Starting the Year Off with a Bang–a Big Bang

I left the office for 90 minutes today and was really pretty shocked to see a near 1% gain in equities–so indexes were already pretty darned high–so let’s stretch them further I guess. Oh well I don’t buy common stock any longer so it doesn’t really matter to me–but still WOW.

The good part of today is income issues also took a nice pop–why? There is a lot of money chasing around after yield-it is as simply as that–there simply is no other explanation.

I thought maybe we had seen the peak in pricing of preferreds and baby bonds–but certainly the ‘average’ prices show we are continuing to see gains.

It was interesting to see interest rates tic 4 basis points lower to 1.88%–lower rates just don’t jib with skyrocketing stock prices. Oh well–what’s new.

It will be good to get to next Monday, when we get back to normal–folks will be back from vacation and we will start to see some new income issues once again. But for now Santa just keeps on giving.

10 thoughts on “Starting the Year Off with a Bang–a Big Bang”

  1. FYI I’m selling 5 1/2 coupons and higher if they are less than 3.5% YTC.

    I’M buying 4.5% ytc or higher. One deal I sold at 28.75 and bought at 26. 0 plus change. Getting same coupon took out over $4,000 for one.

  2. “5.25% ain’t nothing to write home about either. ” I beg to differ. I think 5.25%, if it’s from investment grade paper, is as good as it’s going to get in this interest rate environment. We’ve been spoiled by the easy market of the recent past but need to think about where we are now in the interest rate cycle and where we’re likely to go next. I can’t see rates moving up any time soon so I’d hoard 5.25% IG. But then, I’m retired with no paycheck other that what I can coax out of the market (plus social security) so I might be too conservative.

    1. Vincent–I think everyone has their own needs and if one is looking for a safe income stream, while knowing they have some interest rate risk if rates rise, there isn’t anything wrong with that. I hold a couple issues in that area just for that reason–safety- and I know if we see a sharp rate rise I will see some share price loss, but I am ok with that.

      1. I covered this before but will reiterate because it’s counter intuitive. As an older income investor living on the cash flow yield, I would welcome an interest rate hike even though it would lower the value of my fixed income holdings. A move down in selling prices wouldn’t hurt my income at all and would mean enhanced yield for any future buys made at reduced prices. Income stream becomes much more important than bottom line total value. I’m not planning on selling any of my fixed income holdings. Any erosion in price will be an issue for my heirs not me.

        1. Jerseyvinny–you are absolutely correct. We have many folks here just like you. When I was younger I was in more risky high coupon preferreds–and the older I get the more I put into the super safe issues (CEF preferreds etc) fully knowing I have some capital at risk if rates rise–but that is OK. I am not drawing any money from investments now–and honestly don’t know when I will, but at some point I will be just like you.

  3. Hi Tim,
    Any thoughts about the upcoming PFF quarterly rebalancing? And whether or not they would include the sub 5% issues for PSA/JPM/ALL?

    Happy New Year! Thank you for guiding us.

    1. No more quarterly re-balances for the PFF, they’ve transitioned and it is done on a monthly basis now.

  4. Jacob
    There is another way of dealing with this. You probably have a budget and know how much you need to live off of in 2020 and 2021. If you chart out your total income you will know if your present income covers your projected needs and by how much. If your income covers your needs by x percent then you can breath more easily and probably it would make sense to sell. The reason is that you do not have to chase after yield. On the other hand if your projected income is lower than your budgeted needs, then there is more need to perhaps hold on to the issue. Of course the reverse argument could also be made.
    I’m in the fortunate position of having the number covered. What it has meant is that I’m actually more willing to take a marginally greater risk with a portion of my account than I was in the past as I know I will be ok even if I loose a bit. Though counter productive, knowing how much you think you need liberates one ( at least in my case) to think more rationally about investments. It does not mean that I’m doing silly things but rather that I’m trying to structure things in a rational manner. Again , have built in inflation and other expenses so that I feel fairly sure that my numbers are correct. Prior to doing this exercise, I was too focused on yield. Now I can think more strategically and accept a bit of riskier issues which I might not otherwise have considered. It really is a very personal matter. Many of you have probably already done this but if you have not, strongly encourage you to undertake the exercise. Good luck to all. SC

  5. Tim,
    Im sure we are all facing some slice of the same sort of dilemna pie at the moment….

    To cash in on some frankly ridiculous capital gains….
    OR to stick with the original plan which, in my case, was to slowly build an income stream and keep trading to a minimum.

    I’m certainly on the more conservative side..but have built up a nice income stream over the course of several yrs of investing in preferreds and bonds. Still probably a couple of years away from having to start using that income stream to live on, but pyschologically I’ve been lazer focused on that income stream toal, and geting it to rise.

    But some of the Capital Gains on offer now amount to, at times, over 2 yrs of dividend payments.

    Extreme Example: Little old Webster Bank in CT (WBS-F). I only have 200 shares, held only 18 months, but sitting on a Capital Gain of $900+ on issue that at 5.25% kicks out $260 a yr in dividends (qualified)

    Im sure many of your fIne readers would yell SELL…but to replace with what?? Vanguard money market is only 1.7% at moment.

    Any sage wisdom from anyone out there who has bee through a few up and down cycles. It feels like prices eventually have to come down again don’t they? But Im not sure interes rates are going anywhere soon….

    Love the site and the community! Happy New Year everyone…

    1. Jacob- you are right. We are all facing the question of capital gain vs preserving the income stream. One way to look at it, is to ask yourself if YOU would buy that issue at it’s current price. If not, then it is mispriced in your opinion, so sell. My other thought is that I agree with you, interest rates aren’t going anywhere, but 5.25% ain’t nothing to write home about either. You could sell and either use that money to shop for something else, or just hold for a couple of months. There WILL be an opportunity at some point. 1.7% is better than seeing a couple of years of dividends go away. My opinion only, good luck!

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