The Fear Trade is Alive and Well

While todays moves in stocks is NOT really too scary, the further plunge in the 10 and 30 year treasury bond yields has to give one a bit of a startle. In addition gold is spiking a bunch higher – up $29 last I looked.

The 10 year treasury yield fell as low as 1.44% before bouncing a bit to 1.47%–we are not quite at new record lows, but at this pace it could happen soon. The 30 year bond was at 1.91% last I looked which is a record low–can you feel all of your investment grade investments being ‘refinanced’ soon? These falling yields are in the face of reduced liquidity from the Fed–obviously the fear trade is overwhelming other factors.

This corona virus issue is started to take hold in a big way–I mean riots in the streets in Ukraine overnight shows the power (and maybe danger) of social media. Information–both factual and ‘fake’ moves very fast.

Then on top of the virus issue we see that the purchasing managers index at 49.4 showing a slight potential in the economy slowing. It was only earlier this week that the Philly Fed Manufacturing Index came out extremely hot—everyone will have to make their own determination as to what the hell is going on for sure.

1 thing I know–if I was holding shares in either Triton International (TRTN) or CAI International (CAI) I would be studying trade disruptions carefully. Both of these companies are huge providers of containers moving back and forth between Asia and the rest of the world. Thus far the common stock of the company’s have not really reacted to virus related trade disruptions–certainly their preferreds haven’t suffered–all 6 issues are trading really strong. Certainly if the disruptions are a short term item the companies will do just fine–but a larger spread–who knows–these companies carry a ton of debt and need a continuous flow of revenue to make their payments–no room for error.

Looking over $25/share preferreds and baby bonds today I see mostly green. Investment grade is up 2 cents, while overall shares are up 3 cents. There is a lot of complacency in the income arena so it seems.

This is one of those days to fasten your seat belt into the close of the markets in 2 hours–with the weekend ahead will folks unload their risk assets (stocks)?

19 thoughts on “The Fear Trade is Alive and Well”

  1. I’m no dooms day guy as I’m usually long at 80-90%. But the fed is playing games again like they did in ‘06-‘07. Most of us remember how great the economy was just like today. Guess what, they allowed the curve to invert back then too and they said don’t worry this time is different. The talking heads yesterday said not to worry about the inversion we have a great economy. They never learn from past mistakes. We are on the clock from last May for the next recession. This time is not different I’m afraid. Stupid is as stupid does, HA. ATB

  2. Tim,
    Looking at things I think your correct, even if the Virus scare lets up it still has to trickle down yet. CBS reported this morning on news Maersk announced yesterday that they had cancelled 50 ships going between Asia and other countries. If it continues, that will grow. This is leading to supply line disruptions on top of last years trade wars. Think of car parts, electronics such as cell phone, tv’s and computers to name a few.
    I was expecting this to be a red Friday so I had bids in on some AGNCP and GSL-PB that were filled below the closing price. Leaves me with a full allotment on the one and some on the other to trade with. I was surprised to see my SCE Preferred’s down a bit, but I think that was traders locking in some profits.

  3. Tim- your comment about interest rates is an omen we preferred investors should be very concerned about. Just about every scenario I play out has rates falling, and in some cases close to zero on the 10 year. Really do not see the economy doing better than it has been in the past few years. So, it’s going to take some big downside risks to create enough fear to have the preferred owners sell their High yielding stock so those with dry powder can get in at a reasonable price. Will it be this virus, maybe!

    1. Don – I share your rate view. There are several approaches to mitigate the risk of lower-for-longer rates. Among preferred, there are some that will go up (or at least not drop as much) in a lower rate environment.

      U.S. issues with min rates (small number, mostly banking issues) are one. Canada has quite a lot of min rate issues, some with OTC tickers but most without. Check out the Canadian discussion here at III. The problem common to both is they are richly priced right now. Lots of people see the merit in a min rate strategy. It’s a crowded trade.

      At the end of the day, lower rates push you out of preferred and toward common. That leaves you with more price risk but at least you have upside potential. Would I rather own Microsoft debt or common at this point? Depends on the time horizon. If I’m looking at next year I think the debt. For the next generation I’m thinking the common.

      1. Bob, as usual I agree with your thought process, but yet I continue to defy logic and exploit the low rung 4% perpetual issues (obviously the illiquids, ha). These have done well in small volumes but my percentage returns have been better there than anywhere on the yield curve I have been playing…And today, gulp, I bought my first sub fixed 4% perpetual preferred. But actually closer to its 52 week low than high though. The key is exploiting either the non callable ones or the ones high quality but 15-20% below par. Admittedly I have been exploiting for cap gain trades more than income. Like anything it works until it doesnt.

