, especially at the canadian prefs.

  9. Tim, I think you’re right on not panicking. I jumped in to some HMLP.A at par. Only a small portion, but thought it was worth a shot. I’m waiting to see the reaction when cases are reported here.

    1. dlcnws–we have more newbies stopping by each day than we do ‘seasoned’ folks, so I try to keep folks a little calm. We never hear from the newbies, but I can see them out there.

  10. I sold several things. Not holding much cash I put most of it in fixed income issues that won’t fall as much in a crash and can be sold to buy bargains later.

    But also I’ll be trading all the way down. When the market is wild that’s the best time for arbitrage trades and various forms of selling one to buy another. These gains make up for some of the losses and skew the odds against holding too much cash.

  11. Here’s 2 for you to take a look at. F+B, and EPD. I own both and Iam NOT selling them. I wrote a comment a couple of days ago on EPD and after doing my homework I may even add a few more. But Iam not selling them. Maybe we haven’t had that crash but if you look back at the last 3 or 4 trading days its certainly been a head turner. Even though Iam only 18% in stocks I have lost alot more than I cared to. Hard to understand if you guys are 100% in fixed income as you have no chance for any growth at all. But as they say to each his own. LOL

    1. Hello Chuck
      There’s nothing to understand. I get 8% on my FI as the market moves up and down. I re-invest that cash as it comes in, so my money compounds at that %. Worries? Nah.

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