      2. Bob, Ask orders at too-low credit spreads (for me) keep getting taken, then I buy them again if/when they move back in line at $0.15 – $0.20 deltas and sometimes the same day. However, many issues are now submerged well-below that credit spread line.

        For the reason you mentioned, started making moves on commons with decent dividends a few months back. The holds are individually valued, though still dressed up like B-52 bombers; laden with calls, deep covered calls and puts.

        The last few day’s market rate read has been an expletive-mumbling eye-opener. Incredibly though, a flat fed balance sheet coupled with recent rising inflation is hinting at a still-remote, though potentially conflicting signal on the horizon. Interesting times.

        1. Alpha – OK, I’ll bite – who calculates a “credit spread line?” Sure I know what you mean by a credit spread and I certainly know how spreads in general have been compressing, but is there a charting type website or something that calculates a “credit spread line” on a case by case basis? Is that sort of a Bollinger band for credit spreads?

          1. 2wr, No fish are in danger when I have a pole. I’m sure the last time I tried I saw them laughing.

            It’s just UST10 + 2.80 entered as a line item sorted into different stacks of preferred I track. It’s valuable as an instant reference keeping me honest on risk v return for potential holds. For many months it’s been steadily climbing up through the stacks, like a French-press in reverse.

            The takeaway: The number of viable risk-adjusted holds continues to shrink, while the number of flip-only candidates (below the line) continues to increase.

            If you’re still on the line/not snoring: This credit spread has been further marginalized as inflation is now running hotter than UST10. Tax, inflation and risk-adjusted, some lower YTC/coupon holds are now just preserving purchasing power and not providing real gain. Increasingly, flips are where the gain is hiding. Cap gain capture + less time holding = greatly improved risk/return ratio.

            1. Alpha, your 2.8 spread is a fair one, and a very good one. But everything has an opportunity cost. If one stays above that line only to get everything called, then one risks having to enter when they are even lower (of course opposite could happen and nothing gets redeemed if it goes higher).
              But lets play the “Debbie Downer” angle as very few know this. One can worry about inflation and then it rises….But yields AND preferreds continue to go down! Yes, we have historical precedence for this. Take a look…
              Yearly Inflation Rate…
              1941 annualized inflation… 11.35%. Jan. 1942 10 yr treasury yield… 2.46%
              1942 annualized inflation…7.64%. Jan, 1943 10 yr treasury yield …2.43%
              1946 annualized inflation… 18.13%. Jan. 1947 10 yr treasury yield… 2.25%
              1947 annualized inflation… 10.23%. Jan 1948 10 yr treasury yield …2.44%
              So the Fed can play a heavy hand on monetary issues and has had a net yield of up to negative 1500 basis points.
              And what about preferreds? Lets look at lowly still currently trading UEPEN (that I own a modest amount of). It has a 3.5% perpetual par yield. It was issued in 1946 when inflation was 18% and only about a 125 basis points above 10 year. So preferreds could follow treasury lower all while inflation goes higher if that were to happen. Of course I am not advocating anything, its just that history shows crazy stuff occurs more than even what is happening now.

              1. Added thought to your 2.8% line Alpha. This is just my opinion and its just based on where we are at, not woulda, coulda, or shoulda. But one of the best pure vanilla “Granny needs her maximum safe income” preferred with avoidance of a call loss today is IPLDP. It goes exD next week so its real yield without call going forward is 5.02% at 25.27 (backing out divi). That is 350 bps above 10 yr. from a high quality IG T&D. One cant say its overpriced because it was issued at $25 when 10 year was 2.04% in mid March 2013.
                There is no call loss here. There is no realistic way its getting called before next dividend. And even then I would suggest it will stay outstanding a long time unless yields go significantly lower. Its a “tweener” issue. Its getting above market yield, but not enough to bother with a reissue as the spread just isnt there to justify the cost. Plus the preferred is baked into the consumer rates they receive anyways. And like tax cuts, utes dont benefit greatly from refi like a bank would. These savings ultimately have to be reimbursed mostly back to consumer.
                Of course this doesnt mean any price volatility or that it cant drop because it has in the past several times. The “taper tantrum” and Dec. 2018 rout smacked it in the groin hard. Everything has its risks! That is why I try to spread risk among issues, sector, various entries along yield curve, and various duration lengths whenever possible…..Who knows…

                1. Grid, IPLDP has come down a bit the last few days and I agree with you at this pricing. It was already on the radar for Monday – though that may now not happen as I’m guessing some orders have already been entered. lol

                  We have to get you out of the lead-weighted UMH-D. That “should” have worked better. I mean, who sees an issue glued for weeks to redemption price like that – and especially with the volume churn that was going on? I’m half-wondering if some fund was churning pennies out of that thing.

                  1. Alpha, Yes, UMH-D is getting in my craw! This is not a core hold nor was purchased with core money. The only reason I havent sold is concern the next day I sold, whenever that day is, it would jump a quarter and tick me off, ha! I wonder if there is an ATM going on there with UMH-D.
                    Here is a funny IPLDP story, Friday I had a couple illiquids hit unexpectedly late in the day and I didnt have cash in that account to cover it all. IPLDP was the only liquid issue I could dump some quickly to cover, but I didnt want to lose those shares either. So I had cash in another account to buy them back. Bid was 25.56 ask 25.63 at time. So knowing there would be an intercept in between I set my bid at 25.58 and sent out a market order sell. Immediately my shares sold at 25.60 and I repurchased at 25.58 basically at the same time.
                    As far as your comment on buying a preferred with negative 1500 basis point purchase to inflation and not getting caught long term; think of this.
                    You were alive in 1946 and got an inheritance and put it all in UEPEN. 74 years later all you would have got was 3.5% yearly and a 10% capital loss on the proceeds. Not exactly a great long term investment huh? 🙂

                    1. Grid – I tell you again: Margin! That’s exactly the situation it comes in handy. Right now, I have like 10 bucks in my main trading account and maybe 50k worth of orders in. If I get a bite and I can’t cover it with a sale of something until tomorrow I am covered.

                    2. Bob, I finally got that cleared up with resets all sold. I can effectively do that now with my taxable at TD. I basically had little margin for longest time, because the resets being all stuffed in there allowed for no margin use. I probably will use it more through TD, since I shoved a lot of my illiquid OTC issues into Vanguard for spite, ha.
                      I havent really inquired with Ally which is an option for me also. It was always easy just using Vanguard as that was what I always used in past. And it also forced me to have a plan on what to jettison if something hit.

              2. Grid, Always appreciate how your historical references add perspective. Looking back, there are a few old issues we could have thrown the whole wagon into and thrown all future effort out the window. If we only knew.

                I have a group of core holds which are mostly exempt from tampering and meddling. They are a mix of resets, ftf and fixed perpetuals (one with call dates 90 years out). Always enough to be in the game. For the rest of the loot, the negative 1500 basis points example kind of makes the case. I would not want any of us to be sitting in that position just to have held on. The 2.8 is designed in part to protect against that potential outcome as buying or holding non-core issues below that threshold basically means we’re losing ground. Maybe invisibly at times, but it’s happening.

                At these nose-bleed levels the broader market is silly, but a few opportunities still exist and there will be more. Not a hold but your 1-day XOM flip to make a point to Pendynut was fast and fabulous. Including options around the trade, I had a 106%+ gain on SO in 18 months and completed that trade yesterday. Both of those beat the hell out of a 4.2% or lower YTC or yield which may already be negative on a real-yield basis.

                I don’t know anything, but aside from the core-holds buried out in the back yard, my thinking is your flips are where the best risk/reward action is now in preferreds. And it’s not as easy as it looks, especially for people like me who have not yet (or may never) fully developed the rote skills that you have. But for ongoing inflation protection like you mentioned, keeping some res real estate. Continuing our forced $Cal-exit, another of our CA-buildings went into to contract yesterday (1 to go) and heading to the Carolinas tomorrow to look at a few projects.

  4. TRTN-C just dropped 8 cents but I wouldn’t sell. Nowhere to go and don’t want to give up that 7.35%. If it dropped near par, I would definitely buy in. But that’s a whole 1.25 to go.

    1. That is a 2 week drop in dividends, which is like taking a peanut and chopping it up into 26 pieces, and taking away 1 fractional piece. Or… getting a big group together for a happy hour, and having 1 person sneeze. Not sure i could hear that.

      Now if it dropped 10% or $2… then I would think there would be a lot of buys out there I would be focusing on, and owning TRNT would be the least of your worries. I think many of us here would welcome a 10% correction. Then we have to ask ourselves, should we give up our sock drawer ones, to own the 10% dip… because our sock drawer ones do not really move at all on a daily basis. They might not even flinch on a 10% drop.

      1. Mr. Lucky–I would like a 10% drop–unfortunately we could be sitting in cash for years waiting.

      2. I’m with you, lucky. Fear in capital markets is good. It’s what causes the summer campers to sell so that others can buy.

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